Japanese services PMI points to renewed strength

Chris Scicluna
Emily Nicol

German factory orders fall sharply at end of Q3 on weaker foreign demand to point to a very weak outlook for production
German factory orders remained firmly in reverse gear in September, declining 4.0%M/M following a (revised) drop of 2.0%M/M the prior month. That left them more than 16½% below the peak in July last year, and about 1½% below the pre-pandemic level in February 2020. And despite a firmer start to the quarter, orders dropped 1.6%Q/Q in Q3 following the drop of 5.5%Q/Q in Q2. The weakness in September was largely due to a sharp drop in new foreign demand, which fell a steep 7.0%M/M, with new orders from the rest of the euro area down 8.0%M/M and those from other countries down 6.3%M/M while domestic orders were down just 0.5%M/M. By type of good, capital goods and intermediate items registered steep drops in new orders, but consumer goods orders rebounded. Over Q3 as a whole, however, only capital goods orders failed to drop, being supported by a pickup in new orders from the autos sector. Looking ahead to tomorrow’s IP data, manufacturing turnover inched up 0.2%M/M in September pointing to a steady month for output. That would also mean that factory production provided moderate support to overall GDP over Q3 as a whole as supply-chain strains in the auto sector eased somewhat, even as energy-intensive sub-sectors rationalised output. However, the orders data tally with survey evidence to suggest that production is likely to fall back – perhaps sharply – in Q4 and into the New Year.

Euro area PPI might suggest that producer goods inflation has now peaked
After the flash euro area CPI estimate for October earlier this week significantly beat initial expectations, today will bring the euro area’s PPI figures for September. In line with recent signals from surveys and wholesale markets, these might well suggest that – notwithstanding risks of a new shock – producer goods inflation has now peaked, with the headline rate expected to drop more than 1ppt from August’s record-high 43.3%Y/Y. The final services PMI surveys are also due from the euro area and expected to confirm that the headline activity index declined for the fifth consecutive month in October, to a twenty-month low of 48.2. Separately, ECB President Lagarde is scheduled to give opening remarks at an event organized by the central bank of Estonia.

Japanese services PMI points to renewed strength at the start of Q4
Contrasting markedly with the downbeat services PMIs from the US, euro area and UK, the equivalent Japanese survey today was more encouraging at the start of Q4 as the lifting of international travel restrictions and the launch of the government’s domestic Travel Discount Programme boosted demand. In particular, the headline activity index rose a further 1pt in October to 53.2, the second-strongest reading since August 2019. While a touch softer than in September, new business growth remained comfortably positive in October, with new export orders gaining strength from rising tourism. Confidence about the outlook was among the highest on the survey record and so firms increased their workforces by the most for five months amid growing work backlogs. But inflationary pressures continued to intensify too reflecting higher prices of raw materials and energy, with firms passing on some of these additional costs to consumers. Although the output price PMI (53.2) remains firmly above the long-run average (48.8) it was still well down on the equivalent measures in other major economies.

US payroll data to report further moderation in the pace of job growth
All eyes today will be on the US labour market report for October. Our colleagues at Daiwa America expect a third successive slowing in the pace of job growth, although their forecast for nonfarm payroll growth of 225k (from 263k in September) is a touch above the current BBG consensus (190k). In line with expectations, however, they anticipate a rise in the unemployment rate of 0.1ppt to a still-low 3.6%. Of course, the wage data will also be watched closely by the markets and the Fed, with a third successive month of growth of 0.3%M/M expected for October, down a touch from the average rate in Q2 and Q3. 

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