The weekly macro review for w/c 8 July 2019 – In a speech during the week, Fed Chairman Powell was widely seen as signalling that a rate cut for Jul was likely. The minutes of the prior meeting provided the broader context and outlined the reasons behind the increase in support for a rate cut. The minutes did, however, highlight that committee members acknowledged that some of these heightened risks were only recent – and that accommodations would be required if risks proved to be sustained. In his speeches during the week, US Fed Chairman Powell confirmed that since that FOMC meeting (two weeks ago), those concerns look to be sustained;
“Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook.”
Even before the speeches, the probability of a 25bp rate cut was very high (94.6% on 5 Jul). The probability of a 50bp cut has now edged up from 5.4% on 5 Jul to 25.6% (as of 14 Jul). https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html?utm_source=cmegroup&utm_medium=friendly&utm_campaign=fedwatch&redirect=/fedwatch
On the data front, US CPI growth (not the FOMC preferred measure) grew at a slightly slower pace in Jun of +1.6%. Core CPI growth also slowed slightly to 2%.
The JOLTS data this month is worth noting. The longer-term trend of the annual change in hires suggests some more recent loss of growth momentum – growth is no longer accelerating. The annual change in job openings has slowed noticeably (still growing though) – especially over the last 6-months.
As noted last week, the manufacturing slow down continued to evolve in Jun, with some evidence suggesting that the lack of growth in new orders is manifesting now as falling order backlogs. The reduction in order backlogs continues to support output growth for now.
Despite the weaker manufacturing PMI readings, industrial production in Europe, including Germany and Japan increased in May. These data releases don’t provide the levels of outstanding orders.
Industrial production increased in the Euro area and EU in May. Production growth was recorded across most categories with the exception of intermediate goods.
In Germany, industrial production also increased slightly in the latest month. The increase in the month was due to manufacturing, but annual manufacturing production declined by the second-fastest pace of the last 18-months. The accelerated decline in new manufacturing orders reported last week for May suggests that production declines may continue across intermediate goods and capital goods. Production growth is also likely to remain subdued across durable, non-durable and consumer goods based on the new orders data. Production of utilities continued to slow. Construction has also slowed noticeably over the last several months – with annual growth slowing from 13.5% in Feb to 0.1% as of May.
Industrial production growth in Japan in May was revised slightly lower but still positive for the month. The longer-term trend of annual growth highlights the decline in production and shipments while the indexes for inventory and the inventory ratio reached near-term highs in May.
In Australia, business conditions and confidence data indicated that the confidence boost from the election has not been sustained, even as the RBA has cut rates. The improvement in business confidence recorded in May after the federal election was mostly reversed in Jun. Business conditions improved slightly and remain well below average. Despite the improvement in overall conditions, the forward orders remain negative, suggesting that activity is not likely to rebound in the short-term.
The decline in the value of new lending for housing also resumed in May. Data on the number of new commitments suggest that there may be some slow-down in the decline of owner-occupier lending (led by one state).
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 15 July 2019; The highlights this week will be the commencement of US Q2 earnings announcements, US and China economic data and a speech by US Fed Chairman Powell.
US Q2 earnings;
“Earnings Growth: For Q2 2019, the estimated earnings decline for the S&P 500 is -3.0%. If -3.0% is the actual decline for the quarter, it will mark the first time the index has reported two straight quarters of year-over-year declines in earnings since Q1 2016 and Q2 2016.” https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_071219A.pdf
Fed Chairman Powell will give a speech during the week “Aspects of Monetary Policy in the Post-Crisis Era”. The probability of a 25bp rate cut at the Jul meeting remains high – with an increase in the chance of a 50bp cut.
US data this week will focus on output and consumer demand. This week we get the first look at some Jul manufacturing data with two regional surveys – Philly Fed and the Empire State. Industrial production for Jun will also be released. On the consumer side, retail sales for Jun will be released (likely weaker/flat auto sales) and the prelim consumer sentiment for Jul.
Data out of China this week – Q2 GDP growth, retail sales, and industrial production.
In the UK, data on retail sales, CPI and the labour market will be released this week. Next week, on 22 Jul, expect the results of the Conservative Party leadership ballot.
The minutes of the last RBA meeting will be released this week – covering the second cut in the overnight cash rate. The important labour market survey will be a key focus for the week. US Treasury supply will be heavier this week – the US Treasury will settle approx. $246bn in ST bills and coupons this week, raising approx. $25bn in new cash.
More detail (including a calendar of events) is provided in the briefing document – you can download the file here;
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
