by Kim | Jul 8, 2019
The macro review for w/c 1 July 2019; The manufacturing slow-down in the US and abroad is continuing to evolve. The ongoing lack of growth in new orders is manifesting now as falling order backlogs and, anecdotally, reduced input buying. In some cases, finished goods inventories are increasing. The reduction in input buying suggests further pressure on output for suppliers further back up the supply chain. The reduction in order backlogs continues to support output growth for now.
In the US, the PMI, ISM and factory orders data highlighted the
continued trend of slowing/stalling US manufacturing activity. Services
activity helped to offset the slower manufacturing activity. Despite the
stronger services PMI reading, some concern was raised over the expectations
for future growth in new business. Non-farms payrolls came in stronger and the
household survey recorded a small improvement in annual employment growth.
Unemployment increased in the month though due to an increase in participation.
The PMI’s for manufacturing activity contracted in Europe,
including Germany, UK, Japan, Australia, and China. Similar patterns were also
evident – declining new orders resulting in further declines in backlogs of
work, which was helping to maintain some output growth. Further anecdotal evidence
that firms were reducing input buying to reduce costs in the face of lower orders.
The German manufacturing sector recorded an accelerated decline in new orders
in May – the result of lower orders across most segments and more generally, external
orders.
European production and exports were dealt another potential blow this week as the USTR announced plans to review additional products for tariffs as a part of the dispute on civil aircraft subsidies.
Broadly, the services PMI’s offset the weaker manufacturing results across many countries/regions.
The exception was in the UK where services growth slowed to
almost zero. The Jun PMI’s for the UK indicated that there has been some
renewed slowdown across manufacturing, services and construction in the UK.
In Australia, the RBA cut rates for the second time in two months. The rate cuts, along with the May election result, will likely impact sentiment and spending. This month we reviewed the AiG performance of industry indexes for Jun to gain a reading of activity after the first full month since the election and the first interest rate cut. The services index increased for the second month running with some service firms calling conditions a ‘return to business as usual’. Manufacturing fell back into contraction and construction continued to contract, albeit at a slightly slower pace. Retail sales growth was subdued in May.
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 8 July 2019; Fed-speak picks up again this week. The main focus will be on the three (3) speeches by US Fed Chairman Powell – opening remarks at the stress testing conference in Boston, testimony before the House Financial Services Committee and the semi-annual monetary policy testimony to the Senate Banking Committee.
Other US data in focus this
week will be the FOMC minutes for Jun as well as CPI and PPI.
Data out of China will provide
some insight into any shifts in activity with new loans, trade and CPI/PPI for
Jun.
After the much weaker orders
data last week, Germany industrial production for May will be released. The broader
industrial production data for the Euro-area will also be released later in the
week along with the final figures for Japan in May.
In Australia, the NAB business confidence and conditions for Jun will be released. This will provide another important insight as to any change in activity and sentiment since the first rate cut and covers the first full, post-election month. Housing lending data for May will also be released – it may be difficult to gauge any shift in sentiment/lending given the election was mid-month and APRA only announced a review into changes to serviceability requirements directly after the election.
The Bank of Canada will meet
this week on interest rates and monetary policy.
US Treasury supply will be lighter this week – the US
Treasury will settle approx. $147bn in ST bills paying down approx. $6bn.
Trade negotiations;
Trade talks between the US and China are said to recommence this week in Beijing.
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
by Kim | Jul 1, 2019
The macro review for w/c 24 June 2019 – The G20 delivered over the weekend. From our review last week;
“The G20 is a perfect venue for these gestures, with its traditionally grand shows of diplomatic pleasantries. If Trump and Xi appear together, shake hands and smile, consider that a small victory” https://www.scmp.com/comment/opinion/article/3015396/no-trade-war-breakthrough-no-problem-xi-and-trump-are-meeting-g20
The outcome of meetings between President Trump and President Xi was as good as could be expected – a truce or a pause in any further escalation. One difference this time is that there has been no time limit imposed on achieving an outcome.
Our attention regarding trade tensions shifted to the US-EU relationship. The EU formally announced that Britain, France, and Germany had established a special trade channel (“Instex”) that would enable trade with Iran that avoids the US sanctions. Repercussions for the EU-US relationship are possible.
On the data front, US manufacturing data mostly disappointed. The overarching theme was manufacturing growth stalling at the broader level. The advance durable goods report for May highlights the large adjustment underway regarding non-defense aircraft production, orders, and inventory. But even excluding all transportation, the advance report highlights slowing annual growth in orders and shipments and firms working through unfilled orders, which are also growing at a much slower pace. Within this context, inventory growth, while also slowing, remains elevated. The regional reports into manufacturing and business activity confirm that low and slowing manufacturing activity persisted into June.
The annual change in the headline US PCE price index slowed
slightly in the latest month – led by lower annual growth in both goods and
services prices. In the latest month though, headline PCE prices growth halved
– due mostly to a shift in energy prices, but both overall goods and services
prices growth slowed in the month. Underlying core inflation was also little
changed on an annual basis, slowing slightly. The current FOMC projection for
PCE inflation was revised lower (at the latest meeting) to 1.5% for 2019
(currently at that level) and core PCE was revised lower at the June meeting to
1.8% – which is still well above the current level of +1.6% as of May.
It’s worth noting the stronger industrial production data for Japan in May. Growth in production and shipments accelerated in May and this was across most product areas. Of note was the much faster growth in production and shipments of transport equipment, including passenger cars (which has been an area of weakness recently).
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 1 July 2019 – Although it will be a short week in the US with the Independence Day holiday, it will be a data-heavy week.
Global private sector manufacturing and services
output will be in focus this week with the Markit PMI’s for June to be released.
In the US, the focus will be on a wide range of data-points including non-farm payrolls and employment, the ISM PMI’s, factory orders for May and motor vehicle sales.
In Australia, the RBA will meet on Tuesday for the July
rate decision. As of 28 Jun, there is a 70% expectation for a further 25bps cut
in the overnight cash rate to 1%. This is down slightly from the 89%
expectation on 24 Jun – see details https://www.asx.com.au/prices/targetratetracker.htm
Other Aussie data points released this week will be retail
sales for May and the AiG industry performance indices for Jun – included this
month as it is one of the first datapoints since the May federal election.
US Treasury supply will
be heavier this week – the US Treasury will settle approx. $260bn in ST bills
and coupons, raising approx. $32bn in new money. Approx.
$21.463bn in SOMA holdings of securities will mature on 1 Jul – with $6.5bn to
be reinvested.
Trade negotiations;
There may follow-up from
the G20 with further details to emerge (or key points walked back?) on the roadmap
to restart talks between the US and China.
Also, waiting to see whether
there is any fallout from the EU announcement on the special trade channel designed
to enable trade with Iran that circumvents the US sanctions.
Previously President Trump has stated that the deadline for a trade deal with Japan was August – expect action/activity to ramp up in the coming weeks.
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
by Kim | Jun 24, 2019
The macro review for w/c 17 June 2019 – Central banks were the main focus during the week – mostly signalling that more policy accommodation is to be expected. The FOMC, RBA, and ECB indicated that further accommodations were required in order to reach inflation targets over the medium term.
From the FOMC this week, we expected to see a shift in the language, opening the door to greater accommodation. While rates remained on hold at this meeting, the decision signalled growing support among committee members for more policy accommodation. Downside risks for the domestic economy are on the radar – weakening business sentiment and investment, re-emergence of ‘cross-currents’ on trade and global growth. The concern for the FOMC has been muted domestic inflation – with downside risks seen as further slowing progress on bringing inflation back to the 2% (symmetrical) target. Key language changed; removing reference to a “patient approach”. Forecasts were little revised except for PCE inflation which was revised lower for this year.
The two regional US manufacturing surveys indicated an
abrupt loss of momentum in Jun. The prelim composite PMI for Jun indicated
private sector activity stagnated – led by both manufacturing and services. At
the same time, housing market conditions and existing home sales have stabilized
since the start of the year.
ECB President Draghi also flagged further rate cuts and
monetary stimulus were likely. This is in response to continued weakness across
the Eurozone especially in manufacturing and exports. Downside risks pose a
threat to the ECB reaching its 2% inflation target and ECB President Draghi
reaffirmed the conviction of the Bank to meeting the 2% target.
Annual Eurozone CPI growth slowed further in May while the prelim
PMI’s indicated a slight improvement in momentum – led by services while
manufacturing continued to contract.
The BoJ also kept rates on hold. There was little change
here – with the Bank signalling policy accommodation to remain in place for an
extended period, until at least Spring 2020. Inflation in Japan ex fresh food
remained low in May with little sign of acceleration. The prelim manufacturing
PMI indicated continued slight contraction in manufacturing activity. Exports and
import declined in May.
The BoE kept rates on hold and has so far maintained its very
slight tightening bias – which assumes a smooth Brexit. But the MPC has started
to acknowledge downside risks are picking up with Brexit and political
uncertainty partly fuelling underlying
weaker growth in H1 relative to 2018. While stronger household consumption and
weaker business investment patterns have persisted, retail sales (volumes) have
declined/stalled for the last two months.
The RBA minutes also confirmed that further policy accommodation in Australia is likely. The case for rate cuts; to reduce spare capacity in the labour market in order for inflation to return to the 2-3% band (via an increase in wages growth). The return of inflation to the 2-3% range would be more gradual without further cuts given the current level of unemployment and underemployment.
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 24 June 2019 – The focus will be on the G-20 summit in Osaka at the end of the week – 28-29 Jun. Closely watched will be the outcome of the meeting between US President Trump and China’s President Xi and whether or not there will be another round of tariff escalation. There will also be meetings regarding the US-Japan trade negotiations.
US
data highlights this week include a focus on manufacturing output. After the
falls in momentum reported in the regional surveys and prelim composite PMI for
Jun last week, there will be several further readings of regional activity in
Jun. The final reading of consumer sentiment for Jun will also be released –
possibly reflecting the more positive outcome of no tariffs on imports from
Mexico.
Also,
this week will be the first read on durable goods orders and shipments for May,
personal consumption expenditure and incomes and the PCE price index for May.
US
Fed Chairman Powell speak this week in an interview discussing the challenges facing the U.S. economy and the policies of
the Federal Reserve.
In
Japan – the prelim reading for May industrial production will be important and
the extent to which it confirms the weaker PMI readings for output in manufacturing.
In Australia, month-end private sector credit data will be released for May. This is still cycling over the May election result and the unexpected win by the Liberal Party. US Treasury supply will be somewhat lighter this week – the US Treasury will settle approx. $180bn in ST bills and coupons, raising approx. $16bn in new money.
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
by Kim | Jun 17, 2019
The macro review for w/c 10 June 2019 – Data out of China this week was mixed but suggests little in the way of accelerating growth. Industrial production continued to grow at a slower pace while consumers/households face higher prices with CPI growth accelerating on the back of much higher food prices (meat). Exports increased more than expected but imports continued to decline. The increase in new loans issued by banks was less than expected and only marginally above that of Apr – little to suggest this would create a larger impetus for growth.
US annual CPI growth slowed in May – food prices grew at a
slightly faster pace and this was offset by a decline in energy prices. Core
CPI growth has continued to slow over the last 12 months.
US consumer spending in May was stronger and the good news was that Apr results were also revised higher – consistent with the stronger growth in consumer credit (revolving credit) for Apr. The prelim consumer sentiment reading for Jun mostly reversed the stronger May gains – on the back of increased tariff/cost worries. As the tariffs on imports from Mexico were not implemented, this weaker sentiment result may be reversed.
In terms of output, US industrial production growth
indicated a small increase for the month. Production levels remain on par with
a year ago, but still below the peak of Dec 2018.
The Aus labour market report for May had some positive signs and some continuing concerns for the RBA. Despite indications of a weakening economy, employment growth increased slightly in the latest month – led by faster growth in part-time employed persons. Unemployment and underemployment remain an issue and both ticked higher in the latest month. The main insight is that increased participation (reaching another new all-time high in the latest month) is contributing to the slower change/reduction in total unemployed workers. Employment growth needs to increase at an even faster pace in order to continue to absorb the increase in participation as well as reduce unemployment at a faster pace (as per RBA commentary regarding wage/inflation pressure).
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 17 June 2019 – The focus this week will be on central bank rate decisions.
This week the US FOMC meeting will take place. This
meeting has taken on a more significant tone over the last week or two. Whilst
there had been expectations that the Fed will cut rates at this meeting, we are
now looking at the development of the language the FOMC will use in the rates decision,
and for monetary policy generally, as well as changes in economic forecasts.
The current probabilities as of 17 Jun suggest that rates are likely to remain on hold for this next meeting. For the latest probabilities;
https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html?utm_source=cmegroup&utm_medium=friendly&utm_campaign=fedwatch&redirect=/fedwatch
Two other important central bank meetings/rates
decisions will take place this week – the BoJ and the BoE. The minutes of the 4
Jun RBA rate cut decision will also be released this week.
The next two weeks will be important for the escalation
of the (trade) dispute between the US and China – expect headline risk to be
heightened. The G20 meeting will provide a catalyst for action in either
direction. Public hearings in the US on the proposed tariff list for the
remaining $300bn will be completed over the next two weeks – in time for any
proposed meeting between Presidents Trump and Xi on the sidelines of the G20. This
potentially clears the path for this round of tariffs to be applied. No meeting
between the two Presidents has been confirmed at this stage. Since early May,
negotiations remain at an impasse.
The highlight on the data front will be the first reading for June private sector activity – Markit prelim manufacturing and services PMI’s for the US, Europe, and Japan will be released towards the end of the week.
US Treasury supply will be heavier this week – the US Treasury will settle approx. $251bn in ST bills, notes, and bonds, raising approx. $32bn in new money this week.
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
by Kim | Jun 10, 2019
The macro review for w/c 3 June 2019 – Developments on trade, increasing downside risks from trade tensions and low inflation had central bankers in the US, Europe, and Australia worried this week.
The US Fed Chairman has put a
rate cut into play. Chairman Powell stated in a speech on Tuesday that
the US Fed ‘will act, as appropriate, to sustain the expansion’. The Chairman
was referring specifically to ‘recent developments involving trade and other
matters’ – the stalling of talks with China and the upcoming threat of tariffs
on imports from Mexico. The comments were somewhat out of place in that they
were added to the start of his opening remarks for the Fed conference on
Monetary Policy Strategy, Tools and Comms Practices – a conference dealing with
longer-run issues.
But the brief comments by the Fed Chair had the desired
effect and helped markets in light of some weaker economic data for May –
especially coming into the blackout period before the next FOMC meeting. The
most notable was the much slower growth in non-farm payrolls. The
household survey also highlighted the continued deceleration in employment
growth. The Markit PMI’s indicated that private sector activity in
manufacturing and services had slowed quickly in May to only a marginal level
of growth. The ISM’s was less negative but indicate that growth remained low in
May.
Other measures of output and sales were also weaker for Apr
– with factory orders and shipments falling in the month. Wholesale sales also
declined while inventories increased at a faster pace.
One brighter spot was that motor vehicle sales had picked up
again in May. There is a possibility that retail sales of vehicles will remain
lower (growth from fleet sales) in the May retail sales report. Consumer credit
growth in Apr accelerated on the back of faster growth in revolving credit.
Then, very late on Friday, US President Trump announced that the US and Mexico
had reached an agreement on managing the flow of illegal immigrants into the US
– and that the tariffs on imports from Mexico were on hold indefinitely.
While the ECB kept rates on hold, ECB President Draghi indicated that discussions had started regarding a possible cut or further bond purchases to stimulate inflation. The prelim CPI for May indicated that annual consumer price growth decelerated quickly in May – both headline inflation and core inflation, which will be a concern for the ECB. The underlying drivers of the faster Q1 GDP growth were somewhat positive but incoming data suggested weakness into the second quarter. Retail sales declined in May after flat sales in Apr. The PMI’s for May were mixed – ongoing declines in manufacturing were offset by some growth in services activity – but growth in output/activity likely remained subdued overall throughout the Eurozone.
The RBA cut rates to ‘assist with faster progress in reducing unemployment’ which will help to get the inflation back to the 2-3% range. The RBA cited concerns over increasing trade tensions and domestic uncertainty regarding household consumption, sustained low income growth, and falling house prices. The Q1 GDP did little to allay those concerns. While growth accelerated in Q1 versus Q4, growth of domestic output (GNE) was zero. Into the second quarter, retail sales declined with some pronounced negative shifts in expenditure. The value of housing lending increased due only to an increase in the value borrowed by owner-occupiers. But the number of owner-occupier commitments fell suggesting that underlying weakness in lending persists – which is likely to be reflected in continued falls in house prices.
Special mention of UK Markit PMI’s – overall indicating that in May, private sector activity grew at a lower more marginal pace. Importantly, the weakness in manufacturing and construction was still offset by faster growth in the services sector. The common theme was that Brexit and political uncertainty was holding back growth.
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 10 June 2019 – A solid week of data to focus on given the US Fed blackout period will be in effect leading up to the FOMC meeting next week.
The main focus this week will be data out of China – trade, retail sales, industrial production and new loans for May.
US data will focus on inflation with the latest CPI and PPI for May. Retail sales for May and the first reading of consumer sentiment for Jun will provide some insight into spending patterns. US industrial production will also help to gauge changes in output – both ISM and Markit manufacturing PMI’s suggested little output growth in May.
Following closely on the rate cut from last week, the Australian
labour market survey will be released this week for May. Business confidence
and sentiment data for May will also be released. There is some caution with
the May data given that it will still partly reflect the expectation that there
would be a change in government at the federal election in mid-May.
US-China
trade; the increase in the tariff rate goes into effect on 15 Jun from 10 to
25% on $200bn of imports. A decision on the USTR investigation into further
tariffs on $300bn of imports is due shortly.
The
results of the USTR investigation into EU subsidies for large civil aircraft is
likely due shortly.
G20 meetings continue in the lead up to the Summit in Osaka on 28-29 June 2019.
US Treasury supply will be lighter this week. The US Treasury will settle approx. $147bn in ST bills this week, with a net pay down of $42bn. The 37-day CMB issued on 7 May will also mature this week on 13 Jun – adding another $20bn to the net paydown.
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
by Kim | Jun 3, 2019
The weekly macro review for w/c 27 May 2019 – One of our key themes for the week had been growth and sentiment. Wrapped up in this was not only US growth data but also sentiment around trade negotiations.
Trade talks with China remain on hold. China released a
white paper over the weekend essentially outlining its side of why and how
talks stalled. The official statement advocates for the benefits of
co-operation and positions China as ‘willing’ to work with the US to find
solutions. The aim appears to shift the onus of the stalled talks onto the US. The
statement from China draws a line in the sand;
“There are bottom lines in consultations. China will not
compromise on major issues of principle. China does not want a trade war, but
it is not afraid of one and it will fight one if necessary. China’s position on
this has never changed.”
President Trump has put a question mark over ratifying the
USMCA by commencing a program of increasing tariffs on all imports from Mexico.
The tariffs are aimed at halting the flow of illegal immigration into the US.
President Trump and USTR Lighthizer commenced higher level
trade talks with Japan last week. While differences remain, President Trump declared
that a deal will be announced in August – after the elections in Japan, but
also within the 6-month window for the extension of auto-tariff announcements.
Final submissions for the investigation by the US into EU subsidies
on large civil aircraft should have also concluded during the week. This is
still a live issue and could result in tariffs on both US and EU imports.
Consumer sentiment data out for May has reflected a weakening
in sentiment from the stalled talks with China – “confidence significantly
eroded in the last two weeks of May” (after the US recommenced raising tariffs
on China). The index of current conditions continued to weaken, now 9% below
last year, but the headline index of consumer sentiment continued to increase.
Affecting sentiment was the inflation expectations from higher prices/tariffs creating
a negative impact on current buying conditions.
The already weaker expenditure conditions are visible in the
latest GDP and PCE and income reports. The monthly Apr PCE and income release showed
that while there was faster growth in incomes (but not employee compensation),
expenditure in Apr slowed very quickly – across goods and services. Annual
growth in both headline and core prices for PCE accelerated slightly. But
within the core PCE price measure – core goods prices (ex-energy & food)
declined at the fastest pace since 2007. While at odds with the sentiment and inflation
expectations, it signals potentially weaker demand/expenditure conditions.
US Q1 GDP growth was revised slightly lower. The key features
of Q1 GDP remain the much lower contribution from personal consumption
expenditure and the much higher contribution from the increase in inventories
for the quarter. The contribution from private fixed investment and net exports
were revised lower in the latest release.
The two regional surveys indicate continued lacklustre growth
in manufacturing during May. One point stands out from the Richmond Fed Survey
– stockpiles of raw materials and finished goods inventories have been increasing
sharply since Dec 2018. Stockpiles of raw materials reached an all-time high in
the May report and finished goods inventories are now 2 pts below the post GFC
high.
Also of interest this week was China and the impact of stimulus measures on the economy. Recent data has been disappointing and the official NBS manufacturing and non-manufacturing PMI’s for May were no different. Both indexes paint a less than positive picture of economic activity in China during the month. The hopes of ‘green-shoots’ stemming from massive credit stimulus appear to have been either premature or signal that stimulus has been, at least so far, ineffective in creating a sustained impact on growth.
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 3 June 2019 – Global economic activity and growth is likely to remain in focus this week. This is a very large week of data, rates decisions and speeches – on top of the headline risk regarding trade disputes.
We should get a solid read on global manufacturing and
services activity with PMI’s for May being released this week.
There will be a large amount of US data and Fed
speeches to digest this week. Data will provide a broad overview of activity;
motor vehicle sales, ISM manufacturing and non-manufacturing PMI’s, non-farm
payrolls and employment, and the final factory orders data for Apr. The US Fed
will be running its review of monetary policy strategy, tools,
and communication practices – both Chairman Powell and Vice Chairman Clarida
will speak at this conference.
European growth will be a key focus. The ECB will meet on
rates this week. Of interest will be Germany factory orders and industrial
production data (noting some divergence between PMI’s and German data over
recent months), Eurozone retail sales and the more detailed release of Q1 GDP.
It’s a very big week for Australia. The RBA will meet on rates. As of 31 May, the 30-day interbank cash rate futures indicated a 100% expectation that the RBA will cut rates on Tuesday; https://www.asx.com.au/prices/targetratetracker.htm. The rates decision will be made before Q1 GDP is released on Wednesday. Housing lending and retail sales will also be released this week – both data points are still prior to the general election.
UK PMIs will provide some indication as to how the economy
is responding to the continued Brexit limbo.
Trade negotiations will continue to feature. Negotiations
between the US and Japan are live and issues regarding aircraft subsidies continue
to simmer between the EU and the US which could flare up shortly. There is now a
question over whether the USMCA will be ratified as a new round of tariffs on
imports from Mexico go into effect. Although
there was a one-month deadline given for the trade deal with China, this is
likely to draw out until after the US has completed its review process into tariffs
on the remaining $300bn of Chinese imports (after 17 Jun).
US Treasury supply will be lighter this week. The US Treasury will settle approx. $147bn in ST bills this week, with a net pay down of $22bn.
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
