German factory orders remain down from spring peak

Chris Scicluna
Emily Nicol

Predictable and dovish Fed taper gives markets no cause for alarm
As expected, yesterday evening the Fed confirmed that it will begin tapering its asset purchase programme this month, with its purchases of USTs to be cut by $10bn to $70bn and MBS to be cut $5bn to $35bn for the period from mid-November to mid-December. Purchases will be reduced again by the same amounts for the period from mid-December to mid-January. And the FOMC stated that it expects purchases to continue to be pared back by $15bn per month thereafter, albeit noting that officials will alter the plan if economic conditions warrant.

The new information from the policy statement and Jay Powell’s press conference suggested that Fed officials are still not overly concerned about inflation even though they are seemingly less confident that press pressures are transitory and acknowledge that the risks to the inflation outlook are skewed to the upside. Crucially, the FOMC – and certainly Jay Powell – remains firmly focused on promoting full employment. In particular, with supply-side challenges expected to be resolved in due course but employment still firmly below its maximum level, Powell was clear that the FOMC judged that this is certainly no time to be raising rates. However, how long it will take to meet the conditions for rate take-off – and what those conditions will look like – remains unclear. And Powell was not to be drawn on current market pricing of rates. The assessment of Daiwa America’s Mike Moran can be found here.

Final Japanese services PMIs point to a pickup in activity and prices
There were no major surprises from the final Japanese services PMIs for October, which confirmed a significant improvement in conditions in the sector at the start of Q4 as Covid-related restrictions were relaxed. In particular, the headline activity index was confirmed to have returned above the key-50 expansion level for the first time since November 2019, rising almost 3pts from September to 50.7, some 7.8pts above the August trough, with domestic demand reportedly much firmer. But with input cost pressures rising to their highest January 2020 (when inflation had been boosted by the October-19 consumption tax hike), there was also an inevitable increase in prices charged reported in the sector, with the survey’s index similarly rising to 22-month. But at 51.3, this indicator remains considerably lower than equivalent price PMIs in the US and Europe.

German factory orders remain down from spring peak; final services PMI and PPI data to flag increasing price pressures
Having been particularly strong through to the spring, German factory orders data have since disappointed, showing clear signs of softening demand as supply bottlenecks persist. This morning’s data showed that orders rose a softer-than-expected 1.3%M/M in September following a steeper-than-initially-estimated drop in August (-8.8%M/M), which was the third-largest on the series. Growth in September was only due to a sharp rebound in orders from other non-euro area countries (14.9%M/M), with domestic orders down for the third consecutive month (-5.9%M/M). Moreover, orders of machinery and equipment (+12.2%M/M) were reportedly boosted by a surge in bulk orders, while new orders of motor vehicles were up 9.6%M/M only partially offsetting the 12.6%M/M drop in August. Indeed, when excluding major items, new factory orders were up just 0.2%M/M in September, following a decline of 5.8%M/M previously. So, while underlying orders (excluding major items) remained 4% higher than the pre-pandemic level, they were down by more than 3½%Q/Q in Q3, tallying with the slowdown recently reported in the ifo and PMI surveys.

The level of orders in most subsectors remains higher than the pre-pandemic level, suggesting that, as and when supply chain disruption eventually eases, manufacturing production should rebound. For now, however, today’s manufacturing turnover data – which typically offer an insight into production for the same month – suggested another subdued outturn in September. Indeed, following a drop of 5.8%M/M in August, turnover was down a further 0.2%M/M to its lowest level since June 2020, more than 10% lower than the pre-pandemic level and down 3%Q/Q in Q3. Therefore, today’s data certainly suggest that tomorrow’s IP data will likely fall short of the current Bloomberg consensus forecast of +1.0%M/M.

Meanwhile, after the flash euro area CPI estimate last week saw headline inflation jump to a joint-series high of 4.1%Y/Y in October, today’s PPI release will be watched for any signs that increased energy and raw material costs are being increasingly passed through to other categories along the producer chain. The headline producer price inflation rate is expected to rise 2ppts to a new series high of 15.4%Y/Y. Also this morning, the final October services PMIs will also likely confirm record high input and output price gauges seen in the preliminary release. The flash euro area headline activity index fell 2.6pts to 54.7, a six-month low. Perhaps of most interest in today’s release will be the first breakdown for the Italian and Spanish PMIs, with Markit having previously eluded to a moderating expansion in the sector among the periphery countries.

BoE likely to raise Bank Rate to 0.25%, updated Bank projections to be watched for insight into future path of tightening
All eyes in the UK today will be on the BoE’s policy announcements and updated economic forecasts at midday. While the policy decision from the MPC seems unlikely to be unanimous, the BoE staff members of the Committee are all likely to be on board for tighter policy. So, we think the majority will vote to raise rates by 15bps to 0.25%, with just three external members (Tenreyro, Mann and Haskel) likely to vote against. The MPC will also likely vote to bring an end to its QE programme one month early, thus reducing its asset purchase target by £20bn to £875bn (of which £855bn would comprise Gilts).

Of course, the expected moves would merely reverse the emergency setting of policy that was introduced after the intensification of the pandemic. So, the BoE’s forecasts, MPC policy statement and Bailey’s press conference should also be watched for further signals on the near-term future path of policy and the conditions required to justify additional tightening. We suspect that the BoE’s updated economic projections will imply that the expected tightening currently priced into money markets, of almost four additional hikes in 2022, would be excessive, pushing inflation back below the 2.0%Y/Y target by the end of the horizon.

UK car registrations the weakest in any October since 1991
Today’s data flow will include new car registrations numbers for October, which remain extremely weak not least due to persisting supply bottlenecks. Reports suggest that registrations fell a further 25%Y/Y to just 106k units, the weakest October outturn since 1991. So, in the first ten months of the year, car sales were up less than 1½%YTD/Y despite the low base a year ago. Indeed, compared with the equivalent periods in the five years before the pandemic, registrations were down by almost a third. With production likely to remain hampered by supply chain disruption, there are clear downside risks to SMMT’s recent forecast for annual sales of 1.66mn, which would require sales to be unchanged compared with a year earlier in both November and December. Indeed, aside from the pandemic impact 2020, full-year registrations will prove to be the lowest since 1992. Later this morning will also bring the latest construction PMI survey, which also seems bound to flag persistent supply constraints and rising price pressures within the sector. This morning will also bring the latest UK construction PMI survey, which seems bound to flag persistent supply constraints and rising price pressures within the sector.

US job cuts and claims data due alongside productivity and trade reports
Ahead of tomorrow’s US payrolls numbers and after yesterday’s decent ADP figure (+571k, albeit with a downwards revision in September), this afternoon will bring more labour market indicators with October Challenger Jobs Cuts and weekly jobless claims figures. With employment having been strong in Q3, but GDP growth having slowed, today’s nonfarm productivity data are likely to report a drop last quarter and therefore leave a sizeable increase in unit labour costs. Meanwhile, the latest trade figures are expected to report an improvement in the services surplus, albeit insufficient to offset the widening in the goods deficit reported last week.

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