The Macro Review and Outlook for w/c 27 May 2019

by Kim | May 27, 2019

The weekly macro review for w/c 20 May 2019 – The FOMC minutes reflected a somewhat more upbeat, yet guarded view on growth and risks – “some of the risks and uncertainties that had surrounded their outlooks earlier in the year had moderated”. Unfortunately, the rates decision was made prior to the escalation in the trade dispute between the US and China. Several points noted in the minutes have also been superseded by weaker data on retail sales and manufacturing activity. The Board maintains that low inflation is due to transitory effects. Nonetheless, ‘muted inflation’ and the global economic backdrop warrant a patient approach to rates.

From the RBA, some of the more positive underpinnings of the recent outlook (US-China trade etc) have now shifted to uncertainty and have tilted risks to growth to the downside. The RBA meeting was just after news broke of the deterioration in trade talks between the US and China. Domestically, the low inflation print for the Mar 2019 quarter and the income/spending impact of falling house prices has the Board monitoring the labour market very closely. What has concerned the board is that, despite very strong employment growth, underemployment/slack in the labour market remains elevated and is likely to slow down progress of wage growth (and reaching the inflation target). During the week, Governor Lowe suggested that a discussion on rate cuts was likely at the next board meeting.

Data on manufacturing in the US continues to disappoint. The advance Durable Goods report for Apr highlighted that both shipments and new orders fell in Apr, with Mar results also revised lower. This confirmed the weaker manufacturing data within the industrial production report from the previous week.

The prelim US composite PMI suggested that this weakness accelerated in May with both services and manufacturing growth slowing quickly. New orders in manufacturing declined in this survey for the first time since ’09, employment growth slowed to a marginal rate and business sentiment fell amid a worsening trade backdrop.

Japan prelim manufacturing PMI also fell back into slight contraction in May. While measures of demand remained weaker, most concerning was the shift in manufacturing sentiment to a ‘negative outlook’ – the lowest level in over six years.

The Eurozone prelim PMI was little changed. Results in core countries were more mixed, but there was some deterioration in demand within periphery countries.

Escalations continue between the US and China outside of strictly trade issues, and this is likely to continue. No further talks have been scheduled at this stage.

Amid the impasse on Brexit, PM May will step down as leader on 7 June.

There are more data releases covered in last weeks review. Use the links on the contents page to navigate to different country sections. Download the review here;

The outlook for w/c 27 May 2019 – US growth and sentiment will likely be a focus this week. The second or ‘prelim’ version of Q1 GDP will be released, along with the latest personal consumption and expenditure data for Apr. Of interest will be the income data – after weaker growth in the Mar monthly data. The final read of consumer sentiment for May will be released – again this will be of interest as the prelim reading was taken before the US announced it would revisit tariffs on Chinese imports – this may or may not impact consumer sentiment. Finally, there are several regional surveys providing some further insight into slowing US manufacturing growth.

As mentioned last week, trade headlines and posturing are likely to remain a feature over the next few weeks. Although there was a one-month deadline given for the trade deal, this is likely to draw out until after the US has completed its review process into tariffs on the remaining $300bn of Chinese imports (after 17 Jun).  

Data out of China has been somewhat disappointing after the initial lift in Mar. This week, the NBS will release the manufacturing and non-manufacturing PMI’s for May.

Also of note will be the prelim read on Japanese industrial production for Apr.

The Bank Of Canada will meet on interest rates.

The RBA will release private sector credit data for Australia for Apr.

US Treasury supply will be heavier this week and its month end. The US Treasury will settle approx. $294bn in ST bills and coupons this week, raising approx. $51bn in new money – the heaviest for several months. Approx. $20bn in securities on the Fed balance sheet will mature on 31 May and approx. $14bn of that will be reinvested under the revised lower monthly cap.  

More detail (including a calendar of events) is provided in the briefing document – you can download the file here;

Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net

The Macro Review and Outlook for w/c 20 May 2019

by Kim | May 20, 2019

The weekly macro review for w/c 13 May 2019 – Despite stimulus measures in place, economic data out of China continues to disappoint. This week, there was little follow through on industrial production with growth slowing back down to the lower pre-Mar level. Retail sales growth slowed quickly. Factory sales/shipments of autos declined at an accelerated pace.

US data was mixed. Retail sales fell. The decline in auto sales was expected but weaker sales were recorded across most categories.

Manufacturing activity remains lacklustre. Industrial production growth disappointed with manufacturing and utilities leading the decline. Manufacturing output fell below last year for the first time since 2016. The first regional US surveys for manufacturing in May were higher – led by larger increases in shipments after stronger growth in new orders in Apr. There was no follow-through on new orders growth for May.

The prelim US consumer sentiment data for May was mostly much stronger. The survey was taken prior to the deterioration in talks between the US and China, so the final report may see some revision.

The trade front delivered mixed news. The US came to an agreement with Mexico and Canada to lift retaliatory tariffs under the s.232 duties on steel and aluminium. The US also agreed to postpone the decision to levy tariffs under the s.232 car and truck import investigation. But President Trump announced that he agreed with the conclusion of the Commerce Dept report that auto imports harmed national security by causing declining market share for US-owned carmakers. The Commerce report has not been made public. The threat of these tariffs continues to hang over the negotiations with Japan and the EU.

By the end of the week, it was reported that negotiations between the US and China had stalled. The US continues to move forward on the process to finalise the next round of tariffs on $300bn on imports from China.

Eurozone industrial production continued to decline in Mar, but declines were not as broad, limited to energy and non-durable consumer goods. EU and German Q1 GDP growth accelerated slightly.

In Australia, the Liberal (conservative) government was returned to government – meaning that there would be no removal of the favourable tax incentives related to property (negative gearing, capital gains tax), among other things. Lending for housing in Mar declined at an accelerated pace. Wage growth remains low – with real wages growing at a faster pace only due to lower growth in the CPI.

Employment is a key metric of the RBA at this part of the cycle. There are two dynamics playing out over different timeframes. On an annual basis, the labour market remains in good condition. Employment growth remains larger than the labour force growth resulting in further declines in total unemployed persons.

Although employment growth has been somewhat stronger over the last two years, the underemployment ratio remains close to its highs. This has been a key concern of the RBA regarding ‘excess capacity’ and the implication for wage growth.

The underlying month trend is moving in a different direction. Employment growth only equalled the estimate of what pop growth added to the labour force. Meaning that employment growth was not then high enough to absorb the increase in participation (participation reached a new all-time high in the latest month). As a result, the number of unemployed persons increased for the fourth month in a row.

There are more data releases covered in last weeks review. Use the links on the contents page to navigate to different country sections. Download the review here;

The outlook for w/c 20 May 2019 – This week, the focus will be on the FOMC minutes, a speech by Chairman Powell, US-China relations and the first release of PMI’s for May.

Trade headlines and posturing are likely to remain a feature over the next few weeks. The news from Friday was that negotiations between the US and China had stalled. Further escalations were announced as Huawei was “placed on a business blacklist” by the US. Details of further talks are expected as the US has placed a one-month deadline to complete negotiations – although so far, meeting this deadline is looking less likely. US trade representatives will also meet with Japan and EU trade negotiators this week.

In the US, the focus will be on the FOMC minutes, initial durable goods orders report for Apr and the prelim PMI’s for May.

There is another large array of Fed speeches this week. Of note will be a keynote speech by US Federal Reserve Chairman Powell on Monday at the “Mapping the Financial Frontier: What does the next decade hold?” Annual Financial Markets Conference held by the Atlanta Federal Reserve Bank in Florida.

Also, of note this week, will be the RBA minutes and UK retail sales.

European parliament elections will commence during the week, with most member countries holding elections on Sunday 26 May. Voters in 28 countries will elect 751 Members of the European Parliament for a five (5) year term. The UK will take part in these elections. Once Brexit occurs, these MEP’s will resign, and the Parliament will be reduced to 705 members.

US Treasury supply will be lighter this week. The US Treasury will settle approx. $183bn in ST bills, with a net paydown of $9bn.

More detail (including a calendar of events) is provided in the briefing document – you can download the file here;

Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net

The Macro Review and Outlook for w/c 13 May 2019

by Kim | May 13, 2019

The weekly macro review for w/c 6 May 2019 – The headlines this week continued to follow the US-China trade negotiations in the countdown to the Friday tariff deadline. The USTR has now been directed by President Trump to increase tariffs from 10 to 25% on approx. $200bn of import from China as well as commence the process of increasing tariffs on “essentially all remaining imports from China, valued at approx. $300bn”. The US has set a one-month deadline to complete the deal or the final stage of tariffs will be imposed.

There was little upward performance momentum in data releases this week. The exception was the better than expected German orders and production data. A disconnect seems to be emerging between the accelerating decline in the German manufacturing PMI and production data.

From the US; JOLT’s data was mixed – slowing growth in hires is important. Involuntary separations are slowing, but growth in voluntary quits is also slowing.

Consumer credit slowed in Mar led by a decline in revolving/credit card credit. Senior Loan Officer Opinion Survey indicated a shift to tighter lending standards for credit cards in Q1.

Price growth was little changed in Apr – headline PPI grew at the same pace and CPI growth increased as faster growth in energy and services prices offset slower growth in food and declines in core commodities prices for the year.

Wholesale sales grew at a faster pace – led mostly by non-durable goods (petroleum) in Mar. Sales of durable goods still grew at a faster pace, but growth underperformed the total. The decline in inventories was led by one area – non-durables (drugs). The value of inventories for durables increased at a faster pace. The sales to inventory ratio declined.

European composite PMI indicated little change in momentum with growth remaining only moderate in Apr.

German factory orders grew overall but was led by foreign orders – domestic orders declined at a faster pace in Mar. Industrial production improved in Mar, but manufacturing production across most areas remains below a year ago and below recent peaks. There was no indication of an accelerating decline in activity as indicated by the Mar PMI for manufacturing.

UK GDP growth accelerated in Q1 – reflecting much faster growth in production and manufacturing, imports, investment spending by government and inventories – likely as the result of preparations for Brexit.

Australian retail data continued to disappoint. Real retail sales declined in Q1, after zero growth in Q4 last year. The RBA kept the overnight cash rate on hold. The Board changed its guidance statement, reflecting the need to see improvements in the labour market (i.e. decrease in the elevated underemployment rate) in order to reach the inflation target. The Board “will be paying close attention to developments in the labour market”. Key forecasts for the economy were revised lower in the May Statement on Monetary Policy.

Data out of China showed little acceleration in activity. Services PMI was unchanged for Apr. The trade surplus was lower as imports grew, and exports declined (exports still > imports). New loan growth was lower than in prior months likely indicating a more subdued impact on activity.

There are more data releases covered in last weeks review. Use the links on the contents page to navigate to different country sections. Download the review here;

The outlook for w/c 13 May 2019 – Trade negotiations are likely to remain at the forefront. The US increased tariffs on Chinese imports last week and there is a likelihood of retaliation from China. Details of further talks are expected as the US has placed a one-month deadline to complete the deal.

This comes amid the commencement of trade talks with Japan and the EU. Important to these negotiations is the deadline this week on 18 or 19 May for President Trump to finalise the decision on s.232 investigation on car and truck imports. Given that both negotiations are in the early stages, it’s possible that the decision will be postponed.

Important US data out this week will focus on retail sales (expecting weaker Auto sales), the prelim reading on consumer sentiment for May and the latest view of production and output with the first May regional surveys and total US industrial production.

There is a large range of Fed speeches this week. Of note are two speeches by Fed Reserve Board Vice Chairman Clarida on the Federal Reserve’s Review of Its Monetary Policy Strategy, Tools, and Communication Practices (Monday and Friday).

We continue to look for a sustained improvement in the Chinese economy with retail sales, motor vehicle sales and industrial production (after last month’s large increase in IP). Lower growth in new loans data for Apr will possibly impact expenditure and output.

It will be a big week for Australia in the lead up to the Federal election on 18 May. Data will be in focus – housing lending for Mar, the labour market survey and the wage price index. The labour market data will be the most important indicator for the RBA in setting rates policy.

US Treasury supply will be heavier this week. The US Treasury will settle approx. $244bn in ST bills, notes, and bonds, raising approx. $19.6bn in new money. It’s also mid-month and approx. $38bn in securities on the Fed balance sheet will mature. The new lower cap of $15bn for the month means that approx. $28.6bn will be reinvested on the 15 May.

More detail (including a calendar of events) is provided in the briefing document – you can download the file here;

Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net