The Macro Review and Outlook for w/c 24 June 2019

by Kim | Jun 24, 2019

The macro review for w/c 17 June 2019 – Central banks were the main focus during the week – mostly signalling that more policy accommodation is to be expected. The FOMC, RBA, and ECB indicated that further accommodations were required in order to reach inflation targets over the medium term.

From the FOMC this week, we expected to see a shift in the language, opening the door to greater accommodation. While rates remained on hold at this meeting, the decision signalled growing support among committee members for more policy accommodation. Downside risks for the domestic economy are on the radar – weakening business sentiment and investment, re-emergence of ‘cross-currents’ on trade and global growth. The concern for the FOMC has been muted domestic inflation – with downside risks seen as further slowing progress on bringing inflation back to the 2% (symmetrical) target. Key language changed; removing reference to a “patient approach”. Forecasts were little revised except for PCE inflation which was revised lower for this year.

The two regional US manufacturing surveys indicated an abrupt loss of momentum in Jun. The prelim composite PMI for Jun indicated private sector activity stagnated – led by both manufacturing and services. At the same time, housing market conditions and existing home sales have stabilized since the start of the year.

ECB President Draghi also flagged further rate cuts and monetary stimulus were likely. This is in response to continued weakness across the Eurozone especially in manufacturing and exports. Downside risks pose a threat to the ECB reaching its 2% inflation target and ECB President Draghi reaffirmed the conviction of the Bank to meeting the 2% target.

Annual Eurozone CPI growth slowed further in May while the prelim PMI’s indicated a slight improvement in momentum – led by services while manufacturing continued to contract.

The BoJ also kept rates on hold. There was little change here – with the Bank signalling policy accommodation to remain in place for an extended period, until at least Spring 2020. Inflation in Japan ex fresh food remained low in May with little sign of acceleration. The prelim manufacturing PMI indicated continued slight contraction in manufacturing activity. Exports and import declined in May.

The BoE kept rates on hold and has so far maintained its very slight tightening bias – which assumes a smooth Brexit. But the MPC has started to acknowledge downside risks are picking up with Brexit and political uncertainty partly fuelling underlying weaker growth in H1 relative to 2018. While stronger household consumption and weaker business investment patterns have persisted, retail sales (volumes) have declined/stalled for the last two months.

The RBA minutes also confirmed that further policy accommodation in Australia is likely. The case for rate cuts; to reduce spare capacity in the labour market in order for inflation to return to the 2-3% band (via an increase in wages growth). The return of inflation to the 2-3% range would be more gradual without further cuts given the current level of unemployment and underemployment.

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 24 June 2019 – The focus will be on the G-20 summit in Osaka at the end of the week – 28-29 Jun. Closely watched will be the outcome of the meeting between US President Trump and China’s President Xi and whether or not there will be another round of tariff escalation. There will also be meetings regarding the US-Japan trade negotiations.

US data highlights this week include a focus on manufacturing output. After the falls in momentum reported in the regional surveys and prelim composite PMI for Jun last week, there will be several further readings of regional activity in Jun. The final reading of consumer sentiment for Jun will also be released – possibly reflecting the more positive outcome of no tariffs on imports from Mexico.

Also, this week will be the first read on durable goods orders and shipments for May, personal consumption expenditure and incomes and the PCE price index for May.

US Fed Chairman Powell speak this week in an interview discussing the challenges facing the U.S. economy and the policies of the Federal Reserve.

In Japan – the prelim reading for May industrial production will be important and the extent to which it confirms the weaker PMI readings for output in manufacturing.

In Australia, month-end private sector credit data will be released for May. This is still cycling over the May election result and the unexpected win by the Liberal Party. US Treasury supply will be somewhat lighter this week – the US Treasury will settle approx. $180bn in ST bills and coupons, raising approx. $16bn in new money.

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 17 June 2019

by Kim | Jun 17, 2019

The macro review for w/c 10 June 2019 – Data out of China this week was mixed but suggests little in the way of accelerating growth. Industrial production continued to grow at a slower pace while consumers/households face higher prices with CPI growth accelerating on the back of much higher food prices (meat). Exports increased more than expected but imports continued to decline. The increase in new loans issued by banks was less than expected and only marginally above that of Apr – little to suggest this would create a larger impetus for growth.

US annual CPI growth slowed in May – food prices grew at a slightly faster pace and this was offset by a decline in energy prices. Core CPI growth has continued to slow over the last 12 months.

US consumer spending in May was stronger and the good news was that Apr results were also revised higher – consistent with the stronger growth in consumer credit (revolving credit) for Apr. The prelim consumer sentiment reading for Jun mostly reversed the stronger May gains – on the back of increased tariff/cost worries. As the tariffs on imports from Mexico were not implemented, this weaker sentiment result may be reversed.

In terms of output, US industrial production growth indicated a small increase for the month. Production levels remain on par with a year ago, but still below the peak of Dec 2018.

The Aus labour market report for May had some positive signs and some continuing concerns for the RBA.  Despite indications of a weakening economy, employment growth increased slightly in the latest month – led by faster growth in part-time employed persons. Unemployment and underemployment remain an issue and both ticked higher in the latest month. The main insight is that increased participation (reaching another new all-time high in the latest month) is contributing to the slower change/reduction in total unemployed workers. Employment growth needs to increase at an even faster pace in order to continue to absorb the increase in participation as well as reduce unemployment at a faster pace (as per RBA commentary regarding wage/inflation pressure).

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 17 June 2019 – The focus this week will be on central bank rate decisions.

This week the US FOMC meeting will take place. This meeting has taken on a more significant tone over the last week or two. Whilst there had been expectations that the Fed will cut rates at this meeting, we are now looking at the development of the language the FOMC will use in the rates decision, and for monetary policy generally, as well as changes in economic forecasts.

The current probabilities as of 17 Jun suggest that rates are likely to remain on hold for this next meeting. For the latest probabilities;

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html?utm_source=cmegroup&utm_medium=friendly&utm_campaign=fedwatch&redirect=/fedwatch

Two other important central bank meetings/rates decisions will take place this week – the BoJ and the BoE. The minutes of the 4 Jun RBA rate cut decision will also be released this week.

The next two weeks will be important for the escalation of the (trade) dispute between the US and China – expect headline risk to be heightened. The G20 meeting will provide a catalyst for action in either direction. Public hearings in the US on the proposed tariff list for the remaining $300bn will be completed over the next two weeks – in time for any proposed meeting between Presidents Trump and Xi on the sidelines of the G20. This potentially clears the path for this round of tariffs to be applied. No meeting between the two Presidents has been confirmed at this stage. Since early May, negotiations remain at an impasse.

The highlight on the data front will be the first reading for June private sector activity – Markit prelim manufacturing and services PMI’s for the US, Europe, and Japan will be released towards the end of the week.

US Treasury supply will be heavier this week – the US Treasury will settle approx. $251bn in ST bills, notes, and bonds, raising approx. $32bn in new money this week.

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 10 June 2019

by Kim | Jun 10, 2019

The macro review for w/c 3 June 2019 – Developments on trade, increasing downside risks from trade tensions and low inflation had central bankers in the US, Europe, and Australia worried this week.

The US Fed Chairman has put a rate cut into play. Chairman Powell stated in a speech on Tuesday that the US Fed ‘will act, as appropriate, to sustain the expansion’. The Chairman was referring specifically to ‘recent developments involving trade and other matters’ – the stalling of talks with China and the upcoming threat of tariffs on imports from Mexico. The comments were somewhat out of place in that they were added to the start of his opening remarks for the Fed conference on Monetary Policy Strategy, Tools and Comms Practices – a conference dealing with longer-run issues.

But the brief comments by the Fed Chair had the desired effect and helped markets in light of some weaker economic data for May – especially coming into the blackout period before the next FOMC meeting. The most notable was the much slower growth in non-farm payrolls. The household survey also highlighted the continued deceleration in employment growth. The Markit PMI’s indicated that private sector activity in manufacturing and services had slowed quickly in May to only a marginal level of growth. The ISM’s was less negative but indicate that growth remained low in May.

Other measures of output and sales were also weaker for Apr – with factory orders and shipments falling in the month. Wholesale sales also declined while inventories increased at a faster pace.

One brighter spot was that motor vehicle sales had picked up again in May. There is a possibility that retail sales of vehicles will remain lower (growth from fleet sales) in the May retail sales report. Consumer credit growth in Apr accelerated on the back of faster growth in revolving credit.

Then, very late on Friday, US President Trump announced that the US and Mexico had reached an agreement on managing the flow of illegal immigrants into the US – and that the tariffs on imports from Mexico were on hold indefinitely.

While the ECB kept rates on hold, ECB President Draghi indicated that discussions had started regarding a possible cut or further bond purchases to stimulate inflation. The prelim CPI for May indicated that annual consumer price growth decelerated quickly in May – both headline inflation and core inflation, which will be a concern for the ECB. The underlying drivers of the faster Q1 GDP growth were somewhat positive but incoming data suggested weakness into the second quarter. Retail sales declined in May after flat sales in Apr. The PMI’s for May were mixed – ongoing declines in manufacturing were offset by some growth in services activity – but growth in output/activity likely remained subdued overall throughout the Eurozone.

The RBA cut rates to ‘assist with faster progress in reducing unemployment’ which will help to get the inflation back to the 2-3% range. The RBA cited concerns over increasing trade tensions and domestic uncertainty regarding household consumption, sustained low income growth, and falling house prices. The Q1 GDP did little to allay those concerns. While growth accelerated in Q1 versus Q4, growth of domestic output (GNE) was zero. Into the second quarter, retail sales declined with some pronounced negative shifts in expenditure. The value of housing lending increased due only to an increase in the value borrowed by owner-occupiers. But the number of owner-occupier commitments fell suggesting that underlying weakness in lending persists – which is likely to be reflected in continued falls in house prices.

Special mention of UK Markit PMI’s – overall indicating that in May, private sector activity grew at a lower more marginal pace. Importantly, the weakness in manufacturing and construction was still offset by faster growth in the services sector. The common theme was that Brexit and political uncertainty was holding back growth.

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 10 June 2019 – A solid week of data to focus on given the US Fed blackout period will be in effect leading up to the FOMC meeting next week.

The main focus this week will be data out of China – trade, retail sales, industrial production and new loans for May.

US data will focus on inflation with the latest CPI and PPI for May. Retail sales for May and the first reading of consumer sentiment for Jun will provide some insight into spending patterns. US industrial production will also help to gauge changes in output – both ISM and Markit manufacturing PMI’s suggested little output growth in May.

Following closely on the rate cut from last week, the Australian labour market survey will be released this week for May. Business confidence and sentiment data for May will also be released. There is some caution with the May data given that it will still partly reflect the expectation that there would be a change in government at the federal election in mid-May.

US-China trade; the increase in the tariff rate goes into effect on 15 Jun from 10 to 25% on $200bn of imports. A decision on the USTR investigation into further tariffs on $300bn of imports is due shortly.

The results of the USTR investigation into EU subsidies for large civil aircraft is likely due shortly.

G20 meetings continue in the lead up to the Summit in Osaka on 28-29 June 2019.

US Treasury supply will be lighter this week. The US Treasury will settle approx. $147bn in ST bills this week, with a net pay down of $42bn.  The 37-day CMB issued on 7 May will also mature this week on 13 Jun – adding another $20bn to the net paydown. 

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