Foreign demand boosts Japan's machine orders

Chris Scicluna

Equity markets mixed in Asia today following new highs on Wall Street
Notwithstanding an upside surprise in the US CPI report for March – albeit with the 0.3%M/M lift in the core index largely reflecting the normalisation of prices depressed by the winter surge in coronavirus cases – Treasury yields moved lower yesterday. Assisted by a 30Y auction that went better than investors had expected, the 10Y note closed down 4bps at 1.62%. And so despite US federal agencies recommending the pausing of Johnson and Johnson’s Covid-19 vaccine following instances of severe blood-clotting in a small number of patients, the S&P500 went on to post a gain of 0.3% and thus closed at a new record high, while the Nasdaq advanced 1.1%. The greenback reacted negatively to the CPI report, with losses recorded again almost all major counterparts sending DXY to its lowest level since mid-March.

Against that background, it has been a somewhat mixed day for markets in Asia. In Japan the TOPIX declined 0.3% as $/¥ slipped below 109, domestic machinery orders fell far short of expectations and worries persisted about the impact of new virus curbs just 100 days out from the scheduled start of the Tokyo Olympics. Equities were also slightly weaker in Singapore, where a slightly stronger-than-expected lift in GDP in Q1 (2.0%Q/Q) and the MAS’s forecast that growth this year would exceed the official 4-6%Y/Y range saw the Monetary Authority drop its forecast that accommodative policy settings would be required “for some time”. That said, there was no sign that the MAS is considering a near-term tightening of policy, with the central bank forecasting that core inflation will remain low this year. In China, where investors are now awaiting Friday’s Q1 GDP report, the CSI300 advanced ½%, while shares are up more than 1% in Hong Kong.

In Australia, despite news of a further lift in domestic consumer confidence to a more than 10-year high, the yield on 10Y AGCB’s fell 5bps to 1.75%, largely mimicking the decline in UST yields. Kiwi bond yields were also dragged lower by the rally in USTs, even as the RBNZ made no changes to settings at its latest policy review. The Bank noted that it remained prepared to lower the OCR if required, and that the outlook for employment and inflation meant that a retightening of policy remained unlikely for some time. However, the Kiwi dollar still firmed after the review, with investors perhaps noting the RBNZ’s acknowledgment of an improved global economic outlook.

Foreign demand boosts Japan’s machine orders, but core domestic orders fall steeply
As far as data were concerned, the focus in Japan today was on the Cabinet Office’s machine orders report for February, which provided some good news for exporters but not for those firms dependent on the domestic market. Total machine orders surged 26.4%M/M in February and so were up 40.7%Y/Y, propelled higher by an impressive but ultimately unsustainable 76.2%M/M jump in foreign orders (now up almost 116%Y/Y). This result is consistent with the sharp pickup in external demand indicated by the JMTBA’s machine tool order series.

Less encouragingly, the closely-followed measure of core private domestic orders (which excludes volatile items such as ships and capex by electricity companies) fell by 8.5%M/M, following on from the 4.5%M/M decline registered in January. This outcome, which compared very unfavourably with the 2.5%M/M rebound anticipated by the market, left core orders down 7.5%Y/Y. It also means that over the first two months of Q1, core orders are tracking 5% below the average level recorded during Q4. So, in the absence of a substantial rebound in March, it now appears that orders are on track to meet the 6.0%Q/Q decline that pessimistic machinery producing firms had forecast at the beginning of the quarter, albeit coming after a 12.9%Q/Q lift in orders in Q4. And this would leave core orders down almost 10%Y/Y in FY20. Fortunately, the BoJ’s recent Tankan survey points to some optimism that firms’ capital spending will lift in FY21.

In the detail, orders from the domestic manufacturing sector fell a further 5.5%M/M in February, with orders from the non-ferrous metals sector declining sharply from last month’s more than three-year high. As a result, manufacturing orders were down 2.8%Y/Y, compared with the 1.1%Y/Y increase reported in January. Core orders from the non-manufacturing sector fell an even sharper 10.9%M/M in February, adding to the 8.9%M/M correction in January. As a result, these orders were down 10.1%Y/Y, compared with the 1.7%Y/Y lift reported in January. The monthly decline appears to have been reasonably broad-based, with the residual ‘other non-manufacturing’ category declining more than 27%M/M to a level even weaker than seen during the first wave of the pandemic, while construction orders fell more than 10%M/M to a 4-month low. Finally, government orders, which are typically volatile, rebounded 17%M/M in February following a near 28%M/M slump a month earlier, and so were up 3.5%Y/Y.

IP data and ECB speak the focus in the euro area; quiet day ahead in the UK
In the euro area, the data focus will be industrial production figures in February. While new orders have continued to pick up firmly, manufacturing output dropped 1.8%M/M in Germany and a steep 4.6%M/M in France, weighed not least by supply-chain disruption in the auto sector. So, while production edged up in Italy and strengthened in some smaller member states, euro area IP likely dropped about 1.5%M/M in February to be similarly down about 1½%Y/Y. Also due imminently are final Spanish CPI figures for March, which are highly likely to confirm that the EU-harmonised measure of inflation jumped 1.3ppts to 1.2%Y/Y, the highest since April 2019, on the back of higher energy prices. In addition, several ECB policymakers will make their final public comments ahead of next week’s monetary policy meeting, with a ‘fireside chat’ and Q&A with Christine Lagarde most notable. Meanwhile, today should be relatively uneventful in the UK with just final Q4 productivity and unit labour cost data due.

Fed commentary, bank earnings reports and import price data ahead in the US
Most interest in the US today will probably centre on the Fed, with Chair Powell scheduled to participate in a moderated online Q&A hosted by the Economic Club of Washington and the latest Beige Book report also due for release. Today will also bring the first of this week’s quarterly earnings reports from the big banking and financial heavyweights, with JP Morgan Chase, Wells Fargo and Goldman Sachs all reporting. On the data front, the diary features just the trade price indices for March, with import prices certain to post a large energy-boosted increase in common with the recent PPI and CPI readings.

Australia’s Westpac consumer confidence index rises to more than 10-year high in April
Following on from yesterday’s very positive news from the business sector, today’s Westpac consumer confidence reading pointed to a significant lift in confidence amongst Aussie consumers. Indeed, the headline index increased 6.2%M/M to 118.8 – the highest reading since August 2010 and far above the long-term average (which sits at around 101). Respondents were especially enthusiastic about developments in their household finances over the past year – likely reflecting strong growth in house prices and gains in the stock market – and about the year-ahead outlook for the economy. We suspect that rapidly improving labour market conditions are also underpinning the lift in sentiment, with tomorrow’s Labour Force survey likely to convey more good news.

RBNZ leaves OCR at 0.25%, no change to other policy settings and outlook
Today’s RBNZ meeting was the first at which the Bank’s decision on the OCR had not been constrained by its previous commitment to leave its key policy instrument unchanged for 12 months following the emergency 75bp easing conducted in March last year. But predictably, despite the economy appearing to have backtracked slightly over the summer since rebounding very sharply in Q3, the RBNZ elected to maintain the OCR at 0.25% (the market had been pricing an easing of policy until the latter part of last year). Other aspects of the Bank’s post-pandemic policy response, including the Large Scale Asset Purchase (LSAP) Programme and the Funding for Lending Programme (FLP) operation were also unchanged.

In the short statement accompanying the decision, the Bank stated that the global economic outlook had continued to improve since the Monetary Policy Committees (MPC) February meeting, but that that the outlook for domestic growth was similar to that envisaged previously. So it was noted that the MPC had again agreed to maintain its current stimulatory monetary settings until “…it is confident that consumer price inflation will be sustained at the 2%pa target midpoint, and that employment is at or above its maximum sustainable level”, and that meeting these requirements “will necessitate considerable time and patience”. In the meantime, the MPC reminded that it was prepared to lower the OCR further if required – a statement doubtless made with one eye on the Kiwi dollar.

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