Supply bottlenecks take their toll on demand in Germany

Chris Scicluna
Emily Nicol

Wall Street rebounds overnight, but futures begin to crack in Asia as Treasury yields make new highs, weighing on Asian equity markets
The recent yoyo in the US equity market continued yesterday, with the S&P500 rebounding 1.1% from the previous day’s 2½-month low but remaining below its 100-day moving average. The deadlock on Capitol Hill remained unresolved, with President Biden indicating that Democrat Senators may seek to vote through a debt ceiling exception to the usual filibuster rule, rather than be forced by Republican’s to use the budget reconciliation process. A firmer than expected ISM services survey supported sentiment, with the headline index nudging up to a very solid 61.9 in September, even as the employment index eased slightly to 53.0. Notably, equities made gains despite a sell-off in the Treasury market, with the 10Y UST closing 5bps firmer at 1.53% – just below last week’s peak. However, the sell-off in UST’s has continued during trading in Asia to today, briefly lifting the 10Y yield to 1.57% and the 30Y yield to 2.14%. This has weighed on US equity futures, with S&P minis presently down around ½%. Importantly, whereas the rise in nominal yields over the past month or so has been mostly associated with a less negative real yield, the latest upswing has been driven by a lift in breakevens – indicative of rising stagflation worries due to the rent lift in energy prices.

Markets in Mainland China remained closed today as the Golden Week holiday continued. Elsewhere in the region, investors appear to have taken their lead from the slippage in US equity futures rather than the overnight gain in cash markets. In Japan, the TOPIX declined a relatively modest 0.3% on a day devoid of local data, nonetheless marking an eighth consecutive session in the red. A Nikkei-TV Tokyo poll reported that new PM Kishida’s cabinet had launched with an approval rating of 58% – far above that enjoyed by Suga in the closing days of his leadership, but less than Suga (and Abe before him) had registered when first attaining the role. Meanwhile, speaking via webcast to a Japan-US business conference, the BoJ’s Kuroda contrasted the performance of the two economies through the pandemic and reiterated that Japan’s recent inflation performance – whilst clearly much weaker than in the US – was not as weak as recent headline CPI figures had suggested. Equities rose modestly in Singapore despite news that virus cases had set a new daily record, but stocks have slipped sharply in South Korea, while smaller losses have also been registered by in Hong Kong and Taiwan.

Turning to the Antipodes, the main focus today was on New Zealand with the RBNZ implementing its first rate hike since 2014 and forecasting further tightening contingent on the performance of the economy as pandemic restrictions ease. However, this move was almost fully priced and so Kiwi bonds yields have hardly budged today, notwithstanding the sell-off in USTs. By contrast, in Australia the 10Y AGCB has climbed almost 10bps to a more than three-month high of 1.61%, leaving the ASX200 down 0.6% and so just above the four-month low reached last week. There was no economic news in Australia. However, new virus cases in New South Wales fell to the lowest since 17 August as the state hit its target of fully vaccinating 70% of the adult population, clearing the way for an easing of restrictions. Meanwhile, APRA (Australia’s banking regulator) announced that henceforth its expects lenders to assess new borrowers’ ability to meet loan repayments at an interest rate at least 3% above the offered rate, compared with the 2.5% margin usually required – a change that will cut the typical customer’s borrowing capacity by about 5%. This move comes very soon after last week’s Council of Financial Regulators meeting, at which increased concern was expressed at risks associated with rapid growth in credit amidst sharply rising house prices and historically low interest rates.

German factory orders slump as supply bottlenecks persist, euro area retail sales to reverse only part of July’s weakness
Contrasting with yesterday’s broadly upbeat French IP figures but aligning with downbeat car production numbers, this morning’s German factory orders and turnover data were extremely weak. In particular, orders were down a whopping 7.7%M/M in August, the largest monthly drop since April 2020. Admittedly, this followed significant upward revisions to growth in June (4.6%M/M) and July (4.9%M/M), therefore leaving total orders in August still more than 11½% higher than a year earlier and 8½% higher than the pre-pandemic level. However, the strength in June and July was principally thanks to one-off major orders (i.e. aircraft, ships, trains etc). Excluding such items, orders were up just 1.8%M/M and 0.3%M/M respectively in those months. And the drop in August on this basis was still significant (-5.1%M/M). So, while orders excluding large items were still roughly 4½% higher than the pre-pandemic level in August, they were still down a steep 7½% from April, with underlying orders currently trending in Q3 almost 2½% below than Q2 average.

Within the detail, the weakness reflected a drop in orders placed both domestically (-5.2%M/M) and overseas (-9.5%M/M), which was driven a more than 15%M/M decline from countries outside the euro area. Perhaps unsurprisingly given the global semiconductor shortage and persistent delivery bottlenecks, the weakness was most acute in the autos sector, with orders down 12%M/M, while orders for metal production were also down by almost 10%M/M. Overall, incoming orders for capital goods fell 11.1%M/M, while the declines in orders for intermediate and consumer goods was more modest at 2.8%M/M and 2.7%M/M respectively. The level of orders in all subsectors remains considerably higher than the pre-pandemic level, suggesting that as and when supply chain disruption eventually eases, manufacturing production should rebound firmly.

For now, however, today’s manufacturing turnover data – which typically offer an insight into production for the same month – suggested a particularly weak outturn in August. Indeed, the slump of 5.9%M/M was the largest since April 2020, to leave turnover more than 10% lower than the pre-pandemic level. While last month’s increase in turnover (1.9%M/M) outpaced production (1.0%M/M), today’s data certainly suggest that there are significant downside risks to tomorrow’s IP release, with the decline in August likely to be considerably larger than the current BBG consensus forecast of -½%M/M.

Looking ahead to the rest of the day, euro area retail sales figures for August are likely to mirror the pattern in last week's German data, reporting a modest rebound following a marked decline in July. The market consensus is for an increase of less than 1%M/M, following the drop of 2.3%M/M in July, which would leave sales around 3½% higher than the pre-pandemic level. September construction PMIs for the euro area and various member states are also due for release.

A quiet day in the UK will bring construction PMI data for September
Today will be quiet on the UK economic data front, with only the construction PMI survey for September due. This expected to point to a slowdown in activity in the sector, as the impacts of delivery delays, a shortage of materials and labour, and higher costs continue to be felt.

Developments on Capitol Hill, if any, with remain the key focus in the US today; ADP employment report also due
Turning to the US, for the most part, investors will likely remain focused on Capitol Hill today, with the Senate scheduled to vote again on a House bill to suspend the debt ceiling until December next year. As previously, the bill will likely fail to pass with Senate Republicans seemingly insistent that Democrats use the budget reconciliation procedure to lift the debt ceiling, rather than take any ownership for debt that has been accumulated by successive administrations. On the data front, the main point of note is the ADP employment report for September, with Bloomberg’s survey indicating that analysts expect this to indicate a 430k lift in private payrolls – broadly in line with their expectations for Friday’s official employment report. Of course, the ADP measure has been an inaccurate indicator of the official measure during the pandemic era, and so today’s outcome will likely need to deviate substantially from expectations in order for analysts to revise their forecasts for Friday’s official data.

RBNZ lifts OCR by 25bps to 0.50% as expected, signals further gradual tightening over time
After previously deferring a planned rate hike at the eleventh hour, in response to a Delta-variant virus outbreak that plunged the country into a sudden lockdown, today the RBNZ delivered a 25bps hike in the Official Cash Rate (OCR) to 0.50% – the first lift in the policy rate since 2014 and one that was widely anticipated by analysts and largely priced by markets.

In the accompanying post-meeting statement, the RBNZ noted that a broad range of economic indicators highlight that the local economy has been performing strongly in aggregate, with resulting capacity pressures especially evident in the labour market. Looking ahead, the Bank argued that the current virus-related restrictions had not materially changed the medium-term outlook for inflation and employment since the last meeting in August. Echoing the thoughts expressed yesterday by the RBA in relation to the Australian economy, while acknowledging that the local economy had contracted sharply during the recent lockdown, the Bank expressed confidence that household and business balance sheet strength, ongoing fiscal policy support, and a strong terms of trade will allow economic activity to recover quickly as alert level restrictions ease. Regarding the inflation outlook, the Bank reiterated that headline CPI inflation is likely to exceed 4%Y/Y in the near term, with capacity-related pressures accentuated by the impact of higher oil prices, rising transport costs and supply chain bottlenecks. And while the Bank expects inflation to return to the 2%Y/Y target midpoint over the medium term, it noted that the immediate relative price shocks risk leading to more generalised price rises.

As far as the outlook for policy is concerned, the RBNZ simply stated that “…further removal of monetary policy stimulus is expected over time, with future moves contingent on the medium-term outlook for inflation and employment”. The market has interpreted this to mean that a further 25bp hike can be expected at the next meeting on 24 November – with pricing for a 25bp move nudging up to 90% – especially as the subsequent meeting will not occur until 23 February next year. 

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