The Macro Review and Outlook for w/c 3 June 2019
The weekly macro review for w/c 27 May 2019 – One of our key themes for the week had been growth and sentiment. Wrapped up in this was not only US growth data but also sentiment around trade negotiations.
Trade talks with China remain on hold. China released a white paper over the weekend essentially outlining its side of why and how talks stalled. The official statement advocates for the benefits of co-operation and positions China as ‘willing’ to work with the US to find solutions. The aim appears to shift the onus of the stalled talks onto the US. The statement from China draws a line in the sand;
“There are bottom lines in consultations. China will not compromise on major issues of principle. China does not want a trade war, but it is not afraid of one and it will fight one if necessary. China’s position on this has never changed.”
President Trump has put a question mark over ratifying the USMCA by commencing a program of increasing tariffs on all imports from Mexico. The tariffs are aimed at halting the flow of illegal immigration into the US.
President Trump and USTR Lighthizer commenced higher level trade talks with Japan last week. While differences remain, President Trump declared that a deal will be announced in August – after the elections in Japan, but also within the 6-month window for the extension of auto-tariff announcements.
Final submissions for the investigation by the US into EU subsidies on large civil aircraft should have also concluded during the week. This is still a live issue and could result in tariffs on both US and EU imports.
Consumer sentiment data out for May has reflected a weakening in sentiment from the stalled talks with China – “confidence significantly eroded in the last two weeks of May” (after the US recommenced raising tariffs on China). The index of current conditions continued to weaken, now 9% below last year, but the headline index of consumer sentiment continued to increase. Affecting sentiment was the inflation expectations from higher prices/tariffs creating a negative impact on current buying conditions.
The already weaker expenditure conditions are visible in the latest GDP and PCE and income reports. The monthly Apr PCE and income release showed that while there was faster growth in incomes (but not employee compensation), expenditure in Apr slowed very quickly – across goods and services. Annual growth in both headline and core prices for PCE accelerated slightly. But within the core PCE price measure – core goods prices (ex-energy & food) declined at the fastest pace since 2007. While at odds with the sentiment and inflation expectations, it signals potentially weaker demand/expenditure conditions.
US Q1 GDP growth was revised slightly lower. The key features of Q1 GDP remain the much lower contribution from personal consumption expenditure and the much higher contribution from the increase in inventories for the quarter. The contribution from private fixed investment and net exports were revised lower in the latest release.
The two regional surveys indicate continued lacklustre growth in manufacturing during May. One point stands out from the Richmond Fed Survey – stockpiles of raw materials and finished goods inventories have been increasing sharply since Dec 2018. Stockpiles of raw materials reached an all-time high in the May report and finished goods inventories are now 2 pts below the post GFC high.
Also of interest this week was China and the impact of stimulus measures on the economy. Recent data has been disappointing and the official NBS manufacturing and non-manufacturing PMI’s for May were no different. Both indexes paint a less than positive picture of economic activity in China during the month. The hopes of ‘green-shoots’ stemming from massive credit stimulus appear to have been either premature or signal that stimulus has been, at least so far, ineffective in creating a sustained impact on 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 3 June 2019 – Global economic activity and growth is likely to remain in focus this week. This is a very large week of data, rates decisions and speeches – on top of the headline risk regarding trade disputes.
We should get a solid read on global manufacturing and services activity with PMI’s for May being released this week.
There will be a large amount of US data and Fed speeches to digest this week. Data will provide a broad overview of activity; motor vehicle sales, ISM manufacturing and non-manufacturing PMI’s, non-farm payrolls and employment, and the final factory orders data for Apr. The US Fed will be running its review of monetary policy strategy, tools, and communication practices – both Chairman Powell and Vice Chairman Clarida will speak at this conference.
European growth will be a key focus. The ECB will meet on rates this week. Of interest will be Germany factory orders and industrial production data (noting some divergence between PMI’s and German data over recent months), Eurozone retail sales and the more detailed release of Q1 GDP.
It’s a very big week for Australia. The RBA will meet on rates. As of 31 May, the 30-day interbank cash rate futures indicated a 100% expectation that the RBA will cut rates on Tuesday; https://www.asx.com.au/prices/targetratetracker.htm. The rates decision will be made before Q1 GDP is released on Wednesday. Housing lending and retail sales will also be released this week – both data points are still prior to the general election.
UK PMIs will provide some indication as to how the economy is responding to the continued Brexit limbo.
Trade negotiations will continue to feature. Negotiations between the US and Japan are live and issues regarding aircraft subsidies continue to simmer between the EU and the US which could flare up shortly. There is now a question over whether the USMCA will be ratified as a new round of tariffs on imports from Mexico go into effect. Although there was a one-month deadline given for the trade deal with China, 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).
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 $22bn.
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
