German factory orders still subdued

Chris Scicluna
Emily Nicol

Financial markets continue to shrug off bad news on the pandemic from places as widely spread as the US, Middle East and Australia. Indeed, Asian stocks have rallied at the start of the week despite an absence of meaningful economic data from the region. Despite deadly flooding in Kumamoto prefecture in southwestern Japan, the Topix rose 1.6%. But gains in Hong Kong (the Hang Seng is currently up roughly 4%) and China (the CSI rose 5.7% to a five-year high) were far more vigorous, as investors appeared to respond to media cheerleading about market prospects and broader optimism about economic recovery on the mainland. Against that backdrop, unsurprisingly, US stock futures are up too and European stocks have rallied at the open too, with major indices up roughly 2% so far, despite data reporting a rather underwhelming rise in German factory orders to leave them still far below their level before the pandemic hit.

In the bond markets, most major sovereigns (bar BTPs) are weaker this morning, weighed by the positive risk appetite. So, for example, yields on 10Y JGBs rose almost 2bps to 0.035% even as the BoJ upped slightly its purchase amount in the 5-10Y bucket at today’s scheduled operation. Elsewhere, yields on 10Y USTs are up almost 3bps to close to 0.70%. 10Y Gilt yields are also a few bps higher (around 0.21%) despite data showing a rather tepid rise in UK car sales in June as car showrooms reopened.

Euro area:
While the recovery in Germany’s retail sector from the pandemic shock has been swift, the recovery in Germany’s manufacturing sector looks set to be far less dynamic. Data released this morning showed that German factory orders remained very subdued in May with growth of 10.4%M/M from April’s more-than-20-year low to be down 29.3%Y/Y and 30.8% below February’s pre-pandemic level. Growth in domestic orders (12.3%M/M) was stronger than in foreign orders (8.8%M/M). But new orders from elsewhere within the euro area were fastest, up 20.9%M/M from a deeper trough, while those from elsewhere were up just 2.0%M/M.

At the sectoral level, strongest growth in orders was registered in the autos sector, up 44.4%M/M, led by domestic orders. But that left them still down 47.1% from February’s level. Growth in other sectors – which had been hit to a somewhat lesser extent by the initial shock – was more modest (e.g. orders of engineering goods was up 12.4%M/M, and those of metals was up just 2.8%M/M) or absent altogether (orders of chemicals and electronic items both fell once again).

Meanwhile, despite the partial rebound in car production that month, manufacturing turnover rose ‘just’ 10.6%M/M to be still down 23.5% from February’s pre-pandemic level. A similar growth rate – a little more than 10%M/M to be still down close to 30%Y/Y – is expected from the manufacturing production figures due tomorrow morning.

Spanish IP figures, released a short while ago, showed that output rose by a record 14.7%M/M in May, as production of consumer durables doubled compared with April, while output of capital goods was up by more than 50%M/M and intermediate goods by almost 20%M/M. In contrast, output of consumer non-durable goods continued to slip back. The increase in IP in May followed a drop of more than 22%M/M in April and 13%M/M in March, to leave output in Spain still more than one-fifth below the pre-pandemic level and almost 25% below its level a year ago. The equivalent data from France, Italy and the Netherlands will come on Friday.

This morning will also bring euro area retail sales data for May, which will provide further insight into economic activity in Q2. We expect to see a sharp rebound in aggregate euro area spending, as indicated by the various national data. But while retail sales jumped back above the pre-pandemic level in Germany, they remained well below the equivalent levels in France and Spain. And so, euro area sales will similarly have remained well below February’s peak. The construction PMIs for June and euro area Sentix sentiment indicator for July are also due later today.

While this week’s economic releases are likely to suggest that the Japanese economy continues to reel from the hit from the pandemic, Kumamoto prefecture in southwest Japan suffered an additional blow over the weekend and today, with severe flooding causing landslides resulting in at least 25 fatalities and more than 1500 people evacuating their homes to shelters. Meanwhile, in Tokyo, a renewed spike in infections – with daily cases exceeding 100 for a fourth day to the highest in two months – coincided with the expected reelection of Governor Koike for another four-year term by a considerable margin, receiving about 60% of the vote, and an additional 500k votes compared with her 2016 election.

In terms of economic data, tomorrow will bring the statistical office’s household spending survey and BoJ consumption activity indices for May, both of which are likely to show a modest improvement in spending as the state of emergency during that month. But underlying demand is likely to have remained subdued, not least given ongoing weakness in earnings – indeed, tomorrow’s wage figures for May are expected to report a steeper pace of decline following the 0.7%Y/Y drop in April. Wednesday, meanwhile, brings the latest bank lending survey for June, which is likely to show ongoing strong demand in new loans. That day will also bring the economy watchers survey, followed on Thursday by the BoJ’s regional economic report, both of which are likely to indicate significant weakness in the economy despite an improvement in conditions over the past month. Thursday will also bring machine orders data for May, while Friday will see the release of goods PPI figures for June.

This week will be somewhat quieter for economic data, kicking off today with the UK construction PMIs and new car registrations for June. In terms of the latter, while car dealerships in England reopened on 1 June, reports suggest that new car registrations were still down by around one third compared with a year ago, admittedly a significant improvement on the near-90%Y/Y and 98%Y/Y declines recorded in the previous two months, but nevertheless leaving car sales in the year-to-date down by almost 50%Y/Y. Meanwhile, like in the manufacturing and service sectors, the headline construction PMI is expected to jump in June, from 28.9 previously, as an easing in lockdown measures in mid-May enabled firms to be operational for the whole month (albeit under social distancing rules) for the first time since February.

Other economic releases of some note this week will be the REC/KPMG report on jobs on Wednesday, followed by the RICS Residential survey for June, which is expected to report only a modest easing in the rate at which house prices are falling. Of course, attention this week will be on Chancellor Sunak’s economic statement on Wednesday, although he has appeared to dampen expectations of a significant further fiscal stimulus, hinting to MPs not to expect a big German-style cut in VAT.

In the US, the data calendar kicks off later today with the release of the final services and composite PMIs and non-manufacturing ISM indices for June. Job openings data from JOLTS will be published tomorrow, followed by May consumer credit numbers on Wednesday. The usual weekly jobless claims figures will be published on Thursday, alongside wholesale trade figures for May. On Friday, the June PPI data are scheduled for release.

While Australia has seen a relatively low number of coronavirus cases since the global outbreak, and was among the first countries to relax restrictions, a second wave of infections saw the State of Victoria tighten restrictions further over the weekend, closing the border with New South Wales and declaring strict lockdown measures on 12 areas in Melbourne.

This notwithstanding, the conclusion of the RBA’s latest monetary policy meeting tomorrow seems highly unlikely to bring any amendments to its main policy parameters – i.e. the cash interest rate and 3Y bond yield target unchanged at 0.25% – or economic assessment from the previous meeting, where it hinted that the hit to the economy might not be quite as severe as initially thought. Certainly, today’s job advertisement figures were supportive of a notable improvement in labour market conditions since the main lockdown measures were loosened. For example, job advertisements jumped 42%M/M in June. Admittedly, this a followed sharp decline in March, and still left advertisements down by more than one third compared with February’s level, therefore still supportive of a notable jump in the unemployment rate in due course.

This week will bring just Chinese inflation figures for June on Thursday. Headline CPI is expected to have remained little changed from the 2.4%Y/Y rate recorded in May. Meanwhile, producer prices are expected to remain firmly in negative territory, with the headline PPI rate easing just ½ppt to -3.2%Y/Y, suggesting still significant disinflationary pressures further down the pipeline.

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