16 Dec 2024

Government data published earlier this Monday revealed that Japan's core machinery orders saw a notable increase of 2.1% in October, indicating a strong year-on-year growth of 5.6%. This uptick in machinery orders is a positive sign for the manufacturing sector, suggesting that businesses are investing in capital goods, which can lead to increased production and economic activity.

In the realm of manufacturing sentiment, the au Jibun Bank Japan Manufacturing Purchasing Managers’ Index (PMI) showed a slight improvement, rising to 49.5 in December. However, it is important to note that this figure still indicates contraction, marking the seventh consecutive month of decline in manufacturing activity. In contrast, the services sector demonstrated resilience, with its PMI climbing to 51.4 in December from 50.5, signaling expansion in that area. The composite PMI, which combines both manufacturing and services, also improved, increasing to 50.8 from 50.1 in November. These figures suggest a mixed economic landscape, with the services sector performing better than manufacturing.

This data comes on the heels of the Bank of Japan's Tankan survey released on Friday, which highlighted a rise in business confidence among large manufacturers for the three months leading up to December. This improvement in sentiment could be attributed to various factors, including expectations of stable consumer prices and a moderately expanding economy. The survey results, combined with the expectation that consumer prices in Japan will remain above the Bank of Japan's 2% target, provide the central bank with a rationale to consider raising interest rates in the near future. Rising wages also contribute to this outlook, as they can bolster consumer spending and economic growth.

Despite these positive indicators, investor sentiment remains cautious regarding the Bank of Japan's commitment to tightening its monetary policy further. This uncertainty continues to exert downward pressure on the Japanese Yen, which has been a concern for market participants.

In the United States, the yield on the benchmark 10-year government bond reached a three-week high on Friday, fueled by growing speculation that the Federal Reserve will adopt a cautious stance regarding rate cuts. According to the CME Group's FedWatch Tool, traders are anticipating a greater than 93% likelihood that the US central bank will implement a 25 basis point reduction in borrowing costs during its upcoming meeting on Wednesday. However, there are also signs that progress in reducing inflation towards the Federal Reserve's 2% target has stalled, raising concerns about the pace of interest rate reductions in the coming year.