The Weekly Macro Review and Outlook for w/c 9 December 2019

The weekly macro review for w/c 2 December 2019 – Global manufacturing weakness persisted into Nov across the US, Europe, Japan and Australia. But one of the main sources of recent weakness, China, was the stronger performer this month with activity rebounding into expansion. If this continues, then it could have a positive impact on activity across key markets.

US manufacturing activity remained lackluster (across various indicators) – the accelerated decline in manufacturing overtime hours in Nov was an important highlight this week.

The ISM for Nov manufacturing activity continued to contract at a slightly faster pace. Yet the Markit PMI recorded faster growth in Nov. The detailed Oct factory orders report was little changed – orders increased in the month led mostly by defense aircraft orders. Excluding defense orders, new order growth was flat to the month prior. Manufacturing weakness still seems mostly focused on transport equipment, but orders continue to decline on an annual basis including and excluding transports.

Services activity reported across the Markit and ISM reports indicated that growth remained low in Nov. The ISM recorded a small deceleration in growth while the Markit report recorded a slight acceleration.

Employment and sentiment data suggested little impact on the consumer despite the deceleration in activity. Non-farm payrolls growth for Nov was higher – partly led by the return of striking manufacturing workers. The household survey indicated that annual growth in employment had slowed slightly, but total unemployed persons still declined. Employment growth slowed notably on a monthly basis – but unemployed persons still declined due to a larger decrease in participation in the month.

Growth in hours of all employees indicated no change on an annual basis (0% growth). But the average overtime hours of manufacturing employees declined at an accelerated pace of -11%.

The prelim consumer sentiment reading for Dec was stronger across current sentiment, current conditions and expected conditions. Sentiment readings are now at the “upper end of the favourable range is has travelled since the start of 2017”.  

“Nearly all of the early December gain was among upper income households, who also reported near record gains in household wealth, largely due to increased stock prices.”

Europe – Growth in Q3 was slightly faster across the broader Eurozone – led by households and improvement in the external sector. This helped to offset a lower contribution from private investment spending. So far Q4 results remain weaker, with little improvement regarding the decline in Eurozone manufacturing activity. Services activity also continued to slow. Retail sales in Oct declined at a faster pace.

Weakness in manufacturing persisted in Oct for the largest EU member Germany. New orders, especially for the domestic market continued to decline. Industrial production also declined at an accelerated pace in Oct – led by manufacturing and construction. Overall production levels are now 8% below the peak of Nov 2017.

Japan – There was little evidence of a rebound in Japan manufacturing conditions in Nov. Services activity improved, recording marginal growth. Overall, a fairly neutral result after the increase in the sales tax and rebound from storm disrupted trade and manufacturing in Oct.

Australia – Growth slowed further in Q3 led by lower contributions from households, government and trade. Private investment also continued to decline, but at a slower pace. The RBA was likely hoping to see some positive impact from interest rate cuts, tax relief and small increases in house prices on consumption. But households tightened expenditure in Q3. While household income growth has not been accelerating, household disposable incomes were boosted by tax relief in Q3. Instead of spending that additional disposable income, households increased saving. There has been a shift in household sentiment and behaviour.

Australian retail sales in Oct (nominal value) recorded no growth in the month. Several factors to consider; drought and bushfires in NSW & QLD could be impacting performance and consumers could be holding out for the Nov US-style Black Friday promotions.

The RBA rates decision was made prior to the release of this data and the Board kept rates on hold. The performance of the labour market will be an important datapoint over the next few weeks.

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 9 December 2019 – Not a very data heavy week, but there are several important events;

Central bank decisions this week – FOMC, ECB and SNB. The current target rate probabilities indicate rates likely to remain on hold in the US. Source; https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html?utm_source=cmegroup&utm_medium=friendly&utm_campaign=fedwatch&redirect=/fedwatch

The UK general election will take place this week. An increased majority for the Conservative party will see Brexit likely go ahead by the end of Jan 2020.

On 15 Dec, the tariff rate on certain imports from China is due to increase. There is little indication at this stage that talks have progressed enough on a phase one deal to avoid this increase. Expecting headline risk on trade deals this week.

The Australian government will release its mid-year economic and financial outlook (a mid-year budget statement). While there has been no indication so far, there is still the possibility that stimulus measures could be announced for the economy.

Data highlights this week;

US retail sales, CPI & PPI

China trade, CPI, PPI and new loans data

Australia Q3 house price index, Governor Lowe speech

US Treasury supply will be much lighter and with a rare paydown. . The US Treasury will settle $153bn in ST bills this week paying down approx. $38bn in outstanding bills. The 16-day CMB from late Nov will also mature this week and there is no indication that it will be rolled over at this stage. The effect is likely to continue to help ease pressure on primary dealer balance sheets.

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

MCP Market Update: December 9th, 2019 – Bulls hold the line

Last week, equities fell sharply into support and reversed higher. We expect this decline was wave (iv) of an ongoing bull market trend with new highs likely on deck. Bonds failed to follow through to the upside complicating the near term structure. From a big picture perspective, we still see bonds in a larger 4th […]

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The Weekly Macro Review and Outlook for w/c 2 December 2019

The weekly macro review for w/c 25 November 2019 – US data this week continued to highlight generally weaker manufacturing activity across the three regional reports for Nov.

The advance Durable Goods report for Oct was mixed. Orders rebounded across most categories, but was led mostly by defence aircraft orders. Shipments remained weak with no growth in the month. Unfilled orders increased due to defense aircraft orders. Inventory still increased this month, albeit at a slower pace. The single largest contributor to inventory growth was non-defense aircraft.

We continue to track weakness in several categories – non-defense aircraft and motor vehicles. The annual increase in inventory for non-defense aircraft continued to accelerate and is now at +18%, compared to the 25% and 24% respective annual declines for orders and shipments.  Motor vehicles was also weak; inventory is growing at an annual pace of 6% (consistently) while orders are down -4% and shipments are down -3% (both slowing). While there may some GM effect in this month’s data, the slowing growth trend was established before that.

It’s important to note that last week’s US prelim manufacturing PMI continued to build on the improvement seen in Oct, so it’s possible that there will be an improvement in manufacturing activity in the following months.

The second estimate for US GDP was revised higher to +2.1% from +1.9%. This was mostly the result of a shift in the change in inventories from a -0.4% decline to a +10% increase in Q3. This revision is not surprising given the higher levels of inventories recorded across several categories and seen across several different reports during Q3. As noted in the wholesale sales and inventory report for Sep, the inventory to sales ratio remains elevated – with inventory rising faster than sales.

The annual change in the headline PCE price index was unchanged in the month, but growth slowed further for the core measure of PCE price growth. Core PCE price growth slowed to 1.6% in Oct after approaching +1.8% in Aug. This will continue to reinforce the ‘muted inflation pressure’ view of the Fed.

House prices in the US increased at a faster pace in Sep, after a long period of decelerating growth.

Retail and industrial production data for Japan was volatile, reflecting the first month of the consumption tax increase. Retail sales declined in the month (and on an annual basis) reversing the gains in the two prior months which were likely due to stockpiling before the tax increase. The stockpiling effect will continue to unwind enabling us to evaluate the impact of the consumption tax on demand.

Japanese industrial production and shipments also fell hard with production down 4% in Oct. There was some typhoon related disruption in Oct and likely an impact from stockpiling prior to the increase in the consumption tax in Oct.

The value of Australian construction and private capex continued to decline in real terms in Q3 and will likely detracting from GDP growth in Q3. Growth in the value of outstanding private credit continued to slow – led this month by a notable slowdown in the growth of outstanding business credit.

The RBA Governor’s speech this week reflected on the policy options available if/when the OCR reaches the effective lower bound – which has been confirmed as 0.25%. Governor Lowe goes out of his way to downplay any risk in the Australian economy and yet here we are, two 25bps cuts away from a scenario where the RBA would consider a QE program in Australia;

“There may come a point where QE could help promote our collective welfare, but we are not at that point and I don’t expect us to get there.”

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 2 December 2019 – This will be a full week of data, some important central bank speeches and rates decisions.

The final manufacturing and services PMI’s for Nov will be released this week across the major markets.

In the US, data will focus on non-farm payrolls, the ISM’s, factory orders, wholesale inventories and the first read of consumer sentiment for Dec.

This week, US Fed Vice Chairman for Supervision and Regulation, Randle Quarles, will provide testimony to the House Financial Services Committee and the Senate Banking Committee (Wed and Thu). We will look for any comments or indication of regulatory changes in the lead up to year end given the issues with repo funding.

The USTR will also announce on 2 Dec the outcome of its S.301 investigation into the digital services tax approved by the French government. This will include any proposed action.

The ECB President Lagarde will also provide testimony this week at the ECON hearing of the European Parliament this week. Eurozone data will focus on the second estimate of Q3 GDP and Germany factory orders and industrial production.

The RBA meets on Tue regarding rates in Australia. The current expectations are for rates to stay on hold until at least Feb or Mar. The Q3 GDP result will be released on Wed and growth is expected to remain low. Also out this week; building approvals and retail sales.

The Bank of Canada will also meet this week on rates.

US Treasury supply will be heavier, but with the higher value of securities maturing, there will be a relatively smaller amount of new money raised this week. The US Treasury will settle $297bn in ST bills and notes this week raising approx. $13.6bn 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

MCP Market Update: December 2nd, 2019 – the Bulls roll on

Please note: due to the Thanksgiving Day holiday, the CFTC has not yet published the COT data. We will update when the data is released. Last week we saw equities continue to grind higher in what we believe to be wave C of (B). Bonds continued to correct in what is likely wave (ii) of […]

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