DismalTrader is a tumblelog.

Solid 10-year JGB auction against lowered yield

Ministry of Finance reopened the issue of 2.2 trillion yen of 10-year JGB today. Although JPY yields declined in the morning, the auction was stronger than expected. B/C ratio increased from 3.15 in October to 3.26, and the 0.01-yen tail became narrower than 0.02 in the previous month. Anonymous takedowns of 686 billion yen are the largest since the lase seven months, which imply major banks’ solid appetite for the long sector.

China October manufacturing PMIs: Which is true?

It was a negative surprise that October China manufacturing PMI released by the China Federation of Logistics and Purchasing dropped to 50.4 from September 51.2.

A Chinese manufacturing index dropped to the lowest level since February 2009, bolstering the case for fiscal or monetary loosening to support the expansion of the world’s second-biggest economy. The Purchasing Managers’ Index fell to 50.4 in October from 51.2 in September, the China Federation of Logistics and Purchasing said in a statement today. That was lower than any of 16 economist estimates in a Bloomberg News survey that had a median forecast of 51.8. A reading above 50 indicates expansion.

An index of export orders contracted for the second time in three months as Europe’s failure to resolve its debt crisis dims the outlook for shipments to China’s biggest market. South Korea reported today the weakest export growth since 2009 and Taiwan’s government said yesterday that the island’s economy expanded by the least in two years.

The PMI reading “is a reflection of slowing momentum in the economy” and exports may “slow sharply in coming months,” said Wang Tao, a Hong Kong-based economist at UBS AG. “Policy will ease more visibly in the first quarter of 2012.”

via bloomberg.com

However, we remember that HSBC and Markit preliminary survey on October China manufacturing PMI released on Oct. 24 in advance suggested a pickup of the index, and it was followed by today’s final release of the index, Oct 51.0 vs. Sep 49.9.

According to Markit,

October data signalled a stronger expansion of manufacturing output in China, as overall new business rose for the first time in three months. Renewed growth of new export orders was also signalled, while companies raised their purchasing at the fastest rate since March. Meanwhile, average input costs rose at the weakest pace in four months. In contrast, output charge inflation accelerated.

After accounting for seasonal trends, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – posted 51.0 in October, up from 49.9 in September, signalling an improvement in operating conditions for the first time since June. Nonetheless, the index reading was below the long-run trend (52.1), and at a level indicative of a modest rate of growth.

What is the difference between the two indices? Bloomberg said:

A separate manufacturing index released today by HSBC Holdings Plc and Markit Economics rose to 51 from 49.9. The surveys have different sample sizes and methodologies.

According to the definitions of the two indices, those biggest difference is the sample size: CFLP 820 and HSBC over 400. Both indices are weighted average on five of the individual indices with the following weights: New Orders - 0.3, Output - 0.25, Employment - 0.2, Suppliers’ Delivery Times - 0.15, Stock of Items Purchased - 0.1.

The chart below compares the three series: CFLP (official), HSBC (final), and HSBC Flash (preliminary). The last two series are almost the same. The first official numbers show a more moderate decline since the last year end, but more volatile (pick-ups) in the short run than the HSBC series, possibly because those include smaller larger-sized government-affiliated firms. If it is true, the CFLP series might turn to increasing later but gradually.

(UPDATE) As several Chinese economy analysts already pointed out, the HSBC data showed a recovery trend because the share of small- and medium-sized private firms in the sample is higher than the CFLP, and those firms activities could be stimulated by recent easing policies on loans by the Chinese government.

Recent auctions don’t shake JGB market at all

Having skipped the JGB auction reviews in September and October, we summarize those results: 10-year JGB auction on September 1 resulted in a 2.96 b/c ratio, the lowest since June, but a 0.01 yen tail, which indicated strong biddings. The 10yr auction on October 4 had a good result in a 3.15 b/c ratio with a 0.02 yen tail. Anonymous takedowns, which are closely watched as those of major banks and a few dealers, were both arond 400 billion yen, and major banks’ appetite for the 10 year sector has been steady but not extraordinary large.

In terms of 5-year JGB auctions, the September auction had a result with a 2.68 b/c ratio and a 0.01 yen tail. That was slightly weak, because many banks sold massive JGBs, particularly in the medium term sector, for profit-taking for the end of the fiscal term. The October auction had the similar result with the previous month, with the b/c ratio of 2.72 and the zero tail. That result suggested that many banks would continue investing in the medium term sector, rather than shift to selling the medium-term sector and buying the longer sector to extend duration.

These results above did not fundamentally infulence the JGB market direction, while overseas yields largely moved in these months. The charts below compare 5-day changes in 5-year and 10-year JGB prices before and after the auction date. The recent stability is outstanding.