- German factory orders on track to dip despite encouraging growth forecasts
- Economists to forecast slightly faster growth in revised Q1 GDP data for Japan
- Market expects Fed to raise rates next week while 10-year Treasury yield slides
Germany’s economic trend looks solid but today’s update on factory orders is expected to post a monthly decline for April — the first setback in three months. Later, economists are looking for an upward revision for Japan’s Q1 GDP growth rate in the government’s second estimate. Meantime, keep your eye on the US 10-year Treasury yield, which fell to a seven-month low yesterday despite expectations that the US Federal Reserve will raise interest rates at next week’s policy meeting.
Economists are forecasting that Japan's output growth will be revised up to a 0.6% quarterly increase for the first quarter.
Germany: Factory Orders (0600 GMT): Survey data released this month points to solid economic growth for Europe’s largest economy.
The Retail PMI for May, for instance, continues to reflect a robust expansion in consumer spending. “Although the seasonally adjusted month-on-month rate of growth eased for the first time in four months, it remained among the strongest registered since the global financial crisis,” a senior economist at IHS Markit said on Tuesday.
PMI data for the services and manufacturing sectors in May are encouraging too. In fact, manufacturing activity last month expanded at the fastest pace in over six years, IHS Markit advised last week.
Will the positive tailwind in the soft data find support in today’s update on factory orders in April? Econoday.com’s consensus forecast calls for a mild decline of 0.4% in new orders for April, the first monthly setback since January. The implied annual pace, however, is still on track to advance at a healthy 4.9% rate, the strongest gain so far this year.
In the wake of the upbeat PMI numbers, the market will likely interpret a slight decrease in factory orders for the monthly change as a temporary setback. The chief business economist at Markit told the FT this week that Germany’s macro trend is picking up speed, which lays the groundwork for upward revisions to economic forecasts.
Japan: Q1 GDP (2350 GMT): Economic output in Japan continued to improve in the provisional release of first-quarter GDP. Today’s revision of Q1 data is expected to show that the firmer pace is even stronger than initially estimated.
Economists are forecasting that output growth will be revised up to a 0.6% quarterly increase for the first quarter, according to Econoday.com’s consensus estimate. The projected rate is a slight improvement over the 0.5% increase in the provisional data. Nonetheless, a firmer rate of growth will underpin the view that a modest but sustainable recovery is underway. The provisional report shows that the economy expanded for a fifth straight quarter.
Meanwhile, the Japan Centre for Economic Research this week reported that economic output expanded in April following a contraction in the previous month. That’s a clue for thinking that the recovery will continue in Q2.
A similar message can be found in survey data for May. The Services PMI posted its “fastest growth” since August 2015, IHS Markit advised on Monday. The Manufacturing PMI also ticked up last month, rising to a three-month peak and signalling moderate growth for the near term.
“Ongoing economic growth is having a positive spillover effect on the performance of the labour
market, with jobs being added at the fastest rate in nearly a decade,” noted a senior Markti economist. “Expect this positive trend in employment to continue, with overall business confidence in May the highest in four years.”
US: 10-Year Treasury Yield: The benchmark 10-year rate slumped to a seven-month low in midday trading on Tuesday. The slide is a bit odd, given that economic forecasts for the US remain upbeat and the Federal Reserve is widely expected to raise interest rates next week.
One theory making the rounds for explaining the dip in the 10-year yield is a surge in geopolitical risk as opposed to worries about the economy. In particular, investors are focused on two key events for Thursday: the general election in the UK and former FBI director James Comey’s testimony in the US Senate. In both cases, the potential for fallout on the respective governments in power could be hanging in the balance. As a hedge, investors are loading up on the 10-year note, which is pushing the current yield lower.
In addition, the European Central Bank on Thursday is set to release its monthly policy announcement, which may reflect a relatively hawkish bias for the first time in years, according to some analysts. As such, a degree of macro uncertainty may also be a factor in the renewed appetite for a safe haven.
As for the US economy, the outlook remains encouraging. As I noted yesterday, several estimates of second-quarter GDP growth point to a solid improvement over the sluggish pace of output in Q1. The National Association for Business Economists (NABE), for example, projects a strong pickup in growth for Q2, based on a survey of its members.
“The weakness in the first quarter is expected to be temporary, with real gross domestic product growth projected to bounce back to an annualised rate of 3.1% in the second quarter of 2017, and to about a 2.5% pace in the second half of the year,” said NABE’s president on Monday.
Nonetheless, the crowd is inclined to hedge the risk of weaker-than-expected results, or so one can argue. But the hedging hasn’t derailed expectations for a rate hike at next week’s FOMC meeting. Fed funds futures are pricing in a near certainty (96%) that the central bank will lift its target rate.
The only caveat: the 10-year Treasury yield seems to be predicting no change in rates. Then again, maybe the 10-year rate will jump higher if Thursday turns out to be a normal trading day.
Disclosure: Originally published at Saxo Bank TradingFloor.com