The Weekly Macro Review and Outlook for w/c 4 November 2019

by Kim | Nov 4, 2019

The weekly macro review for w/c 28 October 2019 – The FOMC reduced the FFR target at the latest meeting. While there had been no notable deterioration in conditions since the last meeting, Chairman Powell spoke of this reduction as more of an insurance against ongoing risks to the US economy – especially from the slow-down in global growth and trade which is already impacting exports, production and investment spending. Barring any worsening in conditions, the Fed appears to be favouring a watch and wait approach, noting that the recent rate cuts will take time to impact activity.

US data this week showed some further signs that growth in the US economy is slowing.  

Weakness in manufacturing is likely to persist into Oct given the further decline in the ISM Manufacturing PMI, weaker growth in the Dallas Fed manufacturing report and the renewed contraction in the Chicago PMI. The Markit Manufacturing PMI shows a more positive view of current manufacturing conditions for the second month running.

Wholesale sales/inventory report for Aug showed elevated inventory levels, especially for durable goods (mostly machinery). Faster inventory growth was something that also showed up in the advance durable goods report for Sep last week.

The advance estimate of GDP growth was little changed between Q3 and Q2 coming in at +0.5% for the quarter. On an annual basis, real GDP growth has been slowing since Q3 2018. A similar trend is evident across the annual growth in real personal consumption expenditure, fixed investment, imports and exports.

This persistent slow-down in manufacturing, investment expenditure and exports especially, appear to have had some impact on income and employment growth. While income and employment growth are not accelerating, growth remains moderate. The annual growth in personal income has lifted in the latest month but is still below the recent mid 2018 peak in growth. Income growth is elevated relative to 2016/17 though.

Non-farm payroll growth came in lower this month. Despite positive revisions for the two months prior, the 12-month average growth continues to slow – now averaging +175k over the last 12-months, just above the Sep 2017 low of +168k. The slower growth in non-farm payrolls is evident in the household employment survey. Employment growth has slowed to below the average for the last five years. But on an annual basis, employment growth remains higher than that of the labour force, so unemployment has continued to fall.

Headline inflation slowed somewhat in Sep, led mostly by lower energy prices. But even annual core PCE price growth slowed in Sep (had been accelerating for several months).

In Japan – the acceleration in retail sales in Sep was likely the result of bringing forward purchases before the consumption tax increase in Oct. This will likely impact expenditure growth in coming months. Industrial production for Sep was more positive, but there were notable pockets of weakness in production, shipments and inventory especially for motor vehicles. The manufacturing PMI for Oct slid further into contraction. The BoJ kept rates on hold but shifted its guidance to ensure “closer attention is paid to the possibility that the momentum toward achieving the price stability target will be lost”.

In Australia, headline CPI growth slowed, and measures of core CPI growth were little changed and remain lower. The annual growth of the trimmed mean CPI was unchanged. Headline and core CPI measures are well outside of the 2-3% target range for the RBA.

The official China NBS manufacturing and non-manufacturing PMI’s were weaker in Oct – manufacturing activity declined at a faster pace and non-manufacturing activity recorded the slowest growth in a year. In contrast, the Caixin/Markit Manufacturing PMI showed activity expanding at a faster pace.

Finally, the UK will hold a general election on 12 Dec 2019. The Conservative party will aim to increase its current minority position in order to deliver Brexit by 31 Jan 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 4 November 2019 – Key highlights for this week are the (remaining) manufacturing and services PMI’s for Oct, rates decisions from the RBA and the BoE and several large macro data releases.

The remainder of the PMI reports for Oct are released this week across Asia, Europe and the US.

The RBA and the BoE meet this week on interest rates. As of 4 Nov, there is 93% expectation of no change in the Australian overnight cash rate at the meeting on Tuesday –https://www.asx.com.au/prices/targetratetracker.htm.

Key data releases this week;

US – Factory orders for Sep, Markit services PMI, ISM non-manufacturing PMI and the prelim University of Michigan consumer sentiment for Nov. There will also be a full week of Fed speeches this week.

Europe – Germany factory orders and industrial production for Sep, and Eurozone manufacturing and services PMIs.

Australia – retail sales and housing finance for Sep and the AiG PMI’s across manufacturing, services and construction.

It will be a lighter week for US Treasury supply. The US Treasury will settle approx. $210bn in short term bills this week, raising approx. $24bn in new money. Approx. $15bn in reserve management purchases will settle this week and the Fed will 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