Japanese orders down, but German IP & exports up

After Friday’s strong US payroll number (+224k) injected extra uncertainty into the outlook for Fed policy, Asian equity markets have unsurprisingly started the week in reverse, with China’s markets leading the way (CSI 300 down 2.3%). With the yen reversing some, but by no means all, of Friday’s depreciation against the dollar, Japanese equities fared a little better, although the Topix still closed down 0.9% as a busy day for economic data gave somewhat mixed messages about the strength of economic activity (see below). Japan’s government’s decision to end preferential treatment for exports to Korea of certain materials used in the manufacturing of semiconductors and digital displays saw the KOSPI close down more than 2% and the KOSDAQ down 3½%. In fixed income markets, meanwhile, UST yields have continued to edge lower from Friday’s highs (e.g. 10Y yields are about 5bps down from the peak at the end of last week close to 2.01%), but JGBs were about 1bp weaker across the curve.

Moving westwards, a sharp depreciation in the Turkish lira (down more than 2½%) after President Erdogan sacked Central Bank Governor Cetinkaya with a year left on his term for not easing policy quickly enough, has added to the risk-off tone. And so, in the euro area, most govvies have followed USTs higher this morning – indeed, Bunds have reversed the vast majority of their post-payroll losses (10Y yield close to -0.38%). Of course, investors in Europe are also digesting yesterday’s long-awaited announcement by Deutsche Bank of its restructuring plans, which will see it quit equities trading, downsize fixed income, and establish a bad bank (DB share price opened up about 3½% this morning). A call for analysts is scheduled for lunchtime today.

Also in Germany, after Friday’s dire factory orders numbers, this morning’s IP and trade data were broadly in line with expectations, with a modest pickup in manufacturing output and exports (detail on this also below). Elsewhere in the euro area, meanwhile, Greece’s weekend general election went largely as expected, with a comfortable victory for the centre-right New Democracy (close to 40% of the vote), well ahead of the incumbent populist far-left Syriza (31.5%) while the far-right nationalist Golden Dawn – previously the third largest party in the legislature during the financial crisis – failed to pass the threshold for Parliamentary representation.

Looking ahead, Thursday’s publication of the account of the ECB’s June policy meeting will give insights into whether a rate cut is likely to be forthcoming later this month. And there will be plenty of news from the Fed too, with the minutes of the most recent FOMC meeting due Wednesday and Chair Jay Powell set the same day to give his semi-annual testimony to Congress. Data for US inflation (Thursday) and UK GDP (Wednesday) will also be closely watched.

While the BoJ’s latest Tankan survey provided a predictably more downbeat assessment of economic conditions in Q2, the Bank’s quarterly Regional Economic Report published today was relatively sanguine, suggesting that all nine regions assessed their economies to have been either expanding or recovering over the past three months, supported by continued improvement in domestic demand. It noted, however, an increasing number of firms pointing to heightened uncertainties over the external outlook. And so, while recent data suggest that Japan’s economy might well have avoided contraction in the second quarter, we continue to expect the BoJ’s Policy Board to downwardly revise its growth forecasts at its meeting later this month.

Certainly, today’s machinery orders figures – which offer a guide to private sector investment – came in softer than expected in May, with core orders down 7.8%M/M, the steepest drop since September, to leave them down more than 3½% compared with a year earlier. And the weakness was broad based with orders placed by manufacturers down almost 7½%M/M (albeit driven principally by a notable drop in the volatile ship-building sub sector) and non-manufacturers down 9.0%M/M. So, despite another strong increase in public sector orders (up 19½%M/M), domestic orders fell a further 20%M/M in May. Nevertheless, the decline in core orders in May followed three consecutive increases. And so, on average over the first two months of Q2, orders were trending more than 4% higher than the average in Q1, admittedly well below the survey forecast increase of more than 15½%Q/Q last quarter but still consistent with a pickup in private sector investment over coming quarters.

Like the BoJ’s Tankan, the latest economy watchers survey once again provided a less upbeat assessment of economic conditions. Admittedly, the decline in the headline current conditions DI in June was only marginal (-0.1pt) although this still left the index (44.0) at its lowest level for three years. There was a further drop in the survey’s household-related demand component (down 0.5pt to 43.6) to its weakest reading since July 2016, while the equivalent index for the non-manufacturing sector fell 1.7pts to 42.8. In contrast, the manufacturing DI reversed some of the drop in May. And the survey’s forward looking index rose for the first month in five, albeit by just 0.2pt to leave the index at just 45.8.

Turning to the rest of the week, the focus tomorrow will turn to wage figures for May, which are expected to report the fifth consecutive year-on-year decline, while goods PPI data on Wednesday are expected to report a further moderation in price pressures along the pipeline in June. The back end of the coming week turns to activity in May, with tertiary sector figures due Thursday and final industrial production data due Friday. Supply wise, the MoF will conduct a 5Y JGB auction tomorrow.

Euro area:
While the publication of the ECB’s latest policy meeting account on Thursday will be the most notable new release of the week, the manufacturing sector will be the principal focus of the euro area dataflow this week. After Friday’s dire factory orders numbers, this morning’s German IP and trade reports for May thankfully came broadly in line with expected, albeit still consistent with a weak second quarter. In particular, having dropped 2.0%M/M in April, industrial production rose 0.3%M/M. Manufacturing output rose a firmer 0.7%M/M following a drop of 2.0% the previous month, with output of capital goods up 2.0%M/M from a drop of 2.7%M/M in April. Production of energy and construction (both down more than 2.0%M/M) weighed. Despite the improved showing in May, industrial production over the first two months of Q2 still trended 1.5% below Q1, with manufacturing output similarly on average down 1.2% from the Q1 average. And while output of consumer goods was running slightly higher than in Q1, production of intermediate and capital goods was still trending more than 1.0% below the first-quarter level.

Consistent with the slight improvement in IP and likely reflecting to some extent increased demand from the UK as car factories came back on line after the scheduled shut down in April, today’s German trade figures reported a pickup in the value of exports in May, up more than 1%M/M. And with imports down ½%M/M, the adjusted trade surplus rose €1.7bn to €18.7bn. But this followed significant weakness in April. So, on average in the first two months of Q2, exports were trending more than 2% below the average in Q1. And with imports down more than 1% on the same basis, net trade appears on track to have contracted from GDP growth in Q2.

The Bank of France’s latest business sentiment survey, also published this morning, provided a notably bleaker assessment of the manufacturing sector in June, with the headline index falling 4pts to 95, a more than six-year low, as IP declined significantly in the autos, IT and electronic equipment sectors in particular. Admittedly, this contrasted with the message from the manufacturing sector from the INSEE and PMIs, with the latter showing the headline index rising to a nine-month high. The BoF’s survey suggested the conditions were little changed in the services sector in June, with the relevant index moving sideways at 100, while conditions in the construction sector were impacted by unfavourable weather conditions that month, with the equivalent index down 1pt to 104. Overall, the Bank of France assessed today’s survey to be consistent with GDP growth of 0.2%Q/Q in Q2, down 0.1ppt from its previous forecast and bang in line with our own current forecast.

After a relatively quiet day tomorrow with only Italian retail sales data for May of any note, industrial production figures from the same country and France are due on Wednesday. The euro area industrial production report for May is due Friday, and currently expected to post a very modest rise following the drop of more than 1½%M/M in April. This week also brings final inflation figures for June, with the numbers from Germany and France due Thursday and from those from Spain due Friday.

Politics-wise, the Eurogroup meeting this afternoon will see Finance Ministers discuss fiscal policy issues, including the euro area fiscal stance. Discussions on Italy will now be inconsequential given the European Commission’s decision not to launch a disciplinary procedure. In the markets, Germany will sell index-linked bonds tomorrow and 10Y Bunds on Wednesday, while Italy will auction 3Y and 7Y BTPs on Thursday.

The most notable day for economic data in the UK will be Wednesday, with the monthly output indicators for May due. Following the drop of 0.4%M/M in April, GDP is expected to have risen 0.3%M/M in May. Growth will have been led by a rise in manufacturing output likely to have surpassed 2.0%M/M, driven by a rebound in auto production as car plants returned to normal following Brexit-related closures the previous month. Growth in services, however, is expected to have been subdued, at just 0.1%M/M. And having narrowed the prior month, the trade deficit is expected to have widened once again on stronger imports.

Other than Wednesday, this week will be quiet for data, with the BRC retail sales monitor (tomorrow) and RICS housing market survey (Friday) for June the only other releases of note. Meanwhile, the BoE will present its latest Financial Stability Report on Thursday while MPC members Tenreyro and Vlieghe will speak publicly on Wednesday and Friday respectively. No Gilt auctions are currently scheduled.

In the US, this week will bring a few top-tier economic data releases as well as plenty of public speaking from senior Fed officials. Most notably, after a couple of uneventful days to start the week, Wednesday will see Fed Chair Powell testify to the House Financial Services Panel before repeating his testimony the following day to the Senate Banking Committee. Wednesday will also bring the minutes from the Fed’s June policy meeting, when the FOMC became significantly more dovish.

On Thursday, the June CPI inflation report will be closely watched while the usual weekly claims numbers and June federal budget statement are also due. Finally, Friday brings June producer price figures. In the markets, the Treasury will sell 3Y Notes tomorrow and 10Y Notes on Wednesday, with a 30Y Bond auction to be held on Thursday.

While focus at the start of this week will be on China-US trade talks, Thursday’s trade report for June will no doubt attract attention, with exports expected to have fallen compared with a year earlier. Ahead of this will bring the latest inflation figures for June, which are expected to show the headline rate unchanged at 2.7%Y/Y, underpinned by elevated food price inflation. In contrast, producer price inflation is expected to have remained subdued, with the headline rate likely to have eased from the 0.6%Y/Y rate in May.

After a relatively quiet start to the week for Australian economic releases, tomorrow will bring the NAB’s latest business survey for June, while the latest monthly consumer confidence survey is due Wednesday. Thursday will bring the latest lending figures for May.

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