Japan adds to budget without extra debt issuance, divergence between new export orders and customs export growth, El Niño poses meteorological shocks and geopolitical risk premium --- 0601 Macro Essentials

Japan adds to budget without extra debt issuance, divergence between new export orders and customs export growth, El Niño poses meteorological shocks and geopolitical risk premium --- 0601 Macro Essentials

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  1. Fed dovish officials unexpectedly hawkish, but US-Iran easing reduces rate hike pricing, with December 2027 rate hike probability still dominant. Japan announces a ¥3 trillion additional budget, pledges no extra debt issuance, but fiscal expansion and energy shocks continue to support Japanese bond yields, and the market maintains expectations for one rate hike each in 2026 and 2027.
  2. Domestic May manufacturing PMI recorded at 50.0%; new export order index dropped sharply to 48.6%, but the two often diverge. PMI reflects the proportion of enterprises; customs exports reflect the aggregate. Current export structural differentiation is significant: rapid growth in electromechanical and similar products, negative growth in labor-intensive products.
  3. This year, El Niño brings extreme meteorological shocks and high geopolitical risk premium resonance, with speculative funds already concentrated in soft commodities for pre-pricing. Domestically, possible northern floods, southern droughts, driving up thermal power and coal demand. Carbon-based shocks may burst the silicon-based bubble; downstream monetization lag causes silicon valuation and credit risk to come ahead of schedule.

I. Japan's Additional Budget without Extra Debt Issuance

Japan's Additional Budget without Extra Debt Issuance (Ping An)

Ping An points out that Fed dovish officials unexpectedly hawkish, but US-Iran easing reduces rate hike pricing with December 2027 probability still dominant. Japan announced a ¥3 trillion additional budget, pledging no extra debt issuance, but fiscal expansion and energy shocks continue to support Japanese bond yields; the market maintains expectations for one rate hike each in 2026 and 2027.

  1. Recently, several Fed officials regarded as dovish have turned hawkish.
    • Vice Chair Bowman recently stated that energy shocks triggered by war may change her outlook on interest rates.
    • Usually dovish Governor Christopher Waller said the Fed should remove "easing bias" from its policy statement, leave the door open for potential rate hikes, and said it's "crazy" to discuss rate cuts now.
    • However, as the US and Iran move closer to an agreement, market pricing for rate hikes has eased.
  2. Japanese bond concerns persist but are marginally easing.
    • On May 25, Japan’s government announced an additional budget of about ¥3 trillion for fuel subsidies and to ease living cost pressures, pledging no new debt issuance.
    • Previous worries about extra budget possibly involving new debt issuance have eased.
    • Fiscal expansion and energy shock pressure continue to support Japanese bond yields.
    • With increased bond market volatility, some investors are calling for the BOJ to suspend or slow its balance sheet reduction plan for fiscal 2027.
    • The market maintains expectations for one BOJ rate hike each in 2026 and 2027; long-term rate path has shifted lower.

As of May 30, market pricing for a December 2026 rate hike is about 48%, while December 2027 still dominates.

II. Divergence between New Export Orders and Customs Export Growth

Divergence between New Export Orders and Customs Export Growth (CITIC Securities)

CITIC Securities points out that domestic May manufacturing PMI recorded at 50.0%; new export order index dropped sharply to 48.6%, but the two often diverge. PMI reflects the proportion of enterprises, customs exports reflect total. Current export structural differentiation is evident, with strong growth in electromechanical products and negative growth in labor-intensive products.

  1. Domestic May manufacturing PMI was flat.
    • May manufacturing PMI recorded at 50.0%, falling month-on-month, consistent with off-season in May industry, a mild adjustment.
    • New export order index fell sharply from 50.3% in April to 48.6%, month-on-month decline, slipping back into contraction territory and dragging down new order index.
  2. Decline in new export orders does not mean weaker exports; the PMI new export order index often diverges from customs export growth.
    • PMI reflects changes in the proportion of prosperous enterprises, whereas customs exports reflect totals.
    • Even if most SMEs’ orders shrink, leading enterprises or core industries can support the aggregate.
    • Current export structural split is pronounced, reflecting uneven manufacturing prosperity.
    • Electromechanical products, integrated circuits, automatic data processing devices, and automobile exports are growing, while bags, footwear, toys, and lighting exports are shrinking.

III. El Niño Brings Meteorological Shocks and Geopolitical Risk Premium

El Niño Brings Meteorological Shocks and Geopolitical Risk Premium (Zheshang)

Zheshang points out that El Niño this year brings extreme weather shocks and high geopolitical risk premium resonance, speculative funds already concentrated in soft commodities for pre-pricing. Domestically, possible northern floods and southern droughts increase demand for thermal power and coal. Carbon-based shocks may burst the silicon-based bubble, and downstream monetization lag causes silicon-based valuation and credit risks to emerge earlier.

  1. This year's El Niño event characteristics are established, showing extreme meteorological supply shocks and high geopolitical risk premium.
    • Historically, the transmission of climate damage to physical output usually lags 9–12 months.
    • Core products like palm oil and rubber enter main uptrends after harvest and weather peaks.
    • Energy products face pressure in early winter due to warm winters, but main uptrends are driven by high summer temperature load.
  2. Global warming is causing the main rainfall belt to shift north, breaking the traditional pattern of southern floods and northern droughts.
    • Domestically, northern grain areas could face floods, southern hydro areas may face summer droughts, catalyzing thermal power and coal demand stronger than expected.
    • Indonesia's palm oil core production areas face historic drought, Thailand and Vietnam’s rubber areas see rainfall buffering; palm oil's reduction flexibility is stronger than rubber, undifferentiated reduction pricing needs further observation.
  3. El Niño-induced carbon-based shocks may burst the silicon-based bubble.
    • Floods in Chile and Peru impact copper mines and industrial metal prices.
    • High temperatures in southwestern US boost electricity demand from AI computing and data centers.
    • Downstream commercial monetization lags, bringing forward the silicon-based valuation adjustment and credit risks originally expected in 2027.
    • Global inflation stickiness rebounds, limiting Fed rate cut room and suppressing the tech sector from the valuation side.

Currently, speculative funds and non-commercial net long positions are concentrating in soft commodities in Q2, deeply pre-pricing future supply-demand gaps.

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