German factory orders data for August not quite as weak as headline numbers suggest
At face value, today’s German factory orders data disappointed, declining a steeper-than-expected 2.4%M/M, the most since Russia invaded Ukraine in March. But this followed a notable upwards revision to new orders in July (with monthly growth boosted by 3ppts to +1.9%M/M) following the late inclusion of a large-scale foreign order from the aerospace sector. Indeed, when excluding bulk contracts, orders rose 0.8%M/M in August. Nevertheless, the overall drop in August reflected declines in domestic orders (-3.4%M/M), as well as those from elsewhere in the euro area (-3.8%M/M), reversing the strength seen previously. And there were sizeable declines in orders for capital (-2.4%M/M) and intermediate goods (-4.2%M/M), while a jump orders for consumer goods (5.2%M/M) merely partly offset the slump (-15.9%M/M) in July.

Looking through the monthly volatility, in the first two months of the third quarter total orders were trending some 0.4% higher than the Q2 average, thanks to orders of capital goods (up 2.7% on the same basis). This notwithstanding, orders still remain almost 9% lower than at the start of the year, and more than 13% below last year’s peak. Moreover, survey indicators including the PMIs and ifo indices point to a further deterioration in conditions the sector in September as demand responds to the ongoing energy crisis and increasing concerns of global recession.

Today’s release was, however, more encouraging with respect to manufacturing turnover in August, reporting positive growth (+1.0%M/M) for the fourth month out of the past five, to leave it trending in the first two months of Q3 around 1½% higher than in Q2. That might add to impressions that an easing of supply-chain problems is providing a modest boost to output in certain sub-sectors, we note that there has been a slight mismatch between turnover and IP over recent months. Nevertheless, today’s release suggests that tomorrow’s production report could well surprise on the upside – the Bloomberg survey consensus is for a drop of 0.5%M/M. We will also see the release this morning of German autos production figures for September.

BoJ continues to judge that Japanese economy is recovering moderately
As part of the BoJ’s quarterly Branch Managers’ meeting, its Regional Report published today concluded that, on the whole, Japan’s economy is picking up moderately as the effects of supply constraints and the pandemic continue to ease. That judgement was little changed from the report’s judgement three months ago, although the assessment in Chugoku was revised higher after that region had previously reported ongoing downwards pressures in its economy. But while branch managers assessed production to have increased as China’s restrictions eased, they were also wary of a weakening in global demand. While consumption was boosted later in the summer as the number of domestic Covid infections fell, and was expected to be supported by the government’s new national travel discount scheme, there was wide recognition that higher prices had diminished households’ purchasing power. And while it was reported that some firms were considering increasing summer bonuses amid a tightening labour market, firms were also unsurprisingly cautious due to rising prices and increasing global uncertainties.

Fitch follows S&P, revising UK credit rating to negative
Yesterday evening, Fitch Ratings followed in S&P’s footsteps five days earlier by cutting the outlook to negative on its UK AA- sovereign credit rating. In particular, Fitch noted that “The large and unfunded fiscal package announced as part of the new government's growth plan could lead to a significant increase in fiscal deficits over the medium term”. While the government’s proposals had been presented with none of the usual independent OBR fiscal forecasts, Fitch estimates that without compensatory measures, the general government deficit will remain elevated at 7.8% of GDP in 2022 and increase to 8.8% next year, before declining to a still whopping 7.2% in 2024. It adds that deficits for the median country that it rates AA are projected to average just 2%. Fitch added that “Failure to implement a credible fiscal strategy that restores market confidence and is consistent with government debt/GDP declining over the medium term” could lead to a downgrade.

ECB meeting account due along with euro area retail and construction indicators
Looking ahead, one focus in the euro area today will be the ECB account from its 8 September monetary policy meeting, where the Governing Council raised interest rates by 75bps and signalled further tightening over the next several meetings. The account will be watched for insights into the debate between the hawks and doves, any further discussion on the likely pace of hikes going forward, as well as any debate about QT and/or a possible reverse-tiering system to reduce interest payments on banks’ excess reserves. In terms of economic data, euro area retail sales will offer an update on the sector in the middle of the summer, with real expenditure on non-essential goods likely to have been restrained by rising prices and the continued rebalancing of spending towards services. The construction PMIs from the larger member states were also consistent with another month of contraction at the end of the third quarter, with Germany reporting the steepest pace of decline for 19 months.

BoE Decision-Maker Survey results to highlight wage and price expectations
As in the euro area, the UK construction PMIs are likely to signal contraction in the sector in September, a trend that seems highly likely to continue in coming months given the ongoing shock to UK mortgage and business interest rates. In addition, the BoE’s Decision Maker Survey results will be watched by MPC members not least for updates on business wage and price expectations. Separately, MPC external hawk Haskel will speak publicly this evening.

US focus on jobless claims and Fed-speak
Ahead of tomorrow’s payrolls release, a quiet day for economic data from the US will nevertheless bring the usual weekly jobless claims figures and Challenger jobs cuts numbers for September. Last week, initial claims numbers fell to just 193k, once again well below the consensus forecast and the lowest level since late April. A modest increase back above 200k is expected this week, which would suggest that, with the availability of new staff still low in the very tight labour market, firms are still determined to retain workers despite the loss of growth momentum and highly uncertain economic outlook. There is also plenty of Fed-speak due today, with Fed Governors Waller and Cook set to talk publicly along with regional Fed Presidents Kashkari, Evans and Mester.