German IP plunges to twelve-month low

Chris Scicluna
Emily Nicol

Wall Street rebounds as debt ceiling can set to be kicked down the road (but only until December); Most Asian markets follow suit today, but Japan continues to struggle
Despite being down as much as 1.3% in early trade, notwithstanding ADP reporting a larger than expected 568k lift in private non-farm payrolls in September, an afternoon recovery saw the S&P500 close yesterday’s session with a modest 0.4% advance. The driver of the recovery was news that Senate Minority Leader Mitch McConnell had offered to vote through a small increase in the debt ceiling – sufficient to provide the Treasury with headroom until December – thus averting a near-term crisis. Of course, this offer – clearly a political ploy to counter Democrat assertions that there is insufficient time to use the budget reconciliation path to suspend the ceiling for a longer period without Republican votes – merely kicks the can down the road. Nonetheless, investors welcomed the news, which is likely to be accepted by the Democrats as a measure that will allow the near-term focus to shift to resolving internal disagreements regarding Biden’s proposed budget bill, that have also stalled the advancement of the bipartisan infrastructure bill. Senate Majority Leader Chuck Schumer has indicated that he hopes to have an agreement this morning, with the Senate to come back into session at 10am ET. In the bond market, after trading as high as 1.57% in early European time, the yield on the 10Y UST fell back to 1.52% – less than 1bp below Tuesday’s US close. And so, after threatening to make new highs for the year, the dollar index (DXY) closed with only a modest gain.

Since the close, S&P mini futures have rallied more than ½% while the 10Y UST yield has ticked back up to 1.53%. Against that background, it has been a mostly positive day in Asian equity markets (Mainland China remained closed for the final day of the Golden Week holiday). In Japan, following eight consecutive days in the red, the TOPIX edged down a further 0.1%, underperforming most bourses in the region. While virus cases moved sharply lower in September, allowing the removal of state of emergency restrictions at the end of the month, the BoJ’s measure of real consumption spending slumped 1.7%M/M in August, with growth also revised lower over the previous three months. Speaking ahead of the release of the BoJ’s latest Regional Economic Report (which as summarised below, was less upbeat than that issued in July), Governor Kuroda reiterated the Bank’s view that the economy is nonetheless picking up as a trend and that a gradual uplift in inflation will follow. In South Korea, after declining by a cumulative 5% over the previous three sessions, the KOSPI has rebounded over 1.7% today with even stronger gains seen in Taiwan and Hong Kong.

BoJ measure points to 2.1%M/M slump in real consumer spending in August
With state of emergency conditions in place across much of Japan in August, unsurprisingly, the BoJ’s Consumption Activity Index – second only to the Cabinet Office’s synthetic consumption index as the most reliable indicator of the national accounts based measure of private consumption – pointed a slump in spending during the month. In real terms, the index declined 2.1%M/M in August. In addition, the BoJ also revised lower its estimates of growth over the previous three months, with the previously reported – and somewhat surprising – 0.5%M/M lift in July revised to a 0.1%M/M decline. In the detail, also unsurprisingly, the services sector fared worst with spending declining 2.9%M/M in August. Spending on durable goods was unchanged in August after declining a cumulative 10% over the prior three months, but spending on non-durable goods declined 1.7%M/M (very similar to the revised 1.9%M/M decline in July). Given the August outcome and earlier revisions, spending over the first two months of Q3 is now running 0.7% below the average through Q3 – a deficit that is unlikely to be made up in September. However, with state of emergency restrictions being eased at the end of last month, as virus cases fell sharply amidst a lift in vaccinations, Japanese retailers and service providers can probably look forward to a solid rebound in spending in the current quarter.

Turning to the rest of the day’s Japanese economic data, the Cabinet Office released its preliminary business indicators for August. Largely as anticipated, with the virus weighing heavily on a number of indicators, the coincident index declined 1.9pts to a six-month low of 91.5. Even so, an “improving” assessment was pronounced for a sixth consecutive month. Meanwhile, the leading index declined 2.3pts to a six-month low of 101.8 – still 13pts higher than a year earlier and well above the long-term average for the index. Finally, the office vacancy rate in the Tokyo business area increased a further 0.12ppts to 6.43% in September, marking the highest level since June 2014 (and now a full 1ppt above the long-run average). The high vacancy rate is continuing to weigh on office rental rates, which for buildings more than a year old fell a further 0.4%M/M – the 14th consecutive decline and so leaving these rates down about 9% from the July 2020 peak.

BoJ Regional Economic Report more downbeat reflecting record virus cases in Q3
In other Japanese news, the BoJ released the latest edition of its quarterly Regional Economic Report (Sakura Report), which provides a summary of anecdotal information gathered by the Bank’s various branches in a similar manner to the Fed’s Beige Book. In contrast to the broadly unchanged conditions indicated in last week’s Tankan survey, the news this quarter was weaker than three months earlier, with five of the nine regions (Tohoku, Tokai, Kinki, Chugoku and Kyushi-Okinawa) revising down their economic assessment, and the remaining four regions leaving their assessment unchanged. As a result, four regions (Tohuku, Tokai, Chugoku and Kyushi-Okinawa) now report a pause in the recovery, while the remaining regions continue to report growth, but in most cases at a slower pace than that recorded previously. Encouragingly, signs of a lift in business investment were cited by seven of the nine regions (up from six previously). However, unsurprisingly, the assessment of consumer spending was less positive with most regions citing a pause or slowing of growth. Comments on production were less positive than in the previous reportable, with several regions describing output as “stagnant” or at a “pause”, with supply-side constraints cited by four of the nine regions. Uniformly, all regions continued to describe both labour market conditions and household incomes as being weak.

German IP plunges to 12-month low as shortage of inputs continues to take its toll
After yesterday’s poor turnover numbers, today’s German IP figures were widely expected to be weak. And the 4%M/M drop in August was the steepest since April 2020. So, while growth was revised slightly higher in July (+1.3%M/M) and was still higher than in August last year (1.7%Y/Y), having contracted in five out of the first seven months of the year, output was still a whopping 9% lower than the pre-pandemic level and at a twelve-month low. And when excluding construction and energy, output was down an even steeper 4.7%M/M, to leave it almost 10½% below February 2020 level. This compares with a shortfall of 4½% in France and just 1% in Spain on an equivalent basis.

Manufacturers continued to attribute the weakness to a shortage of intermediate goods. And the challenge remains most acute in the autos sector, with output down a staggering 17.5%M/M in August, taking the cumulative drop since December to 36% and the level down by more than 40% compared with February 2020. And with production of machinery and equipment down 6.3%M/M, output of capital goods fell 7.8%M/M to be almost 19% lower than the pre-pandemic level and trending in the first two months of Q3 some 2.8% lower than in Q2. While more modest, there were also declines in production of intermediate (-2.4%M/M) and consumer goods (-2.6%M/M). So, overall, on average in July and August, German manufacturing output was trending 1.7% lower than the Q2 average. In addition, construction activity also fell sharply in August, by 3.1%M/M, to be trending so far in Q3 0.6% lower than in Q2. And while energy production rose more than 4%M/M in August, weakness in earlier months points to a notably softer outturn in Q3 as a whole. As such, total IP in July and August was trending more than 1½% below the level in Q2, which itself was down ½%Q/Q.

Looking ahead, today will bring the ECB account from September’s monetary policy meeting, when the Governing Council signalled that it expected to conduct its net PEPP purchases at a “moderately lower pace” this quarter. In addition, ECB Chief Economist Lane will participate in a panel discussion on “The ECB strategy – the 2021 review and its future” and Executive Board member Schnabel will give the opening speech at a joint ECB–Cleveland Fed conference on the drivers and dynamics of inflation.

Another quiet day ahead in the UK brings the ONS business survey and productivity figures
On another relatively quiet day for top-tier UK releases, today will see the ONS publish its latest fortnightly business survey on the insights and impact on the economy from the pandemic, as well as the latest productivity figures for Q2.

Weekly jobless claims the highlight of a quiet day in the US; tomorrow’s payrolls report now in focus, together with any further developments on Capitol Hill
Another quiet day for data also looms in the US, although the weekly jobless claims report will be of some interest in light of the upward trend in initial claims in recent weeks. So while investors await tomorrow’s employment report – one that should be sufficiently robust to rubber stamp the start of the QE taper – most interest will remain centred on any further developments on Capitol Hill with respect to the extension of the debt ceiling. 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at