German factory orders and turnover data disappoint

Chris Scicluna

Mixed start to the week in Asia as investors now await this week’s US CPI inflation report
A smaller than expected 559k lift in US non-farm payrolls – albeit coupled with a larger than expected decline in the unemployment rate to 5.8% – was greeted by bond investors on Friday, with the 10Y UST closing down 8bps at 1.55%. This gave the stock market a boost, with the S&P500 rallying 0.9% to close just fractionally below its month-earlier record high, but weighed heavily on greenback. Over the weekend Treasury Secretary Yellen told Bloomberg News that a “slightly higher interest rate environment” would be a “plus” for both society and the Fed. And so, with investors perhaps also reflecting on what was still a very respectable employment report, US Treasuries have re-opened a little weaker today, with the 10Y yield rising 2bps to 1.57%. As a result, US equity futures have opened fractionally weaker too.

Despite the positive background from Wall Street, equity markets in the Asia-Pacific region have had a mixed, albeit largely underwhelming, start to the week. In Japan, the TOPIX inched up 0.1%, even as the BoJ’s consumption indicator confirmed a pullback in spending in April. Stronger gains were seen in Singapore and South Korea, but markets began the week on the back foot in China with the CSI300 and Hang Seng down after China’s May export growth fell slightly short of consensus expectations. Stocks were little changed in Australia despite news of another strong lift in job advertising in May, while Aussie bond yields fell as investors responded to the decline in UST yields since Friday.

Japan’s consumer spending declines in April; leading index rises to 7-year high in April
Following last week’s mixed partial consumer spending indicators, today the BoJ released its Consumption Activity Index for April – second only to the Cabinet Office’s synthetic consumption index as the most reliable indicator of the national accounts based measure of private consumption. The real index declined 0.8%M/M, with a 3.3%M/M increase in spending on durables goods offset by a 2.5%M/M decline in spending on non-durable goods and a 0.4%M/M decline in spending on services. Given last year’s plunge in spending at the start of the pandemic, spending was almost 14% higher than in April 2020. However, the level of spending in April was just 0.3% higher than the average through Q1 (now estimated to have declined 2.2%Q/Q). And so with restrictions on activity in Tokyo, Osaka and eight other prefectures likely to remain in place until at least 20 June, prospects for the remainder of the quarter look poor.

In other Japanese news, the Cabinet Office released its preliminary business indicators for April. The coincident indicator increased 2.6pts to an 18-month high of 95.5, which was more-or-less in line with market expectations. Meanwhile, the leading index increased 0.6pts to 103.0, marking the best reading since March 2014.

Japan’s Q1 GDP revisions likely minor; more interest this week are more contemporary indicators
Looking ahead to the remainder of the week in Japan, tomorrow will bring the second release of the GDP figures for Q1. However, revisions are likely to be very minor, with our colleagues in Tokyo expecting growth to be revised down just 0.1ppt to -1.4%Q/Q. Greater interest tomorrow will centre on more contemporary indicators, including the Cabinet Office Economy Watcher’s survey for May, especially after the notable softening observed last month. Tomorrow will also bring the release of the Monthly Labour Survey for April, providing further information on labour market activity and incomes, while the BoJ will release bank lending data for May. On Thursday, base effects will contribute to what is likely to have been a further sharp lift in annual goods PPI inflation in May. The week concludes on Friday with the release of the MoF’s BSI survey for Q2, which will provide an indication of likely developments in the more closely-followed BoJ Tankan survey when the latter is released early next month.

China’s export growth slows a little in May while rising commodity prices underpin strong growth in imports
The focus in China today was on the international trade report for May. In dollar terms, exports grew 27.9%Y/Y, down from 32.3%Y/Y in April and about 4ppts below the consensus expectation (given the strengthening yuan, exports grew 18.1%Y/Y in local currency terms). Even so, exports grew 40.2%YTD/Y following an 8.0%YTD/Y decline a year earlier. Perhaps more meaningfully, exports in May 2021 were 24% higher than in May 2019. Exports to the US increased 20.6%Y/Y, down from 31.2%Y/Y in April and marking the slowest pace since September. Growth in exports to ASEAN countries slowed slightly to 40.6%Y/Y, outstripping growth of 12.6%Y/Y in exports to the EU and growth of just 5.0%Y/Y in exports to Japan.

Meanwhile, the news regarding imports remained positive for China’s trading partners – especially suppliers of commodities – with growth increasing to 51.1%Y/Y in May from 43.1%Y/Y in April. Growth was boosted by base effects, as imports had declined 16.4%Y/Y in May last year. Indeed, imports of crude oil and iron ore more than doubled from a year earlier, reflecting a recovery in demand and steep increases in commodity prices (as will doubtless be evident in the PPI indices on Wednesday). Imports from the US grew 40.5%Y/Y, but this was nonetheless the slowest pace since November last year. As a result, China’s bilateral surplus with the US widened to $31.8bn in May, which was also the largest surplus since November (China’s overall surplus widened to $45.5bn in May from $42.9bn in April). China’s imports from the EU increased 57.7%Y/Y and imports from ASEAN nations and Australia grew 53.8%Y/Y and 55.4%Y/Y respectively (the latter lifting China’s bilateral deficit with Australia to a near-record $28.1bn). Imports from Japan grew a somewhat slower 33.6%Y/Y, but this was still the fastest pace in more than three years.

Inflation and credit data ahead in China this week
Looking ahead to the remainder of this week, Wednesday will bring the release of China’s CPI and PPI inflation reports for May. Base effects are likely to contribute to a lift in CPI inflation to around 1½Y/Y. Developments in the core index will be of interest, with the 0.3%M/M increase observed in April the largest in 15 months and lifting annual inflation to a 10-month high of 0.7%Y/Y. Meanwhile, surging commodity prices may well see PPI inflation exceed 8%Y/Y, surpassing the previous cyclical peak in 2017. Later in the week, or perhaps over the weekend, the PBoC will likely release the money and credit aggregates for May, which will cast light on the extent to which policymakers are leaning against perceived imbalances in financial markets.

German factory orders and turnover data disappoint, suggestive of supply-side constraints
This morning’s German data were disappointing. Contrary to the expected further rise, factory orders dropped 0.2%M/M in April. And, pointing to a sizeable fall in tomorrow’s IP data, manufacturing turnover contracted a marked 2.6%M/M in the same month, which would leave it almost 5% below the pre-pandemic level in February 2020. Admittedly, the drop in factory orders followed a larger-than-expected rise of 3.9%M/M in March, and left them still almost 10% above the pre-pandemic level, suggesting scope for significant further growth in production ahead. And excluding major items, new orders were up 1.5%M/M. The weakness was due to domestic orders, which fell 4.3%M/M while foreign orders rose 2.7%M/M, of which those from the euro area rose 0.7%M/M and those from beyond the euro area jumped 3.8%M/M. By type of good, orders of intermediate goods fell 1.0%M/M but those of capital goods edged up 0.2%M/M and those of consumer goods rose 1.4%M/M.

With leading indicators (such as the truck-toll mileage index) underwhelming in May, the data from German’s industrial sector point to ongoing constraints from supply bottlenecks, which seem likely to weigh on overall GDP growth over the second quarter as a whole. April IP figures from France and Italy are due for release late in the week. In addition, the final estimates of euro area GDP in Q1 (current estimate -0.6%Q/Q), due tomorrow, will bring the first estimates of the expenditure components – these will confirm that weakness in consumer spending and, to a lesser extent, net trade caused the drop in overall output, with investment possibly having provided some offsetting support.

ECB policy announcements the main event in the euro area – expect no change to pace of asset purchase over the coming quarter
The week’s main event in the euro area will be the conclusion of the ECB’s latest monetary policy meeting on Thursday when the Governing Council will review the pace of its asset purchases on the basis of a fresh assessment of financial conditions and updated economic projections. With the contraction in Q1 only slightly deeper than the ECB previously forecast, ongoing easing of restrictions anticipated, implementation of vaccination programmes accelerated, external demand stronger, and economic survey indicators – such as the May PMIs – pointing to a firm pickup in activity this quarter and acceleration into Q3, the ECB might be tempted to make little change to its GDP forecast for this year (4.0%Y/Y) and revise up slightly its projection for next year (4.1%Y/Y). On the inflation side, the headline rate – which rose to 2.0%Y/Y in May according to the flash estimate – has overshot the ECB’s previous expectation, meriting an upwards revision to the projection for this year (currently 1.5%Y/Y). But despite the upside surprise in the flash May figure – up 0.2ppt to 0.9%Y/Y – core inflation has weakened since the start of the year. While supply bottlenecks persist amid survey evidence of rising input prices, there have been few signs of firms passing increasing cost pressures onto consumers. And pandemic restrictions continue to weigh on prices of many consumer-facing services.

As such, while we expect President Lagarde to be cautiously optimistic about the outlook for growth, we also expect her to restate that the recent increase in price pressures is likely to be transitory, and that the outlook for inflation remains subdued and incompatible with the ECB’s objectives. Indeed, the ECB’s forecast for headline inflation in 2022 (1.2%Y/Y) and 2023 (1.4%Y/Y) might be little changed. Moreover, although financial conditions on the whole will be judged to remain accommodative, the further upwards move in yields since the 11 March meeting when the Governing Council committed to conduct purchases “at a significantly higher pace than during the first months of the year” will underscore the need for caution. The increase in yields will be judged to reflect the more favourable economic conditions, including an increase in market inflation expectations while real yields have remained very low. Nevertheless, unease about a possible tightening of financial conditions at a time when underlying inflation remains subdued will likely persuade the majority of members of the Governing Council to argue for leaving the pace of asset purchases unchanged over the coming quarter. Some of the hawks might be dissatisfied with that outcome, however. And assuming that economic growth does indeed rebound over the summer, and the Fed signals more clearly its plans to taper by then, we would expect a slowing in the pace of purchases to be discussed – and likely agreed – in September.

UK coronavirus trend risks delay to further economic reopening but Friday’s April GDP data will highlight vigour of current economic rebound
All eyes in the UK this week will watch closely the trend in new coronavirus cases, with the current uptrend associated with an Indian variant risking a delay to the next stage of economic reopening due from 21 June. The economic data highlight will be the initial estimate of GDP in April (on Friday), which will offer the first official estimate of the impact of the first-phase easing of lockdown restrictions. With the reopening of non-essential stores having contributed to a rapid rise in retail sales (9.2%M/M), and restrictions on many other services having eased somewhat, GDP is likely to have accelerated somewhat following growth of 2.1%M/M in March. Meanwhile, although likely not quite as firm as growth in services, industrial production is expected to have risen about 2.0%M/M. Stronger import growth, however, might well lead to a widening of the goods trade deficit. The other noteworthy release due in the coming week will be the BRC retail sales survey for May, out tomorrow, which will likely further highlight the boost to spending from the reopening of non-essential stores in April.

Consumer credit data ahead in the US today; Thursday’s May CPI the key focus this week
This week’s US economic diary kicks off today with the release of consumer credit data for April. Tomorrow will bring the full trade balance for April, with Daiwa’s America Chief Economist Mike Moran looking for a sharp narrowing in the deficit to around $69bn in light of the advance goods data released in late May. The NFIB small business survey for May and JOLTS survey for April are also due tomorrow, with the latter casting important light on dynamics in the labour market.

Following Wednesday’s release of final wholesale trade data for April, attention will turn quickly to this week’s key report – Thursday’s release of the CPI for May. Following last month’s shock upside surprise, albeit largely reflecting a more rapid than expected normalization of prices depressed by the pandemic, Mike expects a further solid 0.3%M/M lift in both the headline and core CPI measures. Given these movements, annual headline inflation will rise to around 4½%Y/Y while the likely 3.3%Y/Y increase in the core CPI would be the largest in almost 30 years. Unfortunately, with the Fed now in its pre-FOMC meeting black out period, we will have to wait until next Tuesday’s post-meeting statement and press conference for Fed policymaker reaction to whatever these figures portray.

Thursday will also bring the release of federal budget data for May while the weekly jobless claims data will be of interest to see whether the welcome downtrend in initial claims has continued. On Friday, the week concludes with the release of the preliminary findings of the University of Michigan’s consumer sentiment survey for June. Confidence fell sharply last month due to increased concerns about inflation, but Mike expects a modest recovery this month in light of the continued improvement in the labour market and rising financial asset prices.

Australian job ads rise to 12½-year high in May; business and consumer surveys ahead this week
This week’s Australian data flow got off to a pleasing start today with the ANZ reporting a further 7.9%M/M increase in its job ads index in May. As a result, the index was up more than 200% from last year’s pandemic impacted levels. More meaningfully, the level of advertising was at the highest record since October 2008 and more than a third higher than in the months leading up to the pandemic. This suggests that the decline in employment in April was likely little more than a statistical aberration, as had been suggested by the ABS in its own commentary.

Looking ahead to the remainder of this week, tomorrow most interest will centre on the NAB Business Survey for May. Key confidence and activity indicators all surged to fresh record highs in May, so a pullback would not surprise, especially with the recent short lockdown in the state of Victoria likely reminding respondents that challenges remain. Also of interest will be developments in the survey’s pricing indicators, which have picked up markedly in recent months. The Westpac consumer survey for June will follow on Wednesday, concluding this week’s sparse data flow.

Business survey, consumer and housing indicators of greatest interest in New Zealand
Following today’s local holiday, the first notable release in New Zealand this week is Wednesday’s release of business financial data for Q1, which will go some way to helping analysts to fine-tine their estimates of GDP growth ahead of the following week’s release of the national accounts for Q1. However, more interest will likely centre on the release later that day of the preliminary results of ANZ Business Outlook survey for June, with a particular focus on the survey’s pricing indicators that have surged to historic highs in recent months. On Thursday, the release of the Electronic Card Transactions survey will cast light on consumer spending during May, while the manufacturing PMI for May will follow on Friday. Late in the week may also see the release of the REINZ housing report for May. Data released by CoreLogic has already indicated a further 2.2%M/M in prices, taking annual house price inflation above 20%Y/Y.

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