German factory orders beat expectations

Chris Scicluna

Asian markets mixed today: Japanese equities up, but Chinese equities down
While the technology sector continued to struggle, gains in commodity-related and financial stocks meant that the S&P500 was still able to eke out an advance of 0.1% yesterday while the DJI rose 0.3% to a new record high. Even so, with even relatively hawkish Fed policymakers playing down the inflation risk associated with President Biden’s spending proposals, the 10Y UST yield finished down 2bps at 1.57% and 5bps off its intraday high. Those Fed remarks tallied with those yesterday afternoon from ECB Chief Economist Philip Lane, who was unambiguously dismissive of those espousing concerns about potential upside risks to inflation next year and beyond. Currency markets were mostly little changed.

Turning to the Asia-Pacific region, markets opened in Japan and mainland China for the first time this week and promptly went their separate ways. In Japan, the TOPIX has rebounded 1.5% to a two-week high, notwithstanding indications that the Tokyo, Osaka and Kyoto prefectures are preparing to seek the extension of their respective state of emergency declarations. Indeed, Tokyo’s Governor opined that she was simply not in a position to loosen restrictions, while Osaka’s Governor said that he had no choice but to seek an extension. This follows yesterday’s news that the number of critically ill Japanese patients had climbed above 1,100 to set a new high. By contrast, ahead of tomorrow’s April trade report, China’s CSI300 has fallen 1.1% to the lowest level since mid-April.

In the Antipodes, the Aussie dollar, stocks and bond yields all moved lower after China’s NDRC said that it had “indefinitely” suspended its Strategic Economic Dialogue with Australia, albeit that no meeting has been held since 2017. The symbolic move is indicative of Beijing’s ongoing displeasure with Canberra not least since it banned Huawei from participating in Australia’s 5G network. There were no economic releases in Australia today but it is worth noting that RBA Deputy Governor Debelle will soon deliver an address in Perth on “Monetary Policy During Covid”, which might provide some further insight ahead of tomorrow’s release of the Bank’s latest Statement on Monetary Policy. The Kiwi government also felt the backlash from China after parliament passed a motion declaring that “several human rights abuses” are taking place against Muslims in Xinjang, joining the growing international condemnation of events there. Kiwi equities fell as a very upbeat business survey showed a record level of firms planning price rises, perhaps further raising questions about the future longevity of the RBNZ’s current dovish policy stance.

Japanese vehicle sales rise 22.2%Y/Y in April as favourable base effects kick in
According to the JADA, the total number of vehicle sales increased 22.2%Y/Y in April, up sharply from the 2.4%Y/Y growth reported in March. Sadly, as seen in Germany and the UK for example, that growth reflects base effects associated with last year’s pandemic-induced slump in activity. While sales of cars in Japan grew 26.3%Y/Y in April, they had been down 27.5%Y/Y a year earlier, and the level of sales in April was still more than 8% lower than in April 2019. Sales of trucks grew just 1.7%Y/Y in April while depressed demand for public transport meant that the sales of buses slumped 42.0%Y/Y despite falling 21.6%Y/Y a year earlier.

German factory orders beat expectations in March; euro area retail sales data to come
The day’s euro area data flow got off to an upbeat start as German new factory orders beat expectations, rising 3.0%M/M in March, double the median forecast on the BBG survey, following upwardly revised growth of 1.4%M/M in February. While the annual rate (a whopping 27.8%Y/Y) was clearly flattered by base effects from the first wave last spring, factory orders were still up 9.1% above the pre-pandemic level in February 2020. And following steady growth in January and February, new factory orders were up 2.3%Q/Q in Q1.

The pickup in demand was broad-based. Domestic orders were up 4.9%M/M in March to be up 1.8%Q/Q in Q1. And orders from abroad were up 1.6%M/M but a firmer 2.7%Q/Q, with orders from elsewhere in the euro area up 0.7%M/M and 1.2%Q/Q while those from outside the euro area were up 2.2%M/M and 3.6%Q/Q. By type of good, orders of intermediate goods rose 2.8%M/M and 4.5%Q/Q, with those of capital goods up 2.5%M/M and 1.1%Q/Q, and consumer goods rebounding a vigorous 8.5%M/M to be up a modest 0.3%M/M. With manufacturing turnover up 2.0%M/M, tomorrow’s German IP data for March should similarly confirm solid growth in production at the end of Q1, which, notwithstanding ongoing supply-chain strains, should be followed by ongoing strong expansion in the sector in Q2.

This morning’s March data for euro area retail sales should also be improved. Following an upside surprise to the German figures, which reported a rebound of 7.7%M/M in March, euro area retail sales are now likely to rise about 2.5%M/M to just below the pre-pandemic level in February 2020. Given the steep drop a year earlier, the annual growth rate would then rise to about 10.5%Y/Y following a drop of 2.9%Y/Y in February.

BoE to be more upbeat about near-term outlook, but decision to taper QE will likely wait until next month
The main event in the UK today will be the BoE’s lunchtime monetary policy announcement, which will be accompanied by updated economic projections in the latest Monetary Policy Report. Recent economic activity data have largely been stronger than the MPC expected when the last projections were published in February. And there are many reasons for the BoE to be optimistic about the near-term economic outlook too. The rate of new Covid-19 cases has slowed significantly across the UK while progress with vaccinations has been rapid, with more than half of all adults having received at least one dose already. So, the government is on track to end most restrictions on activity by the second half of next month – a faster pace than assumed previously by the BoE. In addition, UK fiscal policy this year and next will be more supportive than it had assumed in the February forecasts, not least due to extensions to the government’s business support measures to September and the “super-deduction” tax relief for businesses to encourage investment. Prospects for external demand, particularly from the US, have improved too. So, the BoE will likely bring forward the date to Q421 (from Q122) at which it expects the pre-Covid level of GDP to be surpassed.

The MPC is unlikely to be complacent about the near-term outlook, however. The emergence of new mutations that render vaccines ineffective remains a key risk. Current waves of pandemic in many countries, not least India, provide a reminder that the global economy is not out of the woods just yet. There are also significant uncertainties with respect to the impact of the phasing out of government support measures later in the year, not least on the labour market, in which the full extent of slack is hard to determine. And looking further ahead into 2023, the BoE will have to anticipate a non-negligible tightening of fiscal policy from FY23/4, which could well weigh significantly on economic activity at the end of its projection period. The inflation projection will also be weighed by the market-implied path for Bank Rate, which is now significantly higher than that used to produce the February projections. Indeed, the BoE might still judge that inflation at the end of its projection is unlikely to be significantly above its 2.0%Y/Y inflation target. So, with only one member of the MPC (the soon-to-depart Chief Economist Haldane) who might feasibly be considered a hawk, the MPC will probably not yet see the need to taper its Gilt purchases from its current pace of £4.2bn per week. Unlike the Fed, however, it will likely continue to signal its expectation to phase them out gradually before year-end. But a decision to start that process seems most likely to come at the 24 June meeting, which is scheduled just three days after the government currently plans to lift all limits on social contact.

Q1 productivity data ahead in the US; Fed to release Financial Stability Report and more corporate reporting too
Today’s US economic dataflow is unlikely to grab the markets’ attention, especially with the April employment report looming large. Aside from the weekly jobless claims data, most interest will probably centre on the preliminary release of labour productivity and unit labour cost data for Q1. After registering a 4.2%AR decline in Q4, Daiwa America’s Mike Moran expects labour productivity to have rebounded 5.0%AR, with the increase in hours worked well shy of last week’s reported lift in output. As a result, unit labour costs are likely to have declined around 1.0%AR, providing a soft backdrop for CPI inflation.

Aside from economic data and further corporate reporting, today will also see the Fed release its latest semi-annual Financial Stability Report. Judging from comments made by various members, the Fed’s Board of Governors will likely retain a sanguine assessment of risks to financial stability. While asset prices have moved even higher since the November report, the Board will likely attribute this to the improving economic outlook and the underpinning provided by low Treasury yields (albeit not as low as in November). And with the economy and labour market improving, the Board will likely express contentment with overall debt levels, while still noting pockets of vulnerability due to the uneven nature of the recovery. As far as financial leverage is concerned, in light of recent events we can probably expect some further cautionary words aimed at the hedge fund and non-bank sectors.

Kiwi business activity outlook improves to near 4-year high and inflation pressure mount; building approvals strong in March
The preliminary findings of the ANZ Business Outlook survey for May made for very encouraging reading, with the closely-watched activity outlook index rising 10.1pts to 32.2 – the highest reading since August 2017 and now 10pts above the long-run average. Importantly, both capex and employment intentions strengthened too, with the latter also rising to a near 4-year high and well above the long-run average for the survey. Meanwhile, almost a net 58% of firms expressed an intention to raise their selling prices - the most since the question was first asked in 1992 – and firms’ 1-year expectation for inflation increased 20bps to 2.17%, marking the highest reading since November 2018.

In other Kiwi news; after falling sharply in February, the number of dwelling approvals rebounded 17.9%M/M in March, so lifting the 12-month total to a new record high. While this partly reflected a strong month for townhouses and flats, approvals for single unit homes still increased almost 8%M/M and 41%Y/Y, suggesting no immediate loss of appetite despite RBNZ and Government efforts to deter especially investor activity in the housing market. The value of all residential building approvals increased an impressive 38.2%Y/Y, although it is worth noting that annual growth is exaggerated due to base effects associated with last year’s lockdown. Encouragingly, the value of non-residential building approvals increased an even greater 77.9%Y/Y. Given these figures, the value of all approvals in the year to March was 6.9% higher than the previous year, notwithstanding the disruption caused by the pandemic. 

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