A nasty Singapore surprise

Chris Scicluna

Overview:
While yesterday’s Fed-speak did nothing to shake the consensus that a cut in the FFR is coming later this month, and US stocks closed higher (the S&P500 chalked up a modest gain of 0.2%), Asian equity markets were somewhat mixed today. Ahead of the release of China’s June trade data, which will give the latest indication of the impact of Trump’s trade war, mainland and Hong Kong indices were higher (e.g. the CSI300 closed up 0.4%). But Japan’s Topix closed down 0.15% as the yen appreciated a touch and the substantive gain previously reported in Japanese industrial production in May was revised down slightly. Meanwhile, a big downside surprise from Singapore’s Q2 GDP report – with a contraction at an annualised rate of 3.4%Q/Q, the most since 2012, compared to expectations of a positive reading – highlighted the toll being taken on those economies most exposed to the ongoing slowdown in global trade and the tech cycle.

In fixed income markets, UST yields slipped back barely more than 1bp across the curve, with 10Y yields currently around 2.125% having risen yesterday to their highest levels in a month. JGBs caught up with yesterday’s global upwards shift, with 10Y yields up a couple of bps to -0.125%. And having leapt yesterday despite the account of the ECB’s June policy meeting suggesting that this month’s Governing Council is ‘live’ for possible easing, Bund yields have edged up a little further again this morning (10Y yields up more than 1bp to above -0.22%).

Japan:
Japan’s final industrial production data were not quite as upbeat as the preliminary estimates – which had been expectations by a wide margin – but still confirmed the best month’s growth in seven months. In particular, overall output rose 2.0%M/M, 0.3ppt softer than the flash estimate. Compared to a year earlier, IP was down a sizeable 2.1%Y/Y, similarly marking a downwards revision of 0.3ppt from the initial reading. However, the average level for the first two months was still a firm 1.4% above the Q1 average. So, even though the METI production survey forecast suggests a decline in output in June, IP growth of more than 1.0%Q/Q in Q2 remains on the cards. That implies decent support from manufacturers to GDP last quarter, albeit sufficient to reverse only about half of the 2.5%Q/Q decline in the sector in Q1.

The detail of the IP report underscored that all major sub-sectors upped production in May. Following a surge in April, growth in output of autos in May was unrevised at 1.6%M/M to leave the average for the first two months of Q2 up 8.8% above the Q1 average. Production of electrical machinery was up for a fourth successive month in May and, as in the flash estimate, by a vigorous 4.4%M/M. But the increases in output of general machinery (2.0%M/M, a touch firmer than previously thought) and electronic parts and devices (6.4%M/M, down a touch from the initial estimate) were still insufficient to reverse the declines the prior month.

Overall, shipments (up 1.3%M/M, again 0.3ppt softer than previously thought) outpaced inventories (up 0.5%M/M, down just 0.1ppt from the flash) in May. However, as is often the case in this respect, there was significant variation across the subsectors. Inventories of general machinery were little changed, while those of electronic machinery (-3.3%M/M), electronic parts and devices (-2.9%M/M) and ICT equipment (-13.3%M/M) fell back. But the opposite was true for cars, where inventories rose 3.2%M/M, the most since January, to suggest deliberate stockpiling to meet the expected rise in demand ahead of October’s consumption tax hike.

Euro area:
Like in Japan, the euro area’s data-flow today brings industrial production figures for May. With industrial output having increased in the four largest member states – and by an impressive 2.1%M/M in France – we expect aggregate production in the euro area (excluding construction) to have risen 0.8%M/M in May, underpinned by a strong rebound in the manufacturing sector. Nevertheless, this would represent the first monthly rise in four to leave output still down around ½%Y/Y and on average in the first two months of Q2 0.2% below the average in Q1.

This morning has just brought final Spanish inflation figures for June. In contrast to the upside surprise to yesterday’s German figures, which saw the EU-harmonised measure revised up 0.2ppt from the flash estimate to 1.5%Y/Y (likewise up 0.2ppt from May), these confirmed the initial estimate that the EU-harmonised rate fell 0.3ppt to 0.6%Y/Y, a more-than 2½-year low.

US:
In the US, after yesterday’s CPI came in firmer than expected with core inflation rising 0.3%M/M to edge back up to 2.1%Y/Y in June, attention today will be on producer price figures for June.

UK:
It should be a quiet end to the week in the UK with no economic data of note due for release.

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