There was no change in the Q3 Japanese Tankan manufacturing report q/o/q which held at +6 vs the estimate of +7. The services component fell 1 pt. For smaller companies, manufacturing fell 2 pts while services were up 1 pt. The outlook for all was also flat to down slightly. As for cap ex plans, they were little changed too. Corporate profit expectations took a hit as they are expected to drop by 14.6% for the year ended March (worst since 2009) vs the previous estimate of a decline of 11.6%. Bottom line, the Japanese economy continues to muddle along as exporters deal with a stronger yen and modest global growth and banks get slammed with a difficult yield curve. In response to the data, the yen is flat while the 10 yr JGB yield was up by 2 bps to just below 7 bps. Reflecting the close relationship now between JGB’s, European sovereign bonds and US Treasuries, the latter two are seeing an uptick in yields today too. The Nikkei was up 1.2% but the Topix bank index lagged as it was up by just .3%.
One interesting aspect within the Tankan report and to the phrase ‘you can bring a horse to water…’, Japanese banks are ready to lend as an index measuring their desire was the highest since December 1989 but there is not much margin left on any lending. With lackluster demand for loans however, we see another example that the cost of money is not a binding constraint on anything (and thus existing and further easing will do nothing). Japanese banks are doing anything they can to survive and Fitch said this last night: “The BoJ’s latest measures are unlikely to ease pressure on bank profitability, but add to the risks faced by financial institutions and could end up undermining efforts to boost the economy…Japanese bank profitability is being eroded by a number of factors…The BoJ’s steps into the unknown could even lead to banks becoming more cautious and bulking up their absorption buffers with extra capital. Distortions in the bond market could be particularly dangerous for banks, which would be vulnerable to mark to market shocks if normalization of the bond market ever results in a sharp rise in yields. Regional banks look the most at risk, given that they have not reduced JGB holdings in the last few years, unlike the mega banks.”
Yes, central bankers can always do more but more only comes with more collateral damage with no offsetting benefits.
In order to further his ability to pull off “yield curve control,” Haruhiko Kuroda is playing a game of semantics today. He said “Even if our government bond purchases decrease as part of our efforts to meet our target for long term yields, that will be just a technical adjustment and completely different in nature from ‘tapering.’” In a way he’s right because if there is a time when there is ever sharp selling in 10 yr JGB’s because maybe one day there is higher inflation, the BoJ would then turn aggressive buyer in order to best peg that yield at close to zero. Either way, the comment points again to the difficult game the BoJ is now playing.
Manufacturing PMI’s in Japan, Indonesia, Taiwan, Vietnam, and the Philippines all rose slightly while m/o/m declines were seen in India and Thailand. In China, the state sector weighted manufacturing PMI held unchanged at 50.4 about as expected. The services index was up a hair to 53.7 from 53.5 and which keeps it in line with the six month average of 53.6. The Shanghai comp was closed so we couldn’t see the A share market response but the H share index was up by 1%.
The final look at the Eurozone manufacturing PMI was unchanged with the initial at 52.6 which is a touch above the six month average of 52.1. Markit said “production gains are being driven by welcome signs of improving demand from both within the region and from wider export markets.” Employment also improved. The caveat though was this, “The concern is that the upturn is worringly uneven, reliant on a ‘core’ centered on Germany and its neighbors…with strong performances also seen in the Netherlands and Austria. In contrast, growth remains far weaker than earlier in the year in Spain, Italy and Ireland, while manufacturing in France continues to decline.”
With Theresa May laying out a more detailed blueprint for the UK plans to leave the EU over the weekend, the UK manufacturing PMI rose 2 pts to 55.4, the best since June 2014 and well above the estimate of 52.1. Thank you weaker pound for driving export orders but at the cost of higher input prices. Importantly, “the domestic market remained a prime driver of new business wins.” The pound is testing its 31 year low vs the US dollar as the nuts and bolts of the UK leaving the EU becomes reality and more crystallized. As for the UK economy, it’s held in pretty darn well, at least for now, in the face of all the fears of leaving.
US ISM Manufacturing came out while I was in temple (and happy new year to those that celebrate), so I’ll just recap here and give any thoughts tomorrow:
The ISM manufacturing index rose to 51.5 in September from 49.4 in August. (Any reading above 50 signals expansion) A measure of employment was 49.7, its third straight month of decline:
Construction spending dropped 0.7 percent in August, the lowest since December 2015. Expectations were for a rise 0.2 percent: