Japan’s core private machinery orders slump in August

Chris Scicluna
Emily Nicol

US equities and bond yields fall as investors await direction from today’s US CPI report
With investors doubtless awaiting direction from today’s US CPI report, and with bank earnings news and the latest FOMC minutes on the horizon too, a relatively quiet session on Wall Street saw the S&P500 post a modest 0.2% loss yesterday. NFIB reported that small business sentiment had declined slightly in September, while the BLS indicated that the number of job vacancies had fallen from upwardly-revised record levels in August. However, the BLS also reported that the quits rate – measuring the proportion of employees leaving their jobs voluntarily – had increased to a record high in August, suggesting considerably dynamism and confidence in the labour market, likely not least due to rising worker compensation. The latest Fedspeak reinforced expectations that the QE taper will be announced at the next FOMC meeting on 3 November, with Vice-Chair Clarida stating that the necessary conditions had “all but been met”. However, mid- to long-term Treasury bond yields still finished lower on the day, with the 10Y UST closing down just over 3bps at 1.58%. Even so, the greenback continued its upward trend, with $/€ falling to a 13-month low.

US equity futures have weakened a tenth or so since the close, amidst media reports that Apple might cut its iPhone production target by as many as 10mn units due to ongoing chip shortages. There was little reaction to the predictable news that the House had passed the stopgap bill to raise the debt ceiling by $480bn, providing the Treasury with headroom to meet financial obligations until sometime in December. In Asia, markets have been somewhat mixed today. After posting a 0.7% loss yesterday, the TOPIX has declined a further 0.5% today. The machinery orders report added to the run of disappointing August data. However, the Reuters Tankan indicated that non-manufacturing firms – while seeing no improvement yet – were considerably more optimistic about business conditions over the coming two-three months. While stocks have also moved lower in Taiwan, China’s CSI300 has rallied 0.8%, with today’s export data for September proving surprisingly strong for a second consecutive month, notwithstanding power shortages and mediocre PMI readings. A typhoon meant that markets never opened in Hong Kong. However, after declining 1.4% yesterday, South Korea’s KOSPI has rebounded about 1% today, with a solid gain also seen in Singapore.

In the Antipodes, Australia’s ASX200 has moved sideways but AGCB yields have tracked UST yields lower. In contrast to the recent improvement depicted in a weekly survey, the monthly Westpac consumer survey pointed to a slight decline in optimism over the past month. Meanwhile, Australian Treasurer Frydenberg again indicated that he was open to a review of the RBA at some stage – as called for recently by the OECD, some local economists and a former Board member – without giving any indication that he was seeking any particular change in the central bank’s mandate or operation. Kiwi bond yields also moved lower, even as ANZ’s survey reported that firms’ outlook for activity had already returned to the levels seen prior to the recent virus outbreak, even with some form of restrictions remaining in place across the country.

Japanese machinery orders survey adds to run of disappointing August data
The run of weaker than expected August data in Japan continued today, with machine orders also falling short of consensus expectations. Core private domestic orders (which excludes volatile items such as ships and capex by electricity companies) unexpectedly declined 2.4%M/M, compared with the consensus forecast of a 1.5%M/M increase. And so while the unadjusted series report a 17.1%Y/Y increase in orders, annual growth as calculated from the seasonally-adjusted series slowed to 10.2%Y/Y from 13.4%Y/Y previously. Total machinery orders declined by a much larger 7.8%M/M, in large part due to a 14.7%M/M pullback in foreign orders. However, this follows an increase of more than 24%M/M in July and so foreign orders remain up by almost 50%Y/Y. A small 1.3%M/M decline in government orders also weighed on total orders.

Within the detail, after rising 6.7%M/M in July, orders from the private manufacturing sector fell more than 13%M/M in August, slowing their annual growth to just over 22%Y/Y. While orders for ICT equipment increased to the most since January 2008, sharply lower orders were received from the production machinery and electrical machinery industries, while shipbuilding orders also fell. Orders from the private non-manufacturing sector fell just 1.2%M/M in August (with core orders actually increasing by 7.1%M/M, albeit following a 9.5%M/M decline in July). However, private non-manufacturing orders were still down 3.8%Y/Y, with weaker orders reported in every industry aside from real estate and ‘other non-manufacturing’.

Even given today’s result, core machinery orders are tracking about 1.0% above the average through Q2. However, perhaps not surprisingly given virus developments, this is far below the 11%Q/Q growth that firms had forecast for Q3 when surveyed at the beginning of the quarter.

Reuters Tankan points to little change in Japanese firms’ assessment of current business conditions, but non-manufacturers expect a marked improvement over coming months
In contrast to last week’s sharp rebound in the Economy Watchers survey, today’s Reuters Tankan survey pointed to little change in firms’ perceptions of recent business conditions. After falling 15pts last month, not least due to a slump in optimism in the supply-constrained auto sector, the overall diffusion index (DI) for manufacturers eased a further 2pts to 16 in October. This modest decline still leaves the index at very positive levels compared with the long-term average (which sits around zero), albeit at its lowest reading since April. The forecast DI – which measures expected business conditions three months ahead – fell 5pts to 14, indicating that respondents expect business conditions to remain broadly similar in the near term. The overall non-manufacturing DI increased just 1pt to -1, which in contrast to the manufacturing index lies below the long-term average (which is around 5). However, doubtless boosted by the removal of state of emergency conditions at the end of last month, the forecast DI increased 7pts to 14 – the highest reading since February and indicating that firms expect a marked improvement in business conditions over the next three months.

At the industry level, in the manufacturing sector, the modest decline in current business conditions was dominated by a further 17pt slump in the autos and transport DI, which now sits at a 13-month low of -31 (clearly reflecting a combination of supply bottlenecks and other pandemic-related restrictions on output and demand). Optimism also faded in the steel and metals industry. By contrast, the DI in the electrical machinery sector jumped 22pts to a four-month high of 36, although conditions were forecast to be much less favourable over coming months. Within the non-manufacturing sector, the current DI for transport and utility operators increased 19pts to a more than two-year high of 24. That for retailers improved just 6pts to -16, although the forecast index increased 11pts to 11 (with an even larger increase reported by the wholesale industry), The information services industry remained the most optimistic across the survey, with the forecast DI rising 4pts to 54.

China’s export growth exceeds expectations again in September; imports fall short
Ahead of next week’s release of GDP figures for Q3, the focus in China today was on the release of its international trade report for September. In that regard, today’s figures pointed to considerable vigour in China’s traded goods sector, especially the export sector where growth easily beating consensus forecasts for a second consecutive month. However, less fortunately for China’s trading partners, imports fell somewhat short of expectations, so pointing to relatively subdued domestic demand.

Turning to the detail, in dollar terms, exports grew 28.1%Y/Y in September, up from 25.6%Y/Y in August and almost 7ppts firmer than the consensus expectation in Bloomberg’s survey (given the strengthening of the yuan over the past year, exports grew a slower 19.9%Y/Y in local currency terms, but still up from 15.7%Y/Y last month). Moreover, exports increased to a record high in September and were over 40% higher than in September 2019 – clearly a fantastic performance considering the impact of the pandemic on the global economy. By destination, exports to the US increased 30.6%Y/Y – almost double the pace reported in August – while exports to the EU grew at a little changed pace of 28.6%Y/Y. Growth in exports to ASEAN countries was also little changed at 17.3%Y/Y, while growth in exports to Japan slowed to 15.2%Y/Y from 19.5%Y/Y in August.

Meanwhile, following a surprisingly strong August reading, growth in imports slowed to 17.6%Y/Y in September – about 3ppts below the consensus expectation. Even so, the level of imports stood over 33% higher than two years ago – far greater than growth in nominal spending and so indicating a rise in import penetration over the period. Robust growth rates over the past year continued to owe in large part to the rebound in commodity prices, with imports of crude oil up around 35%Y/Y and imports of iron ore up around 41%Y/Y, albeit both reporting much slower growth than in August. By country of origin, imports from the US grew just 16.6%Y/Y. As a result, China’s bilateral surplus with the US widened to a new record high of $42.0bn – up from $37.7bn in August and an outcome that will no doubt raise eyebrows at the White House. This accounted for about half of the widening in China’s overall surplus to $66.8bn – the most since December – from $58.3bn in August. China’s imports from the EU and Japan grew at a markedly slower pace of 1.1%Y/Y and 5.5%Y/Y respectively. Imports from ASEAN nations grew 17.3%Y/Y. Meanwhile, despite ongoing political tensions, imports from Australia increased more than 50%Y/Y in September – clearly benefitting in part from commodity price gains – so that China’s bilateral deficit with Australia widened to a record $30.2bn.

UK GDP continued to narrow gap with the pre-pandemic level in August, although data lack vigour of the labour market report to leave BoE policy call finely balanced
Broadly aligning with expectations, this morning’s UK GDP data showed a further narrowing of the gap with the pre-pandemic level of output. But given that August was largely free of pandemic restrictions, and in contrast to yesterday’s strong labour market data, today’s report was arguably a little underwhelming, with economic activity rising just 0.4%M/M after a revised contraction of 0.1%M/M in July to suggest a loss of vigour over the summer. Overall, GDP was still 0.8% below the pre-pandemic level in August. But given the profile over prior months, the average level of GDP in July and August was 1.3% above the Q2 average, suggesting a still well above-potential rate of growth over the third quarter as a whole.

Within the detail, despite further easing of pandemic restrictions, services activity grew just 0.3%M/M in August, to be still 0.6% below the pre-Covid level. There was again significant variation in performance between sub-sectors, although 11 out of 14 subsectors reported growth. Accommodation and food services (10.3%M/M) almost fully accounted for monthly growth in services in August, while there were also strong rebounds in travel agencies (47.9%M/M), arts and entertainment (24.7%M/M) and sports and amusement park activities (4.0%M/M), with the latter supported not least by the start of the football season and increased staycations this year. But healthcare continued to contract (-5.5%M/M) as doctor visits and vaccinations fell.

In the other main sectors, manufacturing output was a touch firmer than expected, with growth of 0.5%M/M in August driven by a surprising acceleration in the autos sector (3.9%M/M). But transport equipment was still down by almost a fifth compared with the pre-pandemic level, with overall manufacturing still more than 2% lower than in February 2020 too. And construction output continued to disappoint in August too, down for the third month out of the past four and still 1.4% lower than pre-pandemic level.

Overall, given the revisions to the national accounts announced at the end of last month, there is likely to be considerably less spare capacity in the economy than previously estimated by the BoE. But unlike the labour market figures, today’s GDP figures suggested a levelling off of economic momentum in the middle of the summer despite the relaxation of restrictions. And given the conclusion of the government’s job support schemes, the cut in Universal Credit payments and significantly higher household energy bills from this month, a hike in Bank Rate as early as next month may prove a little too hasty.

August IP data ahead in the euro area, also final German inflation figures for September
Today will bring the release of euro area industrial production numbers for August. While IP in France grew solidly (1.0%M/M) and dropped only marginally in Italy and Spain, a sharp slump in German output (-4.1%M/M) combined with softer data from the Netherlands and Ireland, will lead to a notable decline in overall euro area IP. Based on national figures, we will likely see output fall 1.7%M/M, to leave it more than 2½% lower than the pre-pandemic level. This morning we have already seen the release of final German inflation for September. As expected these confirmed that headline CPI (on the EU-harmonised measure) rose to series high of 4.1%Y/Y.

September CPI key US focus today; FOMC minutes and bank earnings reports also due
For bond investors, the key focus in the US today will likely be the CPI report for September. Daiwa America’s Mike Moran expects the core CPI to have increased 0.2%M/M – an outcome that would likely see annual inflation tick up to 4.1%Y/Y – with upward pressure on the prices of many core items is likely to be evident, but discounting on virus-sensitive services likely to limit the advance. He expects higher food and energy prices to drive a slightly larger 0.3%M/M lift in the headline index, which should nonetheless leave annual inflation steady at 5.3%Y/Y. Today will also bring the release of the minutes from last month’s FOMC meeting. Meanwhile, today will also bring the first of this week’s quarterly earnings reports from the major US banks.

Aussie consumer confidence declines slightly in October
In contrast to the recent slight improvement in consumer confidence suggested by the weekly ANZ-Roy Morgan survey, today’s monthly Westpac survey indicated that Australian consumers had become slightly less optimistic over the past month. After increasing 2.0%M/M last month, the headline index fell 1.5%M/M to 104.6 in October – still slightly above the long-term average – with respondents a little less optimistic about the outlook for the economy, especially over the medium-term. Interestingly, but perhaps not surprisingly, the survey also reported a huge gap between the optimism of those respondents intending to be vaccinated (and index reading of 122) and that of the just 6% of respondents that do not plan to be vaccinated (less than 85).

Kiwi business’ activity expectations continue to rebound in October
The focus in New Zealand today was on the release of the preliminary results of the ANZ Business Outlook survey for October. While the headline general business confidence index slipped 1.4pts to -8.6, the far more important Activity Outlook index – which tracks GDP growth – improved a further 8pts to 26.2 – essentially back in line with its pre-lockdown level (and slightly above the long-term average for series), even with restrictions remaining in place to varying degrees across the country. Firms’ investment intentions firmed but employment intentions softened slightly, with both remaining stronger than average. Meanwhile, firms’ year-ahead inflation expectation nudged up 0.02ppt to 3.04%, thus remaining fractionally above the top of the RBNZ’s 1-3% inflation target range for a third consecutive month. 

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