The Weekly Macro Review and Outlook for w/c 28 October 2019

by Kim | Oct 28, 2019

The weekly macro review for w/c 21 October 2019 – The prelim PMI’s this week indicated that private sector activity was slightly weaker, or little changed at lower levels in Oct.

In the US, the advance durable goods report provided more insight behind the weaker US manufacturing activity in Sep and Oct.

Recap of recent US manufacturing data; Sep ISM PMI fell further into contraction (across a broader range of industries) while the Sep Markit PMI was mostly stable after slowing markedly in Aug. Industrial production for manufacturing was weaker in Sep – with the GM strike affecting auto production – but that was not the only driver of the weaker durable goods result.

The Sep advance durable goods orders reflected this weakness in autos but also highlighted further weaker manufacturing results for non-defense aircraft. At the total durable goods level, the monthly decline in new orders and shipments, together with no change in order backlogs, made the inventory growth a standout in both the month and on an annual basis. This was led by non-defense aircraft and motor vehicles.

The US Oct prelim PMI indicated some small rebound in growth for manufacturing. Manufacturing recorded a small increase in the pace of growth, but growth remained moderate. That said demand, output and employment increased at a faster pace. There was also some improvement in the outlook. The services view of the PMI indicated that activity was little changed, but the sub-indices indicated weakening demand and declining employment.

The PMI’s were little changed for Germany and across the Eurozone.  The composite PMI for Germany indicated continued contraction in manufacturing activity which offset the slightly slower growth in services. Across both reports – demand was weaker and order backlogs continued to decline. Sentiment shifted increasingly negative for the outlook. The German PPI, excluding energy prices, continued to slow, indicating that selling price growth remains under pressure. The recent peak in the PPI ex energy was in early 2017 at around 3% – and this has slowed consistently to +0.5% growth in producer selling prices as of Sep.

The broader Eurozone PMI was little changed at the composite level, with the index slowing to virtually no growth in Oct compared to Sep. While there was a slight improvement in the headline services activity index, growth in demand and employment slowed. Manufacturing broadly across the Eurozone remained in contraction, at the same level as the month prior. There was a faster decline in new manufacturing orders and employment declined – “with the steepest job cuts since Jan 2013”.

The ECB kept rates on hold. The outgoing President of the ECB, Mario Draghi, noted that since the last meeting, data had confirmed that the euro area growth remains in a period of protracted weakness. No further change was made to policy settings with several of the measures announced last month yet to be implemented. Outgoing President Draghi called on euro area countries to implement structural changes and fiscal response where possible.

The composite PMI for Japan slipped into contraction for the month. This was partly due to the implementation of the consumption tax increase as well as the major typhoon – but manufacturing firms cited weaker demand conditions generally. The manufacturing outlook shifted from net positive to net negative. Services activity slowed to zero growth.

The prelim Aus PMI indicated that growth of manufacturing and services activity slowed in Oct. Demand was weaker across both services and manufacturing with new manufacturing orders declining for the first time in the series history.

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 28 October 2019 – A big week of data, central bank interest rate decisions and the Brexit 31 Oct deadline.

Brexit – an extension has been confirmed by the EU, but no date yet supplied. The UK will likely go to another general election in early Dec and this will be confirmed early in the week. The second Brexit deadline comes up this week on 31 Oct.

Several central banks will meet this week regarding interest rates and monetary policy;

Interest rate decisions will be announced by the Bank of Canada (Wed), the Bank of Japan (Thu) and the US FOMC (Wed). As of 27 Oct, the probability of a further 25bps rate cut in the US is now 93%. https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html?utm_source=cmegroup&utm_medium=friendly&utm_campaign=fedwatch&redirect=/fedwatch

The major data releases this week;

US – Non-farm payrolls and employment, the prelim Q3 GDP, ISM and Markit manufacturing PMI’s

Europe – Eurozone prelim Q3 GDP and prelim CPI for Oct

Japan – The prelim industrial production for Sep, retail sales for Sep (the month prior to the increase in the consumption tax) and the final manufacturing PMI for Oct

Australia – Q3 CPI, private sector credit and the manufacturing PMI’s for Oct

Finally, it will be a much heavier week for US Treasury supply. The US Treasury will settle $332bn in bills, notes, FRN’s and TIPS this week, raising approx. $59bn in new money. Approx. $15bn in reserve management purchases will settle this week and the Fed will purchase approx. $4.6bn in Treasury coupons as a part of the restarted reinvestment of principal payments. Approx. $15.6bn in securities in the Fed SOMA account will mature on 31 Oct – the full amount will be reinvested/rolled over.

More detail (including a calendar of key data releases) is provided in the briefing document – download the file here;

Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net 

The Weekly Macro Review and Outlook for w/c 21 October 2019

by Kim | Oct 21, 2019

The weekly macro review for w/c 14 October 2019 – Brexit was the main highlight during the week. The vote for the alternative backstop was defeated in the UK parliament until the legislation required to implement the bill is passed by the parliament. This situation will continue to unfold throughout next week. A decision on an extension will likely follow once that legislation has been passed/defeated.

There was little further detail on regarding phase one of the US-China trade deal. With the details yet to be put into writing and fully agreed to (we were here back in May), the situation will likely remain tenuous. Even this week, China continued to advocate that agriculture purchases would be made based on market requirements rather than agreeing to a set purchase amount.

US data this week was little changed. Manufacturing has been a weaker part of the US economy and the industrial production report this week indicated that manufacturing output declined in Sep – in line with weaker readings across PMI’s. The decline in manufacturing was led by both durables (GM strike affecting auto production in Sep) and non-durables led by lower output of petroleum products.

US retail sales were weaker in Sep – the first monthly decline since Feb 2019. The annual growth in retail sales has recovered to above 4% since the slowdown in late 2018. Consumer sentiment data has strengthened in the prelim Oct release, indicating that sales likely remain solid in the near term.

Manufacturing has also been a weak for Europe and the industrial production release for Aug indicated that output growth remained subdued. Despite slight growth in the month in the Euro area, production remains below the levels from a year ago. The Eurozone headline CPI growth slowed further – led by lower growth in energy prices. Energy prices have affected most CPI reports this week. Core CPI growth increased slightly as services prices continued to grow at a faster pace.

Growth in the BoJ preferred measure of CPI ex-fresh food continued to slow this month, down to +0.3% and remaining well below the 2% target. Again, energy prices continue to influence these CPI figures – ex fresh food & energy, CPI was slightly higher at +0.5%. The introduction of the consumption tax will be incorporated into the CPI data next month.

As the Brexit process continues to unfold, the UK labour market survey indicated worsening trends in employment and unemployment – the deterioration visible in the latest 3-month reading. Annual UK CPI growth was unchanged at 1.7% and retail sales growth steadied.

Trends in the Australian labour market remained weaker. Employment growth slowed, while the supply of labour increased (via participation growth) resulting in an increase in the total number of unemployed persons. These developments will be closely watched by the RBA as it looks to further easing to reduce this spare labour market capacity (which it sees as a key drag on the CPI via lower wage growth pressure). The RBA minutes on the labour market outlook were less encouraging;

It was also possible that participation was rising partly in response to weak growth in incomes. Moreover, employment growth was forecast to slow over the period ahead.

Data out of China was mixed. Trade data deteriorated further with both exports and imports declining. The fall in imports especially, reflecting further weaker domestic demand and weaker demand for regional exporters into China.

Retail sales indicated that consumer demand remained steady. Domestic retail sales increased at a similar pace month on month with a small acceleration over the year. Consumer price growth accelerated as meat prices, especially pork, have increased markedly.

Industrial production lifted – led by faster growth in manufacturing and mining while output growth for utilities remained steady. Producer prices declined at a faster annual pace, suggesting weaker demand conditions persisted. The largest annual declines in producer prices continued to be driven by chemicals and petroleum.

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 21 October 2019 – There are several key events and data releases this week.

The process to complete Brexit continues this week. The legislation required to implement the alternative Brexit deal is expected to be introduced into the UK parliament early this week. If this legislation passes, then it is possible that the Brexit deal will be approved by the UK parliament.   

The ECB meets this week and it will be President Draghi’s final meeting as President.

Important data out this week;

Prelim PMI’s for Oct will be released across the US, Europe, Asia and Australia this week.

US durable goods orders, regional manufacturing surveys, existing home sales and final consumer sentiment readings for Oct will be released.

Japan merchandise trade.

It will be a lighter week for US Fed speeches ahead of the FOMC meeting next week on 30 Oct. As of 21 Oct, the probability of a further rate cut next week is 89.3%. https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html?utm_source=cmegroup&utm_medium=friendly&utm_campaign=fedwatch&redirect=/fedwatch

Finally, it will be a lighter week for US Treasury supply. The US Treasury will settle $182bn in Treasury bills raising approx. $25bn in new money. Approx. $22.6bn in reserve management purchases will settle this week.

More detail (including a calendar of key events) is provided in the briefing document – download the file here;

Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net 

The Weekly Macro Review and Outlook for w/c 14 October 2019

by Kim | Oct 14, 2019

The weekly macro review for w/c 7 October 2019 – Large announcements took center stage during the week.

A limited trade deal (or at least a truce) between the US and China was announced this week. This more limited agreement has little detail attached at this stage – but it likely means that China will purchase more US agriculture and the US will not go ahead with the increase in the tariff rate on imports from China from 15 Oct. It is expected that those details will be agreed to in time for the APEC Summit 16-17 Nov.

By the end of the week, there was a more positive tone on Brexit regarding an agreement on an alternative to the Irish border backstop. This has since been downplayed by both sides. With the important EU summit coming up, negotiations will again come down to the wire. The Benn act of the UK Parliament requires the UK PM to request an extension to the Brexit deadline (rather than ‘crash out’ with no deal) if there is no agreement with the EU27 and House of Commons backing by 11pm Sat 19 Oct. The UK PM continues to talk about exiting the EU on 31 Oct without a deal.

There was an announcement by the US Fed that it will commence purchasing ST Treasury Bills at a pace of $60bn per month in what it calls ‘reserve management purchases’. The US Fed Chairman had hinted at some intervention in his press conference at the last FOMC meeting, to ‘provide sufficient supply of reserves’ in the wake of liquidity issues in the repo market. The purchase of these ST T-bills will commence on 15 Oct and will continue into at least Q2 2020. This will be in addition to both the overnight repo operations of up to $75bn (daily) and term repo operations of up to $35bn (twice weekly) to ease funding pressures in the repo market.

Other important releases this week were the FOMC and ECB minutes. The FOMC minutes included detail regarding the funding issues in the repo market and the discussion on the size of policy easing at the meeting. The decision to reduce the FFR by 25bps was not unanimous – and the minutes outline the arguments for a 25bps cut, a 50bps cut and no cut to the FFR. All members agreed that downside risk had increased since the last meeting.

“…a clearer picture of protracted weakness in investment spending, manufacturing production, and exports had emerged.”

JOLTS data out this week indicated some further slower momentum in job hiring and openings. Although there was little to suggest any surge in layoffs/discharges, the growth of quits has slowed notably. The first read of consumer confidence for Oct showed a rebound in sentiment. The annual growth in consumer prices was unchanged in Aug at 1.7% and core CPI growth remained much higher on the back of shelter and medical services prices.  

The ECB minutes outlined the discussion, agreement and disagreement on the final suite of easing measures introduced at the last meeting. While members all agreed that a further easing in policy was warranted, there was some disagreement on the individual elements making up the package of measures. The key data out this week was Germany orders and industrial production for Aug (somewhat backward looking given the deterioration indicated by the Sep PMI’s). Weakness in orders was led by the German domestic market. Industrial production increased in the month, led by stronger growth in manufacturing and mining, but remains well below the near-term peak and below a year ago.

Aussie housing lending data continued to strengthen – although growing at a slower pace than the month prior. Softer data indicated slightly more ‘steady’ results with business confidence and conditions picking up slightly. The AiG performance of industry reports indicated some lift in momentum for manufacturing, weak growth for services and continued contraction in construction. Across all three sectors, selling prices continued to decline indicating that demand remains an issue.

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 14 October 2019 – A range of data, news events and US Fed speeches this week.

The emphasis will shift onto the substance of this first phase of the US-China trade agreement as the details are put into writing for the APEC meeting mid-Nov. The next round of tariff increases on imports from China into the US (which were initially postponed) will not go into effect this week.

This is an important week for Brexit with the EC summit on 17-18 Oct. Negotiations will continue throughout the week in order to find some agreement on an alternative to the Irish border backstop. Both sides have stated that there is still a large distance to cover. The UK Parliament has an extraordinary sitting of the House of Commons planned for Sat 19 Oct in order to vote on any alternative that has been approved at the EC summit. If no agreement is in place by 11pm on Sat 19 Oct, the UK PM is required to request a further extension to the 31 Oct Brexit deadline.

The first of the tariffs on imports from the EU (related to the WTO-Airbus case) will likely take effect on 18 Oct.

Important data out this week;

US retail sales, housing data and industrial production. There is also a very heavy schedule of Fed speeches this week.

China data dump including trade, CPI, retail sales and industrial production.

Eurozone industrial production and CPI.

UK retail sales, employment and CPI.

Australia employment survey.

Finally, it will be a very heavy week for US Treasury supply. The US Treasury will settle $255bn in Treasury bills and coupons raising approx. $69bn in new money (a relatively large amount). This will also be the first week of ‘reserve management purchase’ operations.

More detail (including a calendar of key events) is provided in the briefing document – download the file here;

Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net