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
