The Weekly Macro Review and Outlook for w/c 25 November 2019

by Kim | Nov 25, 2019

The weekly macro review for w/c 18 November 2019 – The FOMC minutes confirmed a more “wait and see” mode, allowing some time for policy rate changes to flow through to the economy. Guidance was also changed to reflect more focus on incoming data. It was noted in the minutes that the rate cut in Oct was an insurance against ongoing, downsides risks. In particular, the FOMC is concerned that weakness across manufacturing, energy, agriculture and weaker external growth could spill over into the labour market.

Other points of interest from the FOMC minutes;

Still seeing pressure in the repo market for year end. There have already been several announcements since the meeting – mostly to increase size of the Fed repo facility. Still possible that further measures will be taken to cope with year-end pressure.

The minutes also included a discussion of policy options in the case of rates reaching the effective lower bound. Negative rates were discussed at length as a part of the policy options;

“…participants did not rule out the possibility that circumstances could arise in which it might be appropriate to reassess the potential role of negative interest rates as a policy tool.” FOMC Minutes 29-30 Oct 2019

The PMI’s at a composite level – overall better view of US activity in Nov with output growth increasing. Eurozone output growth was stagnant in Nov. Output growth in Germany was still declining. Japan output growth was stagnant in Nov. UK output declined in Nov. Australian output shifted into decline in Nov.

US – While the PMI’s were somewhat improved, optimism regarding output growth in the next 12-months across both services and manufacturing was lower. Manufacturing activity improved in the Philly Fed report, but Kansas City Fed manufacturing activity remained in contraction.

US existing home sales are still improving but are yet to exceed the late-2017 cycle highs. Growth in housing permits likely positive for future construction activity.

The prelim PMI’s across the Eurozone remained weak. The manufacturing decline abated slightly, but services activity slowed further.

In Germany, the composite index of output indicated a weaker pace of decline in Nov. Services output growth continued to slow while the decline in manufacturing output also slowed. Despite most measures remaining weaker, optimism lifted for the first time in four months.

Japan PMI’s rebounded slightly – remaining mostly stagnant at the composite level. Services activity rebounded slightly, and optimism lifted. Manufacturing activity declined at a slower pace, but measures of demand continued to decline. Sentiment lifted.

The Japanese trade data for Oct was weak and the underlying detail was negative. Declines in exports and imports in value terms were matched by declines in volume terms (where that detail is provided) and declines were recorded across key customers/markets. A large portion of the decline in imports versus a year ago is related to petroleum, but again, other key imports were down in value and volume terms.

Core CPI growth in Japan accelerated slightly in Oct as the increase in the consumption tax was implemented.

UK PMIs continue to be heavily influenced by the Brexit process. At the composite level private sector output declined at the fastest pace since Jul 2016 – led by declines in services and manufacturing output.

Australian PMIs deteriorated with both services and manufacturing output shifting into contraction. Underlying detail on demand was also negative. Bus sentiment declined.

RBA minutes highlighted that consideration had been given to a further cut in rates at the Nov meeting. Instead, the RBA had opted to ‘wait and assess’ based on having “already delivered sizeable monetary stimulus over the last several months”. The overall assessment of the economy was downbeat.

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 25 November 2019 – This will be a shorter week for US markets with the Thanksgiving Holiday on Thu 28 Nov. Happy holidays to those celebrating this week!

Despite the shorter week, there will still be relatively moderate data flow in the US, Australia and Japan.

It will be mostly quiet on the central bank front with speeches by US Fed Chairman Powell on Mon and RBA Governor Lowe on Tue.

Key US data highlights; durable goods orders, PCE price index, 2^nd prelim GDP for Q3, National house prices and a range of regional manufacturing surveys.

Data in Australia will focus on important construction activity and private sector capex for Q3 as key inputs for the Q3 GDP release next week (4 Dec).

In Japan, retail trade data will be released for Oct. Retail growth has accelerated in the months leading up to the Oct consumption tax increase – and we’ll see the degree to which the tax hike has impacted demand.

On the trade front, headline risk remains high regarding the US-China trade negotiations, which are ongoing.

There was no agreement reached last week within the US on the USMCA – frustrating efforts for a vote before Thanksgiving.

It now appears that the US has missed the deadline to announce auto tariffs as a part of the S.232 National security investigation. It’s possible that this action may take another form and we’ll continue to monitor the US Federal register for announcements.

The phase one trade deal between the US and Japan passed the lower house of the Japanese parliament last week – now likely to be ratified by the end of the year.

US Treasury supply will be a little heavier, especially after the addition of a 16-day Cash Management Bill last week which will settle this week. This week, the US Treasury will settle approx. $219bn in ST bills, FRN’s and TIP’s raising approx. $43bn in new money.

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 18 November 2019

by Kim | Nov 18, 2019

The weekly macro review for w/c 11 November 2019 – US manufacturing data remained weak in Sep. Total industrial production declined in Sep and manufacturing led the decline. Drilling down, auto manufacturing was a notable area of weakness. Production declined at an accelerated pace of -7.1% in Oct after falling -5.5% in Sep. The NY Fed Industrial Production report still cited the GM strike as the cause of the fall in Sep. Yet, there also appears to be a demand problem. Retail sales of autos only partly rebounded in Oct after the larger fall in Sep – the official BEA data last week had total motor vehicle sales declining in Oct. Last week in the wholesale inventories report for Sep, we saw the inventory to sales ratio for autos jump to 1.8 – there are only ten months during the GFC in 2008 when the inventory to sales ratio was higher.

Prelim Q3 GDP was a highlight – growth remains subdued across Germany, Europe and Japan. There was a small acceleration in the UK Q3 GDP growth.

The German economy narrowly averted a technical recession. While Q2 GDP growth was revised lower to -0.2%, the prelim Q3 GDP growth was reported as +0.1%. The full detail will be released next week 22 Nov.

The prelim Q3 Eurozone GDP growth was little changed, growing at +0.2% in Q3 across the Euro area.

GDP growth in Japan slowed from +0.4% in Q2 to +0.1% in Q3. The annual pace accelerated though. The lower Q3 growth was the result of lower private consumption growth, the change in inventories detracting from growth and net exports also detracting from growth.  The complete industrial production report for Sep saw production and shipments revised higher – possibly stronger ahead of the consumption tax increase. Despite the strong growth in the report, both shipments and production of one of the largest weight industry groups, transport/passenger cars, continued to decline.

Auto production remains a problematic area for Japan. In the negotiation of the phase one trade deal, the US provided no assurance that tariffs were off the table. The Japanese parliament is currently debating the US-Japan phase one trade bill with some risk that approval is delayed.

In the UK, the lagging GDP data recorded a rebound in Q3 due to a less negative contribution from private investment. The labour market report for Jul-Sep continued to show deterioration in the more recent 3-month change – with employment continuing to decline. There was no corresponding increase in unemployed persons because participation declined over the same period. Weakness in consumption growth appears to have persisted into Q4 with the decline in retail sales in Oct.

Aussie data will provide some concern for the RBA. The Q3 wage growth was unchanged in the quarter and slowed on an annual basis. The labour market in Oct remained weaker with low employment growth. Unemployment increased and would have been worse except that participation recorded the first monthly decline in fifteen months.  The underutilization rate increased in Oct – this is likely a large reason why wages growth has remained lacklustre and this will not be good news for the RBA. Over the last year, the combination of slower employment growth and increased labour supply have been the key drivers of the higher underutilization rate.

Activity in China continued to expand, but growth/momentum remains at some of the lowest levels recorded. This lower pulse of activity is likely impacting global demand and trade – given the large influence that prior Chinese stimulus and expenditure on fixed asset investment/capital goods had on global growth in the post-GFC period. Chinese consumers are also likely seeing a squeeze on real purchasing power as annual CPI growth accelerated to +3.8% on the back of higher food (meat) prices. Retail sales slowed to the equal lowest pace of growth of the last 12-months. Autos were a large contributor to the weaker retail growth, declining by -3.3% versus Oct a year ago.

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 18 November 2019 – A much lighter week of data flow. The main highlights are;

Prelim composite PMI’s for our first view of Nov activity across the US, Eurozone, Germany, Japan and Australia.

Central bank meeting minutes to be released this week – FOMC, ECB and the RBA. A relatively quiet week for US Fed speeches.

There are two other notable releases this week;

Japan CPI for Oct – the first month after the consumption tax increase.

Germany Q3 GDP detailed release – any slight deterioration in the headline growth could see Germany “officially” in recession.

Headline risks remain this week;

Details of progress, or lack of, regarding phase one of the US-China trade deal.

Possible announcement of a vote by the US House of Representatives on the USMCA.

Possible release or decision on auto tariffs related to the S.232 report into auto imports and national security.

The Japanese parliament is also debating the phase one US-Japan trade deal bill. The bill will either pass the lower house on the 19 Nov or there is the possibility of a delay. Lawmakers remain concerned about the threat of auto tariffs.

It will be a much lighter week for US Treasury supply. The US Treasury will settle approx. $182bn in short term bills this week, raising only approx. $6bn in new money.

Added liquidity will be reasonably strong, especially considering the lighter issuance. There will be approx. $22.6bn in reserve management purchases settling this week – operations this week represent 42% of the total reserve management purchases for the month. The Fed will also purchase approx. $5.3bn in Treasury coupons as a part of the restarted reinvestment of principal payments.

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 11 November 2019

by Kim | Nov 11, 2019

The weekly macro review for w/c 4 November 2019; There were several important highlights in the US data this week – mostly reinforcing the weaker state of growth.

Factory orders for Sep indicated the continued weakening growth across several of the larger categories – motor vehicle bodies/parts, non-defense aircraft and machinery. The annual decline in orders remains more moderate than in 2014-16 but growth in 2019 has slowed from a much higher level this time. Either way, the slower growth in orders may weigh on future shipment growth.

The factory orders and wholesale sales reports for Sep both highlighted the increasing value of inventory especially across motor vehicles, machinery and metals in Sep.

Motor vehicle sales in Oct fell relatively hard (seas adj basis) – for both autos and SUV’s. This suggests that weakness in orders and shipments and increasing inventories is likely to persist.

Consumer credit growth halved in Sep – led mostly by non-revolving credit (helping to explain to the weaker auto sales) but credit card credit also declined for the second month.

Despite the weaker credit growth and declines in new car sales, consumer sentiment data remains robust. The Nov prelim sentiment readings pulled back only slightly from the larger increase in Sep and Oct. Commentary remains positive, although there was a note about consumers becoming more cautious spenders.

The other major highlight in this weeks’ data was the JOLTS report. It was widely reported that job openings continued to decline. But there was also a deterioration in the separations data – namely a larger increase in Sep for layoffs and discharges. This has been a one-month event so far, so it will be something to watch.  

Reports into services – ISM and Markit seemed to diverge at the headline level. But underlying both reports, was further falls in unfilled orders continuing to support business activity. The new orders index in the ISM indicated a negative underlying shift in firms reporting increasing new orders, yet the new orders sub-index increased anyway. The Markit services PMI indicated declining new orders and employment.

Manufacturing PMI’s out of Europe were little changed at the current levels of decline. Services activity improved slightly but the underlying performance detail was less positive.

Germany factory orders in Sep improved – somewhat at odds with the Sep PMI that indicated a further pulse lower in new orders. The factory orders data was weaker only in intermediate goods and durable goods, which was offset by stronger growth in orders across capital, consumer and non-durable goods. On an annual basis though, orders for the domestic and Euro-area markets declined at a faster pace.

Germany industrial production was much weaker in Sep. Levels of manufacturing production in Sep were at their lowest levels since the peak in this part of the cycle – so no sign of a bottom in manufacturing this month. The growth in orders though suggests that this may improve in the near future. Utilities and mining production both recorded growth in the month but remain well below a year ago. Construction was the only area to record growth in the month and on an annual basis.

In Australia, the RBA kept rates on hold. While the Board expected the recent declines in the cash rate to support growth, it acknowledged that it was ready to ease further if required.

The RBA Board noted that a ‘gentle turning point’ may have been reached in the Australian economy.  This was referring mostly to the new upswing in lending for housing and the subsequent anecdotal increase in house prices. Lending for housing has improved somewhat led almost entirely by owner occupiers. At the lowest point, lending for housing was 28% below the peak and that has now improved/grown in several months to be 17% below the peak in lending. Meanwhile Aus retail sales for Sep were disappointing. In real terms, retail sales declined on an annual basis for the first time since the recession of the early 90’s. Nominal retail sales growth remained at +2.5% for the year. In the UK, key sectors such as Services continue to stagnate amid the Brexit uncertainty. But with the general election coming up, firms and the BoE MPC noted that those uncertainties would likely begin to fade and growth would pick up into 2020.   

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 11 November 2019; A full calendar of data and US Fed speeches this week.

Highlights in the US; Fed Chairman Powell will testify before the Congressional Joint Economic Committee and House Budget Committee on Wed and Thu respectively. The US Fed Vice Chairman Clarida will also give a speech at the Swiss National Bank on Monetary Policy, Bond Yields and Price Stability on Tue.

Key highlights on the data front include CPI, Retail Sales and Industrial production for Oct.

The data dump out of China will be important this week as we continue to look for signs of improved/changes in demand. Highlights include trade balance, industrial production, retail sales, CPI, PPI and new loans (since the lowering of the benchmark rate).

Prelim Q3 GDP data will be released for Germany, the broader Eurozone, Japan and the UK – all important barometers of current activity.

A heavy week of UK data also includes CPI, retail sales and the labour market. The PMI’s have indicated the economy stagnating as a result of Brexit uncertainty but expecting some lift in the Oct data, especially retail sales, as consumers prepared (brought forward purchases) for Brexit at the end of Oct.

The final Sep industrial production report for Japan will be important. The prelim headline numbers were stronger for the month, but there was notable weakness across some categories including passenger cars.

In Australia, the important labour market report for Oct and Q3 wage price index will be released this week. This will be closely watched by the RBA.

Headline risks this week; details of phase one of the US-China trade deal, a possible vote on the USMCA to be announced and the possible release or decision on auto tariffs related to the S.232 report into auto imports and national security.

It will be a heavier week for US Treasury supply. The US Treasury will settle approx. $266bn in short term bills, notes and bonds this week, raising approx. $40bn in new money. There will be approx. $41bn in securities on the Fed balance maturing on 12, 14 and 15 Nov. There will be no reserve management purchases settling this week. The Fed will purchase approx. $3.4bn in Treasury coupons as a part of the restarted reinvestment of principal payments.

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