Morning comment: Japan machine orders, China and German trade

Mantas Vanagas
Emily Nicol

While the US mid-terms eventually delivered the result that pollsters had suggested – a GOP-controlled Senate and a Democrat-controlled House – the removal of uncertainty was welcomed by investors on Wednesday. After an initially muted reaction in the futures market, the S&P500 rallied to close with an impressive 2.0% gain. Even so, the US Treasury curve flattened slightly and the US dollar has moved slightly lower. There was little reaction to news that President Trump had demanded – and received – the resignation of Attorney General Jeff Sessions, which had been widely mooted as a likely post-election development. 

US equity futures have been steady since Wall Street closed. As a result, the strong price action on Wall Street filtered through to Asia. The region’s gains were led by Japan where the TOPIX rose 1.7%, shrugging off news of a record monthly decline in core machinery orders in September (more on this below). With investors perhaps taking some unwise comfort from China’s October trade report (more on this below), other markets traded strongly in positive territory, but some late market weakening limited the overall gains. Hong Kong’s Hang Seng ended the day 0.3% higher, while South Korea’s KOSPI and  Singapore’s Straits Times were up 0.6-0.7%. China bucked the trend, with the CSI300 closing 0.3% lower. In New Zealand the 10-year bond yield rose to a 3-month high of 2.78% after the RBNZ left policy settings unchanged but brought forward slightly its assessment of when policy might be tightened (more on this below too).

The key focus during a reasonably busy day for data in Japan was the machinery orders report for September. Notwithstanding the very positive outlook for capex that has continued to be depicted in various business surveys, the market went into today’s report expecting some negative payback from the strong growth in orders recorded across July and August. As it turns out, that payback proved far greater than the market had expected, perhaps at least in part due to a larger-than-expected impact from disruption caused by Typhoon Jebi and the Hokkaido earthquake. Indeed, total machinery orders slumped no less than 17.8%M/M in September, while the closely-watched series of core private orders – which excludes ships and other volatile categories – fell a record 18.3%M/M. As a result, total orders were down 5.8%Y/Y and core private orders were down 7.0%Y/Y. In the detail, orders by manufacturers fell 17.3%M/M (and were down 5.5%Y/Y) while core orders in the non-manufacturing sector fell a similar 17.1%M/M (down 8.0%Y/Y), with large declines recorded across numerous industries. Foreign orders also declined a sharp 12.5%M/M in September and were down 10.2%Y/Y – a development that may owe more to uncertainty created by the US/China trade conflict.

Remarkably, given the very sharp decline recorded in September, core private orders edged up 0.9%Q/Q in Q3 – albeit in the end, disappointingly close to the modest 0.3%Q/Q growth that had been forecast by respondents to the Cabinet Office survey of machinery manufacturers at the beginning of the quarter. The more encouraging news is today’s survey of firms’ expectations for Q4 reports that firms expect a solid 1.7%Q/Q increase in total orders and even-firmer 3.6%Q/Q increase in core private orders. So while September orders were much weaker than expected, the broad trend of solid capex growth appears likely to be sustained in the near-term at least, as necessitated by widespread labour shortages and funded by high levels of corporate profits.

In other news, today the Cabinet Office also released its Economy Watchers survey for October. The overall current conditions index rose an unexpected 0.9pts to 49.5, marking the best result since January. This outcome likely reflects a rebound in activity following the disruptions caused by typhoons and the Hokkaido earthquake last month. All of this improvement came from the household sector index, which rose a sharp 1.8pts to 48.9 (the highest reading since December last year). The business sector index fell 0.8pts to 49.7. Interestingly, all of that declined came from the non-manufacturing index, which fell 2.0pts to 50.3. The manufacturing index rose 1.1pts to 49.2, thus reversing about half of the previous month’s decline. Looking forward, the overall expectations index – which tries to gauge the direction of conditions over the next month or so – fell 0.7pts to 50.6, perhaps responding more to recent developments in financial markets. While the household sector index rose 0.1pts to 50.9, the business sector index slumped 3.0pts to 49.1 – a level last seen in July.

The latest Reuters Tankan survey, meanwhile, provided an update on business conditions at the start of November. And this signalled that ongoing concerns about the global external environment and potential trade war between the US and China continued to weigh on Japanese manufacturers. In particular, the headline index fell 2pts on the month to 26 and was expected to decline a further 2pts over the coming three months too. Admittedly this would still leave the index comfortably above the long-run average, In contrast, sentiment among non-manufacturers improved in November from the two-year low hit in October, with the index up 4pts on the month to 30, led by a pickup in sentiment among retailers and transport firms. And the index was forecast to rise slightly over coming months in line with our view that economic activity returned to growth in the final quarter of the year, following a likely natural disaster-related contraction in Q3 (GDP data are due next Wednesday).  

Today’s other key economic reports came from the BoJ. First up growth in total bank lending edged down 0.1ppt to 2.2%Y/Y in October. While growth in lending at the major city banks was steady at 1.1%Y/Y, growth in lending at regional banks declined 0.1ppts to 3.3%Y/Y while growth at shinkin banks also slowed 0.1ppts to 2.1%Y/Y. Second, the BoJ reported that Japan recorded a seasonally-adjusted current account surplus of ¥1.33tn in September, which was close to market expectations and down marginally from ¥1.43tn last month. The smaller overall surplus was due to a slightly wider deficit on the goods and services balance (¥0.22tn, compared recorded a negligible deficit of ¥0.06tn in August), while the surplus on the primary income balance was little changed at ¥1.69tn. The secondary income balance, which captures transfers, recorded a small deficit of ¥0.14tn.

Euro area:
Consistent with the weaker manufacturing performance so far this year, German exports have also slowed. But while yesterday's data showed industrial production posting a modest increase in September, today's trade report again disappointed expectations. In particular, the value of exports were down 0.8%M/M in September, the steepest decline since February. And with the value of imports down a smaller 0.4%M/M, the adjusted trade surplus narrowed to €17.6bn, leaving the surplus in Q3 at its lowest since Q214. Indeed, export values were down 0.4% over the third quarter, and imports were up 2.4% on the same basis. So, while it is difficult to assess the extent to which this reflects price effects, today's data suggest that net trade was once again a drag on GDP growth in Q3 for the third consecutive quarter.

In France, meanwhile, the message from today's monthly trade figures broadly aligned with the first estimate of Q3 GDP, which showed net trade providing modest support to growth. In particular, the value of exports was down nearly 2%M/M in September to leave them up by 0.2%Q/Q in Q3, while the value of imports decreased1.6%M/M and 1.5%Q/Q in Q3. Overall the trade deficit was little changed compared to the previous month at €5.7bn. While this is larger than the average level over the last twelve months, compared to Q2 this still market an improvement in French trade deficit last quarter.

In addition, ECB President Draghi is due to speak in Dublin today.

The RICS Residential Market survey was released overnight in the UK. Yesterday’s Halifax house price index showed that the annual pace of growth eased in October from 2.5%3M/Y to 1.5%3M/Y, the lowest rate in 5½ years and around a half of the pace shown by the official data from the ONS/Land Registry. The Halifax data also suggested that the average UK house price has been moving broadly sideways. The message from the RICS was more downbeat suggesting that the balance of price pressures turned more negative in the latest month, with the headline index falling from -2% to -10% the lowest level since September 2012. In terms of market flows, agreed sales continued to decline as weakness on both sides of the market persisted, with the survey citing affordability constraints and political uncertainty as main factors. Indeed, new buyer enquiries indicator inched down further into negative territory to -14%, while the supply index capturing new vendor instruction also declined slightly to a very similar level.  Against the backdrop of subdued market dynamics, price expectations for the coming months remained negative and those for twelve months ahead were only marginally positive.

The focus in the US today will be on the conclusion of the latest FOMC meeting. With little prospect of an actual change in policy settings, investor interest will centre on the accompanying short statement to see whether there is any sign that recent financial market developments might cause the Fed to refrain from tightening policy at the subsequent December meeting. Datawise, we will receive the latest weekly jobless claims figures.

The main focus in China today was the external trade report for October which, for a second-consecutive month, painted a more resilient picture of activity than the market had expected. It is worth noting that, due to national holidays, October is a short working month. This could add to the normal volatility seen in the monthly data. With that said, China’s trade surplus widened to $34.0bn in October from $31.3bn previously. Positive surprises were seen on both sides of the ledger. Growth in exports picked up to 15.6%Y/Y from 14.4%Y/Y previously, in contrast to the market’s expectation of a modest decline to 11.7%Y/Y (exports rose 20.1%Y/Y in CNY terms, reflecting the yuan’s depreciation). Meanwhile growth in imports increased to 21.4%Y/Y from 14.5%Y/Y previously, compared with the market’s expectation of steady growth.

Looking at the export data by region, exports to the US rose 13.2%Y/Y, down slightly from 14.0%Y/Y last month. The resilience of trade with the US is doubtless partly due to the continued front-loading of orders in advance of possible further increases in tariffs. Exports to the EU rose a similar 14.6%Y/Y, down from 17.4%Y/Y previously. Growth in exports to Japan slowed to 7.9%Y/Y from 14.3%Y/Y previously. Meanwhile, as usual China’s imported also provided some early pointers on the yet-to-be reported export performance of some of its key trading partners. For example, imports from Japan rose rebounded to 11.4%Y/Y from just 3.1%Y/Y in September (growth was similar measured in yen terms). By contrast, China’s imports from the US fell 1.8%Y/Y – a result that will continue to displease President Trump. China’s bilateral surplus with the US stood at $31.8bn in October, down only slightly from a record surplus of $34.1bn in September.

New Zealand:
The main focus in New Zealand today was on the outcome of the RBNZ’s latest policy review and the accompanying Monetary Policy Statement. As widely expected, the RBNZ left the OCR at 1.75%. In the post-meeting press release the Bank removed the previous observation that “The direction of our next OCR move could be up or down”, and replaced it with the similar observation that “There are both upside and downside risks to our growth and inflation projections. As always, the timing and direction of any future OCR move remains data dependent.”

The Bank’s formal forecast continues to project a first rate hike in 2020 but, following recent strong GDP and CPI outcomes, this now appears to come one quarter earlier (in Q2). It is important to note that the RBNZ’s forecasts were finalised back on 31 October i.e. well before yesterday’s must stronger-than-expected labour market report. Regarding that data, Governor Orr indicated that it was “too early to tell” what the implications of this might be for monetary policy. Orr noted that this data is subject to sample error but also that the outcome was consistent anecdotes from the Bank’s business contacts. Notably, he said that those same contacts had also depicted the economy in a somewhat more positive light than indicated by key business survey indicators. They also report significant pressure on business costs, especially as regards the labour market, but that these costs were being largely absorbed at present.

The market reaction to the RBNZ’s message was muted, with bond yields drifting a little higher but the Kiwi dollar little changed. In aggregate, investors continue to hold the view that they arrived at following yesterday’s labour market report i.e. the first policy tightening in New Zealand is likely to occur around this time next year, rather than in 2020. Finally, it is worth noting that the RBNZ will release its semi-annual Financial Stability Report on 28 November. It is possible that the RBNZ will announce a further modest easing of LVR restrictions with the release of that report – a move that would boost housing activity over the important summer season.

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