Following yesterday’s retreat on the S&P500 (which closed down 0.8%), and ahead of this evening’s all-important Fed policy announcements, Asian stock markets posted a mix of modest gains and losses today. Following some soft domestic economic data and further appreciation of the yen through ¥107.5/$, Japan’s Topix lost ground later in the day to close down 0.2%. Australian markets merely shrugged at another notable improvement in consumer confidence, now back above the pre-covid level. But US stock futures rose, and most European markets have opened the day up a little less 1% despite some more extremely weak French data (see more on these and the Japanese and Aussie data below).
While the Fed looks unlikely to make any significant amendments to policy today, but might still offer new clues on the outlook for rates and asset purchases, USTs are a touch firmer again this morning (10Y yields are now down close to 0.80%, having peaked above 0.95% after Friday’s labour market report). Following yesterday’s curve-flattening, JGBs were relatively little changed, but ACGBs made further gains at the longer end of the curve. But while Gilts and core euro area govvies have again followed USTs in opening higher, BTPs are only slightly weaker so far.
Japan’s latest economic data clearly bore the hallmark of the pandemic, with indicators for capital goods demand and producer prices coming in below expectations that were already very weak. For a start, pointing to a likely sharp drop in private capex in the current quarter, core machine orders fell 12.0%M/M, the most since typhoon disruption in September 2018, to the lowest level in six years. Compared to a year earlier, they were down a whopping 17.7%Y/Y, the steepest such decline since 2009.
While they are adjusted for the most volatile items, the core machine orders data – which focus exclusively on the domestic private sector – still typically vary significantly from month to month. And today’s figures suffered from payback for exceptional strength in March in orders from the transportation and telecoms sectors, which thus saw particularly sharp falls in April (down 61.0%M/M and 36.9%M/M respectively). Nevertheless, there was also additional notable weakness this time in orders from wholesale and retail (-17.9%M/M) and construction (-11.6%M/M). And so, overall, core orders from the non-manufacturing sector – which have provided the principal source of strength over recent years – fell by roughly one fifth (20.2%M/M to be down 19.6%Y/Y).
The drop in orders from manufacturers was much less marked, at just 2.6%M/M. But this was the third consecutive monthly decline in this component, and left them down 15.0%Y/Y and at the lowest level since 2016. Within the detail, significant increases were registered from chemicals (+37.7%M/M) and iron and steel (+21.6%M/M). But while they only edged down slightly (-0.6%M/M), orders from the auto sector slipped the lowest level since 2011. And additional weakness was seen in orders from the electrical machinery and non-ferrous metals sectors.
Beyond the domestic private sector, despite fiscal stimulus, government orders offered no offsetting support, falling 7.2%M/M and 5.2%Y/Y. And reflecting the hit to external demand from the pandemic, and tallying with the similar data from other major producers of capital goods (e.g. Germany), orders from overseas were down 21.6%M/M and 16.8%Y/Y to the lowest level since January 2013.
Meanwhile, the latest corporate goods price data flagged the disinflationary impact of the pandemic, not least the fall in oil prices. In particular, having in April dropped 1.6%M/M, the most since 2009, producer prices fell for a fourth consecutive month in May and by 0.4%M/M. This left the annual rate down 0.3ppt at -2.7%Y/Y. When excluding the effects of the tax hike, the rate stood at -4.1%Y/Y, the lowest since mid-2016.
Within the detail, the weakness in May principally reflected another drop in prices of petroleum and coal (-8.1%M/M) to leave them down a hefty 36.7%Y/Y. And prices of raw materials overall were down 28.9%Y/Y. Intermediate goods prices were down a steep 5.9%Y/Y. And prices of all imported items were down a sharp 17.6%Y/Y in yen terms, the most since mid-2016 (down 16.5%Y/Y on a contract currency basis).
As far as the near-term outlook for CPI inflation is concerned, final consumer goods PPI fell again in May, dropping 0.6%M/M to be down 4.6%Y/Y, again the most in almost four years. And after the BoJ’s preferred measure of core CPI inflation fell to -0.1%Y/Y in April, marking the first negative reading since mid-2017, we expect it to edge lower still into the second half of the year, to close to -½%Y/Y, and to remain sub-zero into next year.
Just as Germany reported a record drop in IP in April on Monday, this morning France did likewise and with a broadly similar magnitude. In particular, French manufacturing production plunged a further 21.9%M/M in April having already dropped 18.3%M/M in March to be down 19.4%3M/Y.
Among the steepest declines, production of transport equipment was down a further 47.5%M/M after dropping 35.0%M/M in March, with output motor vehicles and trailers down 88.0%M/M following a decline of “just” 45.1%M/M previously. So, the level of consumer durables production was down about three-quarters from its level a year earlier. In addition, output of machinery and equipment was down 24.6%M/M having slumped 21.0%M/M the prior month to leave the level of capital goods output only about half the level a year earlier. And contrasting markedly from Germany where the sector remained resilient, construction output fell 32.7%M/M in April having already dropped 42.2%M/M in March, to be down more than 60%Y/Y.
With the easing of lockdown restrictions, the level of output will certainly have rebounded somewhat in May. Indeed, the Bank of France yesterday suggested that capacity utilisation in the industrial sector was back to about 61% at the end of the month, from 78% before the crisis. Of course, there remained significant variation among the various sub-sectors, from 36% capacity in autos to 79% in pharmaceuticals. And surveys point to further improvement in June. But with orders hit by the pandemic (while the French manufacturing new orders PMI picked up last month, it was still just 31.7, barely above the weakest reading during the global financial crisis), the level of production seems bound to remain well below covid levels into next year, and probably beyond.
With Australia having made excellent progress in eradicating Covid-19 – with no new locally transmitted cases announced yesterday and restrictions on activity being gradually eased (e.g. sports fans will be able to attend an Aussie rules football game in Adelaide this weekend), the latest Westpac consumer confidence survey reported a further improvement in sentiment this month. Following a hefty jump of more than 12pts (16.4%m/m) last month, the headline consumer confidence index rose a further 5.6pts (6.3%M/M) in June to 93.6, above the level in January when sentiment sagged due to the bushfire crisis and just 2% below the average in the six months to February, when the Covis-19 crisis kicked off.
Once again, there were improvements in every category of the survey, with a notable pickup (of a little more than 10%) in the “time to buy a major good” indicator. And the expectations index rose to a nine-month high, buoyed by particular improvement in the medium-term outlook. Admittedly, most indices remain at historically low levels and well below their levels a year ago – the headline index is still down 7.0%Y/Y with the “time to buy” index down 9.2%Y/Y and the indicator of expectations for economic conditions in a year’s time still down by more than one fifth from its level in June 2019. And there are obvious headwinds to further improvement ahead, not least elevated unemployment and some ongoing restrictions to activity. Nevertheless, the survey adds to evidence that we should see a near-term rebound in Australian consumer spending, and a sustained, albeit not especially vigorous, recovery ahead.
Today, of course, brings the main event of the week with the conclusion of the latest FOMC meeting. No significant amendments to policy, in terms of rates or asset purchases, are expected. But insights into the Fed’s assessment of economic conditions and possible next policy steps should be informative, with the Committee set to publish updated economic projections and Chair Powell set to give a press conference. Investors will certainly watch for any signals that the Fed has intensified its consideration of a potential future shift to yield curve control to strengthen its rate guidance. And while they are not the responsibility of the FOMC, there might also be news on the Fed’s special liquidity facilities, not least as the intended purchases of corporate bonds remain conspicuous by their absence.
Data-wise, today brings the May CPI figures. After April’s figures showed a whopping 0.8%M/M decline in the headline index and a record drop of 0.4%M/M in the core measure, consumer prices on both measures are expected to have moved sideways last month. If so, this would still leave headline inflation at just 0.3%Y/Y, and the annual core measure of inflation easing slightly lower to 1.3%Y/Y. Today will also bring the full Federal monthly budget statement for May, which is expected to show a deficit circa $500bn following the record deficit of $737.9bn in April.
No top-tier economic data are due from the UK today.