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
