The weekly macro review for w/c 29 July 2019 – The US Fed and the BoJ made changes to policy and guidance citing downside risks from weak global growth and trade policy uncertainty. The US Fed cut the FFR by 25bps and has ended quantitative tightening. The BoJ added to its guidance that “the bank will not hesitate to take additional easing measures” in the case where downside risks regarding developments from overseas economies are significant.
Both decisions were issued before the announcement made by US President Trump that another 10% tariff would be applied on the remaining $300bn of imports from China from 1 Sep. This has amounted to a re-escalation of tensions with China. At the time of writing, China has allowed its currency to fall through the 7.00 level and Chinese state-owned enterprises have been asked to suspend the import of US agriculture products.
Uncertainty on trade and the implications for growth has impacted firms and consumer sentiment.
Consumer sentiment data for Jul indicated that US consumers had a ‘renewed sense of personal financial optimism’ – while there was no expectation of a rapid acceleration in income, there was also no expectation of changes in inflation and unemployment rates. That said, US consumers are taking precautionary measures and that policy uncertainties might outweigh any falls in interest rates on spending decisions;
“Consumers have not ignored mounting policy uncertainties as they have begun to take precautionary measures to increase savings and reduce debt. Favorable buying attitudes toward homes and vehicles have significantly receded from their cyclical peaks despite declining interest rates.”
This sentiment mirrored the income and consumption data for Jun – with incomes growing slightly faster and consumption expenditure growth slowing. Savings increased.
For the Fed this week, the headline PCE price index growth continued to slow, but core price growth increased at a faster pace to +1.6%.
Of note this week was US non-farm payrolls – the growth of which continues to slow. But the household employment survey is also showing some concerning employment trends – especially in the core working-age group of 25-54yrs with annual employment growth declining for the first time since 2013.
Growth of average weekly hours worked, and overtime hours of manufacturing employees are also starting to mirror the weaker manufacturing reports – both declined at an accelerated pace this month.
The Jul manufacturing and output data were mostly weaker. The ISM index continues to grow at a slower pace with firms reporting a notable slowdown in production and employment growth. Across most reports, with weaker new orders growth, production growth continues to be supported for the moment as firms work through order backlogs. Global risks, trade tensions, and lower growth expectations were the key concerns facing firms. The latest escalation with China this week will likely weigh further.
Trade concerns and slower global growth were also issues cited across the continued contraction of manufacturing activity across the broad Eurozone and Japan in Jul. Industrial production in Japan declined faster in Jun. Firms cited issues around China and escalating conflict with South Korea. In Europe, Q2 GDP growth slowed and both headline and core CPI growth also slowed.
Aussie CPI growth picked up slightly but growth in core measures continued to slow led by lower growth in prices from the domestic economy. Retail sales growth (vol) returned to positive territory but, despite the election result and one rate cut, growth remains moderate. Annual growth in retail sales volumes of just +0.2% is a new low in momentum since the GFC.
Late in the week, the US signed into law a two-year agreement that increases the US government’s borrowing limit and suspends the debt ceiling until Jul 2021. The US Treasury reissued the Q3 funding requirements with an additional $273bn in new money to be raised in Q3 (ST bills).
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 5 August 2019 – This week, the focus is on the re-escalation of trade tensions between the US and China and the implementation of punitive measures by both countries. The data so far suggests that the implications of the trade tensions and now, a further escalation including the currency depreciation by China, has wider-reaching economic impacts.
The RBA will announce its interest rate decision early this week. The Q2 CPI from last week lifted slightly but core measures continued to slow led by slower price growth from the domestic economy. Rates were cut at the last two meetings and guidance suggested a ‘wait and see’ approach herein – but the ASX 30-day interbank cash rate futures has shifted to a 50-50 chance of another cut this week (as of 2 Aug) https://www.asx.com.au/prices/targetratetracker.htm
Other Aussie data of note; the AiG performance of industry indexes and housing lending for Jun. The Jun data will incorporate the first of the two recent rate cuts.
In the US, the focus will be on the ISM non-manufacturing PMI, consumer credit and JOLTS data.
Across a range of economies, the services PMI’s will round out the broader view of business activity.
Other important data points this week; Germany new orders and industrial production, Japan prelim Q2 GDP, UK prelim Q2 GDP and a raft of data out of China (trade, lending, CPI and PPI).
Treasury issuance will be lighter this week. The US Treasury will issue approx. $148bn in ST bills this week with a net paydown of $5bn. We expect to see further increases in the size of ST bill issuance in the following week due to the suspension of the debt ceiling.
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
