Morning comment: German orders, ECB account & UK car registrations

Chris Scicluna
Emily Nicol
Mantas Vanagas

While Asian and European equities enjoyed strong gains on Wednesday, buoyed by the latest US-China trade deal headlines, Wall Street gave up much of its early gains to leave the S&P500 up just 0.2% at the close. Trade negotiations recommenced in Washington DC, with White House economic adviser Larry Kudlow describing talks as “making good headway”. According to a Bloomberg report, the US is seeking a deal that would allow China until 2025 to meet commitments to purchase more US products and that would allow US companies to fully own businesses in China. Countering the positive trade news, the non-manufacturing ISM and ADP employment reports fell short of market expectations. But despite the modest advance on Wall Street, bond markets continued to walk back Monday’s rally with the yield on 10Y Treasuries rising 5bps to 2.52%. In currency markets the US dollar was fractionally weaker.

There were no major data releases in the Asia-Pacific region today. However, China’s equities have again moved a little higher on news that President Trump will meet China’s Vice Premier Liu He later today, which might be viewed as a further sign of progress towards a trade deal. Furthermore, newswires reported that the date of a meeting between President Trump and President Xi might also be announced later today. Other Asian markets have mostly posted a mix of small gains and losses, with Japan’s Topix down just 0.1% and JGBs inevitably little changed. Australia was the exception, with the ASX200 declining 0.8% as the 10Y ACGB yield increased 6bps to 1.9%. And New Zealand’s 10Y bond yield rose an even steeper 9bps to return to 2.0% for the first time in a fortnight.

In Europe, meanwhile, the day has got off to a disappointing start, with equities weaker and major government bonds firmer as the latest German economic data revealed another particular sharp drop in factory orders (detail below). Meanwhile, in the UK, Brexit talks between the Government and Labour party are set to continue today, but we certainly don’t expect them to make a meaningful breakthrough.

Euro area:
The main economics focus in the euro area later today will be the account of the ECB’s most recent Governing Council meeting, which will be watched closely for any further insights into plans for the forthcoming third round of TLTROs, as well as any discussions on how the ECB might respond if the downside risks to the economy crystallise.

Indeed, judging from this morning’s German factory orders figures, which can only be described as a shocker, those downside risks might appear as large as ever. The data showed a 4.2%M/M decline in manufacturing orders in February, one of the steepest in recent years, following a 2.1% drop in January to leave the level of orders 8.4% lower compared to a year earlier, the steepest Y/Y decline since the global financial crisis. Excluding major orders, the weakness was somewhat less pronounced, with the 2.7%M/M decline more than fully accounted for by overseas orders (down 4.8%M/M), while domestic orders were up 0.3%M/M. When including major orders, domestic orders were nevertheless weaker, down 1.6%M/M. But again the weakness in the total figure was principally accounted for by foreign demand, in particular that from non-euro area countries, with such orders down almost 8.0%M/M the most since mid-2015. Of course, the timing of the Lunar New Year holiday this year seems bound to have exacerbated the drop in February. Nevertheless, the wider backdrop of weaker global demand is clearly playing a role too, with certain non-Asian emerging markets and the UK among the more notable troubled export markets for German manufacturers. And with the manufacturing PMI survey signalling a further significant contraction in output and new orders in March, the weakness in Germany’s manufacturing sector looks set to continue in the current quarter.

With respect to recent production trends, today’s German manufacturing turnover figures, which typically provide a useful guide to contemporaneous changes in manufacturing output, declined by 1.1%M/M in February, suggesting that tomorrow’s IP release is likely to surprise on the downside (market expectations are for output to have increased ½%M/M). But it is worth noting that in January, the 0.9%M/M rise in manufacturing turnover contrasted with a 1.2%M/M decline in manufacturing output.

Supply-wise, France and Spain will sell bonds with various maturities today.

The only new UK data of note today are the new car registration figures for March. In February, growth in registrations rose back to positive territory for the first time in six months. But that rebound, which occurred in a month always characterised by low sales, proved temporary. In March – which is always one of the most important selling months in the UK as it corresponds with changes to vehicle license plates – preliminary data suggest that new car registrations fell by around 3%Y/Y, as consumer confidence was whacked by Brexit uncertainty.

Brexit-wise, talks between the Government and Labour leadership will continue today in an attempt to find a Brexit compromise. But yesterday’s discussion between May and Corbyn appears to have generated nothing new in terms of concessions from either protagonist. And we certainly don’t attach a significant probability that these talks will ever make a decisive breakthrough – that would simply be bad politics for both sides involved. But – regardless also of the progress today through the House of Lords of a bill (of perhaps debatable added value) aimed at compelling the PM to ask for an extension at next week’s summit – Theresa May will certainly request a delay to Brexit ahead of next Wednesday’s summit, justified by the new process aimed at finding a cross-party consensus. And as she is also now willing to prepare for UK participation in the European Parliament elections if necessary, a lengthy extension, which could be guillotined only in the event that the Withdrawal Agreement is adopted in the meantime, seems likely to be accepted. Quite how long that extension will be, and what MPs think about that, remains to be seen. 

In the US, after a disappointing ADP private payrolls report yesterday and ahead of Friday’s employment report, today will bring the Challenger job cuts figures for May and weekly jobless claims numbers. Elsewhere, the Fed’s Harker is due to speak on the economic outlook.


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