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, 2nd 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
