German factory orders fall further than expected

Chris Scicluna
Emily Nicol

BoE set to raise rates by a further 25bps, launch programme of active Gilt sales
After the Fed hiked by 50bps and signalled further hikes of the same magnitude at the coming couple of meetings (read the assessment of Daiwa America’s team here), the BoE seems bound to follow today with a further increase in Bank Rate to the highest level since 2008. Certainly, inflation has surprised significantly on the upside, with the headline CPI rate now set to exceed 8½%Y/Y in April. And the Bank’s updated economic projections, to be published in its Monetary Policy Report, are likely to suggest that inflation is on track to remain above target over the medium term on unchanged policy.

But the Bank’s forecasts could also again suggest that inflation would fall below the target by the end of the horizon if rates and energy prices evolved in line with the paths implied by current market pricing. They will also suggest non-negligible risks of UK recession this year. So, in line with the consensus, we think the majority of MPC members will vote for another hike in Bank Rate of 25bps to 1.00% rather than anything more aggressive. Indeed, the MPC will maintain relatively cautious forward guidance, suggesting again merely that “some further modest tightening in monetary policy might be appropriate in the coming months".

In terms of QT, with the 1.00% threshold to be met for Bank Rate, the MPC is also set to start a programme of active Gilt sales to smooth the profile of its balance sheet reduction for as long as the market is not disorderly. Comments from Deputy Governor Ben Broadbent earlier this year suggested that such sales would be “very gradual” so not to have a sudden significant market impact. And with only £37bn and £35bn of its Gilt holding scheduled to run off automatically this year and next from the current total of £847bn, even with an additional £10-15bn per month of active sales, the full process of reducing the size of the balance sheet – perhaps to the pre-pandemic level as a share of GDP – would take a number of years.

UK car registrations remain in reverse as supply bottlenecks persist, final services PMI to confirm loss of momentum in April
In terms of economic data, reports overnight suggest that amid the supply-driven weakness in production, UK car registrations fell again in April, by around 16%Y/Y to just 119k units, the second-weakest April outturn since 1980. So, despite a more positive start to this year as supply bottlenecks temporarily eased somewhat, registrations in the first four months of the year were still more than 5% lower than in the same period in 2021 and almost 40% lower than between January and April in 2019. With supply constraints tighter again, and consumer confidence having plummeted over recent months as the cost-of-living crisis intensified, new car sales are likely to remain very subdued for the time being. Meanwhile, the final services PMIs, also out today, are expected to confirm some loss of recovery momentum in the sector at the start of the second quarter, with the flash headline services activity index having fallen 4.3pts to 58.1, a three-month low, while the new business component was down a more striking 5.8pts to 54.6, the second-lowest reading for fourteen months.

German orders and turnover plummet as the impact of the Ukraine war takes its toll; French IP fell slightly in March, but still up over the first quarter as a whole; ECB Chief Economist Lane to come
This morning’s German factory orders data for March fell well short of expectations. Admittedly, given the hit to confidence, demand and supply since the Russian invasion, surveys had pointed to a softening in manufacturing sentiment that month. Nevertheless, the drop in orders of 4.7%M/M was much larger than expected (-1.1%M/M) and marked the biggest monthly fall since October. Perhaps unsurprisingly, the weakness principally reflected a 6.7%M/M decline in overseas orders, with new orders from non-euro area countries down by more than 13%M/M. Domestic orders were also down 1.8%M/M. The weakness was in part exacerbated by a drop in large-scale orders – indeed, excluding these, total orders were down a somewhat more modest 2.2%M/M, to be broadly flat over the first quarter as a whole. Within the detail, there was a sizeable decline in capital goods orders (-8.3%M/M) implying an increasing reluctance to invest. Intermediate goods orders were also down for the third consecutive month (-1.5%M/M), while consumer goods orders jumped (6.4%M/M) on the back of solid domestic and external demand.

Looking ahead to tomorrow’s German IP, today’s manufacturing turnover numbers offered a relatively bleak guide. In particular, turnover fell a much steeper-than-expected 5.9%M/M, the largest drop since April 2020. And this followed a downwards revision in February, with turnover estimated to have declined 2.2%M/M. And so, while these data were a less reliable guide to German manufacturing output in February (0.0%M/M) than is usually the case, they still suggest that risks to the forecast decline in German IP of 1.3%M/M are skewed to the downside.

Today’s French industrial production figures fell slightly short of expectations, albeit suggesting that the hit to manufacturers at the end of the first quarter was significantly less severe than in Germany. In particular, total output fell 0.5%M/M in March, following a steeper-than-previously-estimated drop in February (-1.2%M/M). But this still left output ½% higher over the first quarter as a whole, with manufacturing output up by more than 1%Q/Q with only a modest 0.3%M/M drop in March. This was in spite of a further drop in autos production, which fell for the third consecutive month (-7.3%M/M) to the lowest level since June 2020, to leave it still around one third lower than the pre-pandemic level.

After hawkish ECB Executive Board member Schnabel earlier this week appeared to validate market expectations of a July lift-off for rates and a series of hikes thereafter, Chief Economist Lane’s speech on the euro area economic outlook later this morning will be worth watching. While normally dovish and likely to be still mindful of downside risks to activity, Lane’s recent comments suggest that he would also be unlikely to resist a rate hike in July.

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