Morning comment: RBA, Japan PMI & German factory orders

Chris Scicluna
Emily Nicol
Mantas Vanagas

With reports that Vice Premier Liu He will still visit Washington DC later this week for further trade negotiations, Chinese equities made early gains today having been hammered yesterday in the wake of President Trump’s threat to hike tariffs to 25% on all US imports from China. While the afternoon session was volatile the CSI300 close up 1.0% today after plunging a whopping 5.8% yesterday. Elsewhere, against the backdrop of a rather mixed performance across the region, Japanese stock markets retreated upon reopening from the extended Golden Week holiday, with the Topix closing down 1.1% despite an improved manufacturing PMI survey, as the yen remained within yesterday’s more elevated range (currently ¥110.6/$). JGBs were only slightly stronger and the curve flatter (10Y yields down about 1bp to -0.6%) supported by the latest BoJ rinban operation. Meanwhile, the Aussie dollar strengthened and ACGB yields rose about 7bps at the shorter end of the curve and about 4bps at 10Y maturities as the RBA decided not to cut rates at its latest policy meeting but nevertheless revised down its forecasts for GDP growth and inflation (detail below).

Looking ahead, US equity futures are pointing lower today after the S&P500 closed down 0.45% yesterday, and the tone to European markets also appears relatively downbeat, not helped by some underwhelming German factory orders figures. But having moved lower yesterday on the back of trade fears, euro area government bond yields (except those of BTPs) have followed those on USTs slightly higher (10Y Bund yields are back up to 0.01%, and 10Y UST yields are up to 2.49%).

As Japanese markets opened for the first time in the new Reiwa era, the domestic dataflow brought just the final manufacturing PMI for April. And today’s survey was somewhat more upbeat than the preliminary release, with the headline index upwardly revised by 0.7pt to 50.2, a three-month high and 2pts above February’s 2½-year low. Despite the marked improvement in the output component (up 0.9pt from the flash release), at 48.9 it still remained firmly in contractionary territory for the fourth consecutive month. And the new orders PMI similarly pointed to ongoing contraction, albeit at a softer pace than in the previous two months, with a steeper rate of decline implied by the new export orders index. The pricing news was also disappointing, with a notable downwards revision to the input prices index (down 1pt from the flash estimate) to 54.4, a twenty-month low.And despite being nudged slightly higher from the initial release, the output price index was down 0.1pt to 51.9. So, while we expect manufacturing production to have returned to positive growth in April after a drop of more than 2½%Q/Q in Q1, the extent of the rebound is likely to be far from vigorous and its duration questionable. Certainly, a further negative quarter of growth in the sector in Q2 can’t be ruled out.

Euro area:
Attention today turned to the manufacturing sector, with Germany’s factory orders data for March disappointing. Following two very steep declines – of 2.1%M/M and 4.0%M/M respectively – in January and February, the modest rebound in March of only 0.6%M/M certainly did not signal any underlying improvement. The weakness in the latest month was centred on domestic orders, which fell 4.2%M/M while overseas orders rose at the same rate. These latter data were flattered by much stronger demand from other euro area member states, with orders from these countries up 8.6%M/M. However, that increase appears to be accounted for entirely by major orders – excluding those items, euro area orders were down by 2.5%M/M leaving total orders on this basis down almost 2.0%M/M.

Looking at Q1 as a whole, Germany factory orders were certainly very disappointing – the decline of 4.1%3M/3M in total orders was the steepest since November 2011 and, excluding major orders, the drop of 3.4%3M/3M represented the weakest on the series dating back to 2010. So, tallying with recent survey evidence, the data strongly suggest that momentum in the German manufacturing sector remains very weak. Tomorrow’s release of the latest IP data will probably will be similarly downbeat. Indeed, today’s manufacturing turnover figures, which are typically strongly correlated with changes in manufacturing production, showed an increase of only 0.2%M/M in March. And, having declined five times in the previous six months, manufacturing output seems highly likely to have declined in Q1 as a whole, with prospects for recovery in Q2 highly uncertain.

In the markets, Germany will sell 2026 and 2046 index-linked bonds today.

After yesterday’s Bank Holiday, all attention in the UK will be back on politics. After last Thursday’s local elections saw both main parties fare poorly, talks on Brexit are set to resume between the Conservative and Labour leadership, with reports suggesting that Theresa May could be close to offering Jeremy Corbyn a ‘compromise’ deal based on a temporary customs partnership and some commitments to enhanced regulatory alignment with the EU, with arrangements beyond 2022 subsequently to be determined after the next scheduled General Election. If submitted to Parliament, such a proposal is unlikely to win the support of a majority of Tory MPs. And it also remains to be seen how the Labour leadership would respond to such an offer, which would leave the future relationship between the UK and EU potentially vulnerable to the whims of a future Conservative leader. Moreover, in that context, a meeting to be held later today between Theresa May and Sir Graham Brady, Chair of the 1922 Committee of backbench Tory MPs, should be watched for further insights into the PM’s intentions on both Brexit and her future status as Prime Minister.

With respect to economic data, the most notable release today will be April’s new car registrations, which will provide insight into spending on big-ticket items at the start of the second quarter. Meanwhile, MPC members Cunliffe and Haldane are due to speak publicly, with attention on any further clues about the BoE’s reaction function to Brexit and changes to the UK’s economic outlook.

All eyes in Australia today were on the RBA’s latest monetary policy decision, with market expectations for a rate cut having increased significantly after softer-than-expected Q4 GDP data were followed by a surprisingly weak inflation outturn for Q1. In line with our expectation for today’s meeting, the RBA kept the cash rate unchanged at 1.5%. Nevertheless, the message from the Governor’s accompanying statement was undoubtedly more dovish than of late with downgraded economic forecasts and new guidance on the way forward too.

In terms of the RBA’s forecasts, the central scenario for GDP this year was a touch weaker, with expectations of growth nudged down to around 2¾% (compared with 3% previously). A similar rate was expected over coming years too. But while the Bank highlighted the ongoing strength in employment growth, it also flagged the limited progress in reducing the unemployment rate over the past six months. And it continued to acknowledge that risks to the outlook were tilted to the downside, not least those associated with ongoing housing market adjustment.

Probably most notable, however, was the downward shift in the Bank’s inflation outlook, with only a gradual pickup now expected over the near term. In particular, the central scenario for underlying inflation is just 1¾% in 2019, 2% in 2020 and “a little higher after that”, i.e. not entirely consistent with the RBA’s 2-3% target band over the forecast horizon. Indeed, in previous months, the Board had insisted that “Further progress in reducing unemployment and having inflation return to target is expected”. But now the Board recognises that, given the spare capacity in the economy, further improvement in the labour market is “likely to be needed for inflation to be consistent with the target”. Certainly, that can’t be taken for granted. So, developments in the labour market are likely to be all-the-more important to determining rate decisions at upcoming meetings. And, for the time being, the market will continue to price in policy easing from the second half of the year. More detailed economic forecasts, however, will be published in the Bank’s quarterly Monetary Policy Statement on Friday.

With respect to today’s data, in nominal terms, the latest retail sales figures came in a touch above expectations, up 0.3%M/M in March (bang in line with the trend) following growth of 0.9%M/M in February, with another strong showing in clothing sales (1.2%M/M) and spending in cafes and restaurants (1.4%M/M). And so, over the first quarter as a whole, nominal sales were up 0.7%3M/3M. However, when adjusting for prices, the news was downbeat – real sales fell in Q1 (-0.1%Q/Q) for the first quarter since Q312 to leave sales on this basis up just 1.1%Y/Y, the weakest annual rate since Q311. As such, today’s release suggests that household consumption provided little, if any, support to GDP growth in Q1.

The latest monthly trade figures were also weaker in March, with the value of exports down 1.8%M/M principally reflecting a more than 2%M/M drop in goods exports. But with the value of imports also down that month (-1.5%M/M), the trade surplus narrowed only slightly to AUD$4.9bn, the second-highest reading on record. Moreover, the weakness in exports in March likely reflected payback for the strength at the start of the quarter – indeed, exports were up almost 4%Q/Q in Q1. And with imports down almost 1½%Q/Q, today’s release suggests that net trade should provide a solid contribution to GDP growth in Q1.

In the US, today brings the latest consumer credit figures for March, along with JOLTS job openings numbers for the same month. FOMC members Kaplan and Quarles are due to speak publicly, while the Treasury will sell 2Y notes.

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