Massive upside surprise from Japanese machine orders

Emily Nicol
Chris Scicluna

Financial markets responded to yesterday’s signing ceremony of the first-phase US-China trade deal, which locks in a high-tariff environment for trade between the two countries, with an effective shrug. After yesterday’s modest rise in the S&P500 (up just 0.2%), the main Asian markets today were similarly underwhelmed. So, despite a massive upside surprise from the latest machine orders data (see below), Japan’s TOPIX slipped back 0.1%. And ahead of the release of data showing steady Chinese credit growth at the end of last year (growth in aggregate financing was unchanged at 10.7%Y/Y), the CSI300 closed down 0.4%.

In the bond markets, UST yields remained within the bottom of yesterday’s range (10Y yields currently close to 1.79%). With the latest 5Y auction meeting decent demand, JGB yields also remained little changed, with 10Y yields edging up to 0.01%. And ACGBs inevitably followed yesterday’s moves in USTs to open higher, and subsequently saw the 2024 auction meet its strongest demand for the maturity since 2012.

In Europe, where the latest car registrations data confirmed a much stronger end to 2019 across the continent, govvies have opened a touch weaker. The ECB’s account of its December policy meeting will be the principal focus today, with Lagarde set to speak publicly this evening. In the US, retail sales numbers will be the main economics focus on a busy day for data.

The overnight release of Japanese machinery orders data for November was striking. In particular, core orders – which offer a guide to capex growth three months ahead – rose for the first month in five and by a much stronger-than-expected 18%M/M, leaving them more than 5% higher compared with a year earlier. While orders placed by manufacturers were also up for the first month in five, the increase was less impressive (0.6%M/M). So the improvement principally reflected a surge in orders placed by non-manufacturers – the 27.8%M/M increase was the third highest on record – on the back of two one-off large-scale orders in transportation and the postal sector. This left the level of orders from non-manufacturing firms in October and November on average 6½ higher than Q3. But with manufacturing orders trending 5% lower than the Q3 average, overall core orders were still on track for a drop of ½% in Q4 compared with Q3, which itself saw orders decline by 3½%Q/Q and suggesting subdued private sector non-residential investment in the wake of the consumption tax hike.

Other details of the report were less encouraging too. In particular, overseas orders fell 11½%M/M in November to leave them almost 40% lower than a year ago and on track for a quarterly contraction of almost 6%Q/Q in Q4, compared with the 8%Q/Q increase initially forecast by the Cabinet Office survey. Government orders were also weaker in November. But public sector orders should receive a boost over coming quarters on the back of the fiscal stimulus package announced in December.

Despite the boost from the government and somewhat improved global sentiment around the turn of the year, today’s release of the January Reuters Tankan survey – the first business survey of 2020 – suggested no improvement in conditions at the start of the New Year, with firms concerned about weak global demand for autos in particular, as well as still subdued consumer spending in the aftermath of October’s consumption tax hike. Certainly, manufacturers remained particularly pessimistic in January, with the headline DI unchanged at -6, the sixth successive negative reading. The headline non-manufacturing index also moved sideways at +14, firmly at the bottom of the recent range, with construction firms notably more downbeat in January – indeed, the respective DI fell 19pts to its lowest for almost seven years. And overall, non-manufacturers were less upbeat about the near-term outlook too, with the headline DI forecast to fall a further 1pt by April. Meanwhile, the manufacturing DI was forecast to rise 6pts to 0.

Euro area:
The most notable release today will be the ECB’s account from its 12 December Governing Council meeting, the first to be chaired by President Lagarde. On that occasion, policy was left unchanged, with the ECB’s interest rates, monthly asset purchases and forward guidance all unamended. So, the Governing Council left open the door to further rate cuts. But the post-meeting press conference also suggested that Lagarde was keen not to preempt the findings of the ECB’s scheduled strategic policy review, which is now underway and might not conclude before year-end. The account will no doubt be closely watched for any insight into the Governing Council’s assessment of the economic outlook and how policy might evolve over coming quarters. But we might expect it to underscore expectations that policy is unlikely to change for a while yet. And this evening’s speech by Lagarde in Frankfurt will undoubtedly attract attention too.

We have already seen the release of today’s new euro area economic data, with the latest car registration data from the ACEA confirmed a surge in sales at the end of last year. These reported a whopping rise of 21.9%Y/Y in the euro area and 21.7%Y/Y in the EU as a whole. The headline growth rate was flattered to some extent by base effects (registrations had fallen more than 8%Y/Y at the end of 2018), but the level of sales nevertheless reached a series high for the month of December. Perhaps unsurprisingly, however, special factors which provided incentives to bring forward purchases ahead of the New Year also helped explain the spurt in growth. In particular, tax changes encouraged vigorous sales in France (27.7%Y/Y), the Netherlands (113.9%) and (beyond the euro area) Sweden (+109.3%Y/Y). But among other countries, registrations were also up 19.5%Y/Y in Germany and 12.5%Y/Y in Italy.

Given the leap in December, overall in 2019 new car registrations in the euro area rose for the sixth successive year, up 1.4%Y/Y (up 1.2%Y/Y in the EU as a whole). Germany chalked up the biggest full-year increase (up 5%Y/Y to the highest level since 2009), perhaps surprisingly in light of the sharp drop in car production in that country. But the drop in German production of 9%Y/Y in 2019 to the lowest level in 23 years, which has prompted Merkel’s government to prepare wage subsidies for auto firms and their suppliers to prevent an acceleration in redundancies, was due to softer external demand. Elsewhere, new car registrations in 2019 were up 1.9%Y/Y in France and a minimal 0.3%Y/Y in Italy. In contrast, Spain (-4.8%Y/Y) and (beyond the euro area) the UK (-2.4%Y/Y) saw new car registrations fall last year. Unfortunately, car registrations in the euro area are expected to fall back in 2020 leaving the industry reliant on a (perhaps unlikely) recovery in external demand to generate a recovery in output growth.

There was no surprise whatsoever from the final estimates of German CPI inflation in December, which aligned with the flash estimates to leave the headline EU-harmonised measure unchanged from the flash at a six-month high of 1.5Y/Y, up 0.3ppt from the previous month. The increase in inflation was principally due to energy prices, which were down just 0.1%Y/Y having fallen 3.7%Y/Y in November, and so core inflation likely remained stable. With the equivalent final estimates for France (1.6%Y/Y) and Spain (0.8%Y/Y) similarly having matched their preliminary estimates, tomorrow’s euro area numbers (1.3%Y/Y for both the headline and core rates) are also highly likely to do so.

After ONS data yesterday showed average house price inflation rising 0.7ppt to 2.2%Y/Y in November, the firmest annual rate for a year, the RICS residential survey for December, published overnight, signalled somewhat greater optimism about the likelihood of a pick-up in activity in the housing market over the coming year too. In particular, the headline house price balance rose 9pts to -2, a six-month high, as the outcome of the 12 December General Election seemingly offered some certainty about the near-term outlook. The detail of the report was more encouraging too, with a sharp increase in new buyer enquiries at the end of last year – the relevant index rose 22pts to +17, the highest since August 2015 – while agreed sales also ticked higher, with a notable improvement in London. And surveyors were more upbeat about the outlook too, with near-term sales expectations the strongest since 2015 and expectations for the coming twelve months the highest since early 2014.

This morning will also bring the BoE’s latest credit conditions survey, which will likely report relatively little change to credit availability and loan demand in the final quarter.

In the US, retail sales figures for December will be the highlight on a busy day for new economic data. Other releases include import and export price data for the same month, the Philly Fed and NAHB housing indices for January, and the usual weekly jobless claims numbers.

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