The Weekly Macro Review and Outlook for w/c 29 July 2019

by Kim | Jul 29, 2019

The weekly macro review for w/c 22 July 2019 – Data out this week confirmed lower US growth momentum. The Q2 advance GDP release showed that annual growth slowed to 2.1% (SAAR). Revisions to annual GDP growth had several impacts; the annual growth by quarter was revised higher between Q4 2016 and Q3 2018, while the latest Q4 2018 and Q1 2019 growth was revised notably lower and the overall shape of the trend shows that US growth has been slowing since Q2 2018.

The bright spot for the Q2 GDP release was the much faster growth in personal consumption expenditure.

The data out this week for Jul, especially in manufacturing, indicates continued weakness. The prelim US composite PMI was little changed. Manufacturing activity slowed to zero growth – growth in new orders remains ‘marginal’, firms appear to be managing inventory in light of slower growth in orders and manufacturing employment indicators are weakening. Services activity improved but noted was the sharper fall in future business expectations.

The two US regional surveys for Jul showed manufacturing activity contracting, with several key areas deteriorating markedly. The advance durable goods orders for Jun showed a small, welcomed improvement in new orders for the month.

Across the manufacturing releases in the US, the dynamic remains unchanged; new orders growth has been slowing (if not declining) and shipment growth has slowed but remains positive. In the absence of accelerating growth in new orders, firms are working through order backlogs and this is helping to support output. As an indicator of future output growth, new orders will remain a key focus.

In Europe, last weeks’ fall in the Zew economic expectations index for Jul was backed up by further weakness in the prelim PMI’s for Jul. Services activity slowed slightly but much weaker manufacturing activity dragged the overall index lower. The broad Eurozone manufacturing indicators remain concerning with stagnating growth in new orders and an accelerated decline in new export orders. Unsurprisingly, future expectations for output growth declined to the lowest levels since 2014. The prelim PMI’s for the largest EU economy, Germany, showed that growth slowed more broadly across both manufacturing and services in Jul.

While the ECB kept policy unchanged, there was a significant shift in guidance signalling the likelihood of policy easing in the near future;

“The Governing Council expects the key ECB interest rates to remain at their present or lower levels at least through the first half of 2020”

“In this context, the Governing Council has tasked the relevant Eurosystem Committees with examining options, including ways to reinforce its forward guidance on policy rates, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases.”

Tensions between the US and EU continue to weigh on sentiment. The EU expects the WTO to give the US approval to apply tariffs on EU imports valued at between $5-7bn. The EU has a similar case pending against Boeing. The US has already opened a second S.301 investigation to identify additional EU products for tariffs.

In Australia, the RBA Governor, Philip Lowe, gave a speech on inflation and inflation targeting. The main feature from a policy perspective was that Governor Lowe provided some forward guidance on rates in Australia;

“Whether or not further monetary easing is needed, it is reasonable to expect an extended period of low interest rates.

In the UK, the leadership of the Conservative party was resolved as Boris Johnson won the PM ballot. Johnson has been a strong proponent of leaving the EU on 31 Oct with or without a deal. No details have been released regarding a restarting of negotiations with the EU on the withdrawal agreement. The UK government has instead committed to further spending in preparation for leaving the EU on 31 Oct.

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 29 July 2019 – A big week in the global macro sphere. Interest rate decisions will be announced by three major central banks this week – the BoJ, the BoE, and the FOMC.

It is expected that the FOMC will cut rates by 25bps and, at this stage, there remains a lower probability applied to a 50bps cut. https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html?utm_source=cmegroup&utm_medium=friendly&utm_campaign=fedwatch&redirect=/fedwatch

Of note this week will be important data out of the US; non-farm payrolls and employment, personal consumption expenditure, the PCE price index and consumer sentiment. We will also get a further read on manufacturing activity with the ISM and Markit Manufacturing PMI’s for Jul, the final factory orders data for Jun and several regional surveys.

The final PMI’s for July will also begin to be released this week across the major economies with manufacturing in focus.

In Europe, Q2 GDP will be published along with Jul prelim CPI.

In Australia, the important Q2 CPI will be released along with retail sales. Both will be important considerations for the RBA meeting on rates next week.

On trade, US and Chinese officials will meet for the first time since the G20 on trade. Further meetings with officials in Japan are also expected as officials agreed to ‘speed-up’ negotiations.

US Treasury supply will be heavier this week – the US Treasury will settle approx. $289bn in ST bills and coupons, raising approx. $20bn in new cash. As its also month-end, approx. $19bn in securities will mature on the Fed balance sheet. Of this, approx. $5.8bn will be reinvested.  

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 22 July 2019

by Kim | Jul 22, 2019

The weekly macro review for w/c 15 July 2019 – Speeches by US Fed officials created confusion over signalling this week. Chairman Powell signalled the likelihood of a rate cut at the next meeting. An expectation for a 50bp cut had somehow become embedded and the Williams speech was widely interpreted as signalling that the rate cut would be 50bps. This was then walked back. Current target rate probabilities continue to suggest that a 25bp cut is likely.

US data this week was better and absent was evidence of a deterioration in performance.

The first look at Jul manufacturing data saw both regional surveys rebound. The Empire State headline index rebounded back to positive territory – the outlook for 6-months ahead was more positive while current conditions were slightly less positive – measures of demand remained weaker and declining inventories suggested firms are still wary of conditions. The Philly Fed rebound was very strong – new orders growth was very strong and employment growth was a highlight.

It’s possible that the Jun-specific spike lower in these regional surveys a response to the heightened uncertainty created by the threat of tariffs on imports from Mexico (as well as the uncertainty regarding US-China tariffs). That said, weaker manufacturing conditions have persisted throughout 2019 – confirmed by the lower trend in the ISM index, durable goods and also in the manufacturing component of the industrial production report so far this year. Manufacturing output was slightly higher this month but remains below the Dec 2018 peak. Overall industrial production growth this month slowed to zero %.

On the consumer side, US retail sales continued to grow in Jun with sales increasing across many categories and more than offsetting a relatively large decline in the value of gasoline sales. The first look at consumer sentiment for Jul was little changed.

The improvement in retail sales over the last few months has yet to impact inventories. The manufacturing and trade inventories and sales data highlighted that despite an improvement in sales, the sales to inventory ratio remained unchanged in May.

In Europe, economic expectations (Zew) fell further into negative territory. There was no obvious trigger for the spike lower, instead;

“…the experts seem to lose confidence that current uncertainty factors like the trade conflict between China and the US, the design of Brexit and resolve the recent escalation in the Iran conflict in the medium term.  The experts’ expectation of an imminent depreciation of the dollar against the euro is also likely to be a source of economic pessimism.”

Euro area CPI and core CPI both increased at a faster pace in Jun. The ECB meets in the next week and there is some uncertainty surrounding further monetary accommodations.

In Japan, both exports and imports declined in Jun (versus a year ago), continuing the trend of weaker growth. CPI growth and the BoJ measure of core CPI both slowed further in Jun. Core prices excluding energy remained unchanged.

The RBA minutes indicated that the easing bias remains in place but expectations for a third cut in Aug are low. There was little change in the employment report – with the annual view of employment growth remaining positive. But the monthly trend of increasing unemployment continued. Employment growth in Australia will need to accelerate in order to a) continue to absorb the increase in participation and b) reduce unemployment at a faster pace.

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 22 July 2019 – There are no US Fed speeches scheduled ahead of the FOMC meeting next week.

The ECB meets this week on interest rates and monetary policy – there is some uncertainty as to whether the ECB will apply further accommodations in July.

Although it will be a quieter week on the data front, there are several important releases this week.

We will get the first view of July manufacturing and services activity with the prelim PMI’s released across the major markets.

In the US, the prelim Q2 GDP will be released later in the week along with the advance durable goods report for Jun. The PMI’s and regional surveys will help to clarify the extent to which weaker manufacturing results have persisted into July.

US earnings will remain in focus with both major tech and industrial companies reporting earnings this week.

In the UK, the results of the ballot for the Conservative Party leadership will be announced on Tuesday.

US Treasury supply will be lighter this week – the US Treasury will settle approx. $142bn in ST bills, with a net paydown of approx. $14bn.  

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 15 July 2019

by Kim | Jul 15, 2019

The weekly macro review for w/c 8 July 2019 – In a speech during the week, Fed Chairman Powell was widely seen as signalling that a rate cut for Jul was likely. The minutes of the prior meeting provided the broader context and outlined the reasons behind the increase in support for a rate cut. The minutes did, however, highlight that committee members acknowledged that some of these heightened risks were only recent – and that accommodations would be required if risks proved to be sustained. In his speeches during the week, US Fed Chairman Powell confirmed that since that FOMC meeting (two weeks ago), those concerns look to be sustained;

“Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook.”

Even before the speeches, the probability of a 25bp rate cut was very high (94.6% on 5 Jul). The probability of a 50bp cut has now edged up from 5.4% on 5 Jul to 25.6% (as of 14 Jul). https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html?utm_source=cmegroup&utm_medium=friendly&utm_campaign=fedwatch&redirect=/fedwatch

On the data front, US CPI growth (not the FOMC preferred measure) grew at a slightly slower pace in Jun of +1.6%. Core CPI growth also slowed slightly to 2%.

The JOLTS data this month is worth noting. The longer-term trend of the annual change in hires suggests some more recent loss of growth momentum – growth is no longer accelerating. The annual change in job openings has slowed noticeably (still growing though) – especially over the last 6-months.

As noted last week, the manufacturing slow down continued to evolve in Jun, with some evidence suggesting that the lack of growth in new orders is manifesting now as falling order backlogs. The reduction in order backlogs continues to support output growth for now.

Despite the weaker manufacturing PMI readings, industrial production in Europe, including Germany and Japan increased in May. These data releases don’t provide the levels of outstanding orders.

Industrial production increased in the Euro area and EU in May. Production growth was recorded across most categories with the exception of intermediate goods.

In Germany, industrial production also increased slightly in the latest month. The increase in the month was due to manufacturing, but annual manufacturing production declined by the second-fastest pace of the last 18-months. The accelerated decline in new manufacturing orders reported last week for May suggests that production declines may continue across intermediate goods and capital goods. Production growth is also likely to remain subdued across durable, non-durable and consumer goods based on the new orders data. Production of utilities continued to slow. Construction has also slowed noticeably over the last several months – with annual growth slowing from 13.5% in Feb to 0.1% as of May.

Industrial production growth in Japan in May was revised slightly lower but still positive for the month. The longer-term trend of annual growth highlights the decline in production and shipments while the indexes for inventory and the inventory ratio reached near-term highs in May.

In Australia, business conditions and confidence data indicated that the confidence boost from the election has not been sustained, even as the RBA has cut rates. The improvement in business confidence recorded in May after the federal election was mostly reversed in Jun. Business conditions improved slightly and remain well below average. Despite the improvement in overall conditions, the forward orders remain negative, suggesting that activity is not likely to rebound in the short-term.

The decline in the value of new lending for housing also resumed in May. Data on the number of new commitments suggest that there may be some slow-down in the decline of owner-occupier lending (led by one state).

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 15 July 2019; The highlights this week will be the commencement of US Q2 earnings announcements, US and China economic data and a speech by US Fed Chairman Powell.

US Q2 earnings;

“Earnings Growth: For Q2 2019, the estimated earnings decline for the S&P 500 is -3.0%. If -3.0% is the actual decline for the quarter, it will mark the first time the index has reported two straight quarters of year-over-year declines in earnings since Q1 2016 and Q2 2016.” https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_071219A.pdf

Fed Chairman Powell will give a speech during the week “Aspects of Monetary Policy in the Post-Crisis Era”. The probability of a 25bp rate cut at the Jul meeting remains high – with an increase in the chance of a 50bp cut.

US data this week will focus on output and consumer demand. This week we get the first look at some Jul manufacturing data with two regional surveys – Philly Fed and the Empire State. Industrial production for Jun will also be released. On the consumer side, retail sales for Jun will be released (likely weaker/flat auto sales) and the prelim consumer sentiment for Jul.

Data out of China this week – Q2 GDP growth, retail sales, and industrial production.

In the UK, data on retail sales, CPI and the labour market will be released this week. Next week, on 22 Jul, expect the results of the Conservative Party leadership ballot.

The minutes of the last RBA meeting will be released this week – covering the second cut in the overnight cash rate. The important labour market survey will be a key focus for the week. US Treasury supply will be heavier this week – the US Treasury will settle approx. $246bn in ST bills and coupons this week, raising approx. $25bn in new cash.  

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