Morning comment: Japan orders, French IP & UK monthly GDP

Emily NIcol

A reasonably quiet day for economic data and other news resulted in another day of little change on Wall Street, with the S&P500 closing down just 0.1% thanks to weakness in the financial and industrial sectors. Treasury yields drifted lower after hitting new highs in Asia, with the 10-year yield closing at 3.20%. There was little reaction to President Trump’s further criticism of the pace of Fed policy tightening.

Against that background, and given a relatively light data flow, Asian equity markets have struggled for direction with a mix of gains and losses seen across the region. After recording a large catch-up loss yesterday, Japan’s TOPIX rose a modest 0.2% today as the yen stabilised and as machinery orders impressed (more on this below). Meanwhile after posting big losses back on Monday, China’s equity markets nudged lower for a second day with the CSI300 closing down 0.4%. By contrast, markets were decidedly weaker in Singapore and South Korea, where central bank meetings are now coming into view. 

The most important economic report in Japan today concerned machinery orders during August. Notwithstanding the very positive outlook for capex that continues to be depicted in various business surveys – most recently the BoJ’s Tankan – the market was expecting some negative payback in the August report following the previous month’s very strong 18.8%M/M jump in total orders and encouraging 11.0%M/M lift in core private orders. Instead, total machinery orders rose a further 1.8%M/M in August. Moreover, core private orders – which excludes ships and other volatile categories – rose a further 6.8%M/M so that annual growth remained very impressive at 12.6%Y/Y. As a result, taking July and August together, core private orders are now running 6.4% above the average reading seen in Q2. This compares very favourably with the Cabinet Office survey of machinery manufacturers which, somewhat surprisingly, had forecast a 0.3%Q/Q decline in core private orders in Q3. In the detail, orders by manufacturers rose a further 6.6%M/M and were up 13.9%Y/Y, while core orders in the non-manufacturing sector rose a similar 6.0%M/M to be up 11.6%Y/Y. Foreign orders rose 7.8%M/M in August but thanks to base effects were still down 2.7%Y/Y. Volatile public sector orders fell 21.1%M/M – this after jumping 57.0%M/M last month – and were down 3.6%Y/Y.

Euro area:
Following the disappointing German IP release at the start of this week, this morning will bring greater insight into developments in the euro area’s industrial sector in the middle of the third quarter with the release of production figures from France and Italy. And the French data this morning provided a modest upwards surprise, with industrial output rising for the third consecutive month and by a stronger-than-expected 0.3%M/M, underpinned by the manufacturing sector where output rose 0.6%M/M. So, on average in July and August, total IP was up 1.3% compared with the average in Q2 to suggest that - in contrast to Germany – the sector was well on track for positive growth in Q3. In contrast, despite a forecast 0.8%M/M rise in Italian IP, this outcome would still leave production down more than ½%3M/3M and on track for a contraction in Q3.

With the EU Council meeting kicking off a week today, there appeared to be some meaningful progress made between Theresa May’s chief negotiator Olly Robbins and EU chief negotiator Michel Barnier yesterday, with reports suggesting that the EU was close to agreeing that the contentious Irish “backstop” would apply to the whole UK rather than just Northern Ireland. This backstop would see the UK remaining in the customs union for as long as necessary in order to create mechanisms to deliver a frictionless border in Ireland. But that in itself creates domestic political difficulties for Theresa May, with Brexiteer MPs concerned that this will keep the UK in a customs union with the EU indefinitely. At the same time the DUP, which provides Theresa May with her majority in Parliament, is not going to be happy with the additional checks that may be required between Northern Ireland and the rest of the UK to deal with the fact that the backstop will see Northern Ireland effectively remain in the Single Market for goods, but the rest of the UK not. So, even if a deal can be hammered out, Theresa May will face a significant challenge getting approval in the House of Commons. She is likely to face opposition from hardline Brexiteers and DUP members, while the Labour Party will almost certainly vote against the deal. But it is unclear to what extent Brexiteer and DUP opposition will translate into votes, while there appears to be a large number (potentially 30) of Labour MPs who may vote with the Government. On balance, we continue to judge its eventual endorsement as the most likely scenario, even though there remain non-negligible probabilities of a ‘People’s Vote’ second referendum or disorderly no-deal Brexit too.

Today will be a busy one for top-tier UK data, with the release of the usual monthly output and trade data, as well as the corresponding GDP estimate. Expectations are for a very modest increase in output from the services and industrial sectors in August, and a slight drop in construction. So, despite an anticipated deterioration in the trade deficit that month from a five-month low, the monthly estimate of GDP is forecast to have risen just 0.1%M/M. However, coming on the back of a 0.3%M/M increase in July, this would leave GDP on a 3M/3M basis unchanged at a seemingly healthy 0.6%, matching the firmest pace in a year.

In the US, ahead of Thursday’s CPI release, today will bring the latest PPI figures for September. While prices are expected to have increased by 0.2%M/M, this would leave the year-on-year rate moderating slightly, by 0.1ppt to 2.7%Y/Y.

In an otherwise quiet day for local data, the Westpac consumer confidence survey pointed to a modest improvement in consumer sentiment over the past month. The headline index rose 1.0%M/M to 101.5 in October, placing it roughly in line with its long-term average. The pickup in the headline index, which followed two months of declines, was mostly due to a perceived improvement in family finances and in the year-ahead outlook for the economy.

New Zealand:
Today saw the release of the September edition of the Electronic Card Transactions report – a timely indicator of retail spending based on payments processed electronically. The value of total spending in the retail sector rose a stronger-than-expected 1.1%M/M, following a slightly upwardly-revised 1.1%M/M lift in August. Growth was broad-based across the various store types. Core spending, which excludes fuel and autos, also rose 1.1%M/M to be up a solid 5.9%Y/Y. Given today’s outcome, total retail spending rose 2.2%Q/Q in Q3, while core spending rose an almost equally strong 1.9%Q/Q – the largest quarterly increase recorded since 2011. At face value this bodes well for another solid contribution to GDP growth from private consumption following the 1.0%Q/Q increase reported in Q2.

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