German factory orders disappoint

Emily Nicol
Chris Scicluna

Asian financial markets continued to shrug off concerns about the coronavirus today, with sentiment also supported by the announcement by the Chinese authorities confirming plans to cut tariffs on a range of goods imported from the US. While that announcement might have been aimed at supporting sentiment and easing somewhat the supply-side hit impact of the epidemic, it is also simply likely to be satisfying the commitments made in the first-phase trade agreement (e.g. among other things, tariffs on US crude will fall from 5% to 22.5%, while those on soybeans will fall 2.5ppts to 2.5). Of course, it will also still leave more than half of all US exports to China subject to tariffs and an elevated average tariff more than double the 8.0% rate that prevailed before the trade war.

Nevertheless, with investors enthused, China’s CSI300 rose 1.9% on the day, with the Hang Seng up more than 2.6% and the TOPIX rising 2.1% to be back in positive territory for the year to-date. And euro area stocks have started the day on the front foot, with the Euro Stoxx 600 up ½% to a record high. In forex markets, the improved risk appetite pushed the yen back down to about 110/$ for the first time in two weeks, while the offshore yuan appreciated to about 6.97/$ for the first time in a week. And in bond markets, UST yields have moved higher again, with 10Y yields up to 1.67%, about 7bps higher than this time yesterday. JGBs were inevitably weaker too as were ACGBs despite some mixed Australian retail and trade data. Euro area govvies have also opened lower (10Y Bund yields up to -0.35%) despite some very weak German manufacturing orders data (see below) as ECB President Lagarde, currently speaking at the European Parliament, noted that the ECB had limited options to provide additional stimulus if and when it might be required.

Euro area:
German factory orders ended 2019 on a disappointingly soft note, falling 2.1%M/M, the most since February. Following a revised 0.8%M/M drop in November, that left them down a whopping 8.7%Y/Y, the steepest annual decline since the global financial crisis more than a decade ago. And so, over Q4 as a whole, they were down for a fourth consecutive quarter (and a seventh quarter out of the past eight), falling 0.6%3M/3M to suggest that the long-awaited recovery in German manufacturing will remain elusive for a while yet.

With domestic orders up 1.4%M/M and orders from beyond the euro area up 2.1%M/M, the weakness at the end of last year emanated from other countries within the euro area, from where orders fell an extreme 13.9%M/M. That was partly a correction to strength earlier in the quarter due to exceptional major items. Nevertheless, stripping out such large-scale orders, total orders were still down a sizeable 1.3%M/M, falling from all major destinations. And total domestic and foreign orders were both similarly down more than 8%Y/Y.

By type of good, orders of intermediate goods rose 1.4%M/M to be up 0.7%Q/Q over Q4 as a whole, but were still down 3.6%Y/Y. Consumer goods orders also rose almost 1%Q/Q in Q4 despite falling 3.8%M/M and 2.7%Y/Y in December. But those of capital goods were down a little more than 1½%Q/Q, falling a whopping 3.9%M/M and 12.2%Y/Y in December.

Finally, real manufacturing turnover dropped 1.3%M/M in December following a decline of 0.4%M/M the prior month to suggest that the total production figures, due tomorrow, will be weaker than suggested by the current Bloomberg consensus (down just 0.2%M/M for overall industrial production including construction).

In Australia, meanwhile, the overnight release of December retail sales and trade figures offered mixed messages about economic performance in the final quarter of last year. At face value, the monthly retail sales numbers were disappointing, reporting a steeper than expected decline in December of 0.5%M/M. But while the weakness appeared broad based – e.g. sales at department stores were down 5.6%M/M, clothing down 1.5%M/M and cafes and restaurants down 1.5%M/M – this in part reflected payback from November’s strength associated with Black Friday discounting. There was some evidence, however, of an impact from the bushfires, with businesses in New South Wales suggesting disruption to food retailing and cafes, restaurants and takeaway food services in December.

Nevertheless, given the strength earlier in the quarter, the total value of sales was up 0.9%Q/Q in Q4. (New South Wales was the only state to report a decline in Q4 and by just 0.1%Q/Q). When adjusting for price effects, retail volumes also accelerated in Q4, by 0.5%Q/Q, the first positive quarterly growth in five and strongest since Q218, suggesting that household consumption provided greater support to GDP growth in the final quarter of last year. Admittedly, the year-on-year growth rate was still very subdued at just 0.4%Y/Y. And we wouldn’t be surprised to see annual growth in consumption per capita remaining negative in Q4.

Turning to trade, today’s report showed a further modest pickup in the value of exports heading into year-end, up 1.4%M/M in December, to leave them more than 8% higher than a year earlier. This reflected improved goods exports (1.9%M/M) on the back of higher shipments of metal ores. In contrast, services exports fell (-0.7%M/M) for the second month out of the past three. And given significant weakness in October, the total value of exports in Q4 was down 3½%Q/Q, the first quarterly drop since Q317. With imports (+2.4%M/M) having largely reversed the decline in November, they were up ½%Q/Q in Q4, suggesting that net trade provided a notable negative contribution to Q4 GDP growth. And with the escalation of the bushfires at the turn of the year having likely impacted tourism, while the outbreak of the coronavirus is an additional downside risk to goods and services exports alike, net trade will likely remain a drag on GDP growth in Q1 too.

In the US, ahead of tomorrow’s payrolls report, today will bring Challenger job cuts figures for January, the usual weekly jobless claims figures and preliminary unit labour costs figures for Q4.


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