Japan’s core machine orders rebound, while China’s CPI falls

Chris Scicluna

Equity markets lift on hopes for near-term US fiscal stimulus
Despite surging coronavirus cases and the prospect of new restrictions, the S&P500 shrugged off early losses to advance 0.3% to a fresh high yesterday, with Treasury yields likewise bouncing off their lows. The turnaround in sentiment was underpinned by the growing prospect of additional fiscal stimulus this side of the New Year after Senate Majority Leader McConnell proposed a package temporarily setting aside policies on which there is disagreement, instead focusing on those policies where agreement can be found (e.g. small business assistance, expanded unemployment insurance and funding for vaccine distribution). This change in stance increases the likelihood of Congress agreeing a stop-gap package – one that House Speaker Pelosi has labelled as an ‘emergency supplemental’ in advance of a more comprehensive stimulus once President-elect Biden takes office on 20 January. That said, Pelosi said that parts of Treasury Secretary Mnuchin’s current US$916bn plan – which substituted stimulus checks for the supplementary unemployment benefits in the bipartisan plan – were ‘unacceptable’.

Against that background, and with US equity futures and UST yields higher since the close, Asian equity markets mostly had a positive day. In Japan, after ignoring yesterday’s local fiscal stimulus news, and while JGBs were little changed, the TOPIX increased 1.2% today, assisted by a record bounce in core machine orders in October. In addition, Softbank shares rallied over 5% following media reports that the conglomerate is considering a programme of share buybacks as a means of eventually taking the company private. Among other gains, after declining yesterday, the KOSPI rebounded 2.0% and the Hang Seng is up 0.6%. Meanwhile, the ASX200 increased 0.6% but ACGBs were little changed as consumer confidence increased to a fresh 10-year high, while Kiwi stocks rose twice as much as NZ indicators continued to point to a very strong rebound in activity in Q3. Bucking the trend, China’s CSI300 fell 0.4%.

Japan’s machine orders rebound in October, lifted by big ticket spending
With machine orders having declined 4.4%M/M in September, and firms forecasting a slight decline in Q4, analysts were anticipating that today’s report would point to only a modest bounce during October. However, encouragingly, the survey indicated that total machinery orders rebounded 9.7%M/M, reducing the annual decline to just 0.6%Y/Y. More importantly, the closely followed measure of core private domestic orders (which excludes volatile items such as ships and capex by electricity companies) rebounded by an even larger 17.1%M/M – the largest increase since 1996 and so leaving that series up 2.8%Y/Y. This means that core orders are presently sitting more than 13% above the average level recorded during Q2 – much better than the 1.9%Q/Q decline that firms forecast last month.

While this is undoubtedly good news, the monthly orders data can be very volatile and there is good reason to think that there will be a substantial pullback in orders over the remainder of the quarter. In the detail, orders from the manufacturing sector increased 11.4%M/M in October, with big-ticket spending in the chemicals and non-ferrous metals industries accounting for more than two-thirds of the overall increase during the month. As a result, manufacturing orders were up 1.1%Y/Y – contrasting sharply with the 12.7%Y/Y decline reported last month – but it would be surprising if the level of spending in the aforementioned industries did not return to lower levels in November. Core orders from the non-manufacturing sector increased an even stronger 13.8%M/M in October, lifting annual growth to 4.3%Y/Y from -10.7%Y/Y previously. That growth was driven by a sharp lift in orders from the retail and wholesale trade industries and the finance and insurance industry, to levels that are also unlikely to be sustained. Government orders, which are always volatile, fell almost 23%M/M in September and so were down 4.5%Y/Y. however, after falling sharply last month, foreign orders rebounded 20.7%M/M and so were up 4.1%Y/Y.

In related news, according to the JMTBA – which represents Japan’s major manufacturers of machinery tools – the value of orders placed increased over 7%M/M in November. Combined with the impact of base effects, this meant that orders increased 8.0%Y/Y, compared with the 6.0%Y/Y decline reported in October. However, all of the improvement came from foreign orders, which increased almost 16%M/M and 23%Y/Y. By contrast, domestic orders – which make up a less than a third of orders for this group of manufacturers – fell 8%M/M and so were down more than 15%Y/Y.

China’s CPI inflation turns negative, largely due to lower food prices
The focus in China today was on the latest developments in consumer and producer price inflation. The headline CPI fell a much greater than expected 0.6%M/M in November, which combined with base effects meant that annual inflation fell by a steep 1.0ppts to -0.5%Y/Y – 0.5ppts below market expectations and the lowest reading since October 2009. However, as in previous months, almost all of the decline in inflation was attributable to food prices, for which inflation fell to -2.0%Y/Y from 2.2%Y/Y previously. In turn, this largely reflected a further 6.5%M/M decline in the price of pork. After doubling in price last year due to the impact of the swine flu, the price of pork is now down 12.5%Y/Y. By contrast, non-food prices declined 0.1%M/M and were down 0.1%Y/Y. Meanwhile, excluding food and energy, the CPI also declined 0.1%M/M. This measure of annual core inflation was steady for a fifth consecutive month at the 10-year low of 0.5%Y/Y, suggesting that concerns about too high inflation are unlikely to motivate the PBoC to tighten momentary policy for some time.

While the CPI surprised to the downside, the PPI output index increased 0.5%M/M in November, lifting annual inflation by a greater-than-expected 0.6ppts to -1.5%Y/Y. Reflecting the recovery in industrial activity, the monthly increase was mainly driven by higher prices for producer goods, including a 1.5%M/M lift in the price of raw materials. By contrast, the PPI for consumer goods increased just 0.1%M/M, while prices for durable consumer goods fell 0.2%M/M and 1.8%Y/Y.

Europe focus on politics, sterling range-bound ahead of Brussels dinner date
In Europe, the focus remains on politics. Sterling has been stable ahead of this evening’s Brussels dinner date between Johnson and von der Leyen, which aims to get the EU-UK FTA negotiations back on track even if a deal tonight is highly unlikely. Meanwhile, ahead of tomorrow’s EU summit, Hungarian PM Orban suggested that a deal to secure approval of next year’s EU Budget, and allow the go-ahead for the EU’s €672.5bn Recovery and Resilience Facility, is now just ‘one centimetre away’.

German exports again outpace imports, but shortfalls persist from pre-pandemic levels
Data-wise, this morning’s German trade data showed that exports continued to outpace imports at the start of Q4. In particular, the value of German exports rose 0.8%M/M, 0.5ppt stronger than the pace of increase in imports. That pushed the trade surplus on an adjusted basis up a further €0.3bn to €17.1bn, the highest since February (€17.7bn). Nevertheless, given the steeper decline during the first wave of the pandemic, exports were still down 6.5%Y/Y and 6.8% below February’s level. Imports were down a smaller 5.9%Y/Y and 5.2% below February’s level. By destination, exports to China stood out, rising 0.3%Y/Y. In marked contrast, exports to the US were still down a steep 10.5%Y/Y and those to the UK were down 11.7%Y/Y. Exports to the rest of the euro area were down 5.1%Y/Y, with those to non-euro area EU member states were down a more modest 1.9%Y/Y.

Australian consumer confidence lifts to the highest level since 2010
As suggested by the higher-frequency ANZ-Roy Morgan survey, today’s Westpac consumer confidence survey pointed to a further lift in sentiment over the past month. Thanks to a combination of easing coronavirus restrictions, record low interest rates and rising house and financial asset prices, the headline confidence index increased a further 4.1%M/M to 112.0 – the highest reading since October 2010. In the detail, the largest improvement this month was seen in the index measuring year-ahead expectations for the economy, which increased almost 10%M/M to the highest level since December 2010 – a result that obviously reflects the economy’s weakened starting point. Longer-term expectations about the economic outlook also improved, with the relevant index also rising to a 10-year high.

Kiwi business activity shows further signs of strong rebound in Q3
The countdown to next week’s release of the national accounts for Q3 continued today with the release of information on activity in the manufacturing and wholesale trade sectors. Encouragingly, the news was very good, with activity in both sectors recovering to above pre-pandemic levels, reinforcing the positive news released earlier from the retail and construction sectors. After plunging 12.0%Q/Q during the lockdown-impacted Q2, the volume of manufacturing sales rebounded 17.3%Q/Q in Q3. Indeed, the level of sales set a new record high and was up 3.7%Y/Y. Meanwhile, after slumping 11.2%Q/Q in Q2, the value of wholesale sales rebounded 17.4%Q/Q in Q3, also lifting this series to a record high. So while there is no recouping the output lost in Q2, and while the country remains closed to international tourism, the Kiwi economy is undoubtedly in much stronger shape than official sector forecasts had anticipated earlier this year. This outcome is attributable mostly to the success of the public health response and to the substantial fiscal support provided by the government.

Another quiet day ahead for economic data in the US, focus on stimulus talks
Today’s sparsely populated US economic diary features the final wholesale trade report for October and the release of the JOLTS labour market report for October – neither of which is likely to be a key market driver. As a result, most interest will again centre on any progress in formulating a package of fiscal measures to support the economy into year-end.

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