German gloom deepens as Kiwis give bonds a boost

Chris Scicluna
Emily Nicol

A better session for US stocks (the S&P500 closed up 1.3% on the day) sadly failed to follow through to a notably improved tone to Asian equity markets today, which by and large chalked up a mixture of modest gains and declines. For example, despite further evidence of growth in Japanese private consumption last quarter (see below), the Topix barely rose at all (up just 0.05% on the day) while the Nikkei 225 closed down 0.3%, as the yen firmed to flirt once more with the 106.0/$ mark. Chinese stocks were also limp (the CSI300 similarly closed down 0.3%).

But Antipodean markets received a boost as the Kiwi and Aussie dollars tumbled in response to the surprise decision of the RBNZ to cut its Official Cash Rate by a full 50bps to 1.00%. Notably, RBNZ Governor Orr also flagged the likelihood of further easing to come, stating that the Bank’s preparatory work for non-conventional policy tools was “well-advanced” and that negative rates were “easily within the realms of possibility”.

Following the RBNZ announcement, Kiwi government bond yields fell more than 10bps across the curve. And ACGBs inevitably rallied too, with 10Y yields now down about 8bps on the day at just 0.955%. Other major government bonds, which had anyway failed to get overexcited by the recovery in US stocks yesterday and remained supported among other things by ongoing weakness in oil prices (Brent crude now below $59, more than 22% below the April peak), were also given a modest boost. So, 10Y UST yields are now down close to 1.68%, while 10Y JGB yields moved back just below -0.20%. And Bunds keep chalking up new highs, with the 10Y yields now down close to -0.56% after another weaker-than-expected German industrial production report this morning (detail below).

Ahead of Friday’s preliminary estimate of Q2 GDP, the BoJ’s consumption activity figures published overnight suggested that private consumer spending provided a moderate boost to the economy last quarter. Admittedly, the headline index was flat in June following a modest decline in May (-0.3%M/M). And it was only thanks to a pickup in spending on services (0.7%M/M) that overall consumption activity didn’t decline at the end of Q2. Indeed, on this measure, spending on non-durable goods fell for the second successive month in June (albeit by just 0.1%M/M), while the durable goods index was down more than 2½%M/M.

The weakness in durable goods activity in June, however, was likely to some extent payback for the significant strength seen in the previous two months – indeed, on average in Q2 spending on durable goods was almost 4% higher than the average in Q1, the strongest such increase since Q316. And overall, today’s report signalled a pickup in consumption in the second quarter, with the headline BoJ activity index 0.4% higher than in Q1, following a modest contraction in the first quarter.

Euro area:
Contrasting with yesterday’s somewhat stronger than expected factory orders data, this morning’s German industrial production report for June surprised on the downside, with a decline in total output (including construction) of 1.5%M/M. That left it down 5.2%Y/Y, the steepest annual reverse since 2009. Within the detail, manufacturing and mining production fell 1.8%M/M, with output in all key sub-sectors – capital, intermediate and consumer goods – down by more than 1.0%M/M. Energy production fell for the fifth successive month, down 1.6%M/M. And although it had declined in each of the prior three months, construction output could only muster a rise of 0.3%M/M.

The weak data for June concluded a dire performance for the German industrial sector over Q2 as a whole. Manufacturing and mining output fell 1.7%Q/Q, the fourth consecutive quarterly decline and the worst since the euro crisis in 2012. In addition, construction was down 1.1%Q/Q and energy production fell almost 6% on the same basis. That suggests that the risks to our Q2 German GDP growth forecast of 0.1%Q/Q are skewed to the downside. And with the trend in new orders still down, and survey indicators for July weaker still (e.g. the manufacturing PMI fell to a six-year low of 43.2), the third quarter might prove to be little better for German production.

This morning’s French trade data were little more inspiring. There was a notable deterioration in the trade deficit in June, which widened €1.9bn to €5.2bn, the second largest for nine months. This principally reflected a marked weakening in the value of exports that month, down 4.9%M/M, the steepest drop since the start of 2018. And the weakness was widespread, with shipments down to China (-7.7%M/M), Japan (-16.5%M/M) and the US (-2.9%M/M). In contrast, exports to the UK rose for the first month in three, although this still left them down more than 20% over the second quarter as a whole.

Admittedly, French exports have been particularly volatile over recent months – shipments fell more than 2%M/M in April but rose almost 4½%M/M in May. And, over the second quarter as a whole, the value of shipments was up, albeit by just 0.1%Q/Q. With the value of imports down 0.2%Q/Q, today’s figures tallied with last week’s GDP report suggesting that net trade provided no contribution to the 0.2%Q/Q rate of GDP growth in Q2.

It should be a relatively quiet day for economic news from the UK with just the July Halifax house price survey – which in recent months has provided an unreliable guide to the official data, with a stronger headline rate of price growth (a remarkable 5.7%3M/Y in June) probably reflecting the geographical skew of the sample – due for release.

In the US, another quiet day for top-tier data will bring just consumer credit figures for June. In addition, the Fed’s Charles Evans will speak on the economy, while the US Treasury will sell 10Y notes.

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