Morning comment: Soft Japanese orders & weak Aussie confidence after May's latest defeat

Chris Scicluna
Emily Nicol
Mantas Vanagas

A soft US core CPI reading – up just 0.11%M/M in February – drove a rally in US Treasuries on Tuesday (10Y yields falling to 2.60% having touched 2.67% early in the day), helping to lift the S&P500 to a modest 0.3% gain whilst undermining the US dollar. The DJI fell 0.4%, however, weighed down by the influence of a further slump in Boeing’s stock price after more jurisdictions announced that they were suspending B737-Max operations. There was little market reaction to news that UK PM May’s latest Brexit deal had been defeated by a landslide in the House of Commons (see our note issued after the vote here), with the result having been widely anticipated by investors earlier in the day as soon as the Attorney General failed to give the legal assurances on the package sought by Conservative and Northern Irish Brexiters. MPs seem bound to vote later today to rule out the prospect of a no-deal Brexit at end-March.

The modestly positive tone on Wall Street was not reflected in Asia today, although most bourses have somewhat pared initial losses in afternoon trade. Japan’s market underperformed much of the rest of the region, with the TOPIX declining 0.8% following news of a disappointing start to the year for machinery orders. Later in the day this was partially countered by some better-than-expected service sector news (more on this and today’s other Japanese data below). Ahead of tomorrow’s key activity data, equity markets were also down 0.8% in mainland China, but the loss on the Hang Seng and KOSPI was about half that rate, and smaller still in Australia. In the bond markets, JGB yields were down about 1bp in the middle of the curve, while most Australian bonds rallied 5-7bps – taking the 10Y yield below 2% for the first time since September 2016 – as downside impetus from the US Treasury market was reinforced by the weakest Westpac consumer confidence reading seen in 18 months (more on this below too).

Following last week’s confirmation that business investment had rebounded in Q4 and, less positively, yesterday’s MoF survey indicating a much more cautious stance on capex over the coming year, the domestic focus in Japan today was the machinery orders report for January. In summary, the key headline measure of core private orders proved much weaker than market expectations, providing support for yesterday’s survey results. And foreign orders were very weak too, consistent with the softening capex data seen in many other countries of late.

Turning to the detail, total machinery orders – which are especially volatile from month to month – fell 7.9%M/M in January and were down 9.1%Y/Y. The more closely-watched series of core private orders – which excludes ships and other volatile categories – fell 5.4%M/M and was down 2.9%Y/Y (orders were down 5.2%Y/Y when calculated using the seasonally-adjusted series). The decline was led by an 8.0%M/M slump in core private orders from the non-manufacturing sector – where FY19 capex intentions were especially soft in yesterday’s survey – which reduced annual growth in this series to 1.0%Y/Y. Private orders from manufacturers fell 1.9%M/M in January and were down 7.5%Y/Y. As in December, a particular source of weakness was foreign orders, which suffered a second consecutive 18.1%M/M decline, leaving these orders down 22.7%Y/Y. Meanwhile, after declining sharply over the past two months, public sector orders rose 2.7%M/M in January and were up 6.2%Y/Y.

Given the poor January outcome, core private orders are now running 5.6% below the average recorded in Q4. The Cabinet Office’s latest survey of 280 machinery manufacturers, published with last month’s machinery orders report, had seen firms forecast a 1.8%Q/Q decline in core private orders in Q1. So unfortunately, while it is still early the quarter, firms’ pessimistic expectations may prove to have been not pessimistic enough.

Turning to less discouraging news, today METI’s Tertiary Industry Activity Index painted the all-important service sector in a firmer-than-expected light in January. The overall index increased 0.4%M/M – contrasting sharply with the 0.3%M/M decline expected by the market – albeit with December’s decline now revised to 0.5%M/M from 0.3%M/M previously. As a result, annual growth improved to 1.1%Y/Y from just 0.4%Y/Y in December. Within the detail, the largest positive contributions were made by the wholesale trade and living/amusement sectors – both had been notably weak in December – while the largest drag came from the retail sector. Unfortunately, despite the positive surprise, today’s outcome leaves the overall index sitting almost exactly in line with the average level recorded through Q4. Given present weak indications from the industrial sector, the service sector will have to do much better than this over February and March if overall GDP is to at least hold its Q4 level.

In pricing news, following large back-to-back downside surprises in December and January, the goods PPI rose a fractionally larger-than-expected 0.2%M/M in February, sufficient to lift annual growth by 0.2ppt to 0.8%Y/Y. After falling sharply in each of the previous three months, prices for petroleum and coal rose 1.6%M/M reflecting the turnaround in the crude oil market. Prices for non-ferrous metals also rose for the first time in three months. In a similar vein, measured in yen terms, import prices rose 1.1%M/M in February – they had fallen a cumulative 9% over the previous two months – so that the pace of annual decline slowed to 0.7%Y/Y from 1.8%Y/Y previously. Prices for energy products edged up 1.2%M/M – they had fallen more than 10%M/M in both December and January – while higher prices were also posted for metals. Meanwhile, final prices for consumer goods rose 0.3%M/M in February – the first increase since October – so that annual deflation slowed to 1.1%Y/Y from 1.7%Y/Y in January.

After last night’s crushing Brexit defeat for Theresa May by 149 votes (242 vs 391), MPs will today vote with a big majority to rule out the prospect that the UK will leave the EU without a deal at the end of this month. And while an amendment tabled by backbenchers to rule out the prospect that the UK might leave without a deal at any time in the future might not win a majority this evening, we attach a probability close to zero that a destructive no-deal Brexit might ever take place. Similarly, other amendments tabled calling for a second referendum at the end of an article 50 extension, and for legislation to revoke article 50 to be prepared now, are unlikely to win the day today, but might yet emerge at some point in the future as Parliament and Government alike struggle to coalesce around a practical way forward out of the current mess. The so-called Malthouse amendment, calling for a ‘managed no deal’ in late May – that could never be agreed with the EU – should also be defeated today.

After this evening’s votes, attention in the House of Commons will turn to tomorrow’s votes, where MPs will vote in favour of a motion demanding that Theresa May requests for an extension of the Article 50 deadline at next week’s EU summit. We fully expect the extension to be granted. The main uncertainty relates to the length of the extension (we attach roughly equal probabilities to an extension of 2-3 months and a longer one of about 21 months).

On top of all the further Brexit activity in the House of Commons today, Chancellor of the Exchequer Phillip Hammond will make his 2019 Spring Statement to MPs. While the OBR’s economic forecasts seem bound to revise down the outlook for growth, the fiscal outlook is likely to look better than previously thought. Tax receipts once again have surprised on the upside in the current fiscal year and, therefore, the public sector deficit is likely to undershoot the OBR’s prediction from October (£25.5bn). So, the OBR should indicate that the Chancellor has extra room for manoeuvre going forward, as long as a no-del Brexit is avoided. But Hammond is unlikely to draw on this windfall just yet – there should be no new tax or spending measures announced at this point. Among other detail to be announced, updated Gilt issuance plans could be accompanied by news on the Government’s plans to shift the indexation of linkers away from the discredited RPI inflation metric to a more reliable price indicator.

Euro area:
The main data focus in the euro area today will be industrial production figures for January. Yesterday’s Dutch figures (up 2.8%M/M) were consistent with the strong readings from France, Italy and Spain at the start of the year. So, despite the weakness in Germany, we expect aggregate IP to have risen around 1%M/M in January, albeit still leaving it down compared with a year earlier.

This morning brought final Spanish inflation for February, which aligned with the flash estimate that showed that the EU-harmonised rate edged higher by 0.1ppt to 1.1%Y/Y. But with the pickup having reflected higher energy price inflation, core inflation was weaker than expected, declining 0.1ppt to 0.7%Y/Y, the lowest since July 2016.

Meanwhile, the ECB’s Cœuré will speak in Milan, and in the markets Germany will sell 30Y bonds, while Italy will issue bonds with various maturities. 

In the US, this afternoon will bring a number of top-tier releases, including January durable goods orders data, which are expected to report a soft start to the year in line with other manufacturing indicators; construction spending figures for the same month, which are also expected to post a drop on the month in January; and February PPI numbers. In the markets, the Treasury will sell 30Y bonds.

Following on from the somewhat weaker business sentiment indicators contained in the latest NAB survey released yesterday, today’s Westpac survey cast consumer confidence in a softer light too. As suggested by results of the weekly ANZ-Roy Morgan survey released yesterday, the headline Westpac index fell 4.8%M/M to 98.8 in March – slightly below the long-term average for this series. This outcome more than erased the improvement seen in the February survey and took the index down to its lowest reading in 18 months. Within the detail respondents were significantly less upbeat about the outlook for both the economy and their own finances, but perceptions of current conditions were somewhat more resilient.

New Zealand:
The key economic report in New Zealand today was REINZ housing survey for February, providing some early insight into conditions in the housing market during the key late summer/early autumn selling season. The news was soft, with the number of sales declining 9.5%Y/Y – the largest annual decline registered in 16 months. Indeed, in Auckland sales were at their lowest for a non-January month since October 2010. In other news, the Food Price Index rose 0.4%M/M in February, lifting annual inflation to 1.7%Y/Y from 0.8%Y/Y previously.


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