Economy in Brief

Japan's economy watchers index took a step back in September after rising in August. The step back takes the September level down to just a few ticks above its value in July. The future index for the economy watchers survey also edged lower, although not as definitively as the current index; it fell to 49.7 in September from 50.3 in August, still above its July value by more than a point. Ranked on data back to 2002, the current economy watchers index has a queue standing in its 53rd percentile, putting it just slightly above its median for that period. The median on ranked data occurs at a ranking of 50%. The future index is slightly stronger with a ranking on the same timeline at about its 59th percentile.

Performance overview Both the current and the future indexes show widespread declines in diffusion values in September compared to August. In the current index, only the rating for eating and drinking establishments shows improvement in September; for the future index there are increases in the services index and in the reading for overall employment. Both the current and the future indexes are below the 50 threshold, which on the diffusion index implies a decline in activity. Looking at components, the current index has only one value - that for eating and drinking establishments - above 50 and has a reading for nonmanufacturing establishments exactly at 50. For the future index, the services reading has a diffusion value above 50 along with employment index and eating and drinking establishments; the reading for manufacturers is at 50.1, barely above 50.

Changes in index values; momentum Looking at changes in the current and future indexes over three months, six months and 12 months, both surveys show improvements over three months preceded by net declines over six months and over 12 months. The current index shows a continuous decline over three months, six months and 12 months for the retail sector, as well as for services. In contrast, it shows steady improvements over three months, six months and 12 months in manufacturing. The future index does not show any steady stream of sequential deterioration; however, it shows steady improvement with gains on all three horizons for services, for manufacturing firms, and for employment conditions.

Reading level evaluations Current- The queue percentile readings calculated on data back to 2002 show the current index at a standing of 53 percentile, above its historic median; however, there are below median readings in retailing and services and for employment - with employment having a particularly worrisome, weak standing in its 29th percentile. That means that the employment reading has been weaker than this, only about 29% of the time. In terms of strong standings, only eating and drinking establishments have a standing above the 80th percentile with an 87.7 percentile standing.

Future- By comparison, the future index has a stronger headline standing at 58.9 percentile and has two component readings with standings in their 80th percentiles for eating and drinking establishments and for services. The future index has two relatively weak readings that are below their 50th percentile mark; those are for housing and for employment. The housing standing is in its 34th percentile, a relatively weak standing; employment doesn't do much better with a standing at the 43.9 percentile.

A difficult employment scenario Employment scores out as weak in both the current and in the future standings although the future metrics show that employment has been improving over three months, six months and 12 months; in the current survey, employment only improves on balance over three months. Moreover, in the current survey the employment diffusion index falls by nearly a point month-to-month, while in the future survey the employment reading gains by nearly a point.

Summing up The economy watchers index shows a relatively broad weakening for conditions in September. While the economy watcher indexes continue to log levels above their historic medians, both the future and the current standings are showing some degree of decline in activity in September. Manufacturing tends to be a bellwether industry for Japan; it shows consistent improvement over 12 months, six months and three months in the current survey as well as in the future survey And manufacturing has above-median standings in both surveys although the standings are particularly strong; on the future reading has a diffusion value above 50. Because of the declines in September, we have to mark the survey overall as disappointing; however, there are some positive aspects in the report, particularly for the manufacturing sector.

Industrial output in Germany rose by 2.9% in August compared to July; consumer goods output was flat, capital goods output surged by 6.9%, while the output of intermediate goods ticked up by 0.1%. The gain in output clearly is being carried by capital goods in August reflecting that sector’s turnaround from a sharp drop in July.

Monthly patterns The monthly output figures for July show that German output fell in all major categories a month ago, so the August report is substantially a rebound report. However, in June output was broadly higher as it rose in all categories except for consumer goods output, where it fell by 0.9% on the month.

Manufacturing and industry: Sequential growth in output Sequential growth rates show headline output in Germany on the road to repair; while the road may not be long, it still is winding. Industrial output fell by 2.5% over 12 months. That led to a 3.5% annual rate drop over six months as the sector weakened further, but then it jumped to a 6.7% annual rate increase over three months. Over the same sequence of months, the output of consumer goods drops at progressively faster growth rates. On the other hand, capital goods show acceleration and progress on this same timeline; after falling by 1.1% over 12 months, capital goods output rises by 2.4% at an annual rate over six months, and then explodes at a 23.9% annual rate over three months. Intermediate goods output declines over all horizons, dropping by 5.6% over 12 months, dropping even faster at a 7.5% annual rate over six months, then trimming the decline pace to minus 2.8% over three months.

Construction Construction also shows an uneven path with output dropping in August and in July and with sequential growth rates for construction falling over six months and 12 months but then eking out a small gain over three months.

Industrial surveys Industrial surveys for Germany show slowing. These gauges in August compared to July are weaker across the broad. The August values are also weaker than their June values. Sequential averages of these industrial surveys show some creeping improvement in the ZEW survey, little change in the IFO manufacturing survey, some small tendency for improvement in IFO manufacturing expectations, while the EU Commission industrial index for Germany progressively weakens from its averages over 12-months to six-months to three-months.

Other Europe (Four early reporters) Industrial output in four other early reporting European countries shows increases in output for France and Portugal, contrasted to declines for Spain and Norway. None of these countries have two months in a row of output gains or output declines in August or July. June is another month in which output increases in two of them and decreases in two others. The recent monthly readings of output in Europe have been uneven. Sequential calculations for output in these countries shows manufacturing staggering towards better days in France where output posts a 10.4% annual rate increase over three months, following weak and uneven performance over six months and 12 months. Spain shows clear progressive deterioration with output moving from a 3.7% decline over 12 months to a 19.4% annual rate decline over six months to a 27.1% annual rate decline over three months. Portugal follows that progression but with negative growth rates that are about half of the ones posted by Spain. Contrarily, Norway shows progressive acceleration from their 3% growth over 12 months to a 9.1% annual rate increase over six months, and to a 12% annual rate increase over three months.

Quarter-to-date With all the monthly volatility, the quarter-to-date progress is not a given. It turns out to be negative for overall industrial production in Germany as well as for all three major sectors and construction. Real manufacturing orders are increasing in the quarter, despite falling in August; they are rising at an annualized quarterly rate of 16.9%. Real manufacturing sales, however, make a gain in August after declines in June and July but log a 6.6% annual rate decline in the quarter to date. The four industrial surveys for Germany show declines in the quarter-to-date compared to the previous quarter for three of the four metrics. Industrial output in the four other early reporting European countries shows exactly what you would expect: two increases versus 2 declines among the four reporters.

Queue standings over 24 years The queue standings that rank either growth rates or survey levels over the last 24 years shows rankings up and down the line regardless of whether it's a growth rate or a survey value compared to its history with rankings under 50%- with one exception. Industrial production in Norway has the year-over-year growth rate that ranks in the 70th percentile (the top 30% of all its historic growth rates). However, apart from Norway, the strongest rankings in the table are for industrial production in France with a 45.9 percentile standing, and in Portugal with a 43.4 percentile standing. For Germany, the strongest sector growth rate as a standing in the 29th percentile and that's for capital goods output. German real manufacturing orders have a 23.3 percentile standing, real sales in manufacturing have a 17.4 percentile standing, ranked on the level of their surveys in August. The various 4 surveys in the table have rankings that range from a high of 14.2% for the ZEW current index to 4.9% for IFO manufacturing output.

Summing up Despite a nice bump up in output in August, there is little here to bend trends higher or buoy expectations. Output growth and industrial rankings are still weak. European countries are mired in the same weakness as Germany. Conditions remain touch and go in an environment with a deteriorating geopolitical background and lingering inflation that is keeping central bankers wary, and for a time, back on the sidelines on hold despite being in easing cycles.

German orders fell by 5.8% in August as foreign orders fell by 2.2% and domestic orders plunged by 10.9%. This weakness offsets a period of strength in July and June in which total orders had risen 3.9% and 4.6% in respective months, and in which foreign orders had risen by 5.2% and 1.4%, while domestic orders had risen by 2.2% in July and by 9.1% in June. The sizeable declines in August nullify or substantially blunt the strength in orders seen in the previous two months. Domestic orders measured year-over-year in July mark their first increase since February 2022; however, that gain is now gone and turned to a year-on-year drop in August. Foreign orders have had more episodes of showing gains year-over-year; they too showed a year-over-year gain in July, but in August that's also gone. However, foreign orders also showed a year-over-year gain in April of this year, and in March, and in December of last year. Year-over-year gains are not so unusual for foreign orders; however, gains have been very scarce for domestic orders.

Order trend- The trend for German orders is positive overall with a three-month growth rate of 9.6% up from -1.9% over six months and that's up from -4% over 12 months; the progression is a reassuring acceleration. However, the monthly detail and pattern of how this progression has been created is not so reassuring. Foreign orders are the driving force behind this improvement with a three-month real order growth rate at an 18.4% annual rate, up from 1.9% annual growth over six months, and that's up from a decline of 1.3% over 12 months. There is also progress in terms of domestic orders, but it's much less robust. Over three months domestic orders fall at a 2.5% annual rate; that's less than a 6.9% annual rate fall over six months which is less than an 8% drop over 12 months. It is a progression toward improvement, but these are all negative numbers.

Sales trends- Trends for real sales show mixed results in August compared to July. Over three months manufacturing shows a gain in real sales at a 0.4% annual rate; that's up from a 3.2% annual rate decline over six months, but the six-month decline was slightly worse than a 3.1% annual rate drop over 12 months. There's only a hint of better sales based on real sales trends; looking at sector data is not terribly rewarding either.

Industrial surveys- industrial gauges for Germany, France, Italy, and Spain all show negative readings in August. For Germany and Italy the negative readings worsen while for France and Spain the negative readings slightly improve month-to-month. There was also split performance in July between these four countries in terms of improvement or deterioration.

Quarter to date- Quarter-to-date trends show strong results for German orders overall, but these are supported by a tenuous monthly pattern that has the strength mostly back-loaded in June, and to some extent, in July as August parades significant weakness. Quarter-to-date German real orders are growing at a 16.9% annual rate, foreign real orders are up at a 20.4% annual rate, domestic real orders are up at a 12.5% annual rate. In the same quarter-to-date period, real sales overall, as well as by sector, produce negative numbers for growth.

Industrial data queue standings- The queue standings for the industrial data show Germany and Italy with extreme weakness as exhibited in their low standings on ranked data back to 1990. Both France and Spain have rankings just short of the 60-percentile mark, for each; it’s a reading above their respective median, but still a moderate reading- not a strong one.

Summing up The August orders report for Germany unravels what had been an improving trend. While real sales showed a rebound in August, it was not enough to create a solid uptrend for momentum. In the rest of Europe, industrial indicators rank from moderate to very weak. The German industrial picture remains soured while Europe shows no sign of breaking out of its industrial torpor.

In this week’s newsletter, we explore regional monetary policy, China’s Golden Week holidays, and Japan’s political landscape. Despite the Fed's 50 bps cut in September, many central banks in the Asia opted to maintain their current policy rates, largely due to domestic factors (Chart 1). However, we may see more exceptions this week, as both New Zealand and potentially South Korea appear poised to reduce rates (Chart 2). Inflation trends are also crucial, with recent price pressures easing thanks to declining energy costs. Nevertheless, escalating geopolitical tensions in the Middle East could hamper progress toward disinflation (Chart 3). Turning to China, recent easing measures have been positively received by markets. However, we observed preliminary signs of price stabilization in Hong Kong markets as Chinese markets undergo the Golden Week holidays (Chart 4). We also examine the potential spillover effects of China’s easing, particularly through currency fluctuations (see Chart 5) and the impact of the easing measures on consumer sentiment and spending. Finally, we examine Japan’s political landscape, focusing on market reactions to Ishiba’s appointment as Prime Minister. His dovish remarks have bolstered Japanese equities while contributing to renewed weakness in the yen (see Chart 6).

Updates on monetary policy While the Fed's 50 bps cut in September opened the door for central banks in the Asia-Pacific region to follow suit, many chose to maintain their current policy rates (Chart 1), primarily due to domestic considerations. Notably, the central banks of Japan, Australia, Taiwan, and Malaysia left their rates unchanged in September. For instance, Australia's central bank remains concerned about inflation, while Taiwan's central bank is focused on issues like household debt and the property market. Meanwhile, Malaysia's central bank sees no immediate need to begin an easing cycle, as inflation is under control and growth remains steady. Additionally, maintaining the current policy rates may be beneficial for some economies from a yield perspective, as yield differentials have either become more favourable (or less unfavourable) for their respective currencies.