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
