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The Eurozone economy ended the third quarter on a strong note, according to the PMIs.
Japan's September PMI report showed some slippage, but overall, it suggests that GDP growth in Q3 was a little stronger than the 0.3% quarter- on-quarter rate in Q2.
Yesterday's national business surveys provided an optimistic counterbalance to the underwhelming PMIs on Monday, although they all suggest that the euro area economy is in good form.
The Eurozone PMIs stumbled at the end of Q2. The composite index slipped to a five-month low of 55.7 in June, from 56.8 in May, constrained by a fall in the services index. This offset a marginal rise in the manufacturing index to a new cyclical high. The dip in the headline does not alter the survey's upbeat short- term outlook for the economy.
Friday's PMIs gave the first hint of Q4 growth in the Eurozone, and continue to tell a story of a stable cyclical recovery. The composite PMI in the Eurozone rose 54.0 in October from 53.6 in September, mainly due to a rise in the services index, to 54.2 from 53.7. Assuming the PMI remains unchanged over the remainder of the quarter, the survey indicates solid GDP growth of 0.4%-to-0.5% quarter-on-quarter in Q4.
PMI data in the Eurozone rebounded convincingly in October, as the composite index rose to a 10-month high of 53.7, from 52.6 in September. The gain fully reversed the weakness at the end of Q3.
Yesterday's advance PMI reports in the euro area signal that economic momentum slowed slightly at the start of Q4.
If Japan's flash PMIs for March are a sign of things to come, then the government really should get moving on fiscal stimulus.
Evidence is mounting that the cyclical recovery in the Eurozone accelerated further in the first quarter. The Composite PMI in the euro area rose to 54.1 in March, up from 53.3 in February, taking the quarterly average to 53.3, its highest level since the second quarter of 2011. Combined with latest available retail sales and industrial production data, this is consistent with real GDP growth in the euro area accelerating to about 0.4-to-0.5% quarter-on quarter in the first quarter, from 0.3% in Q4.
Investors think it more likely that the MPC will cut Bank Rate in the first half of next year, following Friday's release of the flash Markit/CIPS PMIs for November.
The PMIs in the Eurozone are still warning that the economy is in much worse shape than implied by remarkably stable GDP growth so far this year.
Friday's PMI data in the Eurozone added to the evidence that GDP growth is slowing, after a cyclical peak last year. The composite PMI in the euro area slipped to a 21-month low of 52.6 in September, from 52.9 in August.
Friday's PMI data were a mixed bag.
China's manufacturing PMIs put in a better performance in November, with the official gauge ticking up to 50.2 in November, from 49.3 in October, and the Caixin measure little changed, at 51.8, up from 51.7.
The Caixin manufacturing PMI picked up to 51.5 in December from 50.8 in November. But the jump looks erratic and we expect it to correct in January.
China's Caixin manufacturing PMI doused hopes of turning over a January new leaf; it dropped to 49.7 in November, from 50.2 in December.
The Markit/CIPS manufacturing PMI shot up to a three-year high of 57.3 in April, from 54.2 in March, bringing an end to the run of downbeat news on the economy. The performance of the U.K. manufacturing sector, however, remains underwhelming, given the magnitude of sterling's depreciation.
Yesterday's final manufacturing PMIs confirmed that the headline index in the euro area rebounded further last month.
MPs will be asked today to approve the PM's motion, proposed in accordance with the Fixed-term Parliaments Act--FTPA--to hold a general election on December 12.
The recovery in the composite PMI to 52.4 in January, from 49.3 in December, should convince a majority of MPC members to vote on Thursday to maintain Bank Rate at 0.75%.
The July Eurozone PMI survey echoed the message from consumer sentiment earlier of a mild dip in momentum going into Q3. The composite PMI in the euro area fell to 53.7, from 54.2 in June due mainly to a fall in the services index. Companies' own expectations for future business fell in the core, but the survey was conducted soon after the Greek referendum. Markit claims this didn't depress the data, but we are on alert for revisions to the headline and expectations next week, or a rebound next month.
Friday's advance Eurozone PMI reports capped a fine quarter for the survey. The composite PMI jumped to a 80-month high of 56.7 in March, from 56.1 in February, rising to a cyclical high over Q1 as a whole.
Japan's flash Nikkei manufacturing PMI report for November was abysmal, putting the chances of a recovery this quarter into serious doubt.
Even the record-breaking slump in Markit's composite PMI probably understates the hit to economic activity from Covid-19 and the emergency measures to slow its spread.
Last week's news that the composite PMI collapsed to 47.7 in July--its lowest level since April 2009--from 52.4 in June is the first clear indication that the U.K. is heading for a recession.
Eurozone investors will be drawing a sigh of relief after yesterday's PMI data. The alarming plunge in February and March made way for stabilisation, with the composite PMI in the euro area unchanged at 55.2 in April.
Japan's manufacturing PMI rose to 53.3 in April, from 53.1 in March. The index weakened earlier this year, but remained at levels unjustified by the hard data.
Yesterday's PMI data in the Eurozone economy were a mixed bag.
Yesterday's advance EZ PMI data were virtually unchanged from previous months, yet again. The composite PMI rose trivially to 53.3 in August from 53.2 in July; this means that the index has been almost stable since February. The headline was lifted by a small increase in services, which offset a slight decline in manufacturing.
Japan's January PMIs sent a clear signal that the virus impact is not to be underestimated. The manufacturing PMI fell to 47.6 in February, from 48.8 in January, contrasting sharply with the rising headlines of last week's batch of European PMIs.
The drop in the flash composite PMI in March will be one for the record books, unfortunately. We look for an unprecedented drop to 43.0, from 53.3 in February, which would undershoot the 45.0 consensus and signal clearly that a deep recession is underway.
We are intrigued by the idea that the rollover in oil firms' capital spending on equipment might already be over, even as spending on new well-drilling--captured by the still-falling weekly operating rigs data--continues to decline. The evidence to suggest equipment spending has fallen far enough is straightforward.
Japan's flash PMI numbers for August were a mixed bag.
Today's market attention will be focused on the advance August PMI data in the major EZ economies. We think the composite PMI in the euro area was unchanged at 53.2 in August, consistent with stable GDP growth of 0.3%-to-0.4% quarter-on-quarter in Q3. The signal of "stability" in the Eurozone business cycle has been consistently relayed by the PMI since the beginning of the year.
Advance PMI data yesterday supported our suspicion that Q1 economic survey data will paint a picture of slowing growth in the Eurozone economy. The composite PMI in the Eurozone fell to a 13-month low of 52.7 in February from 53.6 in January, driven by declines in both the French and German advance data.
Yesterday's German IFO survey broadly confirmed the bullish message from the PMIs earlier this week. The headline business climate index rose to 111.0 in February from a revised 109.9 in January, boosted by increases in both the current assessment and the expectations index.
Friday's PMIs were supposed to provide the first reliable piece of evidence of the coronavirus on euro area businesses, but they didn't. Instead, they left economists dazed, confused and scrambling for a suitable narrative.
Friday's advance PMI data for the Eurozone added further evidence of stabilisation in the economy after the sharp slowdown in GDP growth since the beginning of last year.
Yesterday's PMI data were an open goal for those with a bearish outlook on the euro area economy.
PMI data yesterday provided some relief to anxious investors, despite a modest drop in the headline. The composite PMI in the Eurozone fell to 53.9 in September from 54.3 in August, driven by slight falls in both manufacturing and services. Assuming no major changes to the advance September reading--usually a fair bet--the PMI rose marginally in Q3, pointing to a continuation of the cyclical recovery.
Advance PMI data indicate a slow start to the first quarter for the Eurozone economy. The composite index fell to 53.5 in January from 54.3 in December, due to weakness in both services and manufacturing. The correlation between month-to-month changes in the PMI and MSCI EU ex-UK is a decent 0.4, and we can't rule out the ide a that the horrible equity market performance has dented sentiment. The sudden swoon in markets, however, has also led to fears of an imminent recession. But it would be a major overreaction to extrapolate three weeks' worth of price action in equities to the real economy.
Yesterday's PMIs kicked off a busy week for Eurozone data on a downbeat note. The composite EZ PMI fell to a five-month low of 55.8 in July, from 56.3 in June; it was constrained by a 0.6 point dip in the manufacturing index to 56.8.
A startlingly wide gap has emerged over the past nine months between the ISM manufacturing index and Markit's manufacturing PMI.
The PM now is at a fork in the road and will have to decide in the coming days whether to risk all and seek a general election, or restart the process of trying to get the Withdrawal Agreement Bill--WAB--through parliament.
The PMI survey yesterday painted a more upbeat picture on the Eurozone economy than we expected. The composite index rose to 54.1 in June from 53.6 in May, taking the quarterly average to its highest level since Q2 2011.
Eurozone PMI data yesterday presented investors with a confusing message. The composite index fell marginally to 52.9 in May, from 53.0 in April, despite separate data that showed that the composite PMIs rose in both Germany and France. Markit said that weakness outside the core was the key driver, but we have to wait for the final data to see the full story.
Yesterday's PMI reports repeated the message of a firm cyclical Eurozone recovery, despite investors' angst over deflation and the underwhelming Q3 GDP data earlier this month. The composite index in the zone rose to a 54-month high of 54.4 in November from 53.9 in October, lifted by strong output and solid new business growth. Our first chart shows the rise in the PMI points to slight upside risks in Q4 to the four quarter trend in real GDP growth of 0.4% per quarter.
The PMIs are telling an increasingly upbeat story for the EZ economy in Q4. The composite PMI in the euro area rose to an 11-month high of 54.1 in November, from 53.3 in October. The uptick was driven by strong new business growth across all private sectors, and employment also increased in response to higher work backlogs.
The forward-looking indices of China's Caixin manufacturing PMI for April attracted more attention than the headline, which was a bit of a non-event; it rose trivially 51.1, from 51.0 in March.
The fall in the Markit/CIPS manufacturing PMI to 47.4 in August--its lowest level since July 2012--from 48.0 in July suggests that pre-Brexit stockpiling isn't countering the hit to demand from Brexit uncertainty and the global industrial slowdown.
Yesterday's final PMI data in the Eurozone were better than we expected.
The final EZ PMI data for November yesterday confirmed that the composite index in the Eurozone rose to an 11-month high of 53.9, from 53.3 in October. The key driver was an improvement in services, boosted by stronger data in all the major economies. Manufacturing activity also improved, though, and the details showed that new business growth was robust in both sectors.
The post-election run of upbeat business surveys was extended yesterday, with the release of the final Markit/CIPS services PMI for January.
The latest PMIs suggest that investors have jumped the gun in pricing-in a 50% chance of the MPC raising interest rates again as soon as May.
The fall in the services PMI to 53.8 in May, from 55.8 in April, is a setback for hopes that the slowdown in GDP growth in Q1 will be fleeting. Both business activity and orders rose at their slowest rates since February.
Yesterday's final PMI data in the euro area for November broadly confirmed the initial estimates.
The Caixin services PMI leapt to an eyebrow- raising 53.8 in November, from 50.8 in October.
The rise in Markit/CIPS services PMI to 55.0 in March, from 53.3 in February, brings some relief that GDP growth has not stalled in Q1, following manufacturing and construction surveys that signalled near-stagnation.
The rise in the Markit/CIPS services PMI to a nine-month high of 51.4 in July, from 50.2 in June, isn't a game-changer, though it does provide some reassurance that the economy isn't on a downward spiral.
China's PMIs point to softening activity in Q3. The Caixin services PMI fell to 52.8 in July, from 53.9 in June.
The slump in the Markit/CIPS services PMI in November to its lowest level since July 2016 provides the clearest indication yet that uncertainty about Brexit has driven the economy virtually to a stand-still.
On the face of it, the Caixin services PMI was unremarkable in May, unchanged at 52.9.
On the face of it, markets' newfound view that the MPC's next move is more likely to be a rate cut than a hike was supported by May's Markit/CIPS PMIs.
September PMI surveys in Mexico continued to bolster our argument for a subpar recovery in the second half of the year.
In one line: Not pretty PMIs; money supply details better than the headline.
In one line: A setback, but the composite PMI rose over Q3 as a whole.
In one line: Solid EZ retail sales and German new orders; and upward revisions to the PMIs.
Yesterday's EZ PMI data surprised to the downside. The composite PMI in the euro area dipped to 52.9 in August, from 53.2 in July, below the initial estimate 53.3. The headline was marred by weakness in the German services PMI, which crashed to a 40-month low of 51.7, from 54.4 in July.
The Caixin services PMI fell to 51.5 in August, from 52.8 in July.
Survey data continue to suggest that GDP growth will accelerate in Q1. The final PMI reports on Friday showed that the headline EZ composite index rose to 56.0 in February, from 54.4 in January, in line with the first estimate.
Yesterday's final PMI data for February confirmed the story from the advance reports.
The small rise in the Markit/CIPS services PMI to 51.3 in February, from 50.1 in January, came as a relief yesterday.
Yesterday's Caixin services PMI data complete the set for October.
Friday's final PMI data for March were even more terrifying than the advance numbers. The composite index in the euro area collapsed to 29.7, from 51.6 in February, lower than the consensus 31.4. A downward revision was coming.
August's Markit/CIPS services survey, released today, likely will show that the economy's biggest sector is continuing to slow. We think that the PMI fell to just 53.0--its lowest level since it plunged immediately after the Brexit vote--from 53.8 in July, below the consensus, 53.5.
The recovery in the Markit/CIPS manufacturing PMI to 53.1 in November, from 51.1 in October, propelled it well above the consensus, and the equivalent reading for the Eurozone, 51.8, for only the second time in the last 19 months.
A further rise in the business activity index of the November Markit/CIPS report on services offset declines in the manufacturing and construction surveys' key balances. The composite PMI--a weighted average of three survey's activity indices -- therefore rose, to a level consistent with quarter-on-quarter GDP growth strengthening to 0.6% in the fourth quarter, from 0.5% in Q3. Nonetheless, we do not think this is a convincing signal that the economic recovery is regaining strength.
The Caixin manufacturing PMI for January was grim, indicating that China's start to the year wasn't as benign as the official surveys suggested.
Brazil's manufacturing PMI edged down to a six-month low of 45.2 in December, from 46.2 in November. This marks a disappointing end to Q4, following a steady upward trend during the first half of the year, as shown in our first chart. December's new work index fell to 45.2 from 47.7 in November, driving a slowdown in production, purchases of materials, and employment. The new export orders index also deteriorated sharply in December, falling close to its lowest level since mid-2009.
Yesterday's PMI data confirmed that the EZ manufacturing sector is in rude health. The manufacturing PMI in the euro area rose to a cyclical high of 57.4 in June, from 57.0 in May, slightly above the first estimate. New orders and output growth are robust, pushing work backlogs higher and helping to sustain employment growth.
The final July PMIs indicate that the post-referendum slump in activity has been even worse than the flash estimates originally implied. The manufacturing PMI was revised down to 48.2, from the 49.1 flash reading, while the services PMI was unrevised at 47.4, its lowest level since March 2009.
China's official manufacturing PMI for May, out tomorrow, will give the first indication of the coming hit from the resumption of its tariff war with the U.S.
China's official PMIs were little changed in August, with the manufacturing gauge up trivially to 51.3, from 51.2 in July and the non-manufacturing gauge up to 54.2, from 54.0.
The Caixin PMI likely remained stable or even strengthened in January. The December jump was driven by the forward-looking components, with both the new export orders and total new orders indices picking up.
China's official PMIs for January, due out tomorrow, will give the first indications of how the economy started the year.
The seasonal adjustment problems which tend to drive up the national ISM manufacturing survey in late spring and summer are more or less absent from the Chicago PMI, which will be released today. As far as we can tell, the biggest short-term influence on the Chicago number is variations in the order flow for Boeing aircraft; the company moved its headquarters to the city from Seattle in 2001.
We were surprised to see Japan's services PMI edging up to 51.9 in June, from 51.7 in May. We attributed apparent service sector resilience in April and May to the abnormally long holiday this year.
The Caixin manufacturing PMI was steady in May, at 50.2, in contrast to the official gauge published on Friday, which dropped to 49.5, from April's 50.2.
November's Markit/CIPS construction report brings hope that the sector no longer is contracting. The PMI increased to a five-month high of 53.1 in November from 50.8 in October, exceeding the 52-mark that in practice has separated expansion from contraction.
The Caixin services PMI jumped sharply to 53.9 in December from 51.9 in November. All the PMIs picked up significantly, but we find this hard to believe and suspect seasonality is to blame, though the adjustment is tricky.
The pick-up in the Markit/CIPS services PMI to an eight-month high of 55.1 in June, from 54.0 in May, has provided another boost to expectations that the MPC will raise Bank Rate at its next meeting on August 2.
The latest PMIs indicate that the economy remained listless in Q3, undermining the case for a rate rise before the end of this year. The business activity index of the Markit/CIPS services survey rose trivially to 53.6 in September, from 53.2 in August.
Survey data in EZ manufacturing remain soft. Yesterday's final PMI report for August confirmed that the index dipped to 54.6 in August, from 55.1 in July, reaching its lowest point since the end of 2016.
China's Caixin manufacturing PMI edged down to 50.6 in August, from July's 50.8. This clashed with the increase in the official PMI, though the moves in both indexes were modest.
The failure of the Markit/CIPS services PMI to rebound fully in April, following its fall in March, provides more evidence that the economy is in the midst of an underlying slowdown.
Final October PMI data today will confirm the Eurozone's recovery remains on track. We think the composite PMI rose to 54.0 from 53.6 in September, in line with the consensus and initial estimate. Data on Monday showed that manufacturing performed better than expected in October, and the composite index likely will enjoy a further boost from solid services. The PMIs currently point to a trend in GDP growth of 0.4%-to-0.5% quarter-on-quarter, the strongest performance since the last recession.
We continue to distrust the suggestion from the Markit/CIPS PMIs that the economy is in recession.
September's Markit/CIPS PMIs indicate that the economy still is stuck in a low gear.
Yesterday's August PMI data in the euro area ran counter to the otherwise gloomy signals from the ZEW and Sentix investor sentiment indices.
In one line: Ugly services PMIs in Spain and Italy, but they should recover next month.
Today's advance EZ PMIs will be watched more closely than usual.
We expect the flash reading of Markit's composite PMI, released today, to print at 52.4 in February, below the consensus, 52.8, and January's final reading, 53.3, albeit still in line with last month's flash.
On the face of it, December's flash Markit/CIPS PMIs warrant the MPC cutting Bank Rate at its meeting on Thursday.
Our view that EZ survey data would take a step back in February was severely challenged by yesterday's PMI reports. The composite index in the Eurozone rose to 56.0 in February, from 54.4 in January, lifted by a jump in the services index and a small rise in the manufacturing index.
Investor sentiment data still indicate that EZ PMIs are set for a significant rebound at start of the year.
Yesterday's February PMI data sent a clear message to markets.
We're sticking to our call that the Eurozone PMIs have bottomed, though we concede that the picture so far is more one of stabilisation than an outright rebound.
Members of the Monetary Policy Committee have signalled that January's flash Markit/CIPS composite PMI, released on Friday 24, will have a major bearing on their policy decision the following week.
Yesterday's final May manufacturing PMIs confirmed that the EZ industrial sector is in fine form. The PMI for the euro area was unchanged at a cyclical high of 57.0 in May, in line with the initial estimate.
China's manufacturing PMI posted a surprise, albeit trivial, increase in February, to 51.6 up from 51.5 in January.
China's September PMIs, most of which were released over the weekend, mark out a clear downtrend in activity since late last year.
China's official PMIs paint a picture of robust momentum going into 2018 but we find this difficult to reconcile with the other data.
On the face of it, the rebound in the manufacturing PMI, to 53.3 in August from 48.3 in July, directly challenges our view that the economy is set to slow sharply over the coming quarters. A close look at the survey, however, suggests that the manufacturing PMI exaggerates the extent of the sector's recovery in August.
China's official manufacturing PMI was unchanged at 50.2 in December, marking a weak end to the year. But it could have been worse; we had been worried that the return to above-50 territory in November had been boosted by temporary factors. December's print allays some of those fears.
The bulk of China's PMIs were published over the weekend and yesterday, leaving only the Caixin services PMI on Wednesday.
The Markit/CIPS PMIs for August, slated for release over the next three business days, will be closely watched. They have provided the most resounding indication, so far, that Britain is heading for a recession. In July, the composite PMI--comprised of the manufacturing and services indices--fell to 47.5, from 52.4 in June, its biggest month-to-month fall since records began in 1998.
It seems that yesterday's PMI data left investors and analysts more confused than enlightened.
Chinese data still are in the midst of Lunar New Year-related noise, so take February's PMIs with a pinch of salt, even though they ostensibly are adjusted for seasonal effects.
China's PMIs surprised the consensus forecasts to the downside for February. The manufacturing PMI dropped to 50.3 in February from 51.3 in January, while the non-manufacturing PMI fell to 54.4 from 55.3 in January.
China's manufacturing PMIs have softened in Q4. Indeed, we think the indices understate the slowdown in real GDP growth in Q4, as anti-pollution curbs were implemented. More positively, though, real GDP growth should rebound in Q1 as these measures are loosened.
China's official manufacturing PMI implies a modest gain in momentum in Q2, at 51.4, compared with 51.0 on average in Q1.
Yesterday's Chinese PMI numbers disappointed forecasts across the board, failing to meet widespread expectations for either stability or a continued, albeit marginal, improvement in April.
This week's manufacturing, construction and services PMIs for October will demonstrate how well the economy is coping with the prospect of higher interest rates.
China's official manufacturing PMI edged down to 50.8 in April, from 52.0 in March. The output sub- index stayed relatively high, inching down only to 53.7 from 54.1, and chiming with our initial take on the industrial production data for March.
The composite PMI in the Eurozone continues to edge slightly lower, falling to 53.4 in May from 53.9 in April. A fall in the services index to 53.3, from 54.1 last month offset a modest increase in manufacturing to 52.3 from 52.0 in April.
Unanticipated movements in the Markit/CIPS services PMI often provoke big market reactions, despite its shortcomings as an indicator of the pace of growth. We suspect December's PMI, released today, could surprise to the downside, reversing most of its rise in November to 55.9 from 54.9 in October. Regardless, we place more weight on the official data, which is more comprehensive and shows clearly the recovery is slowing.
Yesterday's final February PMI data were slightly stronger than expected, due to upbeat services data. The composite PMI in the Eurozone fell to 53.0, a bit above the initial 52.7 estimate, from 53.6 in January. The PMI likely will dip slightly in Q1 on average, compared to Q4, but it continues to indicate stable GDP growth of about 0.3%-to-0.4% quarter-on-quarter.
India's shocking PMIs for April leave little doubt that the second quarter will be bad enough to result in a full-year contraction in 2020 GDP, even if economic activity recovers strongly in the second half.
Further compelling signs that the U.K. has lost its status as one of the fastest growing advanced economies were presented by the Markit/CIPS manufacturing survey, released yesterday. The PMI fell in February to 50.8--its lowest level since April 2013--from 52.9 in January.
In one line: No relief at the start of Q4.
In one line: Soft, but decent overall.
In one line: A devastating services report, but we see light at the end of the tunnel in manufacturing
In one line: Amber alert.
In one line: Caixin suggests March was as bad as February... that's bad
In one line: Saved by robust services.
In one line: A supply-demand mismatch
In one line: The French economy is bucking the trend, to the upside.
In one line: Stabilisation at best; details remain depressing reading.
Evidence that mounting concerns about Brexit have caused the economy to slow to a near-halt continued to accumulate last week.
In one line: Stuck in neutral.
In one line: Solid headlines, but can we trust them?
In one line: Soft; strength in France and Germany offset by weakness elsewhere.
In one line: Stabilisation complete; now an upturn?
In one line: Solid; manufacturing index likely hit by pension reform strikes.
In one line: A slow rebound is underway.
In one line: Sobering, but probably not market-moving.
In one line: Welcome to the house of horror.
In one line: Settling.
In one line: Sinking without a trace, but still not recessionary.
In one line: Covid-19 finally hits EZ consumer sentiment; worse is to come.
The upside to manufacturing survey data in the Eurozone appears endless.
Sterling briefly touched $1.30 yesterday, in response to signs that a very small majority in the Commons stands ready to vote for an unamended version of the Withdrawal Agreement Bill--WAB-- on Tuesday.
Yesterday's data presented Eurozone investors with an unfamiliar sight; a big downside surprise in the survey data.
Further evidence that the general election has transformed business confidence emerged yesterday, in the form of January's CBI Industrial Trends survey.
As we write, the Commons appears to be on the verge of voting for the Withdrawal Agreement Bill--WAB--at its second reading but then voting against the government's "Programme Motion", which sets out a very tight timetable for its passage through parliament, in a bid to meet the October 31 deadline and to minimise parliamentary scrutiny.
Yesterday's data in the Eurozone did little to calm investors' nerves amid rising political uncertainty in Italy and tremors in emerging markets.
The flash readings of the Markit/CIPS surveys in February provide reassurance that GDP is on track to rebound in Q1, despite disruption to the global economy caused by the COVID-19 outbreak and bad weather in the U.K. this month.
Investor sentiment in the Eurozone showed further signs of recovery yesterday. The ZEW expectations index rose strongly to 48.4 in January from 34.9 in December, and the leap since the trough in October ranks among the strongest rebounds ever recorded in the index.
Holiday effects are tedious and you are going to hear us talking about them until the March data come through.
After seemingly endless speculation, the confidence vote in Theresa May's leadership of the Conservative party finally has been triggered following the submission of at least 48 letters by disgruntled MPs to the Chairman of the 1922 Committee.
Mrs. May looks set to lose the second "meaningful vote" on the Withdrawal Agreement-- WA--today, whether she decides on a straightforward vote or one asking MPs to b ack it if some hypothetical concessions are achieved.
We often hear that the large gap between the slowing rising path for interest rates anticipated by the MPC and the flat profile expected by markets is justified because markets have to price-in all of the downside risks to the economic outlook posed by Brexit.
The Prime Minister is threatening to bring back her Brexit deal to the Commons for a third time before March 20, in a final bid to win over the rebels within the Tory party who want a harder Brexit.
Yesterday's German ZEW investor sentiment survey provided the first clear evidence of the coronavirus in the EZ survey data.
Yesterday's first batch of Q3 survey data in the Eurozone suggest that economic growth eased further, albeit it slightly, at the start of the quarter.
Survey data in Germany continue to tell an upbeat story on the economy. The IFO business climate index rose to 109.0 in November from 108.2 in October, lifted by gains in both the expectations and current assessment indexes. The IFO tends to be slightly over-optimistic on GDP growth, but our first chart shows that the survey points to upside risks in the fourth quarter.
Real M1 growth is slowing, and financial conditions are beginning to tighten in the Eurozone, but shortleading indicators continue to signal firm momentum in the economy.
Recession fears were fanned yesterday by the renewed deterioration of the Markit/CIPS services survey.
October's Markit/CIPS services survey added to evidence that the economy has started Q4 on a very weak footing.
Our conviction that the economy continues to grow at a snail's pace increased yesterday following the release of August's Markit/CIPS services survey.
The services sector in China is notoriously difficult to track, with the major aggregate statistics published only on a quarterly or even annual basis.
The MXN came under pressure last week as news broke that Banxico Governor Agustin Carstens plans to resign next year. Mr. Carstens has led the bank since 2010; during his term, Banxico cut interest rates to record low levels and managed to keep inflation under control.
In one line: Robust, but not a reliable indicator for GDP growth.
The Fed will do nothing to the funds rate or its balance sheet expansion program today.
Friday's economic reports delivered more sobering news for the euro area economy.
The real Boris Johnson will have to stand up this year.
Last week we made a big call and further downgraded our China GDP forecasts for Q1; daily data and survey evidence suggested that our initial take, though grim, had not been grim enough.
All the main surveys of business activity in Q1 now have been released and they present a uniformly downbeat picture.
Hopes that GDP growth will strengthen following the general election, which has eliminated near- term threats of a no-deal Brexit and a business- hostile Labour government, were bolstered yesterday by the release of December's Markit/ CIPS services survey.
In one line: Spared complete embarrassment by resilient services.
In one line: Boeing's woes and trade are hurting.
In one line: Grim; trade war and Boeing woes to blame.
In one line: Much better, but still soft, and downside risks ahead.
In one line: Terrible.
In one line: Likely bottoming, but no real recovery in sight.
In one line: Reassuringly solid, given virus and weather headwinds.
In one line: Still excessively depressed by political uncertainty.
In one line: Still dormant, despite the Brexit delay.
In one line: Q1 net trade hit confirmed; a rebound in Q2?
In one line: Horrid, hideous, harrowing...you get the picture.
In one line: A stable headline with resilience in services and depressed manufacturing
In one line: Stability; thanks to solid services.
In one line: Soft, but also resilient overall.
In one line: Inflation still little source of concern.
In one line: Not bad at all.
In one line: Strong enough for the MPC to keep rates on hold next week.
In one line: Record low level signals a very deep recession.
In one line: Terrible, but could have been worse.
In one line: Could have been worse. Will be worse
In one line: Wild.
In one line: Better, but still weak.
In one line: Awful, especially in services, with worse to come.
In one line: Boeing, probably.
In one line: Destocking is driving the renewed slowdown.
In one line: Understating the slump in production now underway.
In one line: Consistent with falling GDP, though it has been too downbeat repeatedly this year.
In one line: Don't take the sub-50 reading literally; output likely is recovering in May, albeit sluggishly.
In one line: An unprecedented collapse.
In one line: Year-end struggles should give way to stabilisation in Q1.
In one line: A glimmer of light between the storm clouds.
In one line: Supply chain disruptions to depress output in the spring.
In one line: Better than expected.
In one line: Services were improving before the Covid-19 outbreak.
In one line: Manufacturing still looks terrible, but the remaining headlines are decent.
In one line: Ugly; manufacturing is sinking without a trace.
In one line: Grim; manufacturing enjoyed another "boost" from a tighter supply side.
In one line: A rebound, and from a better level than elsewhere in the EZ.
In one line: The new sick man of Europe.
In one line: Still ugly.
In one line: The road to recovery begins; we hope.
In one line: Great headlines, but the details paint a more negative picture.
In one line: Still holding up better than the rest.
In one line: Still grim, but the second derivative is turning.
In one line: A strong rebound from the September swoon.
In one line: Still grim in manufacturing, but services look ok.
In one line: Weak, but not recessionary.
In one line: Not pretty, but short-time work schemes are preventing some permanent layoffs.
In one line: Recession all but confirmed; over to you Berlin.
In one line: Soft, but still consistent with decent GDP growth.
In one line: Not pretty; downside risks remain for industrial production in Q2.
In one line: Ugly, but not nearly bad enough to tell the true story on the ground.
In one line: Still grim, but the rate of contraction is easing.
In one line: Ugly, but everyone is looking ahead to the rebound.
In one line: EZ services are still holding up.
In one line: An altogether more positive picture.
In one line: Promising, but a coronavirus hit looms in the next few months.
In one line: Solid, but old news.
In one line: Still miserable in EZ manufacturing, but an impressive jump in the Sentix.
In one line: Grim manufacturing, mixed money supply data.
In one line: Still weak, but a few signs of improvement.
In one line: Every bit as terrible as feared.
In one line: A bad finish to a bad year.
In one line: Small rebound confirmed, but still overall weak.
In one line: Terrible.
In one line: Consensus-beating print merely underscores how bad February was; the economy isn't out of the woods
China's PMIs show no sign of a recovery yet, but the authorities are sticking to the playbook; they've done the bulk of the stimulus and are waiting for the effects to kick in, but are recognising that they need to make some adjustments.
Yesterday's final EZ manufacturing PMIs for August provided little in the way of relief for the beleaguered industrial sector.
Yesterday's labour market data delivered a further blow to hopes that consumers' spending will retain enough momentum for the MPC to press ahead and raise interest rates this year. The most striking development is the decline in year-over-year growth in average weekly wages to just 1.9% in December, from 2.9% in November.
The Asian PMIs point to a strengthening manufacturing sector in September but external demand is the driver.
Yesterday's euro area PMI data continue to tell a story of a firm business cycle upturn. The composite PMI was unchanged at 53.9 in December; an increase in the manufacturing index offset a decline in the services PMI.
Data released yesterday showed that gross fixed investment in Mexico started Q4 on a decent note, increasing on the back of healthy purchases of imported machinery and equipment and construction spending.
The latest Markit/CIPS manufacturing survey has dashed hopes that sterling's depreciation and the pickup in global trade will facilitate strong growth in U.K. production this year. The PMI dropped to 54.2 in March, from 54.6 in February.
Yesterday's relatively good news--we discuss the implications of the August trade data below--will be followed by rather more mixed reports today. We hope to see a partial rebound, at least, in the September Chicago PMI, but we fully expect soft August consumer spending data.
Capex data by industry are available only on an annual basis, with a very long lag, so we can't directly observe the impact the collapse in the oil sector has had on total equipment spending. But we can make the simple observation that orders for non-defense capital goods were rising strongly and quite steadily-- allowing for the considerable noise in the data--from mid-2013 through mid-2014, before crashing by 9% between their September peak and the February low. It cannot be a coincidence that this followed a 55% plunge in oil prices.
Manufacturing in the Eurozone remained a strong driver of GDP growth in the third quarter. The headline EZ manufacturing PMI rose to 58.1 in September, from 57.4 in August, only a tenth below the initial estimate 58.2.
Survey data signal that Eurozone manufacturing retained momentum at the start of Q4. Yesterday's final PMI reports showed that the EZ manufacturing index rose to 58.5 in October from 58.1 in September, trivially below the first estimate.
The manufacturing sector appears to have finished 2017 on a strong note. The Markit/CIPS manufacturing PMI fell to 56.3 in December from 58.2 in November, but it remained above its 12-month average, 55.9.
The Eurozone manufacturing sector finished 2017 on a strong note. The headline PMI increased to a cyclical high of 60.6 in December, from 60.1 in November, in line with the initial estimate.
The official PMIs suggest that the January survey data have escaped the worst of the hit from the virus.
Business surveys coming out of the Eurozone have been remarkably strong recently. The composite PMI for the Eurozone jumped to 56.7 in March--its highest level since April 2011--from 56.1 in February. Germany's IFO business climate index leaped to a 67-month high in March.
The sharp fall in China's manufacturing PMI in May makes clear that its recovery is nowhere near secured.
Yesterday's final manufacturing PMIs confirmed that all remained calm in the EZ industrial sector through February.
Manufacturers in the Eurozone are still suffering, but yesterday's final PMI data for April offered a few bright spots.
The preliminary April PMIs due today will provide the first economic sentiment data for Q2, and likely will point to a continuation of the cyclical recovery. We think the composite PMI was unchanged at 54.0 in April, driven by a small gain in manufacturing offset by a slight decline in services.
Industrial companies in the Eurozone are still struggling with low growth, but the outlook is stabilising following the near-recession late last year. The Eurozone manufacturing PMI was unchanged at 51.0 in February, trivially lower than the initial estimate of 51.1.
Economic data in the Eurozone continue to come in soft. Yesterday's final manufacturing PMIs confirmed that the euro area index slipped to an eight-month low of 56.6 in March, from 58.6 in February.
Japan's services PMI edged down to 52.0 in March, from 52.3 in February, taking the Q1 average to 52.0, minimally up from Q4's 51.9.
The hit from oil prices has just started; CPI deflation is imminent in Korea. Korea's PMI descends further, but April could mark the low
The Caixin services PMI was due a bounce
Caixin services PMI shows labour market worries before the virus hit
China's Caixin services PMI corrects from November's Singles' Day bump
China's manufacturing PMI was poised for major disappointment... the trade war impact is clear. Don't be fooled by the relative stability of China's non-manufacturing PMI. Japan's March unemployment uptick was early; April was payback. Japan's CPI inflation has peaked. Japan's industrial production ticks up after extreme weakness; don't hold your breath for the recovery. Japan's consumers in poor shape, but maybe it's not that bad. The upswing in Korean industrial production likely to take a breather this month. The BoK holds firm, despite rising calls for a rate cut.
Consensus-beating March PMI merely underscores how bad February was... the economy isn't out of the woods. The non-manufacturing bounce was broad-based, but construction led the way. Japan's job openings plunge shows the direction of travel for unemployment. Japan's retail sales suggest Q1 pain to be concentrated in March. Japan inc granted a last month of reprieve before the Covid-19 storm hits. Korean carmakers' sourcing woes largely to blame for February hit.
China's manufacturing PMIs suggest the private sector is recovering ahead of SoEs. China's non-manufacturing PMI again masks construction/services cross currents. Japan's industrial production continues to languish. OK so now Japanese households are front-loading spending. Korean IP corrects from the bumper July; the momentum from the Q2 recovery is waning.
China's PMIs are not yet fully picking up the coronavirus; China's non-manufacturing PMI lifted by local government spending; not yet hit by the virus; Japan's job postings still suggest the unemployment rate is unsustainably low; Japan's national inflation has less far to fall than Tokyo's; The coronavirus will delay the return of Japanese retail sales to pre-tax hike levels; Investment goods drive Japan's IP rebound in December; no real support now for consumer goods production; December probably is as good as it will get for Korean industrial production, for now
China's manufacturing PMI edged up in July. Services in China are finally starting to feel the pinch. Korean IP looks poised for a stronger increase in July, notwithstanding Japan's export curbs.
Japan's wage growth rebounded because August is not a bonus month. Japan's current account maintains stability as trade balance cross currents persist. China's services PMI report contains some positive details but we aren't convinced. The rebuilding of Korea's current account surplus will soon lose momentum.
China's trade surplus falls unexpectedly in April, thanks partly to a bump in imports. Japan's services PMI falls despite holiday boost. The BoJ remains in a holding pattern. Korea's current account surplus rose in March, but its overall downtrend remains intact.
French manufacturing cooled at the end of 2016. Industrial production slipped 0.9% month-to-month in December, partially reversing an upwardly revised 2.4% jump in November. The main hits came from declines in oil refining and manufacturing of cars and other transport equipment.
The manufacturing indexes for January showed a small improvement for the biggest economies in LatAm: Brazil and Mexico. In Brazil, the PMI manufacturing index increased marginally to 50.7 in December from 50.2 in November, thanks to stronger output and new orders components, which rose together for the first time in ten months.
PM Abe last week asked the cabinet to put together a package of measures in a 15-month budget aimed at bolstering GDP growth through productivity enhancement, in addition to the shorter-term goal of disaster recovery.
Car registrations, French inflation, advance PMIs and a central bank meeting make up today's substantial menu for investors in the euro area.
It probably would be wise to view the increase in the ISM manufacturing index in December with a degree of skepticism. The index is supposed to record only hard activity, but we can't help but wonder if some of the euphoria evident in surveys of consumers' sentiment has leaked into responses to the ISM. That said, the jump in the key new orders index-- which tends to lead the other components--looked to be overdue, relative to the strength of the import component of China's PMI.
The 15% fall in the FTSE 100 since its May 2018 peak undoubtedly is an unwelcome development for the economy, but past experience suggests we shouldn't rush to revise down our forecasts for GDP growth.
The most positive thing to say about the EZ manufacturing PMI at the moment is that it has stopped falling.
Investors have concluded from June's Markit/CIPS PMIs and Governor Carney's speech on Tuesday that the chance of the MPC cutting Bank Rate before the end of this year now is about 50%, rising to 55% by the time of Mr. Carney's final meeting at the end of January.
The economic data were mixed while we were away. The final PMI data showed that the composite PMI in the euro area fell to 53.1 in October, from 54.1 in September, somewhat better than the initial estimate, 52.7.
Yesterday's IFO data reversed the good vibes sent by last week's upbeat German PMIs.
The disappearance from the FOMC statement of any reference to global risks, which first appeared back in September, was both surprising and, in the context of this cautious Fed, quite bold. After all, one bad month in global markets or a reversal of the jump in the latest Chinese PMI surveys presumably would force the Fed quickly to reinstate the global get-out clause. So, why drop it now?
Financial market performance and economic survey data on the Brazilian economy have been better than many investors and commentators feared this year. The composite PMI has improved gradually since November last year, consumer sentiment has stabilized, and national business surveys have been less bleak.
We think this week's main economic surveys in the Eurozone will take a step back following a steady rise since the end of Q3. Today's composite PMI in the Eurozone likely slipped to 54.0 in February, from 54.4 in January, mainly due to a dip in the manufacturing component. Even if we're right about slightly weaker survey data in February, though, it is unlikely to change the story of a stable and solid cyclical expansion in the EZ.
Today's data dump will deliver the advance PMIs and the French INSEE business sentiment indices for February, all of which will be examined closely for signs of stabilisation in the wake of recent evidence that EZ growth is slowing quicker than markets and the ECB have been expecting.
Swoons in EZ investor sentiment are not always reliable leading indicators for the economic surveys, but it is fair to say that risks for today's advance PMIs are tilted to the downside, following the dreadful Sentix and ZEW headlines earlier this month.
Last week's advance PMI data suggest that economic activity in the Eurozone was stable at the beginning of Q2. The composite EZ PMI fell trivially to 53.0 in April, from 53.1 in March, because a dip in manufacturing offset a small rise in the services index.
The April IFO business sentiment survey increased the degree of uncertainty over the German economy, following stabilisation in the PMIs earlier this week.
Friday's July PMI reports presented investors with a rather confusing story. The composite PMI in the Eurozone fell trivially to 52.9 in July, from 53.1 in June, despite rising PMIs in Germany and France. The final data on 3 August will give the full story, but Markit noted that private sector growth outside the core slowed to its weakest pace since December 2014.
Yesterday's final EZ PMIs imply that growth in manufacturing slowed marginally in August. The PMI fell to 51.7, from 52.0 in July, trivially below the initial estimate, 51.8. Output and new orders growth declined, pushing down the pace of new job growth. But we think the hard data for industrial production in Q3 as a whole will be decent.
The Eurozone economy is in fine shape, according to the latest PMI data. The composite EZ PMI fell trivially to 54.3 in January, but remains strong. A marginal dip in the services index offset a small increase in the manufacturing PMI to a cyclical high of 55.1. These data tell a story of a strong private sector that continues to support GDP growth.
Yesterday's barrage of survey data were a mixed bag. The composite EZ PMI edged higher in May to 51.6, from 51.5 in April, but the details were less upbeat, and also slightly confusing.
The nominal value of orders for non-defense capital equipment, excluding aircraft, fell by 3.4% last year. This was less terrible than 2015, when orders plunged by 8.4%, but both years were grim when compared to the average 7.5% increase over the previous five years.
Sterling rallied to $1.25 last week--its highest level against the dollar since Boris Johnson became PM in mid-July--amid growing speculation that a Brexit deal still was possible in the next couple of weeks, enabling the U.K. to leave the E.U. on October 31.
All the regional PMIs and Fed business surveys are volatile in the short-term, so observations for single months need to be viewed with due skepticism.
Economic sentiment data, which rebounded in March, continue to suggest slight downside risk to EZ GDP growth in Q1. The composite Eurozone PMI in March rose modestly to 53.7 from 53.0 in February, only partially erasing the weakness in recent months. The PMI dipped slightly over the quarter as a whole, although not enough to change the EZ GDP forecast in a statistically meaningful way.
Yesterday's national surveys in the EZ confirmed the downbeat message from the PMIs and consumer sentiment data earlier this week.
Over the summer, both Chancellor Javid and PM Johnson appeared to be repositioning the Conservatives, claiming that the era of austerity was over and that higher levels of spending and investment were justified.
French manufacturers recovered their optimism towards the end of Q3. The headline INSEE manufacturing sentiment index rose to 103 in September, from 101 in August, and the composite business confidence gauge also increased. A rebound in transport equipment firms' own production expectations was the key driver of the recovery.
Consensus forecasts expect further gains in this week's key EZ business surveys, but the data will struggle to live up to expectations. The headline EZ PMIs, the IFO in Germany, and French manufacturing sentiment have increased almost uninterruptedly since August, and we think the consensus is getting ahead of itself expecting further gains. Our first chart shows that macroeconomic surprise indices in the euro area have jumped to levels which usually have been followed by mean-reversion.
The preliminary April PMIs point to a continuation of the cyclical bounce, despite falling slightly from last month. The composite PMI in the Eurozone fell to 53.5 in April, down from 54.0 in March.
Yesterday's PMI data in the euro area were a horror show. The composite EZ index cratered to 13.5 in April, from 29.7 in March, dragged down by a collapse in the services index to 11.7, from 26.4 last month.
Yesterday's March PMIs confirmed that governments' actions to contain the Covid-19 outbreak dealt a hammer blow to the economy at the end of Q1.
Final PMI data in the Eurozone yesterday confirmed that manufacturing remains under pressure from global headwinds. The manufacturing PMI in the zone fell to 52.0 in September from 52.3 in August, in line with the initial estimate. A rare upside surprise in France was not enough to offset weakness in the other major economies, and the trend in private investment growth likely will stay subdued this year.
Mr. Abe yesterday called a snap general election, to be held on October 22nd; more on this in tomorrow's Monitor. For now, note that the election comes at a reasonably good stage of the economic cycle, hot on the heels of very rapid GDP growth in Q2, while the PMIs indicate that the economy remained healthy in Q3.
Yesterday's IFO survey in Germany sent a marginally more downbeat message than the strong PMIs last week. The IFO business climate index fell to 115.2 in September, from 115.9 in August, its second straight monthly dip.
The Caixin manufacturing PMI rebounded to 51.1 in July from 50.4 in June, soundly beating the consensus for no change. The PMIs are seasonally adjusted but the data are much less volatile on our adjustment model. On our adjustment, the headline has averaged 50.9 so far this year, modestly higher than in the second half of last year.
Industrial sector activity in the euro area was broadly stable at the beginning of the third quarter, despite the headline dip in the July manufacturing PMI. The Eurozone index fell to 52.0 in July, from 52.8 in June, but if it holds at this level it will be unchanged in Q3 compared with the second quarter.
Brazilian financial assets lately appear to be responding only to developments in the presidential election race and external jitters.
ECB board member Peter Praet fired the first shot across the markets' bow yesterday following this week's turmoil. Speaking to journalists in Germany, Mr. Praet noted "increased downside risk of achieving a sustainable inflation path towards 2%," and assured investors the current QE program is fully flexible, and can be readily adjusted in response to an adverse development in inflation expectations. We don't think, though, this is a pre -cursor for additional easing at next week's ECB meeting.
PM Johnson has conceded considerable ground over the terms of Brexit for Northern Ireland in order to get a deal over the line in time for MPs to vote on it on Saturday, before the Benn Act requires him to seek an extension.
On the face of it, British manufacturers are weathering the global slowdown well. The Markit/CIPS PMI jumped to 55.1 in March, from 52.1 in February, and now comfortably exceeds those for the Eurozone, U.S. and Japan.
We were happy to see the small increase in the March ISM manufacturing index yesterday, following better news from China's PMIs, but none of these reports constitute definitive evidence that the manufacturing slowdown is over.
Japanese data continue to come in strongly for the second quarter. The manufacturing PMI points to continued sturdy growth, despite the headline index dipping to 52.0 in June from 53.1 in May. The average for Q2 overall was 52.6, almost unchanged from Q1's 52.8, signalling that manufacturing output growth has maintained its recent rate of growth.
The PMI survey continues to send a downbeat message on growth in the euro area despite signs of improvement in other sentiment data: The final manufacturing PMI in the Eurozone fell to 50.1 in November from 50.6 in October.
We have argued over the past couple of years that if you want to know what's likely to happen to U.S. manufacturing over the next few months, you should look at China's PMI, rather than the domestic ISM survey, which is beset by huge seasonal adjustment problems.
China's Caixin manufacturing PMI was unchanged at 51.0 in October, continuing the sideways trend this year.
The huge drop in the March Markit services PMI, reported yesterday, and the modest dip in the manufacturing index, are the first national business survey data to capture the impact of the Covid-19 outbreak.
On a headline level, the key message from the Eurozone PMIs was little changed on Friday.
The PMI survey points to a slow, but steady improvement, in Eurozone manufacturing. The gauge rose marginally to 52.5 in June, up from 52.2 in May. This pushed the quarterly average in Q2 to 52.2, up from 51.1 in Q1. The survey is also telling a story of broad-based manufacturing strength in the two major peripheral economies, despite declines in June.
The deterioration of the Markit/CIPS manufacturing survey in November should temper optimism about the potential benefits of sterling's depreciation. The PMI fell to 53.4 in November, from 54.2 in October.
We struggle to find much wrong with the near-term outlook for Eurozone manufacturing. The headline PMI fell marginally to 59.6 in January, from 60.6 in December, but it continues to signal robust growth at the start of the year.
The manufacturing sector appears to have started the new year on a weaker note. The Markit/CIPS manufacturing PMI dropped to 55.3 in January--its lowest level since June--from 56.2 in December.
China's manufacturing PMI highlights supply-demand mismatch. China's non-manufacturing PMI reveals struggling services and rebounding construction. Retail sales in Japan started to turn sour before the state of emergency, but the overall picture for Q1 isn't bad. The worst is yet to come for Japanese industrial production.
Expectations that the ECB will respond to weakening growth in China with Additional stimulus mean that survey data will be under particular scrutiny this week. The consensus thinks the Chinese manufacturing PMI--released overnight--will remain weak, but advance PMIs in the Eurozone should confirm that the cyclical recovery remained firm in Q3. We think the composite PMI edged slightly lower to 54.0 in September from 54.3 in August, consistent with real GDP growth of about 0.4% quarter-on-quarter in Q3.
Promises of new money to facilitate construction on public sector land from the Chancellor and the pick-up in the construction PMI have fostered optimism that the sector's downturn is over.
LatAm markets and central banks have been paying close attention to developments in the U.S. The FOMC left rates on hold on Wednesday, as expected, but underscored its core view that inflation will rise in the medium-term, requiring gradual increases in the fed funds rate.
Yesterday's survey data tell a story of resilient manufacturing in the Eurozone. The headline EZ PMI rose to 52.6 in September, from 51.7 in August, lifted by a rise in new orders to a three-month high.
The chances of a cut in official interest rates were boosted yesterday by the sharp fall in the business activity index of the Markit/CIPS report on services in February, to its weakest level since April 2013. Its decline, to just 52.8 from 55.6 in January, mirrored falls in the manufacturing and construction PMIs earlier in the week and pushed the weighted average of the three survey's main balances down to a level consistent with quarter-on-quarter GDP growth of just 0.2% in Q1.
The latest U.K. PMIs were unambiguously dreadful. The manufacturing, construction and services PMIs all fell in April, and their weighted average points to quarter-on-quarter growth in GDP slowing to zero in Q2, from 0.4% in Q1. The U .K.'s composite PMI also undershot the Eurozone's for the second month this year.
Increased volatility has given equity investors a torrid start to the year, but economic reports have been strong, and yesterday's PMIs were no exception. The composite index in the Eurozone rose marginally to 54.3 in December from 54.2 in November, slightly higher than the initial estimate of 54.0. This is consistent with a continuing cyclical recovery, and real GDP growth of 0.4%-to-0.5% in Q4, modestly higher than the 0.3% rise in the third quarter.
Yesterday's final May PMI data in the Eurozone confirmed the strength of the cyclical upturn. The composite PMI was unchanged at 56.8, in line with the initial estimate.
China's service sector slowed again in June, with the Caixin PMI falling to 51.6 from 52.8 in May. The Q2 average of 52.0 was only minimally lower than the 52.6 in Q1.
Investors have stuck to their view that interest rates are just as likely to rise this year as not, despite the soft round of PMIs released this week.
Yesterday's economic data point to a sea of calm in the Eurozone economy. The composite PMI was unchanged at 53.1 in June, a slight upward revision from the initial estimate, 52.8. The index suggests real GDP growth was stable at 1.5%-to-1.6% year-overyear in Q2, though the quarter-on-quarter rate likely slowed markedly, following the jump in Q1.
This week's hard data confirmed the bleak situation of Brazil's industrial sector, signalled over the last few months by key leading indicators such as the PMI manufacturing and the CNI business confidence surveys. March industrial production fell by 0.8% month-to-month and 3.5% year-over-year, following a downwardly-revised 9.4% contraction in February.
October's Markit/CIPS services survey suggests that the PM's new Brexit deal has had a lukewarm reception from firms.
The PMI survey points to a slight loss of momentum in Eurozone growth towards the end of Q3. The composite index fell to 53.6 in September from 54.3 in August, trivially lower than the initial estimate of 53.9. This is not enough to move the needle on the survey's signal for Q3 GDP growth, though; our first chart shows it pointing to stable growth of 0.4% quarter-on-quarter.
Yesterday's Nikkei services PMI report completed Japan's set of surveys for the fourth quarter of 2018.
The sharp 0.4% month-to-month fall in GDP in December and the slump in the Markit/CIPS PMIs towards 50 have created the impression the economy is on the cusp of recession.
Total real inventories rose at a $48.7B annualized rate in the fourth quarter, contributing 1.0 percentage points to headline GDP growth. Wholesale durable goods accounted for $34B of the aggregate increase, following startling 1.0% month-to-month nominal increases in both November and December. The November jump was lead by a 3.2% leap in the auto sector, but inventories rose sharply across a broad and diverse range of other durables, including lumber, professional equipment, electricals and miscellaneous.
After last week's drama, the pace of political developments should slow down this week.
Japan's services sector PMI last week was disappointing.
Upbeat PMIs, the MPC's abandonment of its easing bias and the High Court ruling that only a parliamentary vote--and not the Prime Minister--can trigger Article 50, all helped sterling to make up some lost ground last week.
Eurozone manufacturing is showing signs of stabilisation. Final PMI data showed the headline gauge falling trivially to 52.4 in July from 52.5 in June, slightly above the initial estimate of 52.2. New orders slowed, though, with companies reporting weakness in export business amid firm domestic demand.
The nosedive in the Markit/CIPS manufacturing PMI in April provides an early sign that GDP growth is likely to slow even further in the second quarter. The MPC, however, looks set to keep its powder dry. We continue to think that the next move in interest rates will be up, towards the end of this year.
The improvement in the August services PMI has generated hyperbolic headlines suggesting the U.K. is on a tear despite the Brexit vote. Taken literally, however, the PMIs suggest that the revival in business activity in August only partially reversed July's decline. Meanwhile, the impact of sterling's sharp depreciation on the purchasing power of firms and consumers has only just begun to be felt.
India's PMIs for October were grim, indicating minimal carry-over of energy from the third quarter rebound.
Investors have treated the upbeat message of the Markit/CIPS PMIs this week with caution and continue to think that the chance that the MPC will raise interest rates this year is remote. Overnight index swap rates currently are pricing-in just a one-in-four chance of a 25 basis point increase in Bank Rate in 2017.
The Nikkei services PMI for Japan partly rebounded in January, to 51.6, after it fell sharply to 51.0 in December.
Korea's manufacturing PMI fell for a fourth straight month in April, dropping to 41.6, which is the lowest reading since January 2009.
Yesterday's final manufacturing PMIs for October were grim, but they told investors nothing they don't already know.
The improvement in the Markit/CIPS services PMI in October was pretty limp, supporting our view here that the recovery is shifting into a lower gear. What's more, the poor productivity performance implied by the latest PMIs indicates that wage growth will fuel inflation soon. As a result, the Monetary Policy Committee--MPC--won't be able to wait long next year before raising interest rates. Indeed, we expect the minutes of this month's meeting, released today, to show that one more member of the nine-person MPC has joined Ian McCafferty in voting to hike rates.
Yesterday's economic reports in the Eurozone will rekindle the debate on hard versus soft data. The final composite PMI rose to 56.7 in September, from 55.7 in August, in line with the first estimate.
Headline Eurozone PMI data have declined steadily since the beginning of the year, but the June numbers stopped the rot.
China's official and Caixin manufacturing PMIs have diverged in the last couple of months.
China's Caixin gauge still to register renewed tariff threat. Japan's Capex growth on borrowed time. Korean exports stumble in May, but Q2 is shaping up to be better than Q1. Korea's PMI for May highlights the still-huge downside risks facing exporters.
The Caixin services PMI ticked down to 53.6 in January, from 53.9 in December.
Yesterday's final PMI data added to the evidence that the EZ economy was firing on all cylinders at the end of last year. The composite PMI in the euro area rose to an 11-year high of 58.5 in December, from 57.5 in November, in line with the initial estimate.
Yesterday's data showed that the euro area PMIs were a bit stronger than initially estimated in November.
Japan's Nikkei services PMI dropped to 51.0 in September from 51.6 in August, continuing the downtrend since June. For Q3 as a whole, the headline averaged 51.5, down from 52.8 in Q2; that's a clear loss of momentum.
Evidence that the U.K. economy has slowed significantly this year is starting to come in thick and fast. Following the Markit/CIPS manufacturing PMI on Monday --which signalled that growth in production declined in March to its lowest rate since July--the construction PMI dropped to 52.2 in March, from 52.5 in February.
China's official manufacturing PMI was little changed in January, ticking up to 49.5, from 49.4 in December, with the output and new orders sub-indices largely stable.
The collapse in business activity and consumer confidence since the referendum has sealed the deal on policy easing from the MPC on Thursday. The Committee has cut Bank Rate by 50 basis points when the composite PMI has been near July's level in the past, as our first chart shows.
China's official manufacturing PMI, published on Monday, implies the industrial complex has maintained momentum going into Q3. The official manufacturing PMI moderated slightly to 51.4 in July from 51.7 in June. The July reading was unchanged from the average in Q2 and only modestly down from the 51.6 in Q1.
China's official PMIs for March surprised well to the upside, cheering markets across Asia.
Yesterday's wall of data told us a bit about where the economy likely is going, and a bit about how it started the first quarter. The January trade and inventory data were disappointing, but the February Chicago PMI and consumer confidence reports were positive.
China's Caixin services PMI picked up further in November to 51.9 from October's 51.2, but the rebound is merely a correction to the overshoot in September, when the headline dropped sharply.
We wrote last month about how the Caixin services PMI appeared to be missing the deterioration in several key services subsectors.
The final Eurozone PMIs indicate that the cyclical recovery continued in Q1, but downside risks are rising. The composite index rose marginally to 53.0 in March, from 53.1 in February, below the initial estimate 53.7. Over the quarter as a whole, though, the index fell to 53.2 from 54.1 in Q4, indicating that economic momentum moderated in the first quarter.
The latest PMIs have added to the weight of evidence that the economic recovery has lost momentum this year. The prevailing view in markets, however, that the Monetary Policy Committee is more likely to cut--rather than raise--interest rates this year continues to look misplaced because inflation pressure is building.
The resolution of tensions in Italy and aboveconsensus U.K. PMIs for May last week persuaded investors that the MPC likely will press on and raise interest rates soon.
Final Q2 GDP data yesterday indicate the euro area economy was stronger than initially estimated in the first half of the year. Real GDP rose 0.4% quarter-on-quarter in Q2, slightly higher than the initial estimate of 0.3, following an upwardly revised 0.5% increase in Q1. Upward revisions to GDP in Italy were the key driver of the more upbeat growth picture. The revisions mean that annualised Eurozone growth is now estimated at 1.8% in the first six months of the year, up from the previous 1.4%, consistent with the bullish message from real M1 growth and the composite PMI.
The MPC's view that the economy likely will grow at an above-trend rate over the coming quarters was challenged immediately last week by the PMIs.
Trade tensions weigh on Japan's PMI
Net trade and inventories cushion Korea's historic consumption collapse in Q1. Nasty Japan manufacturing readings, but we can extrapolate light at the end of the tunnel. A devastating services PMI report for Japan.
Non-core items drive Japan's CPI inflation higher, with energy also indirectly pushing up core inflation. Sino-U.S. Phase One trade deal gives Japan's manufacturing PMI a boost. Japan's services PMI levels look unsustainable.
China's retail sector is on its knees at best. China's IP data suggest that the horrendous PMIs underplayed the carnage. A damning FAI report... tertiary capex should rebound, but the hit to global demand will hold back the secondary industry. China's property market grounds to a halt in February. The Bank of Korea steps in with an emergency cut, despite falling new infections locally.
Japan's PMI report bodes well for Q3, but points to headwinds thereafter. PPI deflation in Korea is unlikely to get worse than the August drop.
Judgement pending on Chinese industrial production. Chinese retail sales buoyed by inflation. Chinese FAI growth stable through Q4; local government spending better managed this year. China's housing market still not reached a bottom. Japan's tertiary index plunge is more tax hike than typhoon. Japan's PMIs underline damage from tax hike.
China's manufacturing PMIs turn less grim, but look unsupported, for now. China's non-manufacturing PMI receives a one-off singles day boost. Japan's capex data suggests Q3 upgrade. Net trade is shaping up to be a drag on Q4 GDP, as Korean exports remained weak in November. Korea's exit from deflation is complete, thanks largely to more favourable base effects. Korea's PMI jumps in November... and that's before the likely sentiment boost from normalising ties with Japan.
China PMI chimes with our GDP downgrade last week. China's non-manufacturing PMI weakest on construction. Japan's MoF capex numbers point to Q4 GDP downgrade. Ignore the consensus-beating headline, Korean exports were abysmal in February, calendar effects aside. The virus now has infected Korea's PMI; expect business surveys to get a lot worse.
Japan's trade balance should recover as domestic weakness sets in; Japan's manufacturing PMI undermines H2 recovery hopes; Japan's services PMI paints a damning picture of Q2; Korea's export recovery from the April low will be more gradual than the descent; A lot more downside left for PPI deflation in Korea before Q3 trough
Further weakness to come for Japan's manufacturing PMI. First services hit from the coronavirus is damning. Japan's all-industry activity index suggests the 2019 tax hike was as bad as 2014. A drop in food inflation was enough to offset lagged oil pressures in Japan's January CPI. Ignore the headline; the coronavirus is now hurting Korean exports.
China's manufacturing PMIs remain in the downdraft
Japan's flash PMIs for August point to short-term gain and long-term pain. Construction is starting to show signs of peaking.
Japan's CPI inflation has peaked. Japan's PMI hit by renewed trade wars, while domestic demand shows signs of slowing. The fledgling recovery in Korean exports lost steam in June.
Non-core items outweigh government measures in Japan's October CPI. Ignore the minor rebound in Japan's manufacturing PMI; the trend remains very weak. The post-tax drop and rebound in Japan's services PMI isn't as sharp, but Q4 looks vulnerable to a painful GDP hit.
PBoC rate cut still on the tame side but more is coming, China's Caixin manufacturing PMI yet to see virus damage, China's profits better than the headline suggests going into the coronavirus hit, Early signs of coronavirus damage in Korea's trade data, Surge in Korea's manufacturing PMI comes to a stop in January
Echoes of the global financial crisis and the 2011 tsunami in Japan's manufacturing PMI; Japan's services index tanks to a record low
Japan's PMI had suggested an upside surprise, but now points firmly down
The Tankan points to a q/q contraction for capex in Q3, but GDP growth overall will stay strong. Japan's unemployment steady, but details bode ill for Q4. September's full-month data dispel some export worries in Korea; expect a Q3 lift from net trade. Korea's PMI pours cold water on the spectacular jobs report for August. September is as bad as it gets for Korean CPI deflation.
PBoC holding still in the wake of Fed rate cut. China's Caixin manufacturing PMI was due a bounce. Inflation in Korea will soon take another nosedive, due largely to unfavourable non-core base effects. Korea's export slump turned less bad in July. Korea's two main manufacturing surveys aren't talking to each other.
Tankan reinforces our impression of a nasty Q2. China's manufacturing PMIs show why the authorities are eager for a trade deal. China's non-manufacturing sector holds steady for now. Korean exports disappointed in June, but this probably is as bad as it will get. Ignore Korea's volatile PMI readings... sentiment is improving gradually.
China's Caixin manufacturing PMI was due a correction. Korea's PMI closes out the year strong, chiming with December's punchy trade data.
China's official manufacturing PMI slipped in June, but the overall picture for Q2 is sound despite the uncertainty posed by rising trade tensions with the U.S.
This Monitor provides a summary of the main points of interest over the two weeks we were out. The Chinese Caixin manufacturing PMI, published last Friday, confounded expectations for a modest fall, rising to 51.6 in August from 51.1 in July.
The jump in the Caixin services PMI in the past two months looks erratic, with holiday effects playing a role, though there could be more going on here.
The decline in China's unofficial PMI, which has dropped to a six-year low, signals increasing troubles ahead for U.S. manufacturers selling into China, and U.S. businesses operating in China. This does not mean, though, that the U.S. ISM will immediately fall as low as the Caixin/Markit China index appears to suggest in the next couple of months. Our first chart shows that in recent years the U.S. manufacturing ISM has tended hugely to outperform China's PMI from late spring to late fall, thanks to flawed seasonals.
Echoes of the global financial crisis and the 2011 tsunami in Japan's manufacturing PMI
Claus Vistesen discussing the German PMI's
Chief Asia Economist Freya Beamish on China's PMI data
Chief UK Economist Samuel Tombs on the latest PMI data
Are there any signs of a Chinese recovery yet? Freya Beamish discusses
Chief U.K. Economist Samuel Tombs on U.K. GDP
Chief U.S. Economist Ian Shepherdson discussing Durable Goods Orders in May
Chief U.K. Economist Samuel Tombs on the latest PMI data
Chief U.K. Economist Samuel Tombs on U.K. PMIs in December
While businesses--and farmers--fret over the damage already wrought by the trade war with China and the further pain to come, consumers are remarkably happy.
The emergence last month of a new E.U. Withdrawal Agreement that has a strong chance of being ratified by MPs appears to have given a small boost to business confidence.
Data released this week have confirmed that the Mexican economy is struggling and that the near-term outlook remains extremely challenging.
Leading economic indicators in the Eurozone continue to send contradictory signals. Most of the headline surveys indicate that a further slowdown, and perhaps even recession, are imminent, while the money supply data suggest that GDP growth is about to re-accelerate.
Retail sales values in Japan plunged by 14.4% month-on-month in October, reversing September's 7.2% spike twice over.
Headline money supply growth in the Eurozone has averaged 5% year-over-year since the beginning of 2015; yesterday's October data did not change that story.
Yesterday's EZ money supply data confirmed that liquidity conditions in the private sector improved in Q3, despite the dip in the headline.
Our analysis of the Q3 activity and GDP data in yesterday's Monitor strongly suggests that China's authorities will soon ready further stimulus.
LatAm financial and FX markets have behaved relatively well in recent sessions, thanks to the array of monetary and fiscal measures taken to counter the severe risk-off environment.
Once again, MPs failed to coalesce around any way forward for Brexit in the indicative votes process on Monday.
Don't expect a pretty picture when Korea's Q1 GDP report appears in the last week of April.
Brazil's February industrial production numbers, labour market data, and sentiment indicators are gradually providing clarity on the underlying pace of activity growth, pointing to some red flags.
The political momentum in the run-up to the election now lies with Labour.
The Redbook chainstore sales survey today is likely to give the superficial impression that the peak holiday shopping season got off to a robust start last week.
Both the E.U. and the U.K. government have been keen to emphasise, since the Withdrawal Agreement was provisionally signed off, that March 29 is a hard deadline for Brexit.
Households' inflation expectations have fallen again over the last few months, but we doubt they will constrain the forthcoming rebound in actual inflation. Past experience shows that inflation expectations are more of a coincident than a leading indicator of inflation. In addition, inflation is weakest right now in sectors where demand is relatively insensitive to price changes, so, when retailers' costs rise, they won't pay much heed to households' expectations.
Even Charles Dickens could not have written a more dramatic prologue to today's ECB meeting. Elevated expectations ahead of major policy events always leave room for major disappointment, but we think the central bank will deliver. Advance data yesterday indicated inflation was unchanged at 0.1% year-over-year in November, below the consensus 0.2%, and providing all the ammunition the doves need to push ahead. We expect the central bank to cut the deposit rate by 20bp to -0.4%, to increase the pace of bond purchases by €10B to €70B a month, and to extend QE to March 2017.
Japan's unemployment rate edged back up to 2.5% in February after the drop in January to 2.4%.
The economic data in the Eurozone were mixed while we were away.
China is set to ease reserve requirements for banks lending to small businesses. In a statement after the State Council meeting yesterday, Premier Li Keqiang said that commercial banks would receive a cut in their RRR , from 17% currently, based on how much they lend to businesses run by individuals.
Friday's consumer sentiment data in the two main Eurozone economies were mixed.
Monetary policy usually is the first line of defence whenever a recession hits.
The newly-revised data on capital goods orders, released on Friday, support our view that sustained strength in business capex remains a good bet for this year.
Today's payroll number is completely irrelevant, because 97% of the 10.2M increase--so far--in initial jobless claims from their pre-coronavirus level came after the employment survey was conducted, between Sunday March 8 and Saturday March 14.
We'd be very surprised to see a material weakening in today's March ISM manufacturing survey. The regional reports released in recent weeks point to another reading in the high 50s, with a further advance from February's 57.7 a real possibility.
China's economic targets are AWOL this year, thanks to Covid-19 disruptions to the legislative calendar... and because policymakers seem unsure of what targets to set in such uncertain times.
We aren't convinced by the idea that consumers' confidence will be depressed as a direct result of the rollover in most of the regular surveys of business sentiment and activity.
If we're right with our forecast that real consumers' spending rose by just 0.1% month-to-month in February -- enough only to reverse January's decline -- then it would be reasonable to expect consumption across the first quarter as a whole to climb at a mere 1.2% annualized rate.
The Prime Minister's resignation and the stillborn launch of the Withdrawal Agreement Bill last week has forced us to revise our Brexit base case, from a soft E.U. departure on October 31 to continued paralysis.
Gilt yields have tumbled, with the 10-year sliding to just 1.0%, from 1.2% a week ago.
Data to be released this Friday should show that Japan's labour market remains tight, though the unemployment rate likely ticked back up in February, to 2.6%, after the erratic drop to 2.4% in January.
Momentum in the euro area's money supply slowed last month. M3 growth dipped to 4.7% year-over-year in February, from a downwardly-revised 4.8% in January. The headline was mainly constrained by the broad money components. The stock of repurchase agreements slumped 24.3% year-over-year and growth in money market fund shares also slowed sharply.
We covered the detailed German Q1 GDP report in Friday's Monitor--see here--but the investment data could do with closer inspection. The headline numbers looked great.
China's abysmal industrial profits data for October underscore why the chances of less- timid monetary easing are rising rapidly.
China's official real GDP growth slowed to 6.0% year-over-year in Q3, from 6.2% in Q2 and 6.4% in Q1. Consecutive 0.2 percentage points declines are significant in China.
The latest profits data out of China were grim, as we had expected.
French consumers remained in great spirits midway through the fourth quarter. The headline INSEE consumer confidence index jumped to a 28-month high in November, from 104 in October, extending its v-shaped recovery from last year's plunge on the back of the yellow vest protests.
The MPC will be looking for the Q1 national accounts and April's index of services data, both released on Friday, to support its view that the economy hasn't lost momentum this year.
Industrial profits growth is closely watched by the Chinese authorities, even more so now that deleveraging is a prime policy aim.
As the situation with the coronavirus develops, and we gain more information on the authorities' response, it's becoming clear that the damage to Q1 GDP is going to be nasty.
Housebuilders were one of the biggest winners from the post-election relief rally in U.K. equity prices.
We have no choice but to revise down our forecast for GDP growth in Q2, now that the threat of a no-deal Brexit likely will hang over the economy beyond March, probably for three more months.
Core durable goods orders in recent months have been much less terrible than implied by both the ISM and Markit manufacturing surveys.
We expect today's preliminary estimate of Q4 GDP growth to surprise the consensus to the downside, underscoring our view that the economic recovery has shifted down to a much slower gear.
Taken at face value, the preliminary estimate of Q2 GDP suggests that the economic recovery weathered Brexit risk well. But growth received support from some unsustainable sources, and also probably was boosted by a calendar quirk. Meanwhile, with few firms or consumers expecting a vote for Brexit prior to the referendum, Q2's brisk growth tells us little about how well the economy will cope in the current climate of heightened uncertainty.
This is the final report before your scribe disappears into the Scottish Highlands for a few weeks, and we are leaving you with a Eurozone economy in fine form. The calendar will be relatively light in our absence and will tell us what we already know; namely that the euro area economy maintained its strong momentum in Q2.
Judging by the survey data, German business sentiment remained depressed at the start of the year.
Survey data in Germany showed few signs of picking up from their depressed level at the start of Q4.
Recent export performance has been poor, but the export orders index in the ISM manufacturing survey-- the most reliable short-term leading indicator--strongly suggests that it will be terrible in the fourth quarter.
The MPC won't seek to make waves on Thursday.
In the last few weeks markets have been treated to the news that euro area industrial production crashed towards the end of Q4, warning that GDP growth failed to rebound at the end of 2018 from an already weak Q3.
German data yesterday indicate that inflation pressures have, so far, been resilient in the face of the recent collapse in oil prices. Inflation rose to 0.5% year-over-year in January from 0.3% in December, partly due to base effects pushing up the year-over-year rate in energy prices, but core inflation rose too. The detailed state data indicate that almost all key components of the core index contributed positively, lead by leisure and recreation and healthcare.
The extent of shut downs within China is now reaching extreme levels, going far beyond services and threatening demand for commodities, as well as posing a severe risk to the nascent upturn in the tech cycle.
Our base-case forecast for the May core PCE deflator, due today, is a 0.17% increase, lifting the year-over-year rate by a tenth to 1.9%.
The agreement between Presidents Trump and Xi at the G20 is a deferment of disaster rather than a fundamental rebuilding of the trading relationship between the U.S. and China.
The Prime Minister appears set to have one more go at getting the House of Commons to ratify the Withdrawal Agreement today.
Data yesterday revealed that headline inflation in Germany was unchanged in March at 1.5%, thanks mainly to higher energy inflation, which offset a dip in food inflation.
Our base case forecast has core PCE inflation at 1.9% from November 2018 through July this year.
When we argue that the Fed will have to respond to accelerating wages and core prices by raising rates faster than markets expect, a frequent retort is that the Fed has signalled a greater tolerance than in the past for inflation overshoots.
Net foreign trade was a drag on GDP growth in the second quarter, subtracting 0.7 percentage points from the headline number.
Japan's unemployment rate merely edged up to 2.5% in March, from February's 2.4% rate. It probably will end the year around one percentage point higher, though, with the pain extending through the second half.
It seems reasonable to think that manufacturing should be doing better in the U.S. than other major economies.
Mr. Draghi used his introductory statement at the ECON--EU Economic and Monetary Affairs Committee-- hearing last week to assure investors that the central bank is vigilant to downside risks. The president noted the governing council "would not hesitate to act" if it deems growth and inflation to be undershooting expectations. Market volatility has increased the ECB's worries, but economic data continue to tell a story of a firm business cycle upturn.
The astonishing 86% annualized plunge in capital spending in mining structures--mostly oil wells--alone subtracted 0.6 percentage points from headline GDP growth in the first quarter. The collapse was bigger than we expected, based on the falling rig count, but the key point is that it will not be repeated in the second quarter.
The BoJ until last week had been in wait-and-see mode over China's slowdown, but they finally folded with Thursday's decision.
Yesterday's money supply data in the Eurozone were solid across the board.
The EZ economic survey data for April were disappointing in our absence.
Inflation in Mexico remains relatively sticky, limiting Banxico's capacity to adopt a more dovish approach, despite the subpar economic recovery.
We have to hand it to Italy's politicians. In an economy with a current account surplus of 3% of GDP, a nearly balanced net foreign asset position and with the majority of government debt held by domestic investors, the leading parties have managed to prompt markets to flatten the yield curve via a jump in shortterm interest rates.
The Manufacturing Upswing Continues; no Sign of Weakening
The stage is set for the Fed to ease by 25bp today, but to signal that further reductions in the funds rate would require a meaningful deterioration in the outlook for growth or unexpected downward pressure on inflation.
Most of the time, markets view auto sales as a bellwether indicator of the state of the consumer. Vehicles are the biggest-ticket item for most households, after housing, and most people buy cars and trucks with credit. Auto purchase decisions, therefore, tend not to be taken lightly, and so are a good guide to peoples' underlying confidence and cashflow. We appreciate that things were different at the peak of the boom, when anyone could get a loan and homeowners could tap the rising values of their properties, but that's not the situation today.
The sharp and unexpected improvement in the Markit/CIPS manufacturing survey in October released on Monday raised hopes that the recession in the industrial sector might be over. A cool look at the evidence, however, suggests that this probably is just wishful thinking.
Producer price inflation in the euro area almost surely peaked over the summer.
Britain looks set for a general election during the week commencing December 9, now that all main parties are pushing for a pre-Christmas poll.
The Fed's statement yesterday was unsurprising, acknowledging a "sharp" decline in economic activity and a significant tightening of financial conditions, which has "impaired the flow of credit to U.S. households and businesses."
Brazil's industrial production surprised to the downside in August, suggesting that manufacturing is struggling to gather momentum over the second half of the year.
Last week's advance EZ GDP data for the first quarter suggest the economy shrugged off the volatility in financial markets. Eurostat's first estimate indicates that real GDP in the euro area rose 0.6% quarter-on-quarter in Q1, up from 0.3% in Q4, and above the consensus, 0.4%.
The MPC restated its commitment to an "ongoing tightening of monetary policy" yesterday, but provided no new guidance to suggest that the next hike is imminent.
Yesterday's advance CPI data in Germany suggest that inflation fell slightly in August.
FOMC members in fleeces took to the airwaves en masse on Friday morning from Jackson Hole, but most said pretty much what you'd expect them to say. Arch-hawks Loretta Mester and no-quite-so-hawkish Jim Bullard strongly suggested that they think the time to raise rates is very near, while super-dove Naryana Kocherlakota said he doesn't regard a near-term hike as "appropriate". No surprises there.
Survey data point to a very strong headline, 0.6%-to-0.7% quarter-on-quarter, in today's Q1 advance Eurozone GDP report. But the hard data have been less ebullient than the surveys. A GDP regression using retail sales, industrial production and construction points to a more modest 0.4% increase, implying a slowdown from the upwardly-revised 0.5% gain in Q4.
Today's wave of economic reports are all likely to be strong. The most important single number is the increase in real consumers' spending in July, the first month of the third quarter.
We have no way of knowing what will be the final outcome of the impeachment inquiry now underway in the House of Representatives, but we are pretty sure that the first key stage will end with a vote to send the President for trial in the Senate.
French consumer confidence and consumption have been among the main bright spots in the euro area economy so far this year.
Yesterday's advance Q1 GDP data in the EZ confirmed that growth slowed at the start of the year.
The FOMC delivered no big surprises yesterday, but seemed keen to make it clear that policymakers are sticking to their core views, despite the slowdown in growth in the first quarter. Unlike the March statement, yesterday's note pointed out that the slowdown came in the winter months, though it did not directly blame the weather for the sluggishness in growth.
We already have a pretty good idea of what happened to consumers' spending in March, following Friday's GDP release, so the single most important number in today's monthly personal income and spending report, in our view, is the hospital services component of the deflator.
Yesterday's economic reports in the euro area were mixed.
Reporting on the German labour market has been like watching paint dry in this expansion, but yesterday's data were a stark exception to this rule.
Japanese retail sales were unchanged in October month-on-month, after a 0.8% rise in September.
Yesterday's FOMC , announcing a unanimous vote for no change in the funds rate, is almost identical to December's.
Chancellor Javid told the Financial Times earlier this month that he wants to lift the rate of GDP growth to between 2.7% and 2.8%, the average rate in the 50 years following the Second World War.
We have argued recently that the year-over-year rates of core CPI and core PCE inflation could cross over the next year, with core PCE rising more quickly for the first time since 2010.
Today's barrage of data kicks off a couple of busy days in the Eurozone economic calendar.
Neither the strength in October consumption nor the softness of core PCE inflation, reported yesterday, are sustainable.
Japan is one of the countries most exposed to economic damage from the coronavirus.
Markets remain convinced that the U.S. faces no meaningful inflation risk for the foreseeable future.
It's pretty easy to spin a story that the recent core PCE numbers represent a sharp and alarming turn south.
Yesterday's economic numbers in the Eurozone were mixed, but we are inclined to see them through rose-tinted glasses.
Markets see a strong possibility, though not a probability, that the BoJ will cut rates on Thursday.
Political volatility is a recurrent theme in Brazil. Six members of President Michel Temer's cabinet resigned last Friday due to allegations of conflict of interest on a construction deal. Rumours that President Temer was involved in the affair stirred up market volatility and revived political risk concerns
The recent spate of manufacturing business survey indices from Korea show that sentiment is deteriorating in the wake of its trade spat with Japan and the re-intensification of U.S.-China tensions.
Yesterday's economic news in the French economy was solid.
We are expecting a hefty increase in the August ADP employment number today--our forecast is 225K, above the 175K consensus --but we do not anticipate a similar official payroll number on Friday. Remember, the ADP number is based on a model which incorporates lagged official employment data, the Philly Fed's ADS Business Conditions Index, and data from firms which use ADP for payroll processing.
Data yesterday showed that German inflation roared higher at the start of the year, but the devil is in the detail.
Yesterday's sole economic report in the Eurozone confirmed that the economy slowed further at the end of 2018.
Japan's domestic demand has underperformed in the last three quarters, while exports were strong last year but weakened--due to temporary factors--in Q1.
A bullish EZ money supply report was the key highlight while we were away over the holidays. M3 growth in the euro area accelerated to 4.8% year-over-year in November from 4.4% in October.
We expect China's quarterly real GDP growth in the second quarter to edge down from Q1, but only because Q1 growth was unsustainable. The official data shows real GDP growth at 1.3% quarter-onquarter in Q1.
Last week's EU summit was an exercise in political pragmatism rather than the bold step forward on reforms that investors had been hoping for.
Japan's Q2 Tankan survey wasn't all bad news, but the positives won't last long. The large manufacturers index dropped to 7 in Q2, after the decline to 12 in Q1.
Japan's June retail sales data add to the run of numbers suggesting a strong rebound in real GDP growth in Q2, after the 0.2% contraction in activity in Q1.
The first economic report of 2020 confirmed the main story in the euro area last year; namely a recession in manufacturing.
The substantial gap between the key manufacturing surveys for the U.S. and China, relative to their long-term relationship, likely narrowed a bit in December.
Friday's advance Q4 growth numbers in the EZ were a bit of a dumpster fire.
The number of coronavirus cases continues to increase, but we're expecting to see signs that the number of new cases is peaking within the next two to three weeks.
December's money and credit data support the MPC's decision last week to hold back from providing the economy with more stimulus.
We are not bothered by either the drop in real December consumption, all of which was due to a weather-induced plunge in utility spending, or the drop in the ISM manufacturing index, which is mostly a story about hopeless seasonal adjustments.
CPI inflation looks set to remain below the 2% target this year, driven by sterling's recent appreciation and lower energy prices.
The data in LatAm were all over the map while we were out.
Korean trade ended the year strongly, salvaging what was shaping up as a dull fourth quarter for the economy.
German retail sales always have to be taken with a pinch of salt, given their monthly volatility and often substantial revisions, but the preliminary Q2 data don't look pretty.
Don't write off the outlook for the construction sector purely on the basis of June's grim Markit/CIPS survey.
Yesterday's advance Eurozone Q4 GDP report conformed to expectations. Headline GDP increased 0.6% quarter-on-quarter, slowing trivially from an upwardly-revised 0.7% rise in Q3, and nudging the year-over-year rate down marginally to 2.7%.
Chair Yellen's final FOMC meeting today will be something of a non-event in economic terms.
Japan's headline jobless rate edged up to 2.8% in December, from 2.7% in November, but the increase was negligible, with the rate moving to 2.76% from 2.74%.
The headline employment cost index has been remarkably dull recently, with three straight 0.6% quarterly increases. The consensus forecast for today's report, for the three months to December, is for the same again.
It's a myth that the 10-ye ar decline in the unemployment rate has not driven up the pace of wage growth.
The Bank of Korea's two main monthly economic surveys were very perky in January.
Colombia's sluggish growth and near-term economic outlook resembles that of most other LatAm economies. Domestic demand is weak, credit conditions are tight, and confidence is depressed. The medium term outlook, however, is perking up, slowly.
We expect to learn today that the economy expanded at a 2.1% annualized rate in the fourth quarter, slowing from 3.4% in the third.
The CPIH--the controversial, modified version of the existing CPI that includes a measure of owner occupied housing, or OOH, costs--will become the headline measure of consumer price inflation when February's data are published on March 21.
It has been a nasty start to the year for LatAm as markets have been hit by renewed volatility in China, triggered by the coronavirus.
Gilts continued to rally last week, with 10-year yields dropping to their lowest since October 2016, and the gap between two-year and 10-year yields narrowing to the smallest margin since September 2008.
The FOMC has gone all-in, more or less, on the idea that the headwinds facing the economy mean that the hiking cycle is over.
The value of Japanese retail sales bounced back strongly in December, rising 0.9% month-on-month, after a 1.1% drop in November.
Banxico's Quarterly Inflation Report--QIR--for Q4 2016, published this week, confirmed that the monetary authority is concerned about the slowing pace of economic activity and rising inflation pressures. Banxico noted that signs of a recovery have emerged in external demand, but it also pointed out that the Trump administration might impose policies which would hit FDI flows into Mexico.
The Bank of England issued a statement yesterday that it is "working closely with HM Treasury and the FCA--as well as our international partners--to ensure all necessary steps are taken to protect financial and monetary stability".
The Bank of Korea finally pulled the trigger, raising its base rate to 1.75% at its meeting on Friday. After a year of will-they-or-won't-they, five of the Monetary Policy Board's seven members voted to add another 25 basis points to their previous hike twelve months ago.
Yesterday's IFO survey confirmed that the private business sector in Germany was off to a flying start in Q4. The headline business climate index rose to 110.5 in October, from 109.5 in September, lifted mainly by a rise in the expectations index to a 30-month high of 106.5.
Yesterday's detailed GDP report in Germany showed net exports propelled GDP growth to a cyclical high last quarter.
Today's ECB meeting will mainly be a victory lap for Mr. Draghi--it is the president's last meeting before Ms. Lagarde takes over--rather than the scene of any major new policy decisions.
Core durable goods orders have not weakened as much as implied by the ISM manufacturing survey, as our first chart shows, but it is risky to assume this situation persists.
A grim-looking headline durable goods orders number for April seems inevitable today, given the troubles at Boeing.
Last week's data added yet more weight to our view that manufacturing is in deep trouble, and that the bottom has not yet been reached.
Japanese policymakers will have been scouring yesterday's data for signs that the trade situation is improving.
All the evidence indicates that growth in Eurozone consumers' spending is slowing. We think data today will show that the advance GfK consumer sentiment index in Germany was unchanged at 9.5 in April, but the headline index does not correlate well with spending. The "business expectations" index is better, and while it likely will increase slightly, our first chart shows that it continues to signal a slowdown in consumers' spending growth.
Eurozone consumers' spending jumped in Q2, but we are pretty certain that a slowdown in retail sales constrained growth in Q3.
Today's EZ calendar is a busy one.
Yesterday was a watershed moment for investors.
Brazil's inflation rate remained well under control over the first half of February.
The Eurozone economy is becoming increasingly service-oriented. The private services sector has contributed just over 50% of gross value added-- GVA -- in the past three years, up from 44% in the seven years before the crash of 2008.
Yesterday's barrage of economic data in the Eurozone added to the evidence that economic momentum is slowing.
The Monetary Policy Board of the Bank of Korea is likely to keep its benchmark base rate unchanged, at 1.25%, at its meeting this week.
The rational thing to do when the price of a consumer good you are considering buying is thought likely to rise sharply in the near future is to buy it now, provided that the opportunity cost of the purchase--the interest income foregone on the cash, or the interest charged if you finance the purchase with credit--is less than the expected increase in the price.
EU negotiations tend to go down to the wire; and last week's summit in Salzburg, and Theresa May's statement on Friday, suggest that the Brexit negotiations will do just that.
Margins for German manufacturing firms remained depressed at the start of the second quarter. The headline PPI rose 0.1% month-to-month in April, pushing the year-over-year rate down marginally to -3.1% from a revised -3.0% in March. Falling energy prices are the key driver of the overall decline in the PPI.
The prospect of fiscal stimulus in the euro area-- ostensibly to "help" the ECB reach its inflation target-- remains a hot topic for investors and economists.
While we were out last week, market nervousness over the Covid-19 outbreak intensified, though most key indicators of the spread of the infection continued to improve.
The public finances are in better health than appeared to be the case a few months ago.
We expect today's second estimate of Q2 GDP to confirm that the U.K. has been the slowest growing G7 economy this year.
We can't yet know how bad the spread of the coronavirus from the Chinese city of Wuhan will be.
The Bank of Japan's biannual Financial System Report was published earlier this week.
Yesterday's business confidence data in the EZ core were mixed.
The ECB will not make any major changes to policy today.
The ECB conformed to expectations today, at least on a headline level.
On the face of it, the trend in public borrowing deteriorated sharply late last year. In the three months to December, borrowing on the main "PSNB ex ." measure, which excludes banks owned by the public sector, was a trivial £0.3B, or 1.6%, lower than in the same months of 2017.
The initial "official estimate" of the French presidential election--released 20.00 CET--suggest that the runoff will be between the centre-right Emmanuel Macron and Front National's Marine Le Pen. This is consistent with opinion polls. The average of five early estimates also suggests that Mr. Macron won the vote with 23.1% of the vote against Mrs. Le Pen's 22.5%.
The apparent softness of business capex is worrying the Fed.
Over the past few days we have written about the difference between the Fed's tactics--signalling rate hikes and then choosing not to act in the face of weaker data--and its strategy, which is to normalize rates in the expectation that inflation will head to 2% in the medium-term.
One way or another, the preliminary estimate of Q1 GDP--due Friday--will have a big market impact, following Mark Carney's warning last week that a May rate hike is not a done deal.
Eurozone investors are fixed on Mr. Draghi's speaking schedule this week, looking for hints of the ECB's future policy path.
Friday's economic data in Germany left markets with a confused picture of the Eurozone's largest economy.
Our base case remains that the slowdown in quarter-on-quarter GDP growth to about zero in Q2 is just a blip, and that the economy will regain momentum in Q3 and sustain it well into 2020.
Economists' forecasts are changing almost as quickly as market prices these days, and not for the better.
The Conference Board's index of leading economic indicators appears to signal that the U.S. economy is plunging headlong into recession.
The weaker is the economy over the next few months, the more likely it is that Mr. Trump blinks and removes some--perhaps even all--the tariffs on Chinese imports.
Detailed GDP data yesterday showed that the domestic German economy fired on all cylinders in the first quarter. Real GDP rose 0.7% quarter-on-quarter in Q1, up from 0.3% in Q4, lifted by strong investment and spending. Domestic demand rose 0.8%, only slightly slower than the 0.9% ris e in the fourth quarter. Net exports fell 0.3%, a bit better than in Q4, when gross exports fell outright.
The commentariat was very excited Friday by the inversion of the curve, with three-year yields dipping to 2.24% while three-month bills yield 2.45%.
Japan's CPI inflation was stable at 0.2% in October, despite the sales tax hike, thanks to a combination of offsetting measures from the government and a deepening of energy deflation.
Yesterday's economic data in Germany confirmed that the economy slowed in Q3, but also added to the evidence that growth will rebound in Q4. The second estimate for Q3 showed that real GDP rose 0.2% quarter-on-quarter, slowing from a 0.4% gain in Q2.
The ECB sent a strong signal yesterday that it is ready to fight deflation with a full range of unconventional monetary policy tools. Asset purchases, including sovereigns, to the tune of €60B per month will begin in March, and will run until end-September 2016, but Mr. Draghi noted that purchases could continue if the ECB is not satisfied with the trajectory of inflation.
Barring a meteor strike, the ECB will leave its main refinancing and deposit rates unchanged today, at 0.00% and -0.5% respectively.
The IFO continues to tell a story of a German economy on the ropes.
We are fundamentally quite bullish on the housing market, given the 100bp drop in mortgage rates over the past six months and the continued strength of the labor market, but today's May new home sales report likely will be unexciting.
The further depreciation of sterling yesterday, to its lowest level against the dollar and euro since March 2017 and September 2017, respectively, signified deepening pessimism among investors about the chances of a no-deal Brexit.
Broadly speaking, yesterday's headline EZ survey data recounted the same story they've told all year; namely that manufacturing is suffering amid resilience in services.
After strong real GDP growth in Q1, China commentators called the peak, claiming that growth would slow for the rest of 2017.
The June durable goods, trade and inventory reports today, could make a material difference to forecasts for the first estimate of second quarter GDP growth, due tomorrow.
Japan's headline inflation will be volatile for the rest of the year, thanks to movements in the noncore elements.
Last week's debt-relief agreement between Greece and its European creditors goes somewhat further than previous instances when the EU has kicked the can down the road.
The latest data from container ports around the country are consistent with our view that imports are still correcting after the surge late last year, triggered by the hurricanes.
The ECB made no changes to policy yesterday, leaving its key refinancing and deposit rates unchanged, at 0.00% and -0.5%, and confirmed that it will restart QE in November at €20B per month.
Korean 20-day exports are volatile and often miss the mark with respect to the full-month print. But these data offer the month's first look at Asian trade, and we often find value in these early signs.
We find it remarkable, after the market volatility induced by the two Brexit deadlines in 2019, that investors do not foresee another bump in the road at the end of this ye ar, when the Brexit transition period is due to end.
The end of China's Party Congress can feel like an endless exercise in reading the tea leaves.
Yesterday's stock market bloodbath stands in contrast to the U.S. economic data, most of which so far show no impact from the Covid-19 outbreak.
The Monetary Policy Board of the Bank of Korea yesterday left its benchmark base rate unchanged, at 1.75%, at its first meeting of the year.
With most poll-of-poll measures showing a very narrow margin in the U.K. Brexit referendum, while betting markets show a huge majority for "Remain", today brings a live experiment in the idea that the wisdom of crowds is a better guide to elections than peoples' preferences.
The rate of growth of new coronavirus infections across Europe slowed yesterday, in some cases quite markedly. We can quibble about the reliability of the data in individual countries, given variations in testing regimes, but the picture is strikingly uniform.
MPs look set to take a decisive step next Tuesday towards removing the risk of a calamitous no-deal Brexit at the end of March.
The spectre of a general election relentlessly will haunt the new Prime Minister--due to be announced as Tory party leader today before moving into Downing Street tomorrow--but our base case remains that a poll won't happen this year.
High inflation and interest rates, coupled with increasing uncertainty, both economic and political, put Mexican consumption under strain last year.
Today's headline durable goods orders number for January is likely to blast through the consensus forecast, +2.7%. We expect a 6.5% jump, comfortably reversing December's 5.0% drop.
The gaps in the third quarter GDP data are still quite large, with no numbers yet for September international trade or the public sector, but we're now thinking that growth likely was less than 11⁄2%.
The mortgage market is continuing to hold up surprisingly well, given the calamitous political backdrop.
We see considerable downside risk to the consensus forecast that GDP increased by 0.4% quarter-on-quarter in Q4, the same as in Q3.
The ECB made no major policy changes yesterday.
Today's preliminary estimate of Q3 GDP is the last major economic report to be released before the MPC's meeting on November 2.
Fed Chair Yellen set out a robust and detailed defense of the orthodox approach to monetary policy in her speech in Amherst, MA, yesterday afternoon. Her core argument could have come straight from the textbook: As the labor market tightens, cost pressures will build. Monetary policy operates with a "substantial" lag, so waiting too long is dangerous; the "...prudent strategy is to begin tightening in a timely fashion and at a gradual pace".
The IFO survey signals that markets shouldn't be too downbeat on the German economy, even as it faces uncertainty from global trade tensions.
The coronavirus pandemic looks set to spread rapidly throughout LatAm.
India's government imposed a three-week nationwide lockdown on March 25 to combat the increasingly rapid spread of Covid-19.
Yesterday's consumer sentiment data provided further evidence of a strengthening French economy, amid signs of cracks in the otherwise solid German economy.
It has been difficult to be an optimist about U.S. international trade performance in recent years. The year-over-year growth rate of real exports of goods and services hasn't breached 2% in a single quarter for two years.
German retail and consumer sentiment data for March have been mixed this week, but broadly support our call that growth in consumption should pick up soon.
Japan's retail sales data--due out on Thursday-- have been badly affected by the October tax hike.
Political uncertainty is starting to dampen housing market activity again.
The uncertainty over the new U.S. administration's economic policies new is clouding the outlook for the Eurozone economy. The combination of loose fiscal policy and tight monetary policy in the U.S. should be positive for the euro area economy, in theory. It points to accelerating U.S. growth--at least in the near term--wider interest rate differentials and a stronger dollar. In a " traditional" global macroeconomic model, this policy mix would lead to a wider U.S. trade deficit, boosting Eurozone exports.
The landslide victory by anti-austerity party Syriza in Greece this weekend will increase uncertainty in coming months. The coalition between Syriza and the Independent Greeks will prove a tough negotiating partner for the EU as both parties are strongly in favor of pushing the Troika to significant concessions on any future bailout terms this year.
Yesterday's consumer sentiment data in the two major euro area economies were mixed, but they still support our view that a rebound in EZ consumption growth is underway.
The Chinese Communist Party looks set to repeal Presidential term limits, meaning that Xi Jinping likely intends to stay on beyond 2023.
Orders for non-defense capital goods, excluding aircraft, have risen in six of the past seven months. In the fourth quarter, orders rose at a 4.7% annualized rate, in contrast to the 5.3% year-over-year plunge in the first half of the year.
Sterling has appreciated sharply over the last two weeks and yesterday briefly touched its highest level against the euro since May 2017.
Forecasting the health insurance component of the CPI is a mug's game, so you'll look in vain for hard projections in this note.
On Friday last week, the Chinese authorities suspended sales of domestic and international tours, in an effort to contain the spread of the coronavirus, which started in Wuhan.
The dovish members of Banxico's board garnered further support on Friday for prolonging the current easing monetary cycle over coming meetings.
Yesterday's sole economic report in the EZ showed that consumer sentiment in Germany improved mid-way through the fourth quarter.
Today's wave of data will bring new information on the industrial sector, consumers, the labor market, and housing, as well as revisions to the third quarter GDP numbers.
We were happy to see upside surprises from both sides of the domestic economy yesterday, but we doubt that the August readings from both the Conference Board's consumer confidence survey and the Richmond Fed business survey can hold.
The preliminary estimate of Q1 GDP looks set to show that the economy started 2017 on a weak footing. We share the consensus view that quarter-on-quarter GDP growth slowed to 0.4%, from 0.7% in Q4.
The slowdown in GDP growth in Q1 reflects more than just Brexit risk. The intensifying fiscal squeeze, the uncompetitiveness of U.K. exports, and the lack of spare labour suggest that the U.K.'s recovery now is stuck in a lower gear.
Headline M3 money supply growth in the Eurozone was steady as a rock at around 5% year-over-year between 2014 and the end of 2017.
The BoK surprised markets and commentators by keeping rates unchanged at 1.25% yesterday, rather than cutting to 1.0%.
It seems pretty clear from press reports that the White House budget, which reportedly will be released March 14, will propose substantial increases in defense spending, deep cuts to discretionary non- defense spending, and no substantive changes to entitlement programs. None of this will come as a surprise.
The Fed will soon have to step in to try to put a firebreak in the stock market.
Yesterday's IFO survey in Germany was a big relief for markets, in light of recent soft data. The main business climate index jumped to 109.5 in September, from 106.3 in August, the biggest month-to-month increase since 2010.
We're revising down our forecast for quarteron-quarter GDP growth in Q3 to 0.3%, from 0.4%, in response to signs that the rebound in industrial production is shaping up to b e smaller than we had anticipated.
The last time oil prices fell sharply, from mid-2014, when WTI peaked at $107, through early 2016, when the price reached just $26, the U.S. economy slowed dramatically.
Since the Party Congress last month, China has made a number of bold moves in multiple policy fields, with a regularity that almost implies the authorities are working through a list.
Yesterday's consumer confidence report in Germany was soft, in contrast to surging business sentiment data earlier in the week.
Money supply data are sending an increasingly contrarian, and bullish, signal for the euro area economy.
All eyes today will be on the core PCE deflator for August, which we think probably rose by a solid 0.2%.
Banxico cut its policy rate by 25bp to 7.75% yesterday, as was widely expected, following August's 25bp easing.
Yesterday's State Council meeting significantly expanded support to the economy, through a number of channels.
The stagnation in business investment since 2016 has been key to the slowdown in the overall economy since the E.U. referendum.
need to add docMea culpa: We failed to spot the press release from the Commerce Department announcing the delay of the release of the advance December trade and inventory data, due to the government shutdown.
The first exit poll published at 18.00 CET on Sunday evening points to a landslide victory for Syriza, and the real possibility that the party could form a majority government. Counter-intuitively, the prospects for Syriza here depend upon how the smaller parties do.
The Prime Minister's announcement on Sunday that the meaningful vote in parliament on her Brexit deal will be delayed from this week, until March 12, came as no surprise after a series of prior postponements.
Today's preliminary estimate of GDP likely will show that the economy continued to struggle in response to high inflation, further fiscal austerity and Brexit uncertainty.
The German statistical office will supply a confidential estimate to Eurostat for this week's advance euro area Q2 GDP data. Our analysis suggests this number will be grim, and weigh on the aggregate EZ estimate. Our GDP model, which includes data for retail sales, industrial production and net exports, forecasts that real GDP in Germany contracted 0.1% quarter-on-quarter in the second quarter, after a 0.7% jump in Q1.
I need to ask your indulgence today, because the release of the durable goods and advance international trade reports coincides with my elder daughter's college graduation ceremony.
Data released last week confirm that the Argentinian economy was resilient at the start of the year, but downside risks to growth have increased.
Nothing is done until it's done, and, in the case of Sino-U.S. trade talks, even if a deal is reached, the new normal is that tensions will be bubbling in the background.
In our Webinar--see here--we laid out scenarios for Chinese GDP in Q1 and for this year.
Today's second estimate of Q2 GDP likely will restate the preliminary estimate that quarter-onquarter growth picked up to 0.6%, from 0.4% in Q1. Over the last two decades, the second estimate of GDP has differed from the preliminary estimate just 38% of the time.
French manufacturing confidence soared at the start of Q2. The headline INSEE index jumped to a six-year high of 108 in April, from an upwardly revised 105 in March. The headline was flattered by a big increase in the "past activity" index, but the survey's leading indicators also improved.French manufacturing confidence soared at the start of Q2. The headline INSEE index jumped to a six-year high of 108 in April, from an upwardly revised 105 in March. The headline was flattered by a big increase in the "past activity" index, but the survey's leading indicators also improved.
Amid all the trade tensions, it's easy to lose sight of the big picture for China.
Yesterday's IFO survey in Germany was a nasty downside surprise for markets. The business climate index slipped to 106.2 in August, from 108.3 in July, well below the consensus forecast for a modest rise. In addition, the expectations index slid ominously to 100.1, from a revised 102.1 in July.
News that the Covid-19 virus has spread to more countries frayed investors' nerves further yesterday, with the FTSE 100 eventually residing 5.3% below its Friday close.
The spread of the Covid-19 virus remains the key issue for markets, which were deeply unhappy yesterday at reports of new cases in Austria, Spain and Switzerland, all of which appear to be connected to the cluster in northern Italy.
The German economy finished last year on the back foot.
The INSEE's manufacturing sentiment data in France are slightly confusing at the moment.
Analysing the EZ sentiment data at the moment is a bit like a surveyor being called out to assess the damage on a property after a flood.
Yesterday's barrage of French business sentiment data was mixed.
Economic news in the Eurozone, and virtually everywhere else, has been mostly downbeat in the past few months, but French consumers are doing great.
Korea's GDP growth in Q3 was a miss. Quarter- on-quarter growth was unchanged at 0.6%, below the consensus for a 0.8% rise.
Economic and financial conditions have worsened substantially in Brazil in recent weeks, due mainly to Covid-19 and the sharp deterioration of the global economy.
It's pretty clear now that the President is not a reliable guide to what's actually happening in the China trade war, or what will happen in the future.
The Covid-19 scare can be split into two stages, the initial outbreak in China, concentrated in Wuhan, and the now-worrying signs that clusters are forming in other parts of the world, primarily in South Korea, the Middle East and Italy.
The rate of growth of Covid-19 cases outside China appears to have peaked, for now, but we can't yet have any confidence that this represents a definitive shift in the progress of the epidemic.
The ECB kept its cool yesterday, at the headline level, amid crashing stock markets, volatile BTPs and souring economic data.
It is becomingly increasingly clear that the trade war with China is hurting manufacturers in both countries.
Yesterday's IFO offered a rare upside surprise in the German survey data.
The IFO survey released yesterday provides further evidence that the cyclical recovery in Germany's economy continued in the current quarter. The headline business climate index rose to 107.9 in March from 106.8 in February, lifted by increases in both the current assessments and expectations index.
Hong Kong delivered a resounding landslide victory to pro-Democracy parties in district council elections over the weekend.
We were terrified by the plunge in the ISM manufacturing export orders index in August and September, which appeared to point to a 2008-style meltdown in trade flows.
The Bank of England will be dragged into the political arena on Thursday, when it sends the Treasury Committee its analysis of the economic impact of the Withdrawal Agreement and the Political Declaration, as well as a no-deal, no- transition outcome.
The November IFO report suggests that the headline indices are on track for a tepid recovery in Q4 as a whole, but the central message is still one of downside risks to growth
Fed Chair Powell sounded a lot like Janet Yellen yesterday, at least in terms of substance.
The third estimate of euro area growth in the first quarter provides clear evidence that measuring GDP is not an exact science. Real GDP rose 0.6% quarter-on-quarter in Q1, accelerating from 0.4% in Q4. This latest estimate is higher than the previous estimate, 0.5%, but in line with the first calculation. Eurostat and all the large Eurozone economies now provide early estimates of GDP, before data for the full quarter is available.
Hard data in the Eurozone continue to tell a story of a relatively bright pre-Covid-19 world.
February's GDP report, released on Thursday, likely will show that the economy continued to struggle for momentum, despite the fillip to sentiment stemming from the general election.
If you had asked us in the spring where the action would be in capital spending over the summer, we would have said that the housing component was the best bet. Right now, though, the opposite seems more likely, with housing likely to be the weakest component of capex.
German factory orders probably bounced a modest 0.3% month-to-month in February, equivalent to a 0.5% decline year-over-year. We expect private investment growth to have picked up in the first quarter, but leading indicators for the industrial sector in Germany are sending conflicting signals.
Officially, Japanese wages have been falling year- over-year since January, marking a break from the gradual acceleration over the past 18 or so months.
The Mexican economy maintained its relatively strong momentum in Q2. The first estimate of Q2 GDP, released last week, confirmed that growth was resilient during the first half of this year, despite the confidence hit caused by domestic and external headwinds.
Friday's GDP report should show that the economy narrowly avoided contracting in Q2.
Yesterday's manufacturing data in German threw off a nasty surprise.
Japanese labour cash earnings data threw analysts another curveball in July, falling 0.3% year-over-year. At the same time, June earnings are now said to have risen by 0.4%, compared with a fall of 0.4% in the initial print.
Speculation that another general election is imminent is rarely out of the news. At present, betting markets see about a 35% chance of another election in 2019, broadly the same chance as one in 2022, when it is currently scheduled to be held.
Recently released data in Mexico are sending weak signals for the business outlook, and the Texcoco airport saga won't help.
The economic data calendar for next week is so congested that we need to preview early September's GDP report, released on Monday.
The Monetary Policy Committee of the Reserve Bank of India voted unanimously on Friday to cut interest rates at a fifth straight meeting, as expected.
Make no mistake, business investment has been depressed by Brexit uncertainty over the last year.
Growth momentum in Mexico has improved marginally over the last few months after the soft patch during the first quarter, with business and households gaining confidence in the economic recovery. But the upswing has been rather modest, due to the volatility in global financial markets and the challenging external environment. The outlook for the global economy has deteriorated over recent months due to China's problems, and commodity prices remain under pressure. All these factors are now weighing on investors' confidence and hurting EM across asset classes.
Data while we were away have intensified fears that the global, and by extension EZ, economy is slipping into recession.
We hadn't expected the scorching 3.6% year-over- year growth rate in Japan's June average wages
By any yardstick, U.K. productivity growth has been terrible in recent years. Output per hour exceeded its pre-recession peak only in the second quarter of 2015, and it has grown at an average annual rate of just 0.6% this decade. U.S. productivity growth has been equally dismal since 2010. But the U.K.'s performance is more worrying, because the productivity slump during the recession suggested scope for a period of catch-up. In the U.S., by contrast, productivity surged during the recession as firms cut headcount sharply.
New orders data increasingly suggest that German manufacturers all but shut their production lines at the start of the year.
Data released last week confirmed that Mexico's economy stumbled in the first half of the year, hurt by a temporary shocks in both the industrial and services sectors, and heightened political uncertainty, due to policy mistakes at the outset of AMLO's presidency.
The German manufacturing data remain terrible. Friday's factory orders report showed that new orders plunged 2.2% month-to-month in May, convincingly cancelling out the 1.1% cumulative increase in March and April.
New orders data indicate that German manufacturing enjoyed a strong start to the second quarter. Factory orders rose 1.4% month-to-month in April, equivalent to a modest 0.4% gain yearover- year, down from a revised 2.0% in March. The numbers put new orders on track for a solid 1.8% quarter-on-quarter gain in Q2--assuming no change in May and June--but these data are volatile, making this estimate highly uncertain.
GDP growth in Korea surprised to the upside in the fourth quarter, with the economy expanding by 1.2% quarter-on-quarter, three times as fast as in Q3, and the biggest increase in nine quarters.
LatAm assets have done well in recent weeks on the back of upbeat investor risk sentiment, low volatility in developed markets and a relatively benign USD. A less confrontational approach from the U.S. administration to trade policy has helped too.
A setback in German manufacturing orders was coming after the jump at the end of 2016, but yesterday's headline was worse than we expected. Factory orders crashed 7.4% month-to-month in January, more than reversing the 5.4% jump in December. The year-over-year rate fell to -0.8% from a revised +8.0%. The decline was the biggest since 2009, but the huge volatility in domestic capital goods orders means that the headline has to be taken with a large pinch of salt.
The German economy's engine room continues to stutter.
Survey data have been signalling a relatively resilient Brazilian economy in the last few months, despite intensified political risk, and hard data are beginning to confirm this story.
Markets expect the MPC to shelve November's guidance--that interest rates need to rise only twice in the next three years--at today's meeting.
Japanese firms hand out a significant portion of labour compensation through bonuses, with the largest lump awarded in December.
Industrial production in Germany stumbled at the end of Q4. Data yesterday showed that output fell 0.6 month-to-month in December, though this drop has to be seen in light of the downwardly-revised 3.1% jump in November.
The $10 increase in the price of Brent crude oil over the last three months to $68 is an unhelpful, but manageable, drag on the U.K. economy's growth prospects this year.
Colombia was the fastest growing LatAm economy in 2019, due mostly to strong domestic demand, offsetting a sharp fall in key exports.
The ink has hardly dried on economists' and the ECB's inflation projections for 2020, but we suspect that some forecasters are already considering ripping up the script.
The trade war with the U.S. has taken its toll on the RMB.
Yesterday's economic reports in the Eurozone were mostly positive.
Last week's heavy snowfall, which blighted the entire country, will depress GDP growth in Q1, making it harder for the MPC to read the economy.
According to Shadow Chancellor John McDonnell, it is "almost inevitable" that Labour will table a no-confidence motion in the government next month, shortly after MPs return from the summer recess on September 3.
Manufacturing orders in Germany recovered some ground in the middle of Q1, following the plunge at the beginning of the year. Factory orders rose 3.4% in February, pushing the year-over-year rate up to +4.6% from a revised 0.0% in January.
If the current rate of contraction continues, the U.S. onshore oil industry will cease to exist in the third week of January next year. Over the past six weeks, the number of operating rigs has dropped by an average of 8.5, and 362 rigs were running last week. At the peak, in early October 2014--just 18 months ago--the rig count reached 1,609.
Manufacturing activity in Germany rebounded at the start of the fourth quarter, following a miserable Q3. New orders jumped 1.8% month-to-month in October, lifted by increases in consumer and capital goods orders, both domestic and export. But the year-over-year rate fell to -1.4%, from a revised -0.7% in September, due to unfavorable base effects, and the three-month trend remained below zero. Our first chart shows that non-Eurozone export orders are the key drag, with export orders to other euro area economies doing significantly better.
Demand for German manufacturing goods remained firm at the start of Q4. Data yesterday showed that factory orders increased 0.5% month-to-month in October, helped by gains in both export and domestic activity.
October's GDP report, released on Monday, might just manage to break through the wall of noise coming from parliament ahead of the key Brexit vote on Tuesday.
The tepid recovery in German manufacturing continued in at the start of Q4. Factory orders edged higher by 0.3% month-to-month in October, boosted by a 2.9% month-to-month increase in export orders, primarily for capital and intermediate goods in other EZ economies.
Ms Keiko Fujimori, the candidate of Peru's conservative Fuerza Popular party, seems on course to win the first round of the presidential election this Sunday, April 10. According to the latest Ipsos poll, the daughter of former President Alberto Fujimori continues to lead the race, with the support or about 34% of voters.
Negotiations between Greece and its creditors will come to a head in the next few weeks as the country faces imminent risk of running out of money. Following a meeting with the head of the IMF, Christine Lagarde, on Sunday Greek finance minister Faroufakis assured investors that the country intends to make a scheduled €450M payment to the fund on Thursday.
Demand in German manufacturing slid at the start of Q3.
The MPC's penchant for providing interest rate guidance reached new heights last week.
Markets have interpreted the Monetary Policy Committee's "Super Thursday" releases as an endorsement of their view that interest rates will remain on hold for another year. We think the Committee's communications were more nuanced and believe the door is still open to an interest rate rise in the second quarter of next year.
EZ consumers' spending slowed at the start of Q3. Retail sales slipped 0.3% month-to-month in July, pushing the year-over-year rate down to 2.6% from an upwardly revised 3.3% in June.
Brazil's industrial sector came roaring back at the start of Q3, following a poor end to Q2. Industrial production jumped 0.8% month-to-month in July, driving the year-over-year rate higher to 2.5%, from 0.5% in June and just 0.1% on average in Q2.
A trio of data releases yesterday provided no relief from the run of abysmal economic news.
The EZ retail sector slowed at the start of Q3, though only slightly.
Yesterday's detailed EZ GDP report showed that real output rose 0.3% quarter-on-quarter in Q3, the same pace as in Q2. The year-over-over rate rose marginally to 1.7% from 1.6%, trivially higher than the first estimate, 1.6%. The details showed that consumers' spending and public consumption were the key drivers of growth in Q3, offsetting a slowdown in net trade.
The rally in U.K. equities immediately after the general election has done little to reverse the prolonged period of underperformance relative to overseas markets since the E.U. referendum in June 2016.
The hard numbers in Eurozone manufacturing continue to lag the sharp rise in the main surveys. Data yesterday showed that German factory orders rose 1.0% month-to-month in May, only partially rebounding from a downwardly revised 2.2% plunge in April.
Markets likely will be particularly sensitive to May's industrial production and construction output figures, released today, as they will provide a guide to the strength of the preliminary estimate of Q2 GDP, released shortly before the MPC's key meeting on August 3.
Inflation in the Eurozone fell significantly last month, and probably will ease further in Q1.
Japan's average year-over-year wage growth slowed sharply in May, but this mainly was a correction of the April spike.
April's GDP report, released on Monday, likely will add fuel to the fire of the re cent sharp decline in interest rate expectations.
Brazil's industrial sector was off to a soft-looking start in Q1, but the fall in January output was chiefly payback for an especially strong end to 2017.
The Italian economy slowed at the end 2017, and it continues to underperform other major EZ economies. Real GDP rose 0.2% quarter-on-quarter in Q4, a bit slower than the 0.3% gain in Q3, pushing full-year growth up to a modest 1.0%. This compares poorly, though, with growth of 1.6% in the euro area as a whole.
Chile's economic outlook remains challenging. Overall, 2015 will likely mark the second consecutive year of disappointing growth, but it will be better than 2014, a year to forget.
Yesterday's economic reports in the Eurozone were solid across the board.
Our hope for a year-end jump in German factory orders was laughably optimistic.
Nobody knows the damage China's virus- containment efforts will have on GDP, and we probably never will, for sure, given the opacity of the statistics.
German manufacturing is in good shape, but probably is not as strong as implied by yesterday's surge in new orders. Factory orders jumped 5.2% month-to-month in December, rebounding strongly after a downwardly revised 3.6% fall in November. December's jump was the biggest monthly increase in two years, but it was flattered by a leap in bulk investment goods orders, mainly in the domestic market and other EZ economies.
December's GDP report, released next Monday, likely will maintain the flow of negative news on the U.K. economy.
Our chief economist, Ian Shepherdson, set out our initial thoughts on the rising tensions between U.S. and Iran here.
Demand for German manufacturing goods remained subdued at the end of Q4.
Economic growth in Chile slowed in Q1, despite a relatively strong end to the quarter, and the chances of an accelerating recovery remains disappointingly low, due to both global and domestic headwinds.
Demand in German manufacturing rebounded slightly at the end of Q1, though the overall picture for the sector remains grim.
No post-lockdown bounce for private services in China
Japan's stable unemployment rate belies underlying weakness. Tokyo energy inflation turns the corner. Sales tax preparations breathe life into Japanese production in May... if only temporarily. Korea's IP plunge in May shows why Japan can't rest on its laurels.
Korean inflation surprises to the upside in April. Manufacturing surveys in Korea are turning up.
China's exporters fulfil old orders; new orders have plunged; Caixin survey underlines that smaller firms are still sputtering; An unsurprisingly modest start for "unlimited QE" in Japan; Expect much more trade damage to Korea's current account surplus in April
In one line: Like watching paint dry.
In one line: The market speaks, and the ECB listens.
In one line: Solid, but risks loom for the Q2 numbers.
China's export data for April were a mixed bag, to say the least.
Over the weekend, the PBoC cut the RRR for the vast majority of banks. FX reserves data released shortly after suggested that the Bank already is propping up the currency.
Chile's inflation outlook remains benign, allowing policymakers to cut interest rates if the economic recovery falters.
This week's Inflation Report--now released alongside the MPC's decision and minutes of its meeting in a deluge of releases now known as "Super Thursday"--is likely to be a damp squib.
We're among a small minority of economists forecasting that GDP rose by 0.1% month-to-month in March.
We look for August's GDP report, released on Thursday, to show that output held steady, following July's 0.3% month-to-month jump.
German manufacturing rebounded somewhat mid-way through Q3.
Friday's German new orders data were sizzling. Factory orders jumped 3.6% month-to-month in August, pushing the year-over-year rate up to a nine-month high of 7.8%, from an upwardly-revised 5.4% in July.
Britain's productivity problem has been building under the surface for years, but it is set to be more pertinent now that the economy is close to full employment.
In one line: A truce, but the battle isn't over.
In one line: Stabilisation in the m/m data, but trend still points to slower output growth.
In one line: Better, but still an incomplete recovery.
In one line: Households aren't fazed by the political crisis.
In one line: Brexit preparations provide a temporary fillip to manufacturing.
In one line: Much stronger than the ISM, but the gap is not necessarily about to close.
In one line: The trend is softening; blame the trade war.
In one line: Great, but March and April, at least, will be grim.
In one line: Downward revisions soften the blow from October's data.
In one line: An inevitable pull-back after Q1's pick-up.
In one line: Underlying pressures are modest, and food prices are starting to stabilise.
In one line: Core inflation remains subdued, but it will rise soon.
In one line: Not much to cheer about; the trend is still falling.
In one line: Soft, and the outlook for Q2 isn't great.
In one line: Great, but it won't last.
In one line: Manufacturing gain fails to offset weakness elsewhere.
In one line: A further rebound in investor sentiment, and a robust Q1 for the EZ consumer.
China's trade surplus collapsed unexpectedly in April, to $13.8B, from a trivially-revised $32.4B in March.
Industrial production data in Germany continued to defy the signal of doom and gloom from leading indicators.
Economic data have yielded the limelight in recent months to Brexit news and, alas, we doubt that February's GDP data, released on Wednesday, will reclaim investors' attention.
Most investors remain convinced that the MPC will raise Bank Rate when it meets next, on May 10.
The lockdown in Britain that began two-and-a half weeks ago is starting to stem the number of new infections.
We aren't convinced that China's recovery is in train just yet.
The recovery in small business sentiment since the fourth quarter rollover has been extremely modest, so far.
The headline Chinese trade numbers are beginning to come into line with the story we have been telling about the more recent trends.
China's trade numbers for July surprised to the upside, with both exports and imports faring better than consensus forecasts in year-over-year terms.
Friday's factory orders report in Germany provided a bit of relief amid the gloom in manufacturing.
We have argued for a while that China and the U.S. will not reach a comprehensive trade deal until after the next election.
Headline inflation in Brazil remained low in October, and even breached the lower bound of the BCB's target range.
Manufacturers in Germany endured another miserable quarter in Q3.
Investors now see a 50/50 chance of the MPC cutting Bank Rate within the next nine months, following the slightly dovish minutes of the MPC's meeting, and its new forecasts.
The RMB has been on a tear, as expectations for a "Phase One" trade deal have firmed.
Recent economic indicators in Mexico have been mixed, distorted by temporary factors, including the effect of the natural disasters in late Q3. Private consumption has lost some momentum, hit by the lagged effect of high interest rates and inflation, as well as the earthquakes.
Yesterday's manufacturing data in Germany were poor, but not as weak as implied by the headline.
Demand for German manufacturing goods slipped at the end of Q3. Yesterday's report showed that factory orders fell 0.6% month-to-month in September, constrained by weakness in domestic demand and falling export orders to other EZ economies.
Investors with long sterling positions should not pin their hopes on Friday's GDP report to reverse some of the losses endured over the last week.
London has been the U.K.'s growth star for the last two decades. Between 1997 and 2014, yearover-year growth in nominal Gross Value Added averaged 5.4% in London, greatly exceeding the 4% rate across the rest of the country. Surveys since the referendum, however, indicate that the capital is at the sharp end of the post-referendum downturn.
Economic reports released yesterday indicate that the German economy was off to a solid start early in the second quarter. Industrial production rose 0.9% month-to-month in April, equivalent to a 1.4% increase year-over-year, up from a revised tiny 0.2% gain in March. This is the biggest annual jump in production since July last year, but the underlying trend is turning up only slowly, in line with the moderate improvement in survey data this year.
The Mexican inflation rate soared at the start of 2017, but this is yesterday's story; the headline will stabilize soon and will decline slowly towards the year-end. May data yesterday showed that inflation rose to 6.2%, from 5.8% in April. Prices fell 0.1% month-to-month unadjusted in May, driven mainly by lower non-core prices, which dropped by 1.3%, as a result of lower seasonal electricity tariffs.
Mark Carney revealed last week that recent data had given him "greater confidence" that the weakness of Q1 GDP was almost entirely due to severe weather.
Leave it to an economist to tell contradictory stories; German manufacturing orders, at the start of the year, rose at their fastest pace since 2014, but it doesn't mean anything.
Labour cash earnings in Japan ostensibly started the year strongly, jumping by 1.5% year-over-year in January, much better than December's 0.2% slip.
January's GDP report, released on Wednesday, was set to be one of the most important data releases of this year, due to its role in providing the first official steer on the economy's post-election performance.
The Fed's 50bp rate cut last week, aiming to shield the U.S. economy against Covid-19, has opened the door for some central banks in LatAm to emulate the move.
Friday's industrial production data in Germany added to the manufacturing optimism following the sharp rise in new orders--see here--reported earlier in the week.
The upturn in German manufacturing orders waned slightly towards the end of 2017; factory orders fell 0.4% month-to-month in November.
In Friday's Monitor we analysed the draft Japanese budget, as reported by Bloomberg. We suggested that the GDP bang-for-government-expenditure- buck is likely to be less than that implied by the authorities' forecasts.
The hard data in Germany took a turn for the worse at the start of Q4. The outlook for consumers' spending was dented by the October plunge in retail sales--see here-- and on Friday, the misery spilled over into manufacturing.
The release of October's GDP report on Tuesday likely will be overshadowed by campaigning ahead of Thursday's general election.
The German manufacturing sector appears to have settled into an equilibrium of sustained misery.
The slew of EZ economic data on Friday supports our view that the economy ended 2016. The Commission's economic sentiment index jumped to 107.8 in December from a revised 106.6 in November. The headline strength was due to a big increase in "business climate indicator" and higher consumer sentiment. In individual countries, solid numbers for German construction and French services sentiment were the stand-out details.
Productivity statistics released yesterday continued to paint a bleak picture. Output per worker rose by a mere 0.1% year-over-year in Q3, despite jumping by 0.6% quarter-on-quarter.
Brazil's industrial sector continues to suffer, despite September's report surprising marginally on the upside. Output contracted 1.3% month-to-month in September, after a 0.9% fall in August, pushing the year over-year rate down to -10.9% down from -8.8% in August. This is the biggest drop since April 2009. Output has fallen an eye-popping -7.4% year-to-date, and in the third quarter alone activity contracted by 3.2% quarter-on-quarter, in line with our vie w for a 1.2% contraction in real GDP for the third quarter.
Productivity growth reached the dizzy heights of 1.8% year-over-year in the second quarter, following a couple of hefty quarter-on-quarter increases, averaging 2.9%.
We have spent the past few weeks shifting our story on the EZ economy from one focused on slowing growth and downside risks to a more balanced outlook. It seems that markets are starting to agree with us.
Eurozone manufacturing selling prices remain under pressure from deflationary headwinds. The PPI index, ex-construction, in the euro area fell 4.2% year-over-year in March, matching February's drop. Weakness in oil prices continues to drive the headline.
LatAm data in recent days have confirmed that efforts to contain the coronavirus, plunging global trade, and the collapse in oil prices, are dealing a severe economic and financial blow.
The downturn in global trade looks set to turn a corner, at least judging by the outlook for Korean exports, which are a key bellwether.
The unexpectedly robust 128K increase in October payrolls--about 175K when the GM strikers are added back in--and the 98K aggregate upward revision to August and September change our picture of the labor market in the late summer and early fall.
Thursday and Friday were busy days for LatAm economy watchers. In Brazil, the data underscored our view that the economy is on the mend, but the recent upturn remains shaky, and external risks are still high.
The economic and political backdrop to this week's Monetary Policy Committee meeting is significantly more benign than when it last met on September 19.
Today's local elections are more important than usual, because they will enable investors to assess if the Conservatives really are on track for a landslide victory in the general election, as suggested by the opinion polls and priced-in by the forex market.
Last week's final barrage of data showed that EZ headline inflation rose slightly last month, by 0.1 percentage points to 1.5%, driven mainly by increases in the unprocessed food energy components.
Markets were left somewhat disappointed yesterday by the G7 statement that central banks and finance ministers stand ready "to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks."
India's GDP report for the fourth quarter surprised to the upside, with the economy growing by 4.7% year-over-year, against the Bloomberg median forecast of 4.5%.
We are revising down our forecasts for quarteron-quarter GDP growth in Q1 and Q2 to 0.3% and 0.2%, respectively, from 0.4% in both quarters previously, to account for the likely impact of the coronavirus outbreak.
Brazil is now paying the price of President Rousseff's first term, which was characterized by unaffordable expansionary policies. As a result, inflation is now trending higher, forcing the BCB to tighten at a more aggressive pace than initially intended--or expected by investors--depressing business and investment confidence.
Investors focussed last week on Chair Powell's semi-annual Monetary Policy Testimony, but he said nothing much new.
Japan's jobless rate inched up to 2.5% in January, from 2.4% in December.
January's money supply figures continued the nerve-jangling flow of data on the economy's momentum.
China's current account surplus was revised down last week to $46.2B in Q2, from $57.0B in the preliminary data, marking a dip from $49.0B in Q1.
The rapidity with which the BoJ's QE programme has been scaled back is dramatic. Growth in the monetary base slowed to 15.6% year-over-year in September from 16.3% in August.
We have been telling an upbeat story about the EZ economy in recent Monitors, emphasizing solid services and consumers' spending data.
China hit back against the Trump-administration tariffs yesterday, targeting Mr. Trump's electorate.
Brazilian February industrial production data, released yesterday, were relatively positive. Output rose 0.1% month-to-month, pushing the yearover- year rate down to -0.8% from 1.4% in January. Statistical quirks were behind February's year-over-year fall, though.
The relative strength of the investor and consumer confidence reports for March, released this week, signal a better outlook for the Mexican economy.
The Monetary Policy Committee of the Reserve Bank of India lowered the benchmark repurchase rate by another 25 basis points yesterday, to 6.00%, as widely expected.
India's headline GDP print for the third quarter was damning, with growth slowing further, to 4.5% year- over-year, from 5.0% in Q2.
We were worried about downside risk to yesterday's ADP employment measure, but the 67K increase in November private payrolls was at the very bottom of our expected range.
Data yesterday showed that consumers in the euro area increased their spending in February, following recent weakness. Retail sales rose 0.7% month-to-month in February, reversing the cumulative 0.4% decline since November. The year-over-year rate was pushed higher to 1.8% from an upwardly revised 1.5% in January.
Corporate bonds will not be included in the ECB's monthly QE purchases until the end of Q2, but markets are already preparing. The sale of non-financial corporate debt jumped to €49.4B in March, from about €25B in February, within touching distance of the record set in Q1 last year.
The news-flow in the Eurozone was almost unequivocally bad over the summer.
Japan's real GDP seems unlikely to have risen in Q3, and could even have edge down quarter-on- quarter, after the 0.7% leap in Q2.
The Brazilian economy has been recovering at a decent pace in recent months. The labor market is on the mend, with the unemploymen t rate falling rapidly to 12.5% in August from 14% at the end of Q1.
Yesterday's Brazilian industrial production data were downbeat.
We have argued for some time that much of the early phase of the downturn in global manufacturing was due to the weakening of China's economic cycle, rather than the trade war.
Eurozone manufacturing boosted GDP growth in the first half of the year, and survey data suggest that momentum will be maintained in Q3.
The ECB left its key interest rates unchanged yesterday, and maintained the pace of QE at €60B a month, but increased the issue limit to 33% from 25%. The updated staff projections revealed a downward adjustment of the central bank's inflation and growth forecasts across all horizons up to 2017. These forecasts were accompanied by a very dovish introductory statement, noting disappointment with the pace of the cyclical recovery, and emphasizing renewed downside risks to the economy and the inflation outlook.
The key story in Brazil this year remains one of gradual recovery, but downside risks have increased sharply, due mainly to challenging external conditions.
Mr. Draghi struck a dovish tone yesterday, despite the new ECB staff projections upgrading the inflation forecast this year to an average of 0.3%, up from the zero predicted in March. The president reiterated that the central bank's expectation of a gradual improvement in inflation and real GDP growth is conditional on the full implementation of QE.
The Brazilian manufacturing sector remains very depressed by weak end-demand, but the misery is easing, at the margin. Industrial production fell 2.5% month-to-month in February, equivalent to an eye-watering 9.8% contraction year-over-year, but this was rather less bad than the 13.6% slump in January.
The Japanese unemployment rate fell again in September, to 2.3% from 2.4%. In the same vein, the job-to-applicant ratio rose to 1.64, from 1.63.
The September consumption data were a bit better than median expectations, with real spending rebounding by 0.6%, led by an 15.1% leap in the new vehicle component.
Yesterday's economic reports added to the evidence the euro area economy as a whole is showing signs of resilience in the face of still-terrible conditions in manufacturing.
2019 is a year many in the construction sector would prefer to forget.
Korea's final GDP report for the third quarter confirmed the economy's growth slowdown to 0.4% quarter-on-quarter, following the 1.0% bounce-back in Q2.
Implied volatility on the euro is now so low that we're compelled to write about it, mainly because we think the macroeconomic data are hinting where the euro goes next.
In yesterday's Monitor we suggested that China's profits surge has been party dependent on developers' risky debt issuance practices.
Europeans, who usually save more of their income than Americans, have spent all the windfall from falling gas prices. Americans have not. It is tempting, therefore, to argue that perhaps Americans have come to see the error of their low-saving ways, and are now seeking to emulate the behavior of high-saving Europeans. Undeniably, the plunge in gas prices has given Americans the opportunity to save more without making hard choices.
Covid-19 has cut short a nascent recovery in housing market activity.
The PBoC cut its seven-day reverse repo rate to 2.20%, from 2.40%, while making a token injection; the Bank only moves these rates when it injects funds.
A pair of closely-watched reports today will confirm that business and consumer confidence is tanking in the face of the coronavirus outbreak.
On the face of it, the February consumer spending data, due today, will contradict the upbeat signal from confidence surveys. The dramatic upturn in sentiment since the election is consistent with a rapid surge in real consumption, but we're expecting to see unchanged real spending in February, following a startling 0.3% decline in January.
Yesterday's advance data from Germany and Spain suggest that today's Eurozone inflation report will undershoot the consensus. In Germany, headline inflation slipped to 1.6% in March from 2.2% in February, and in Spain the headline rate plunged to 2.3% from 3.0%.
On a headline level, last week's European Parliament elections were an excellent occasion for the EU.
In the wake of April's 0.2% increase in real consumers' spending, and the upward revisions to the first quarter numbers, we now think that second quarter spending is on course to rise at an annualized rate of about 3.5%.
The dovish message from the ECB going into today's final meeting of the year has intensified. Mr. Draghi's comments last month, at the European Banking Congress in Frankfurt, point to an increased worry on low core inflation.
Industrial production data yesterday confirmed downside risks to Q4's GDP data in Brazil. Output fell 0.7% month-to-month in October, the fifth consecutive decline, pushing the year-over-year rate down to -11.2%, from -10.9% in September. This was the biggest drop since April 2009, when output collapsed by 14.2% during the global financial crisis. The October details were even worse than the headline, as all three broad-measures fell sharply.
Korean hard data for December, so far, leave the door ajar for the possibility that the Bank of Korea will roll back its November hike sooner than we expect.
A cluster of surveys suggest that the manufacturing sector finished 2016 with a flourish, after a dismal performance for most of the year. But momentum will drain away from the sector's recovery in 2017, as higher oil prices make low value-added work unprofitable again and resurgent inflation causes domestic consumer demand to crumble.
Where to start with the January employment report, where all the key numbers were off-kilter in one way or another?
The Tankan survey powered ahead in Q2, pulling away from Q1 and mostly beating consensus. This confirms our impression of the strength of the recovery ,just as Prime Minister Abe's Liberal Democratic Party is trounced at the polls in Tokyo. The drubbing is understandable as the main benefits of Abenomics have gone to the business sector, at the expense of the household sector.
Europe's political leaders finally made a breakthrough this week in nominating candidates for the top jobs in the EU.
The downbeat tone of Markit's May manufacturing survey shouldn't come as a surprise, given the weak global backdrop and the inevitable fading of the boost to output from Brexit preparations.
The Caixin manufacturing headline was unremarkable, but the input price index signals that PPI inflation is set to rise again in May, to 4.0%-plus, from 3.4% in April.
The near-term performance for EZ manufacturing will be a tug-of-war between positive technical factors, and a still-poor fundamental outlook.
The PBoC yesterday cut its 7-day and 14-day reverse repo rate by 10bp, to 2.40% and 2.55% respectively, while injecting RMB 1.2T through open market operations.
Sterling strengthened last week to its highest tradeweighted level since mid-May, amid hopes that the U.K. government will concede more ground to ensure that the European Council deems, at its December 14 meeting, that "sufficient progress" has been made in Brexit talks for trade discussions to begin
Japan's labour market is already tight, but last week's data suggest it is set to tighten further.
Following the much-anticipated meeting between Presidents Xi and Trump over the weekend, the U.S. will now leave existing tariffs on $200B of Chinese goods at 10%, rather than increasing the rate to 25% in January, as previously slated.
The 90-day truce in the trade wars between the U.S. and China, brokered on Saturday at the G20 meeting in Argentina, is a big deal for financial markets in the euro area, at least in the near term.
January's Markit/CIPS manufacturing survey suggests that the outcome of the general election has brought manufacturers some momentary relief.
The fundamentals underpinning our forecast of solid first half growth in consumers' spending remain robust.
Brazil's key data flow started Q4 on a soft note, but we still believe that the economic recovery will gather strength over the next three-to-six months.
Data last Friday showed Japan's labour market trends deteriorating.
November's monetary indicators provide an upbeat rebuttal to the swathe of downbeat business surveys. Year-over-year growth in the MPC's preferred measure of broad money--M4 excluding intermediate other financial corporations--rose to a 19-month high of 4.0% in November, from 3.5% in October.
The economic calendar in Mexico was relatively quiet over Christmas, and broadly conformed to our expectations of poor economic activity in Q4.
Friday's early EZ CPI data for December were red hot. Headline HICP inflation in Germany jumped to 1.5%, from 1.3% in November, while the headline rate in France increased by 0.4pp, to 1.6%.
Advance inflation data from Germany and Spain indicate that the Eurozone slipped into deflation last month, piling maximum pressure on Mr. Draghi later this month. Inflation in the euro area's largest economy fell to 0.2% year-over-year in December from 0.6% in November, driven by a 6.6% plunge in the energy component.
It's probably happening a decade too late, but the EU is now moving in leaps and bounds to restructure the continent's weakest banks. Yesterday, the Monte dei Paschi saga reached an interim conclusion when the Commission agreed to allow the Italian government to take a 70% stake in the ailing lender.
Yesterday's industrial production report in Brazil was sizzling. Headline output jumped 0.8% month- to-month in April--well above the 0.4% consensus-- pushing the year-over-year rate up to 8.9%, a five- year high.
Demand in German manufacturing rebounded strongly midway through the second quarter.
Late last year, China said it would scrap residency restrictions for cities with populations less than three million, while the rules for those of three-to-five million will be relaxed.
The run of above-consensus news on the U.K. economy came to an abrupt end last week, as a series of survey indicators for January took a turn for the worse. After six months of breathing space, the economic consequences of the Brexit vote are increasingly being felt.
November's Markit/CIPS surveys for the manufacturing, construction and services sectors suggest that GDP growth is on track to strengthen a touch in Q4.
For sterling traders, no election news is good news.
Yesterday's detailed Q3 growth data in the Eurozone offered no surprises in terms of the headline.
Consumers' spending in the Eurozone stalled at the start of Q4. Retail sales slid 1.1% month-to-month in October, pushing the year-over-year rate down to a four-year low of 0.4%, from an upwardly-revised 4.0% jump in September.
Korea's trade data for January provided the first real glimpse of the potential hit to international flows from the disruptions caused by the outbreak of the coronavirus.
Mexico's latest hard data suggest things might not be as bad as we feared. Retail sales and manufacturing output were relatively strong at the end of last year, the Q4 preliminary GDP report was mostly upbeat, and the labor market was firing on all cylinders.
Consumers' spending in the euro area weakened at the end of Q4, but we think households will continue to boost GDP growth in the first quarter. Data on Friday showed that retail sales fell 0.3% month-to-month in December, pushing the year-over-year rate down to 1.1%, from a revised 2.8% in November.
Business surveys released over the last week have made us more confident in our call that quarter-on- quarter GDP growth will recover to about 0.4% in Q2, from Q1's weather-impacted 0.1% rate.
We are sticking to our call for a weak first half in Japan, despite likely upgrades to Q1 GDP on Monday.
The collapse in global demand last month will have derailed China's trade recovery, causing exports to drop unpleasantly month-on-month after the bounce of around 45% in March; the January/February breakdown is not provided, so we can't be sure of the extent of the March rebound.
Efforts to contain the coronavirus outbreak severely dented industrial activity in Brazil.
It would be astonishing if the May and June payroll numbers looked much like April's strong data, at least in the private sector.
Emerging evidence suggests that the economy has passed the period of peak Covid-19 pain.
Political risks in the periphery have simmered constantly during this cyclical recovery, but they have increased recently. In Italy, the government is scrambling to find a solution to rid its ailing banking sector of bad loans. But recapitalisation via a bad bank is not possible under new EU rules.
Judging by interactions with readers in the past few weeks, fiscal policy is one of the most important topics for EZ investors as we move into the final stretch of the year.
The PBoC finally moved yesterday, cutting its one-year MLF rate by 5bp to 3.25%, whilst replacing around RMB 400B of maturing loans.
Chile's IMACEC economic activity index rose 2.4% year-over-year in January, down from 2.6% in December, and 3.3% on average in Q4, thanks mostly to weak mining production.
The case for the MPC to hold back from raising interest rates in May remains strong, despite the improvement in the Markit/CIPS services survey in February.
The rapid escalation of Covid-19 cases in Korea in recent weeks has broadened the likely damage to the economy this quarter.
In today's Monitor, we'll let the economy be, and focus instead on what are fast becoming the two defining political issues for the EU and its new Commission, namely migration and climate change.
Chancellor Sunak faces a tough first gig on Wednesday, when he delivers the long-awaited Budget.
The Brazilian industrial sector started this year on a very downbeat note, despite a 2% month-to-month jump in output. The underlying trend in activity is still very weak. Production fell 5.2% year-over-year.
LatAm assets have struggled in recent days as it has become clear that the Fed will hike next week. But we don't expect currencies to collapse, as domestic fundamentals are improving and the broader external outlook is relatively benign.
If 2017 really is the year of "reflation", somebody forgot to tell the gilt market. Among the G7 group, 10-year yields have fallen only in the U.K. during the last three months, as our first chart shows.
We have consistently flagged the likelihood that Japan's government would boost spending after the consumption tax hike was implemented.
Consumers' spending in the Eurozone slowed in the second half of 2017, providing a favourable base for growth in H1 2018.
Korea's economic data for June largely were poor, and are likely to make more BoK board members anxious ,ahead of their meeting on July 18.
The slowdown in quarter-on-quarter growth in households' real spending to 0.4% in Q1--just half 2016's average rate--was driven entirely by a 0.1% fall in purchases of goods. Households' spending on services, by contrast, continued to grow briskly. Indeed, the 0.8% quarter-on-quarter rise in households' real spending on services exceeded 2016's average 0.5% rate.
The June ISM manufacturing index signalled clearly that the industrial recovery continues, with the headline number rising to its highest level since August 2014, propelled by rising orders and production. But the industrial economy is not booming and the upturn likely will lose a bit of momentum in the second half as the rebound in oil sector capex slows.
The flow of downbeat business surveys continued yesterday, with the release of the Markit/CIPS construction survey.
The week started well for Brazil's President Bolsonaro.
It will take a while for the economic data in the euro area fully to reflect the Covid-19 shock, but the incoming numbers paint an increasingly clear picture of an improving economy going into the outbreak.
The Fed's unscheduled 50bp cut on Tuesday opens up some space for Asian central banks to follow suit.
Brazil's external position continue to improve, but we are sticking to our view that further significant gains are unlikely in the second half, given the stronger BRL. For now, though, we still see some momentum, with the unadjusted trade surplus increasing to USD7.2B in June, up from USD4.0B a year earlier. Exports surged 24% year-over-year but imports rose only 3%.
Mr Abe's Liberal Democratic Party took a drubbing at the polls in Tokyo's Assembly election over the weekend. The consequences for fiscal spending probably are minimal but the vote strengthens the case for increased emphasis on the structural reform "arrow" and less focus on monetary policy.
The opening gambits in the post-Brexit trade negotiations were played earlier this week, in speeches from U.K. Prime Minister Boris Johnson and EU chief negotiator, Michel Barnier.
The Budget on March 11 will be the first time that the new government's ambition and bluster collide with reality.
We've previously highlighted the pro-cyclical elements of the BoJ's framework, but it's worth repeating, when an economic shock comes along.
Yesterday's retail sales report indicates that preliminary Eurozone Q4 GDP data next week are likely to paint an upbeat picture of the economy. Sales rose 0.3% month-to-month in December, equivalent to 2.8% year-over-year. An upward revision to November data means that turnover increased 0.8% quarter-on- quarter, the best since the first quarter of 2005.
The majority of headlines from last week's advance Q4 GDP data in the Eurozone--see here--were negative.
December's Markit/CIPS surveys for the manufacturing, construction and services sectors suggest that the economy ended 2017 on a lacklustre note.
November's money and credit figures showed that households increasingly turned to unsecured debt last year in order to maintain rapid growth in consumption. Unsecured borrowing, excluding student loans, rose by £1.7B in November alone, the most since March 2005. This pushed up the year- over-year growth rate of unsecured borrowing to 10.8%--again, the highest rate since 2005--from 10.6% in October.
Speculation mounted yesterday that the MPC will follow the U.S. Fed and cut interest rates before its next meeting on March 26.
This weekend will bring closure to an extraordinary presidential election campaign in France. The polls correctly predicted the first result, and assuming they are right in the second round too, Mr. Macron will comfortably beat Ms. Le Pen.
Yesterday's Brazilian industrial production data were relatively upbeat.
We've been surprised by the fast rate of Japanese GDP growth in the first half, though the Q1 pop merely was due to a plunge in imports.
Data yesterday showed that EZ consumers' spending was off to a bad start in the third quarter.
Friday's Brazil industrial production data were surprisingly upbeat. Output rose 0.1% month-to-month in July, slightly better than the consensus forecast for no change. July's modest gain was the fifth consecutive increase, confirming that industrial output in Brazil is stabilizing, and it paints a less grim picture of GDP growth at the start of Q3.
The run of consensus-beating activity measures and the pickup in leading indicators of inflation have led markets to doubt that the MPC really will follow up August's package of stimulus measures with another Bank Rate cut this year.
Readers have asked us about the availability of flow-of-funds data in the Eurozone similar to the detailed U.S. reports. The ECB's sector accounts come close and cover a lot of ground, but are also released with a lag. We can't cover all sectors in one Monitor, but the investment data for non-financial firms, excluding construction, suggest that investment growth slowed last year.
The U.K. services sector has vanished overnight, following the introduction of tough restrictions on everyday life to stem the spread of Covid-19.
Brazil's economic and fiscal outlook has worsened in recent months, and economic activity will likely contract even further in the short-term. Some of last week's economic reports, however, were a bit less bad than of late. The latest industrial production data were less bad than expected in August, but the picture is still very grim. Industrial output plunged 1.2% month-to-month, above the consensus, and allowing the annual rate to stabilize at -9% year-over-year.
News last week increased our conviction that the economy will struggle over the coming months, but then will have a spring in its step next year.
Activity surveys picked up across the board in April, offering hope that the slowdown in GDP growth--to just 0.3% quarter-on-quarter in Q1-- will be just a blip. The headline indicators of surveys from the CBI, European Commission, Lloyds Bank and Markit all improved in April and all exceeded their 2004-to-2016 averages.
Wednesday's Brazilian industrial production data were worse than we expected but the details were less alarming than the headline. Output slipped 1.8% month-to-month in March, the biggest fall since August 2015, setting a low starting point for Q2.
Services will bear the brunt of the Covid-19 shock in the euro area, but manufacturing is not far behind.
Evidence of slowing growth in Eurozone consumers' spending continues to mount. Retail sales in the euro area fell 0.5% month-to-month in March, pushing the year-over-rate down to 2.1% from a revised 2.7% in February. The headline likely was depressed by the early Easter. March had one trading day less than February, which was not picked up the seasonals.
Support in opinion polls for both the Conservatives and Labour has been increasing steadily.
China is facing a nasty mix of spiking CPI inflation and ongoing PPI deflation.
Yesterday's BoJ statement, outlook and press conference raised our conviction on two key aspects of the policy outlook.
CPI inflation surprises look set to trigger larger- than-usual market reactions over the coming months, given that the MPC emphasised last month that it wants to see domestically-generated inflation rebound swiftly, after falling suddenly late last year, in order to justify keeping Bank Rate on hold.
Today's industrial production data will confirm that EZ manufacturing suffered a slow start to Q4. Advance country data signal a 0.2% month-to-month fall in October, slightly worse than the consensus, 0.0%.
Mexican industrial activity started the fourth quarter badly. Industrial production fell 0.1% month- to-month in October, pushing the year-over-year rate slightly up to -1.1% from -1.2% in September and -0.7% in Q3.
China's October activity data showed signs of the infrastructure stimulus machine sputtering into life. Consensus expectations appear to hold out for a continuation into November, but we think the numbers will be disappointing.
The fact that Italy's economy is in poor shape will not surprise anyone following the euro area, but the advance Q4 GDP headline was astonishingly poor all the same.
Suggestions that the U.K. government might choose to hold a second referendum have been constantly rebuffed by the Prime Minister.
Japan's money and credit data have shown signs of life in recent months, but that's all set to change quickly, due to the disruptions caused by the outbreak of the coronavirus.
We've been consistent in saying that Japanese capex would roll over this year, after strength in the first three quarters was seen by the authorities and many commentators as a sign of resilience.
A sluggish GDP headline, a further increase in inflation, and poor German manufacturing data were the primary euro area highlights in our absence.
To the extent that markets bother with the NFIB survey at all, most of the attention falls on the labor market numbers. But these data--hiring, compensation, jobs hard-to-fill--haven't changed much in recent months, and in any event most of them are released the week before the main survey, which appeared yesterday. The message from the labor data is unambiguous: Hiring remains very strong, employers are finding it very difficult to fill open positions, and compensation costs are accelerating.
We have downgraded our 2019 and 2020 China GDP forecasts on previous occasions because monetary conditions have been surprisingly unresponsive to lower short-term rates.
The Mexican economy gathered strength in Q3, due mainly to the strength of the services sector, and the rebound in manufacturing, following a long period of sluggishness, helped by the solid U.S. economy and improving domestic confidence.
September's GDP report laid bare the economy's sluggishness.
The French manufacturing sector remains challenged by weak end-demand. Industrial production was unchanged month-to-month in February, equivalent to a meagre 0.6% increase year-over- year; manufacturing output fell 0.8% on the same basis.
Next week is a big one for China. The five yearly Party Congress opens on Wednesday, and on Thursday, the monthly raft of activity data is published, along with Q3 GDP.
Today's industrial production report in the Eurozone will be poor.
Japan's tertiary index fell further in December,by 0.3% month-on-month, after the downwardly- revised 0.4% drop in November.
April's labour market data show that slack in the job market is no longer declining, while wage growth still isn't recovering. As a result, we no longer think that the MPC will raise Bank Rate in August and now expect the Committee to stand pat until the first half of 2019.
In her inaugural Monitor, our Chief Asia Economist Freya Beamish plots three scenarios for the Chinese economy. The best-case scenario is that China makes a smooth transition to consumer-led growth.
Inflation in Germany rebounded last month, rising to plus 0.1% year-over-year in May, from minus 0.1% in April. We think the economy has escaped the claws of deflation, for now. Household energy prices fell 5.7% year-over-year in May, up from a 6.3% decline in April, and the rate will rise further. Base effects and higher oil prices point to a surge in energy inflation in the next three-to-six months.
The effects of Covid-19--both negative and positive--on Korea's labour market certainly were felt in February.
As we go to press, Mrs. May's last-minute scramble to Strasbourg appears to have failed to persuade enough rebels to back the government.
Last week's detailed GDP data in the Eurozone confirmed that the economy is benefiting from an investment cycle for the first time since before the financial crisis.
Mexico's latest industrial production figures, released on Friday, showed that the recovery is stuttering. May output fell 0.9% year-over-year, down from the 1.2% gain in April. Total production was depressed by a 1.5% month-to-month drop in construction output, after two consecutive increases.
Manufacturing in the Eurozone rebounded midway through the second quarter.
The French manufacturing data delivered another upside surprise last week, following the solid numbers in Germany; see here. French industrial production rose slightly in November, by 0.3% month-to-month, extending the gains from an upwardly-revised 0.5% rise in October.
China's GDP report for the fourth quarter, due on Friday, is likely to show that economic growth has stabilised, on the surface.
The euro area economy continues to defy rising political uncertainty. Data yesterday showed that industrial production, ex-construction, in the Eurozone jumped 1.5% month-to-month in November, pushing the year-over-year rate up to 3.2% from a revised 0.8% in October. Output rose in all the major economies, but the headline was flattered by a 16.3% month-to-month leap in Ireland. This was due to a production jump in Ireland's "modern sector" which includes the country's large multinational technology sector.
Japan's producer price inflation levelled off in June and, for now, both commodity prices and currency moves in the first half imply that inflation should fall in the second half.
Official, real GDP growth was low in Q1, at 1.4% quarter-on-quarter, down from 1.6% in Q4.
Yesterday's data showed that industrial production in the Eurozone accelerated at the end of spring. Output, ex-construction, jumped 1.3% month-to-month in May, much better than the downwardly-revised 0.3% rise in April; the rise pushed the year-over-year rate up to a six-year high of 4.0%.
The Q1 GDP figures, released on Wednesday, likely will show that the quarter-on-quarter decline in economic activity eclipsed the biggest decline in the 2008-to-09 recession--2.1% in Q4 2008--even though the U.K. went into lockdown towards the very end of the quarter.
Monetary policy loosening over the last year implies that China's M1 growth already should be picking up.
Yesterday's German trade data showed that the external surplus recovered in August, following its poor start to Q3. The seasonally-adjusted trade surplus rose to €22.2B, from €19.4B in July.
The Office for National Statistics yesterday released the last major batch of output data before the preliminary estimate of Q3 GDP is published on October 25, just one week before the MPC's key meeting.
China's PPI deflation deepened in August, with prices dropping 0.8% year-over-year, after a 0.3% decline in July.
Manufacturing in France rebounded only modestly at the start of Q3, despite favourable base effects.
Chinese exports grew by just 5.5% in dollar terms year-over-year in August, down from 7.2% in July. Export growth continues to trend down, with a rise of just 0.2% in RMB terms in the three months to August compared to the previous three months, significantly slower than the 4.8% jump at the p eak in January.
A cursory glance at July's labour market report gives no cause for alarm. The headline, three-month average, unemployment rate returned to 3.8% in July, after edging up to 3.9% in June.
Germany's nominal external surplus rebounded smartly over the summer, but real net trade looks set to be a drag on Q3 GDP growth, again. The seasonally adjusted trade surplus increased to €21.6B in August from a revised €19.3B in July.
The latest GDP data continue to show that the economy is holding up well, despite the Brexit saga.
Hideous though the official April payroll numbers were, the chances are that they'll be revised down.
Last week finished as it started, with more depressing economic numbers in the Eurozone, this time from manufacturing in the core economies.
China's October foreign trade headlines beat expectations, but the year-over-year numbers remain grim, with imports falling 6.4%, only a modest improvement from the 8.5% tumble in September.
Friday's data force us to walk back our recession call for Germany. The seasonally adjusted trade surplus rose in September, to €19.2B from €18.7B in August, lifted by a 1.5% month-to-month jump in exports, and the previous months' numbers were revised up significantly.
Business investment in Japan took a nasty hit in the third quarter.
Yesterday's economic reports in the Eurozone were ugly.
Yesterday's industrial production report in Mexico added weight to the idea that the sector improved marginally in the first quarter, despite many external threats. Industrial output rose 0.1% month-to-month in February, following a similar gain in January. The calendar-adjusted year-over-year rate rose to -0.1%, after a modest 0.3% contraction in January.
Today's industrial production data in the Eurozone will extend the run of soft headlines at the start of the year.
China's Q2 official GDP growth, to be released on Monday, likely slowed to 6.2% year-over-year, from 6.4% in Q1.
The combination of astounding fourth quarter payroll numbers and weak GDP growth has prompted a good deal of bemused head-scratching among investors and the commentariat. The contrast is startling, with Q4 private payrolls averaging 276K, a 2.4% annualized rate of increase, while the initial estimate for growth seems likely close to 1%. Even on a year-over-year basis, stepping back from the quarterly noise, Q4 growth is likely to be only 2% or so.
Judging by the headline performance metrics, EZ equity investors have little cause for worry.
The case for continuing to increase Bank Rate gradually--recently reiterated by MPC members Andy Haldane and Michael Saunders-- strengthened yesterday with the release of April's labour market report, which revealed renewed momentum in wage growth.
The Fed paved the way with a 50bp emergency rate cut on March 3, with more to come.
China's money and credit data for February were reassuring, at least when compared with the doomsday scenario painted, so far, by other key indicators for last month.
On the face of it, the latest GDP data look awful. December's 0.4% month-to-month fall in GDP closed a poor Q4, in which quar ter-on-quarter growth slowed to 0.2%, from 0.6% in Q3.
Chinese CPI inflation trends point to diminishing wage growth, as the services sector begins to struggle with the influx of labour displaced by the industrial productivity drive.
The U.K. general election is the main event in today's European calendar, but the first official ECB meeting and press conference under the leadership of Ms. Lagarde also deserves attention.
China concludes its annual Central Economic Work Conference today, where the economic targets and the agenda for next year are set.
In previous Monitors--see here--we've suggested that, thanks to the coronavirus, China simply will lose some of the spending that would have gone on during the holiday this year.
On a headline level, the Spanish economy conformed to its image as the star performer in the EZ in Q4.
Yesterday's Mexican industrial data painted a downbeat picture of the sector at the end of last year, and highlighted the downside risks facing the economy in the first half of this year. Industrial output fell 0.1% month-to-month and was flat year over-year in December, with weakness in all sectors except manufacturing. Overall, industrial activity expanded by only 0.2% year-over-year in the fourth quarter, the slowest pace since late 2013.
Our default position for core durable goods orders over the next few months is that they will fall, sharply.
More depressing economic numbers in LatAm have been released in recent days, and high frequency data continue to show a near-term bleak outlook.
Today's CPI report from India should raise the pressure on the RBI to abandon its aggressive easing, which has resulted in 135 basis points worth of rate cuts since February.
We remain confident--see here--that today's Q3 GDP report in Germany will be a shocker, but this already is priced-in by markets.
Hard data for Brazil and Mexico, released last week, support the case for further interest rate cuts.
Sterling leapt to $1.27, from $1.22 last week, amid some positive signals from all sides engaged in Brexit talks.
The Brazilian consumer will continue to suffer from high interest rates and a deteriorating labour market this year. But sentiment data imply that the fundamentals are stabilising, at least at the margin. The headline consumer sentiment gauge, published by the FGV, has improved significantly in the past five months, and we expect another modest increase later this month
Mexican industrial production data for August were a little stronger-than-expected. Output rose 1.0% year-over-year, for the second consecutive month, and marginally higher than the 0.6% average growth in the second quarter. The rise in production in August is encouraging, especially the strong manufacturing component, which accounts for about half of all output.
Soft September data in Germany and Italy suggest that today's industrial production report in the Eurozone will be poor. Our first chart shows that data from the major EZ economies point to a 0.8% month-to- month fall in September.
LatAm's economies are starting to expand at a relatively healthy pace, inflation is more or less under control and near-term growth prospects are positive.
Yesterday's data provided further evidence of the damage wrought on the EZ at the end of Q1.
Yesterday's EZ industrial production data for January confirmed the string of positive advance numbers from most of the individual economies.
Korea's unemployment rate was unchanged in April, at 3.8%, beating even our below-consensus forecast for only a minor uptick, to 3.9%.
Manufacturing in the EZ was held above water by Ireland at the end of Q3.
Sterling weakened yesterday, to $1.31 from $1.32, following news that 40 Conservative MPs have agreed to sign a letter of no-confidence in the Prime Minister.
Japan's PPI data yesterday confirmed that October was a turning point for prices--due to the consumption tax hike--despite the surprising stability of CPI inflation in Tokyo for the same month.
The U.K. Monitor will be on a short break soon for paternity leave, so we are taking this opportunity to preview next week's data releases.
The hard economic data in Brazil were relatively solid while we were off last week, supporting our view that the economy was experiencing a good spell at the start of the year just before the coronavirus hit.
Eurozone GDP data last Friday suggest the cyclical recovery continued at the end of last year. Real GDP in euro area rose 0.3% quarter-on-quarter in Q4, the same as in Q3, lifted by growth in all the major economies. This was in line with the consensus forecast, but noticeably higher than implied by monthly industrial production and retail sales data.
The ECB did its utmost not to say or do anything remotely novel today. The central bank kept its main refinancing and deposit rates unchanged at 0.00% and -0.40%, respectively, and reiterated its plan for QE next year.
The Eurozone economy was resilient at the end of last year, but yesterday's reports indicated that growth was less buoyant than markets expected. Real GDP in the euro area rose 0.4% quarter-on-quarter in Q4, the same pace as in Q3, but slightly less than the initial estimate 0.5%.
We can't remember the last time a single economic report was as surprising as the December retail sales numbers, released yesterday.
The weekly jobless claims numbers are due Thursday, as usual, but in the wake of a flood of emails from readers, all asking a variant of the same question-- should we be worried about the rise in continuing jobless claims?--we want to address the issue now.
China's trade surplus jumped to a six-month high of $46.8B in December, from $37.6B in November, on the back of a strong increase in exports.
Eurozone manufacturers had an underwhelming start to Q4. Data yesterday showed that production fell 0.1% month-to-month in October, pushing the year-over-year rate down to 0.6%, from a revised 1.3% in September. Output was constrained mostly by weakness in France and a big month-to-month fall in Ireland, which offset marginal gains in Germany and Spain.
Japanese real Q2 GDP growth surprised analysts, increasing sharply to a quarterly annualised rate of 4.0%, up from 1.0% in Q1 and much higher than the consensus, 2.5%. But its no coincidence that the jump in Japanese growth follows strong growth in China in Q1.
In the wake of the uptick in the March ISM manufacturing survey, we think today's official production data for the same month are likely to disappoint. Our model of the month-to-month output numbers incorporates the ISM data, but it is substantially driven by manufacturing hours worked, which fell in both February and March.
China's unadjusted March trade balance rebounded to a surplus of $20B, from a combined deficit of -$7B in the first two months of the year.
In the last two months, we have suggested that monetary conditions have turned the corner, but have cautioned that Lunar New Year distortions make the March data critically important.
Yesterday's data showed that growth in the EZ slowed in the second quarter.
Today's advance Q2 GDP report in Germany will add evidence that the EZ economy performed strongly in the first half of 2017. We can be pretty sure that the headline will be robust. The German statistical office reports a confidential number to Eurostat for the first estimate of EZ GDP--two weeks ahead of today's data--which was a solid 0.6%.
The consumer in Brazil was off to a strong start to the first quarter, and we expect household spending will continue to boost GDP growth in the near term.
After the first round of voting by Tory MPs, Boris Johnson remains the clear favourite to be the next Prime Minister.
Yesterday EZ industrial production report confirmed the message from advance country data that manufacturing rebounded towards the end of summer. Output, ex-construction, jumped 1.6% month-to-month in August, and the July data were revised up by 0.4 percentage points.
The manufacturing sector likely was the primary driver of Q3 GDP growth in the Eurozone. Data yesterday showed that industrial production rose 1.4% month-to-month in August, pushing the year-over-year rate up to 3.8%, from a revised 3.6% in July.
Korea's jobs report for August was a stonker, with unemployment plunging to 3.1%, from 4.0% in July, marking the lowest rate in more than five years.
Industrial production in the euro area dipped in February. Output fell 0.8% month-to-month pushing the year-over-year rate down to 0.8% from a revised 2.9% in January. This indicates that Eurozone manufacturing continues to lag the pace seen in previous business cycle upturns.
U.K. activity data have consistently surprised to the downside over the last month.
Japanese domestic demand probably strengthened in Q2, with both private consumption and fixed investment accelerating. Trade and inventories are the key swing components for GDP growth.
Brazil's retail sales data undershot consensus in August, falling by 0.5% after four straight gains. But we think this merely a temporary softening, following the strong performance in recent months.
The outlook for private investment in the Eurozone has deteriorated this year, especially in manufacturing.
The political situation in Spain remains an odd example of how complete gridlock can be a source of relative stability.
Activity in the Eurozone industrial sector cooled at the end of the first quarter. Manufacturing production declined 0.8% month-to-month in March, pushing the year-over-year rate down to 0.2% from a revised 1.0% in February. Over Q1 as a whole, though, the story was positive.
Mexican manufacturing data continue to offer a counterweight to strong consumers' spending and services numbers. Output in the key manufacturing sector contracted by 0.2% month-to-month in September, due mainly to severe external headwinds. But the year-over-year rate was unchanged at 3.3%, with a flat underlying trend. Total industrial output, by contrast, rose 0.4% month-to-month in September, pushing the year-over-year rate up to 1.7%, from an upwardly-revised 1.1% gain in August.
Industrial production data yesterday confirmed downside risks to today's GDP data in the Eurozone. Output fell 0.3% month-to-month in September, pushing the year-over-year rate down to 1.7% from a revised 2.2% in August. Weakness in Germany was the main culprit, amid stronger data in the other major economies. A GDP estimate based on available data for industrial production and retail sales point to a quarterly growth rate of 0.4% quarter-on-quarter, but we think growth was rather lower, just 0.2%, due to a drag from net trade.
Overall, the Chinese October data paint a picture of continued weakness in trade, with PPI inflation still high but the rate of increase finally slowing.
The underlying health of the construction sector isn't as poor as today's official output figures likely will imply. Nonetheless, growth in construction output, which accounts for 6% of GDP, probably won't return to the stellar rates seen in 2013 and 2014, and the sector can't be relied upon to provide much support to overall growth.
Data released earlier this week show that Japan's current account surplus continued its downtrend in October, falling to ¥1,404B, on our seasonal adjustment, from ¥1,494B in September.
We argued earlier this week that the data on the consumer economy are likely to be rather stronger than the industrial numbers.
Inflation in Brazil Ended 2019 Above the BCB's Target; 2020 will be Fine
Industrial production in India turned around sharply in November, rising by 1.8% year-over-year, following October's 4.0% plunge and beating the consensus forecast for a trivial 0.3% uptick.
Inflation in Brazil ended 2018 under control, despite slightly overshooting expectations.
A cursory glance at November's GDP report gives the misleading impression that the U.K. economy is ticking over nicely, despite Brexit.
Korea watchers appear to be hanging on Governor Lee Ju-yeol's every word, searching for any sign that he'll drop his hawkish pursuit of more sustainable household debt levels and prioritise short-term growth concerns.
China's headline trade numbers appear to paint a picture of an economy in rude health but scratch the surface and the story is quite different. The trade surplus rose to$42.8B in June from $40.8B in May, hitting consensus.
Investors concluded too hastily yesterday that November's GDP report boosted the chances that the MPC will cut Bank Rate at its upcoming meeting on January 30.
The EZ calendar has been extremely busy in the first few weeks of the year, making it virtually impossible to see the forest for the trees.
Japan's GDP likely dropped by a huge 0.9% quarter-on-quarter in Q4, after the 0.5% increase in Q3, with risks skewed firmly to the downside.
It was no surprise that Banxico cut its policy rate by 25bp to 7.00% yesterday, following similar moves in August, September, November and December.
Chancellor Javid's resignation, only eight months after assuming the role, is the clearest sign yet that the Johnson-led government wants fiscal policy to play a bigger part in stimulating the economy over the next couple of years.
All eyes in the Eurozone will be on the second estimate of Q4 GDP today, and the report likely will confirm that growth accelerated in Q4. We think real GDP rose 0.5% quarter-on-quarter, up from a 0.3% increase in Q3, in line with the first estimate. If this forecast is correct, the year-over-year rate will be unchanged at 1.8%. Risks to the headline, however, are tilted to the downside.
More evidence indicating that the recovery in global industrial activity is underway and gaining momentum- has poured in. In particular, trade data from China, one of LatAm's biggest trading partners, was stronger than the market expected last month. Both commodity import and export volumes increased sharply in January, and this suggests better economic conditions for China's key trading partners.
Economic conditions in Brazil are deteriorating rapidly.
This week's data confirmed Mexico's strong economic performance over the first few months of this year.
Chile's April retail sales data, released on Monday, show that private consumption started the second quarter on a solid footing. Sales rose 3.0% month-to-month, pushing the year-over-rate up to 7.9% from 1.4% in March and an average of 4.0% in Q1. The headline was boosted by a favourable calendar effect, as April this year had two more trading days than April 2015.
Last week's consumption releases were the first data from the real economy in the second quarter. In Germany, retail sales jumped 1.7% month-to-month in April, equivalent to a 1.0% rise year-over-year, an impressive start to the quarter. But our first chart shows that this still points to a moderate slowdown in Q2, consistent with mean-reversion following rapid gains in Q4 and Q1.
When the Fed raised rates in December, it subverted one of its own long-standing conventions by hiking with the ISM manufacturing index below 50. The December survey, released just 15 days before the meeting, showed the headline index slipping to 48.6, the third straight sub-50 reading. It has since been revised down to 48.0, the lowest reading since June 2009.
Money supply data in the euro area disappointed yesterday. Growth in M3 fell to 4.6% year-over-year in April, from 5.0% in March, due to an accelerated fall in the pace of narrow money growth. M1 rose 9.7% year-over-year, down from 10.1% in March. It was hit by lower growth in both overnight deposits and currency in circulation.
Brazil's GDP growth slowed to just 0.1% quarter- on-quarter in Q4, from a downwardly-revised 0.5% in Q3.
All eyes today will be on the core PCE deflator for January, following the unexpectedly large 0.3% increase in the core CPI.
We're expecting a strong-looking 225K increase in the May ADP measure of private sector payroll growth, due today. The consensus forecast is 180K.
The manufacturing sector is much more exposed to external forces--the dollar, and global growth--than the rest of the economy. But much of the slowdown in the sector over the past year-and-a-half, we think, can be traced back to the impact of plunging oil prices on capital spending in the sector.
The underlying U.S. consumer story, hidden behind a good deal of recent noise, is that the rate of growth of spending is reverting to the trend in place before last year's tax cuts temporarily boosted people's cashflow.
The easiest way to track the impact of the rising dollar on real economic activity is via the export orders component of the ISM manufacturing survey. We have been profoundly skeptical of the value of the ISM headline index, because it suffers from substantial seasonal adjustment problems, but the export orders index seems not to be similarly afflicted.
Trade talks between the U.S. and China officially resumed this week, with the first face-to-face meeting of the main negotiators taking place yesterday in Shanghai.
Economy-wide confidence deteriorated in November, highlighting that Britain continues to struggle to shake off its malaise.
Yesterday's FOMC statement was a bit more upbeat on growth than we expected, with Janet Yellen's final missive describing everything -- economic growth, employment, household spending, and business investment -- as "solid".
We have lost count of the number of times the drop in the ISM manufacturing survey, in the wake of the plunge in oil prices, was a harbinger o f recession across the whole economy. It wasn't, because the havoc wreaked in the industrial economy by the collapse in capital spending in the oil sector was contained.
If you apply a seasonal adjustment to a seasonally adjusted series, it shouldn't change. When you apply a seasonal adjustment to the U.S. GDP numbers, they do change. First quarter growth, reported Friday at just 0.7%, goes up to 1.7%, on our estimate.
Yesterday's economic headlines in the Eurozone were pleasant reading.
On the heels of yesterday's benign Q3 employment costs data--wages rebounded but benefit costs slowed, and a 2.9% year-over-year rate is unthreatening--today brings the first estimates of productivity growth and unit labor costs.
The BoJ kept policy unchanged, as expected, at its meeting yesterday.
The obsession of markets and the media with the industrial sector means that today's ISM manufacturing survey will be scrutinized far more closely than is justified by its real importance.
A firmer picture is emerging of how Japan's economy fared in Q3, in light of the latest slew of data for August.
Official Chinese real GDP growth likely slipped to 6.3% year-over-year in Q1, the lowest on record, from 6.4% in Q4, which matched the trough in the Great Financial Crisis.
The case for believing that August's unexpected 14-year high in the ISM manufacturing index was a fluke is pretty straightforward, and it has both short and medium-term elements.
The BoJ kept monetary policy unchanged yesterday, as expected, with the signal coming through loud and clear: Japan's central bank will continue its aggressive easing policy until the inflation cows come home...
Yesterday was a nearly perfect day for investors in the Eurozone. The Q3 GDP data were robust, unemployment fell, and core inflation dipped slightly, vindicating markets' dovish outlook for the ECB.
Britain is indisputably beyond the peak of the first wave of Covid-19 infections, though the descent in new cases, hospitalisations and deaths has been shallower than the ascent.
The FOMC meeting today will be a non-event from a policy perspective but we are very curious to see what both the written statement and the Chair will have to say about the unexpected strength of the economy in the first quarter.
The Office for Budget Responsibility has decided to press ahead with the publication of new fiscal forecasts on November 7, despite the government's decision to postpone the Budget until after the next election.
We expect to see a 70K increase in October payrolls today.
The more headline hard data we see in the Eurozone, the more we are getting the impression that 2019 is the year of stabilisation, rather than a precursor to recession.
The BoJ yesterday kept the policy balance rate at -0.1%, and the 10-year yield target at "around zero", in line with the consensus.
Yesterday's March labour market data in Germany were surprisingly strong
Data released this week in LatAm are the last calm before the coronavirus storm.
Data yesterday suggest Eurozone consumers' spending rebounded towards the end of Q4. Retail sales rose 0.3% month-to-month in December, pushing the year-over-year rate down to 1.4%, from a revised 1.6% in November. A +0.3 percentage point net revision to the month-to-month data added to the optimism, but was not enough to prevent a slowdown over the quarter as a whole.
Today's September ISM manufacturing survey is one of the most keenly-awaited for some time. Was the unexpected plunge in August a one-time fluke--perhaps due to sampling error, or a temporary reaction to the Gulf Coast floods, or Brexit--or was it evidence of a more sustained downshift, possibly triggered by political uncertainty?
The odds of the MPC cutting interest rates again in November took another knock yesterday after further signs that the manufacturing sector is getting back on its feet quickly.
Mexico's structural reforms, robust fundamentals, and its close ties to the U.S. should have conferred a degree of protection from the turmoil in EMs over the past year. But its markets have been hit as hard as other LatAm countries by the sell-off in global markets in recent weeks. The MXN fell about 5% against the USD in January alone, and has dropped by 20% over the last year.
The first major data release of 2016 showed manufacturing activity slipping a bit further at the end of last year, but we doubt the underlying trend in the ISM manufacturing index will decline much more. Anything can happen in any given month, especially in data where the seasonal adjustments are so wayward, but the key new orders and production indexes both rose in January; almost all the decline in the headline index was due to a drop in the lagging employment index.
Advance data suggest German inflation pressures eased towards the end of last year. Inflation fell to 0.3% year-over-year in December from 0.4% in November, likely due to a fall in food inflation--mean reversion in fruit and vegetables inflation--and a sharp fall in the annual price increase of clothing and shoes. State data indicate that deflation in household utilities persisted, but that inflation of fuel and transportation is slowly recovering. Assuming a stable oil price in coming months, base effects should push up energy price inflation in the first quarter, though it should then fall again slightly in the second quarter. Overall, though, we expect energy price inflation gradually to stabilise and recover this year.
The revival in the construction sector is slowing on all fronts as the fiscal squeeze intensifies, business confidence fades and the recovery in housebuilding loses momentum. These headwinds are likely to ensure that construction output only holds steady this year, thereby contributing to the broader economic slowdown.
Brazil's economic news this week remained bleak at the headline level, but some of the details were less terrible in than in recent months. Industrial production fell by a worse-than-expected 11.9% year-over-year in December, marginally up from the 12.4% drop in November.
The worst is over for manufacturers, we think. The three major forces depressing activity in the sector last year--namely, the strong dollar, the slowdown in China, and the collapse in capital spending in the oil sector--will be much less powerful this year.
Andres Abadia authors our Latin American service. Andres is a native of Colombia and has many years' experience covering the global economy, with a particular focus on Latin America. In 2017, he won the Thomson Reuters Starmine Top Forecaster Award for Latam FX. Andres's research covers Brazil, Mexico, Argentina, Chile, Colombia, Peru and Venezuela, focusing on economic, political and financial developments. The countries of Latin America differ substantially in terms of structure, business cycle and politics, and Andres' researchhighlights the impact of these differences on currencies, interest rates and equity markets. He believes that most LatAm economies are heavily influenced by cyclical forces in the U.S. and China, as well as domestic policy shocks and local politics. He keeps a close eye on both external and domestic developments to forecast their effects on LatAm economies, monetary policy, and financial markets. Before starting to work at Pantheon Macroeconomics in 2013, Dr. Abadia was the Head of Research for Arcalia/Bancaja (now Bankia) in Madrid, and formerly Chief Economist for the same institution. Previously, he worked at Ahorro Coporacion Financiera, as an Economist. Andres earned a PhD in Applied Economics, and a Masters Degree in Economics and International Business Administration from Universidad Autónoma de Madrid, and a BSc in Economics from the Universidad Externado de Colombia.
The 0.7% first quarter increase in the ECI measure of private sector wages and salaries raised the year-over-year rate to 2.8%, the highest since late 2008 and significantly stronger than the 2.1% increase in hourly earnings in the year to March.
The upward revisions to real consumers' spending in the fourth quarter, coupled with the likelihood of a hefty rebound in spending on utility energy services, means first quarter spending ought to rise at a faster pace than the 2.2% fourth quarter gain. Spending on utilities was hugely depressed in November and December by the extended spell of much warmer-than-usual weather.
Data yesterday showed that the downward trend in Eurozone unemployment continued towards the end of last year. The unemployment rate fell to 10.4% in December from 10.5% in November, extending an almost uninterrupted decline which began in the first quarter of 2013.
Unemployment in the Eurozone fell to a 22-month low of 10.3% in January, from 10.4% in December, helped by a continued fall in Spain but underpinned by low unemployment in Germany.
The outlook for Brazil's industrial economy is better than at any time since before the crisis. But data released this week highlighted that the recovery will be slow and bumpy.
Chile's economic outlook is still clouded, due mostly to the slowdown in China and low copper prices. But the steady, slow increase in the Imacec index, a monthly proxy for GDP, supports our view of a sustained but modest economic recovery this year. The index increased 1.8% year-over-year in November, marginally up from the meagre 1.5% gain in October, but below the 2.2% average seen during Q3 as a whole. November's gain was driven by an increase in services activity, offsetting weakness in mining. Services have been the key engine of growth in the current cycle and likely will remain so in H1.
Demand in the German manufacturing sector stumbled at the end of Q4. Factory orders fell 0.7% month-to-month in December, but the details of the report were slightly more upbeat than the headline. The main hit came from a 2.5% fall in domestic orders, chiefly as a result of weakness in the intermediate goods sector.
Yesterday's German factory orders report showed that manufacturing activity accelerated in August. New orders rose 1.0% month-to-month, after a 0.3% increase in July, pushing the year-over-year rate up to +2.1% from a revised -0.6%.
The consensus view that the recovery won't lose more momentum this year seems to assume that the U.K. economy is better placed to deal with the intensification of the fiscal squeeze than earlier this decade. We do not share this optimism.
Yesterday's German factory orders data suggest that manufacturing remained weak in the beginning of Q1. New orders fell 0.1% month-to-month in January, though the year-over-year rate rose to 1.1% from a revised -2.2% in December. The small monthly decline was due to a fall in domestic orders; this offset an increase in export orders to other Eurozone economies.
Today's March ADP employment report likely will catch the leading edge of the wave of job losses triggered by the coronavirus.
Investors currently think that official interest rates are more likely to fall than rise this year. Overnight index swap markets are factoring in a 30% chance of a rate cut by December, but just a 1% chance of an increase by year-end. The case for expecting looser monetary policy, however, remains unconvincing.
Even though Greece managed to avert default yesterday by paying €200M in interest to the IMF, our assumption is that the country remains on the brink of running out of money. Our view is supported by the government's decision to expropriate local authority funds, and reports that the government's domestic liabilities, excluding wages and pensions, are not being met.
The Budget on March 16 is set to mark the end of Chancellor George Osborne's lucky streak. Without corrective action, his self-imposed debt rule-- one of the two specified in the 'legally-binding' Charter for Budget Responsibility--looks set to be breached.
September's Markit/CIPS services survey added to the evidence indicating that GDP growth softened, rather than fell off a cliff, in the third quarter. The activity index edged down only to 52.6, from 52.9 in August.
Today's March retail sales report will likely disappoint, despite the already- downbeat consensus forecast of a 0.7% month-to-month fall. We think sales fell 1.2%, equivalent to a 1.3% increase year-over-year, due mostly to the bigger-than-expected 2.3% plunge in German sales, reported too late to be incorporated in the Bloomberg consensus.
This is the final report before your Eurozone correspondent dials down for the summer, and heads for the beach. Advance Q2 GDP data next week is the key release while we are away, with the latest Bloomberg consensus--published July 20th--looking for a 0.4% increase quarter-on-quarter. Everything we look at suggests the consensus is right on this one, with risks tilted to the upside due to strong net exports in Germany.
Brazil's economic news remained grim at the headline level last week, but some of the details were less bad than in recent months. Industrial production fell by 13.8% year-over-year in January, down from the 12.1% drop in December and the worst performance on this basis since mid-2009.
Final Italian Q4 GDP data on Friday confirmed that the economy stumbled at the year-end. Real GDP rose 0.1% quarter-on-quarter in Q4, slowing from 0.2% in Q3, in line with the initial es timate. But the details were better than the headline. Inventories shaved off a hefty 0.4 percentage points, reversing boosts in Q3 and Q2, so final demand rose a robust 0.5%. Consumption added 0.2pp, while public spending contributed 0.1pp.
Chinese PPI inflation was unchanged at 5.5% in July; it had been expected to rise modestly. Officially, inflation peaked at 7.8% in February, but we think this peak was artificially high, thanks to seasonal effects. The slowing in PPI inflation since the peak appears to suggest that monthly price gains have slowed sharply. We find little evidence to support this.
Brazil's retail sales ended the second quarter on a less-bad footing. Sales volumes increased 0.1% month-to-month in June, pushing the year-over-year rate up to -5.3%, from -9.0% in May. Smoothed year-over-year growth in retail sales has improved to -7% from its cyclical trough of around -9% in the end of last year.
Yesterday's Sentix investor sentiment survey provided the first glimpse of conditions on the ground in the EZ economy in the wake of the coronavirus scare.
The clear threat to demand posed by the coronavirus and China's efforts at containment have sent a shock wave through commodities markets.
Chinese PPI inflation fell to 4.9% in December, from 5.8% in November. The decline was expected, but underneath the slowdown in commodity price inflation, the rate of increase of manufacturing goods prices is slowing sharply too.
Momentum in French manufacturing eased slightly in November, but the setback was modest. Industrial production dipped 0.5% month-to-month, only partially reversing the revised 1.7% jump in October.
The upturn in the new monthly measure of GDP in May, released yesterday, was strong enough--just--to suggest that the MPC likely will raise Bank Rate at its next meeting on August 2.
Economic data in the euro area are still slipping and sliding.
Mexico's latest forward-looking indicators are showing tentative signs of stabilisation in the wake of recent evidence that growth slowed quicker than markets have been expecting.
The combination of sluggish GDP growth in October and news that the Prime Minister will attempt to renegotiate the terms of the Brexit backstop, most likely pushing back the key vote in parliament until January, has extinguished any lingering chance that the MPC might be in a position to raise Bank Rate at its February meeting.
Manufacturing in France remained on the front foot at the start of Q4.
The ECB made no changes to its policy stance yesterday.
Recent activity data in Mexico have been soft and leading indicators still point to challenging near-term prospects, due mainly to relatively high domestic political risk, stifling interest rates and difficult external conditions.
Markets rightly placed little weight on October's below-consensus GDP report yesterday, and still think that the chances of the MPC cutting Bank Rate within the next six months are below 50%.
Japan's Q3 real GDP growth was revised up substantially to 0.6% quarter-on-quarter in the final read, compared with 0.3% in the preliminary report.
China's November money and credit data were a little less grim, with only M2 growth slipping, due to unfavourable base effects.
Yesterday's manufacturing data in France were in stark contrast to last week's upbeat German numbers.
Recent economic indicators in Mexico have been relatively positive.
It's just not possible to forecast the reaction of businesses and consumers to the coronavirus outbreak.
It's still unclear how exactly Covid-19 will impact the euro area as a whole, but little doubt now remains that Italy's economy is in for a rough ride.
We expect the Budget today to underwhelm investors who are eager to see a quick and powerful government response to the coronavirus outbreak.
Friday's manufacturing data in the Eurozone were mixed.
The re-emergence of Chinese PPI inflation in 2016 was instrumental in stabilising equities after the 2015 bubble burst.
The 20K increase in February payrolls is not remotely indicative of the underlying trend, and we see no reason to expect similar numbers over the next few months.
Collapsing oil prices add fresh deflationary pressure on China.
We already know that the key labor market numbers in today's May NFIB survey are strong.
France is solidifying its position as one of the Eurozone's best-performing economies.
The economy looks to be in better shape following May's GDP report than widely feared.
The latest IPCA inflation data in Brazil show the year-over-year rate fell to 8.8% in June from 9.3% in May. This is the slowest pace since May 2015, with inflation pulled lower by declines across all major components, except food. Indeed, food prices were the main driver of the modest 0.4% unadjusted monthto-month increase, rising by 0.7%, following a 0.8% jump in May. The year-over-year rate rose to 12.8% in June from 12.4%.
China's trade surplus has been trending down in the last two years.
April's GDP data give a grim firs t impression, though the details provide reassurance that the economy isn't on the cusp of a recession.
Industrial production hit its stride last year, notching up eight consecutive month-to-month gains--the longest run of unbroken growth since May 1994--before a setback in December, which was triggered by the temporary closure of the Forties oil pipeline.
Lacklustre economic data and persistent no deal Brexit risk mean that the MPC won't rock the boat at this week's meeting.
Yesterday's industrial production report in Germany was much better than implied by the poor new orders data--see here--released earlier this week.
The year-long surge in CPI inflation in China will soon end.
It's hardly surprising that the consensus forecast for month-to-month growth in November GDP, released on Friday, is a mere 0.1%, given the flow of downbeat business surveys.
History is repeating itself in France. When the Republican Nicolas Sarkozy defeated the Socialist candidate Ségolène Royal in April 2007, consumer sentiment briefly soared to a six-year high, before plunging to an all-time low a year later.
It has been mostly doom and gloom for euro area investors in equities and credit this year.
China's FX reserves were little changed in June, at $3,112B.
The market-implied probability that the MPC will cut Bank Rate in the first half of this year leapt to 50% yesterday, from 35%, following Mark Carney's speech.
Survey data have been signalling a resilient Brazilian economy in the last few months, despite the broader challenges facing LatAm and the global economy in 2019.
The early Q4 hard data in Germany recovered a bit of ground yesterday.
Japan's GDP growth was revised up, to 0.4% quarter-on-quarter in Q3, from 0.1% in the preliminary reading.
China's January trade data were scheduled for release on Friday, but instead, the customs authority delayed the publication, saying it would publish the numbers with the February data
We can't quibble with the consensus that GDP likely rose by 0.2% month-to-month in December, reversing only two-thirds of November's drop.
German exporters stumbled at the end of last year. The seasonally adjusted trade surplus in Germany dipped to €18.4B in December, from €21.8B in November, hit by a 3.3% month-to-month plunge in exports. Imports were flat on the month. The fall in exports looks dramatic, but it followed a 3.9% jump in the previous month, and nominal exports were up 2.5% over Q4 as a whole. Advance GDP data next week likely will show that net trade lifted quarter-on-quarter growth by 0.2 percentage points, partly reversing the 0.3pp drag in Q3. Real imports were held back by a jump in the import price deflator, due to rebounding oil prices.
Friday's industrial production data in the core EZ economies, for December, were startlingly poor. In Germany, industrial production plunged by 3.5% month-to-month, comfortably reversing the revised 1.2% rise in November.
Friday's data provided the first bit of evidence that manufacturing in the Eurozone is headed for a slowdown in Q2, partly reversing the strength in Q1.
China's trade balance flipped to an unadjusted deficit of $7.1B in the first two months of the year, from a $47.2B surplus in December.
Gloom and uncertainty are spreading across the global economy as we head into the final stretch of the year.
New business in German manufacturing ended the first quarter on a strong note. Factory orders rose 1.9% month-to-month in March, above the consensus 0.6%, and net revisions to the February data were +0.4 percentage points. The rise in new orders was exclusively due to a 4.3% increase in export orders, which offset a 1.2% fall in domestic orders. These are strong numbers, but the details suggest that mean reversion will push the headline down next month.
Industrial production figures look set to surprise the consensus to the downside again today. We think that production was flat on a month-to-month basis in August, falling short of the consensus forecast of 0.2% growth.
China's August foreign trade data were nasty, on the face of it, with exports falling 1.0% year-over- year, after the 3.3% increase in July.
Japan's labour cash earnings rose by 1.5% year-over- year in July, a strong result in the Japanese context, if it hadn't been preceded by the 3.6% leap in June.
Friday was a busy day in the Eurozone economy. The third detailed GDP estimate confirmed that growth was unchanged at 0.4% quarter-on-quarter in Q2, pushing the year-over-year rate down by 0.4 percentage points to 2.1%, marginally below the first estimate,2.2%.
Unsurprisingly, cross-party Brexit talks are not going well.
The French manufacturing sector slowed more than we expected in Q1.
We're now starting to see clear signs in unofficial data that households are slashing their expenditure on discretionary services, in order to minimise their chances of catching the coronavirus.
In this Monitor we'll let the data be, and try to make some sense of the recent market volatility from a Eurozone perspective, with an eye to the implications for the economy and policymakers' actions.
Investors in the gilt market would be wise not to take the new official projections for borrowing and debt issuance at face value. The forecast for the Government's gross financing requirement between 2017/18 and 2021/22 was lowered to £625B in the Budget, from £646B in the Autumn Statement.
Brazil's industrial sector had a relatively good start to the year. Data on Wednesday showed that production fell 0.1% month-to-month in January, less than markets expected, and the year-over-year rate rose to 1.4%, after a 0.1% drop in December.
Yesterday's economic data in Germany cemented the story of a strong start to the year, despite the disappointing headlines. Industrial production slipped 0.4% month-to-month in March, pushing the year-over-year rate down to +1.9% from a revised +2.0% in February.
Upbeat survey data, a competitive MXN, and the strong U.S. manufacturing sector indicate that Mexican industry should be rebounding.
The Korean unemployment rate edged back up to 3.7% in November from October's 3.6%. Young graduates--the usual suspects--accounted for most of the rise.
The industrial sector in the EZ slowed further at the end of Q3.
Renewed stockpiling ahead of the October Brexit deadline finally appears to be providing some near-term support to manufacturing output.
The Japanese government's plan to smooth out the consumption cliff-edge generated by October's sales tax hike is either going too well, or consumers now are facing fundamental headwinds.
Yesterday's surprising decline in the Eurozone unemployment rate adds further evidence to the story of a slowly healing economy. The rate of joblessness fell to 10.9% in July from 11.1% in June, the lowest since the beginning of 2012, mainly driven by a 0.5 percentage point fall in Italy, and improvement in Spain, where unemployment fell 0.2 pp to 22.2%.
The INSEE business sentiment data in France continue to tell a story of a robust economy.
Halfway through the third quarter, we have no objection to the idea that GDP growth likely will exceed 2% for the third straight quarter.
The dreadful September ISM manufacturing survey reinforces our view that the sector will be in recession for the foreseeable future, and that both business capex and exports are on the verge of a serious downturn.
Japan's Tankan survey continues to paint a picture of a contracting economy.
Korea's trade data have been extremely volatile over the past two months, thanks to distortions caused by last year's odd holiday calendar.
Brazil's central bank kept the Selic policy rate at 6.50% this week, as markets broadly expected.
Last month was sobering month for equity investors in the Eurozone, and indeed in the global economy as a whole.
The Fed won't raise rates today, or substantively change the wording of the post-meeting statement. In September, the FOMC said that "The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives."
Brazil's industrial production rose 0.8% month- to-month in August, well above our call, and the consensus, for a trivial increase.
October's Markit/CIPS manufacturing survey indicates that producers are not shying away from passing on to their customers the higher costs stemming from sterling's depreciation.
The BoJ held firm, for the most part, during this year's bout of central bank dovishness.
China's December foreign trade numbers were unpleasant, with both exports and imports falling year-over-year, after rising, albeit slowly in November.
Friday's detailed euro area CPI report for December confirmed that inflation pushed higher at the end of last year. Headline inflation increased to 1.3% year-over- year, from 1.0% in November, lifted primarily by higher energy inflation, rising by 3.4pp, to +0.2%. Inflation in food, alcohol and tobacco also rose, albeit marginally, to 2.1%, from 2.0% in November.
Officially, China's real GDP growth was unchanged at 6.0% year-over-year in Q4; low by Chinese standards, but not overly worrying. Full-year growth was 6.1% within the 6.0-to-6.1% target down from 6.7% last year, also in keeping with the authorities' long-term poverty reduction goals.
Today's labour market data look set to show that the headline, three-month average, unemployment rate held steady at just 5% in May, unchanged from April's reading.
Japan's trade balance deteriorated sharply in May, flipping to a ¥967B deficit from the modest ¥57B surplus in April.
Brazil's recovery is consolidating, with recent data flow confirming that the economy had an encouraging start to the year.
We have been on the ECB's case recently. The action taken at last week's official meeting--see here--fell short of market expectations, but more importantly, Ms. Lagarde's communication around the decisions was disastrous.
Expectations that the MPC will cut Bank Rate at its meeting on January 30 received a further shot in the arm at the end of last week, when December's retail sales figures were released.
Brazil's December economic activity index, released last week, showed that the economy ended the year on a relatively soft footing. The IBC-Br index, a monthly proxy for GDP, fell 0.3% month-to-month, though the year-over-year rate rose to -1.8%, from -2.2% in November.
The PBoC late on Wednesday announced measures to provide medium-term funding for smaller businesses.
German survey data did something out of character yesterday; they fell. The IFO business climate index declined to 117.2 in December from a revised 117.6 in November.
The FOMC did the minimum expected of it yesterday, raising rates by 25bp--with a 20bp increase in IOER--and dropping one of its dots for 2019.
The market-implied probability that the MPC will cut Bank Rate by June fell to 34%, from 38%, after the release of January's consumer price figures, though investors still see around an 80% chance of a cut by the end of this year.
Wednesday's State Council meeting implies that the authorities are starting to take more serious coordinated fiscal measures to counter the virus threat to the labour market and to banks.
Production in the EZ construction sector slumped at the end of Q4. Data yesterday showed that output slid by 3.1% month-to-month in December, comfortably reversing the 0.7% increase in November.
The Fed yesterday acknowledged clearly the new economic information of recent months, namely, that first quarter GDP growth was "solid", with Chair Powell noting that it was stronger than most forecasters expected.
If recent labor market trends continue, the four employment reports which will be released before the June FOMC meeting will show the economy creating about 1.1M jobs, pushing the unemployment rate down to 5.3%, almost at the bottom of the Fed's estimated Nairu range, 5.2-to-5.5%.
Japan's jobless rate was unchanged, at 2.4% in October, as the market took a breather after September's job losses.
The key detail in Friday's barrage of economic data was the above-consensus increase in EZ inflation.
The labour market in the Eurozone continues slowly to improve. The unemployment rate fell to 10.7% in October from 10.8% in September, reaching its lowest level since 2013. The divergence in rates, however, between the major economies remains significant. Unemployment in France, Italy and Spain is still above 10%, but the advance German number continued their record-breaking form in November.
Our payroll model, which incorporates survey data as well as the error term from our ADP forecast, points to a hefty 225K increase in November employment. We have tweaked the forecast to the upside because of the tendency in recent years for the fourth quarter numbers to be stronger than the prior trend, as our first chart shows.
The FOMC statement did enough to keep alive the idea that rates could rise in March, but the ball is now mostly in Congress' court. If a clear plan for substantial fiscal easing has emerged by the time of the meeting on March 15, policymakers can incorporate its potential impact on growth, unemployment and inflation into their forecasts, then a rate hike will be much more likely.
The Greek economy escaped recession in the second half of last year. Real GDP rose a cumulative 1.2% in Q2 and Q3, following a 0.6% fall in Q1. And industrial production and retail sales data suggest that the advance GDP report released later this month will show that the momentum was sustained in Q4. Headline survey data, however, indicate that downside risks to the economy remain.
With campaigning for the general election intensifying last week, it was unsurprising that October's money and credit release from the Bank of England received virtually no media or market attention.
Investors awaiting today's interest rate decision might be a little unnerved to learn that the MPC has a track record of surprises.
Within the space of two months, investors have gone from wondering whether the slowdown in manufacturing would spill-over into the rest of the EZ economy, to the realisation that the crunch in services is now driving the overall story on the economy.
President Trump wrote to Congress on Monday, saying that the U.S. finally has reached a trade deal with Japan, about a month after he and Prime Minister Abe announced an agreement in principle, on the sidelines of the G7 Summit in France.
The duration and future scope of the current lockdown is the main uncertainty that U.K economic forecasters have to grapple with at present.
The Q1 Tankan survey headlines were close to our expectations, chiming with our call for year-over-year contraction in Japanese GDP of at least 2%, after the 0.7% decline in Q4.
The past two days have seen a slew of data that should keep the hawks in the Bank of Korea at bay during the Board's meeting at the end of this month.
Inflation in the Eurozone stumbled at the end of Q3.
The 2010s were the first decade since reliable records begin--in the 1700s--in which a recession was completely avoided
While were out over the holidays, the single biggest surprise in the data was yet another drop in imports, reported in the advance trade numbers for November.
The number of Covid-19 cases is increasing at a faster rate, though 89% of the new cases reported Saturday were in China, South Korea, Italy and Iran.
Japan's labour data threw another January curve ball this year--last year it was wages--with a change in the standards for job openings.
Data on Friday showed that the downward trend in Brazil's unemployment continued into this year. The unadjusted unemployment rate fell to 11.2% in January, slightly below the consensus, and down from 12.0% in January last year.
We'll cover Friday's barrage of EZ economic data later in this Monitor, but first things first. We regret to inform readers that the ECB is behind the curve. Last week, Ms. Lagarde downplayed the idea that the central bank will respond to the shock from the Covid-19 outbreak.
Advance inflation data in the Eurozone will likely surprise to the upside today. The consensus forecast expects inflation to rise slightly to -0.5% year-over-year in February from -0.6% in January, but we expect a much bigger jump, to -0.2% year-over-year.
Investors moved rapidly last week to price-in renewed easing by central banks around the world, in response to the rapid growth in coronavirus cases outside China and the resulting sell-off in equity markets.
The manufacturing sector's recovery has sped up since Q1, according to Markit's latest survey, but growth still looks too weak to prevent the overall economy from struggling again in Q2.
We anticipated that the G20 meeting at Osaka over last weekend would be a potentially important mark of thawing relations between China and the U.S., with the hotly awaited meeting between Messrs. Xi and Trump.
At the end of last year, China's Central Economic Work Conference set out the lay of the land for 2019. Cutting through the rhetoric, we think the readout implies more expansionary fiscal policy, and a looser stance on monetary policy.
Data on EZ consumption were soft while we were enjoying our Christmas break. The advance EC consumer confidence index slipped to a three-year low of -8.1 in December, from -7.2 in November, breaking its recent tight range.
We suspect that euro area investors have one question on their mind as we step into 2019.
We keep hearing that the auto market is struggling, but that idea is not supported by the recent sales numbers.
Yesterday's economic data in the Eurozone were soft.
The euro area's trade advantage with the rest of the world slipped at the start of the year.
Mexico's recent rebound in inflation and a more volatile financial environment, due to increasing global trade tensions, forced Banxico to keep its policy rate unchanged at 8.25% last Thursday.
Yesterday's barrage of French business sentiment data suggest that confidence in the industrial sector was a little stronger than expected in Q2.
Korean trade activity is slowing.
Today's economic calendar in the Eurozone is filled to the rafters.
Unlike other central banks, the MPC has stuck to its message that "an ongoing tightening of monetary policy over the forecast period" likely will be required to keep inflation close to the 2% target, provided a no-deal Brexit is avoided.
The latest trade data from Korea underscore the unfortunate timing of the resumption of the U.S.-China tit-for-tat tariff war.
The Spanish economy has been living a quiet life recently, amid markets' focus on political risks in Italy and manufacturing slowdowns in Germany and France.
The EU has had a better start to the Brexit negotiations than its counterpart across the Channel. The risk of disagreement within the EU on the details with of the U.K.'s exit is high, but the Continent has presented a united front so far, mainly because Mr. Macron and Mrs. Merkel agree on the broad objectives. They have no interest in punishing the U.K., but they are also keen to show that exiting the EU has costs for a country which leaves.
Soon after last week's vote to keep Bank Rate at 0.50%, the MPC's doves were quick to assert that monetary easing is still imminent. A speech by Andy Haldane, published on July 15, called for "... a package of mutually complementary monetary policy easing measures" that should be "delivered promptly and muscularly". Meanwhile, Gertjan Vlieghe, who was alone in voting for a rate cut in July, wrote in The Financial Times last week that he also favours "a package of additional measures" in August.
Yesterday's Japanese activity data were grim.
The U.S. consumer is back on track, almost. We have argued in recent months that the sharp slowdown in the rate of growth of consumption is mostly a story about a transition from last year's surge, when spending was boosted by the tax cuts and, later, by falling gas prices, to a sustainable pace roughly in line with real after-tax income growth.
The BoJ kept its main policy settings unchanged yesterday, in another 7-to-2 split.
November's labour market report provided timely reassurance, after last week's downside data surprises, that the economy did not grind to a halt at the end of last year.
The China Daily ran an article entitled "Beijing, nation get breath of fresh air" on the day Chinese GDP figures were published last week, underlining where the authorities' priorities now lie.
As we reach our Sunday afternoon deadline, no deal has been reached to re-open the federal government.
We still don't have the complete picture of what happened to EZ consumers' spending in Q1, but the initial details suggest that growth acceleretated slightly at the start of the year.
We're placing less weight than usual on conventional business surveys at the moment, as they are ill-suited to charting the economy's turnaround from the Covid-19 slump.
The BoJ kept policy unchanged yesterday, with the policy balance rate remaining at -0.1% and the 10-year yield target remaining around zero.
Discussion about whether the U.K. would be better off voting to leave the European Union in the forthcoming referendum is rarely out of the press, raising the question of whether simply holding the national vote could damage the economy even if the U.K. votes for the status quo in the end.
Japan's headline CPI inflation is set to edge down in coming months, thanks to non-core prices.
Inflation in Brazil remained subdued at the start of the second quarter, strengthening the odds for an additional interest rate cut next month, and opening the door for further stimulus in June.
The Mexican economy shrank by 0.2% quarter-on-quarter in Q2, according to the final GDP report, a tenth better than the preliminary reading. The year-over-year rate rose marginally to 2.5% from 2.4% in Q1. But the year-over-year data are not seasonally adjusted, understating the slowdown in the first half of the year, as shown in our first chart.
The performance of Italy's economy in the first half of 2017 proves that the strengthening euro area recovery is a tide lifting all the r egion's boats.
The slowdown in the EZ economy is well publicised.
After the strong Philly Fed survey was released last week, we argued that the regional economy likely was outperforming because of its relatively low dependence on exports, making it less vulnerable to the trade war.
The PBoC's quarterly monetary policy report seemed relatively sanguine on the question of PPI deflation, attributing it mainly to base effects--not entirely fairly--and suggesting that inflation will soon return.
Japan's export data for April unsurprisingly were abysmal, driving a massive deterioration in the trade balance, which flipped from a modest ¥5B surplus in March, to a ¥930B deficit.
The public finances are in better shape than October's figures suggest in isolation. Public sector net borrowing excluding public sector banks--PSNB ex.--leapt to £11.2B, from £8.9B a year earlier.
Yesterday's barrage of survey data in France suggests that business sentiment in the industrial sector remained soft mid-way through Q4, but the numbers are more uncertain than usual this month.
Japan's all-industry activity index fell 0.5% month-on- month in September after a 0.2% rise in August. Construction activity continued to plummet, with the subindex dropping 2.3%, after a 2.2% fall in August.
The New York Fed tweeted yesterday that "Housing market fundamentals appear strong.
Exports rebounded sharply in Q3 so far, after the Q2 weakness. This will be a useful boost to GDP growth in Q3, as domestic demand likely will soften.
Chile's Q2 GDP report, released on Friday, confirmed that the economy gathered momentum in recent months, following an alarmingly weak start to the year.
The recent sharp, if not startling, upturn in the regional manufacturing surveys should continue today with the release of the Philadelphia Fed report. The survey is constructed in the same way as the more volatile Empire State, which has rocketed in the past few months, and the headline indexes follow similar trends, as our first chart shows.
Chile's Q2 GDP report, released yesterday, confirmed that the economy gathered strength in the first half of the year, consolidating a strong recovery that started in Q3 2017.
The third quarter national accounts, due to be published on Friday, likely will not alter the picture of economic resilience immediately after the referendum. The latest estimate of GDP growth often is revised in this release, but revisions have not exceeded 0.1 percentage points in either direction in the last four years, as our first chart shows.
Once again, Chinese January data released so far suggest that the Phase One trade deal was the dominant factor dictating activity for the first two- thirds of the month, with the virus becoming a real consideration only in the last third.
This is the final report before we dial down for our Christmas break, and we are happy to report that the economic calendar will be almost empty in our absence.
Covid-19 has finally showed up in Japan's exports, which plunged 11.7% year-over-year in March, after falling a mere 1.0% in February.
It was widely assumed that the MPC simply would regurgitate its key messages from August in the minutes of September's meeting, released yesterday alongside its unanimous no-change policy decision.
Yesterday's headline economic data in the euro area were solid across the board, though the details were mixed.
The annual National People's Congress meeting of China's legislature will get underway at the end of this week, after delay due to the Covid outbreak.
CPI inflation in India jumped to 4.6% in October, from 4.0% in September, marking a 16-month high and blasting through the RBI's target.
Leading indicators are giving conflicting signals regarding the outlook for core goods CPI inflation.
The Spanish economy has been punching above its weight in the current business cycle. Real GDP growth has trended at about 0.8% quarter-on-quarter since 2015, far outpacing the other major EZ economies.
Looking through recent supply disruptions, Japan's adjusted trade balance seems likely to remain in the red until the new year.
Economists refer to two different types of forward rate guidance by central banks: Delphic and Odyssean. The former describes a "normal" situation, in which the central bank follows a transparent rate-setting rule allowing markets to forecast what it will do, based on the flow of economic data.
As we write, markets see a 70% chance that the MPC will cut Bank Rate on January 30.
If the only manufacturing survey you track is the Philadelphia Fed report, you could be forgiven for thinking that the sector is booming.
Japanese trade remained in the doldrums in October, keeping policymakers on their toes as they repeat the refrain of "resilient" domestic demand.
Borrowing by local authorities from the Public Works Loan Board, used to finance capital projects-- and arguably dubious commercial property acquisitions--has surged this year.
The Eurozone's external surplus recovered a bit of ground mid-way through the third quarter.
It has become pretty clear over the past couple of weeks that Hillary Clinton will be the next president, so it's now worth thinking about how fiscal policy will evolve over the next couple of years.
The government now has a 50:50 chance of getting the Withdrawal Agreement Bill--WAB--through parliament in the coming weeks, despite Letwin's successful amendment and the extension request.
The year so far in EZ equities has been just as odd as in the global market as a whole.
CPI inflation took a big step in April towards the near-zero rate we anticipate by the summer.
The perfect world for equities is one in which earnings and valuations are rising at the same time, but in the Eurozone it seems as if investors have to make do with one or the other.
Latin American markets have been relatively resilient this year, despite Fed tightening and high global political risks. The LACI index has risen more than 5% year-to-date, and the MSCI index has been trending higher since late last year.
Now that the Fed has abandoned the idea of raising rates this year, despite 3.8% unemployment and accelerating wages, it is very exposed to the risk that the bad things it fears don't happen.
The chances of the first phase of the Brexit saga concluding soon declined sharply last week.
Yesterday's final CPI report for April confirmed that the Eurozone is edging towards deflation.
Sterling took another pounding last week. Resignations from the Cabinet, protests by the DUP, and the public submission of letters by 21 MPs calling for a confidence vote in Mrs. May's leadership, imply that parliament won't ratify the current versions of the Withdrawal Agreement and the Political Declaration on the future relationship with the E.U. next month.
The run of weak retail sales figures continued yesterday, with the release of November's official data.
Yesterday's GDP reports confirmed that growth was stable at 0.3% quarter-on-quarter in the Eurozone, leaving the year-over-year rate unchanged at 1.5%. Rebounding growth outside Germany, which has been a main driver of EZ GDP growth in this cycle, was the key story.
Even if the Prime Minister fends off an emerging leadership challenge--as we write, the rebels still are short of the 48 signatures required to trigger a confidence vote--her chances of getting parliament to back the Withdrawal Agreement in its current form are slim.
China's official real GDP growth likely slowed to 6.0% year-over-year in Q3, from 6.2% in Q2.
The Chinese trade surplus was reasonably stable on our seasonal adjustment in September, falling to $27.5B from $29.7B in August.
Japan's tertiary index edged up 0.1% month-on-month in July, after the 0.1% decrease in June.
China's official real GDP growth is absurdly stable, but the risks in Q3 are tilted to the downside.
Japanese GDP growth in the third quarter corrected the imbalances of the second. Domestic demand took a breather after unsustainable growth in Q2, while net exports rebounded.
Brazil's Vice-President, Michel Temer, has taken over as interim president, following the approval of the impeachment motion against President Dilma Rousseff, accused of using creative accounting to hide large budget deficits. The impeachment motion suspends Ms. Rousseff for now; she will be removed from office permanently if a two-thirds majority finds her guilty.
The sharply increased virus spread outside China has lead to a serious downgrade in the global GDP growth outlook.
Last week's hard data in Colombia were upbeat, confirming that economic growth accelerated in the first half. Retail sales rose 5.9% year-over-year in May, overshooting consensus.
It's now four weeks since the Prime Minister called a snap general election, and the Conservatives still are riding high in the opinion polls. The average of the last 10 polls suggests that the Tories are on track to take 47% of the vote, well above Labour's 30%.
Chinese April retail sales growth slowed sharply in value terms, to 9.4% year-over-year, from 10.1% in March.
The second round of EZ GDP data on Friday confirmed the resilience of cyclical upturn. Real GDP in the euro area rose 0.5% quarter-on-quarter in Q1, up from 0.3% in Q4, and the fastest pace since the first quarter of last year. But the headline was slightly lower than the initial estimate, 0.6%, and consistent with our forecast before Friday's data.
Official industrial production growth in China plunged to 5.4% year-over-year in April, from 8.5% in March.
We have been quite bullish on U.S. economic growth this year.
Brazil's government announced on Monday spending cuts and new tax increases, aiming to generate a 0.7% of GDP primary surplus, and so restore market confidence and avoid further credit rating downgrades. The plan is to reduce expenditure by BRL26B next year--or 0.4% of GDP--mainly through freezing public sector salaries and slashing social projects. These measures, especially the latter, will likely meet strong resistance in Congress. The salary freeze has more of a chance of passing, but reducing or closing some Ministries is a cost-cutting exercise with an extremely high political price.
Friday' second Q4 GDP estimate revealed that the EZ economy barely grew at the end of 2019. The report confirmed that GDP rose by 0.1% quarter-on-quarter in Q4, slowing from a 0.3% rise in Q3, but the headline only narrowly avoided downward revision to zero, at just 0.058%
Data on air quality in China provide some useful insights into the economic disruptions--or lack thereof--caused by the outbreak of the coronavirus from Wuhan and the government's aggressive containment measures.
If the collapse in oil sector capex and the strong dollar were going to push the industrial economy into recession, it probably would have started by now
A strong finish to the fourth quarter spared the EZ auto sector the embarrassment of posting an outright fall in domestic sales through 2019 as a whole.
To avoid rocking the 2020 boat, the Phase One trade deal needed to be sufficiently vague, so that neither side, and particularly Mr. Trump, would have much cause to kick up a fuss around missed targets.
The trend in manufacturing output probably is about flat, with no real prospect of any serious improvement in the near term.
The Eurozone economy finished last week with a horrendous set of economic data.
When the MPC last met, on November 2, it attempted to persuade markets that Bank Rate would need to rise three times over the next three years to keep inflation close to the 2% target.
China's activity data outperformed expectations in November.
Output in EZ construction rebounded sharply in February, erasing a slip at the start of the year.
With Russia and some other emerging economies now in full panic mode, the financial market story is sharply divided between two narratives. Either the plunge in global energy prices acts as positive catalyst by boosting real incomes and allowing most central banks to run easier monetary policy or it is a sign that risk assets are about to hit a deflationary wall.
Eurozone inflation continued its slow rebound last month. Final CPI data showed that inflation rose marginally to 0.2% in November from 0.1% in October, a bit higher than the initial estimate of 0.1%. The upward revision was due to marginally higher services inflation at 1.2%, compared to the initial 1.1% estimate. Non-energy goods inflation eased slightly to 0.5% from 0.6% last month. We have received push-back on our call for higher inflation next year, but core inflation is a lagging indicator, and it can rise independently of the story told by GDP or survey data. Core inflation tends to peak during recessions, and only starts falling later as prices are adjusted downwards, with a lag, to the cyclical downturn.
We had expected the batch of Chinese data released at the end of last week to disappoint.
Judging by the solid advance data in the major economies, yesterday's EZ industrial production report should have hit desks with a bang, but it was a whimper in the end.
The BoJ is likely to be thankful next week for a relatively benign environment in which to conduct its monetary policy meeting.
Mexican industrial production is slowly improving, and further good numbers are likely in coming months.
The German economy fired on all cylinders at the beginning of the year. Advance data on Friday showed that real GDP rose 0.6% quarter-on-quarter, accelerating from a 0.4% increase in Q4.
Yesterday's inflation data in Germany were old news to markets, but the details were spectacular all the same.
The gap between the official measure of the rate of growth of core retail sales and the Redbook chainstore sales numbers remains bafflingly huge, but we have no specific reason to expect it to narrow substantially with the release of the April report today.
China's main activity data for October disappointed across the board, strengthening our conviction that the PBoC probably isn't quite done with easing this year.
Japan's GDP likely dropped by 1.1% quarter- on-quarter in the first quarter, even from the favourable Q4 base, when it fell by 1.8%.
Manufacturing is not in recession, yet, despite the reams of gloomy analysis of the sector, including our own.
Industrial production bounced back in February. These data point to a reprieve for old-guard dirty industry, after stringent anti-pollution curbs were put in place in Q4.
Manufacturers in the Eurozone stood tall mid-way through Q2, despite still-subdued leading indicators.
Treasury Secretary Mnuchin's five-line letter to House Speaker Pelosi on last Friday--copied to other Congressional leaders--which said that "there is a scenario in which we run out of cash in early September, before Congress reconvenes", introduces a new element of uncertainty to the debt ceiling story.
We are pushing back our forecast for the next rise in Bank Rate to May 2020, from the tail-end of this year.
Brazil's retail sales improved at the start of the second quarter, increasing 0.5% month-to-month in April, partially reversing the 0.9% contraction in March. But the details were less upbeat than the headline.
The collapse in capital spending in the oil sector and poor construction spending have constrained aggregate Mexican industrial output in recent months, despite the strength of the manufacturing sector. Total production fell 0.1% year-over-year in January, though note this was a clear improvement after the 0.6% drop in December, and better than the average 0.4% contraction over the second half of 2016.
The German inflation rate soared at the start of 2017, but it likely will fall in the next few months. Final February data yesterday showed that inflation rose to 2.2% in February, from 1.9% in January, consistent with the initial estimate. Since December, headline inflation in Germany, and in the EZ as a whole, has been lifted by two factors. Base effects from the 2016 crash in oil prices have pushed energy inflation higher, and a supply shock in fresh produce--due to heavy snowfall in southern Europe--has lifted food inflation.
Investors have welcomed the flurry of encouraging opinion polls for the Conservatives that were published over the weekend, with cable rising nearly to $1.30 on Monday, a level last seen on a sustained basis six months ago.
The Chinese activity data published yesterday were a mixed bag, with headline retail sales and production weakening, while FAI growth was stable. We compile our own indices for all three, to crosscheck the official versions.
Markets greatly cheered the Conservatives' landslide victory on Friday, but remained cautious on the potential for the MPC to return to the tightening cycle it started in 2017.
ate last week, China and the U.S. reached an agreement, averting the planned U.S. tariff hikes on Chinese consumer goods that were slated to be imposed on December 15.
Friday's sole economic report showed that wage growth in France remained robust mid-way through the year. The non-seasonally adjusted private wage index, ex-agriculture and public sector workers, published by the Labour Ministry, rose by 0.3% quarter-on-quarter in Q3.
A casual glance at our first chart, which shows the headline and core inflation rates, might lead you to think that our fears for next year are overdone. Core inflation rose rapidly from a low of 1.6% in January 2015 to 2.3% in February this year, but since then it has bounced around a range from 2.1% to 2.3%.
Increasingly, we are hearing equity strategists argue that investors should rebalance their portfolios toward EZ equities. On the surface, this looks like sound advice. Commodity prices have exited their depression, factory gate inflation pressures are rising, and global manufacturing output is picking up. These factors tell a bullish story for margins and earnings at large cap industrial and materials equities in the euro area.
Mr. Draghi's introductory statement before yesterday's hearing at the European Parliament repeated that the ECB will "review and possibly reconsider its monetary policy stance in March." But it didn't provide any conclusive smoking gun that further easing is a done deal.
We are not concerned by the slowdown in retail sales over the past few months.
A sizeable drop in China's year-over-year GDP in Q1 is now the consensus view, after 6.0% growth in Q4.
We expect September's consumer prices report, released on Wednesday, to show that CPI inflation held steady at 1.7%, below the 1.8% consensus.
Japanese leading indicators point to a slowdown, and the trend over this volatile year is emerging as firmly downward.
Data released yesterday from Brazil support our view that the economic recovery continues, but progress has been slow.
China's September imports missed expectations, but commentators and markets tend to focus on the year-over-year numbers.
China's September trade numbers show that, far from reducing the surplus with the U.S., the trade wars so far have pushed it up to a new record.
Japan's PPI inflation likely has peaked, with commodities still in the driving seat. Manufactured goods price inflation will soon start to slow, following the downshift in China's numbers.
Yesterday's second Q3 GDP estimate confirmed that the EZ economy expanded by 0.2% quarter-on- quarter in Q3, the same pace as in Q2, leaving the year-over-year rate unchanged at 1.2%.
The Eurozone economy all but stalled at the start of Q4.
It would be a serious mistake to conclude from July's retail sales figures that consumers' spending will be immune to the fallout of the Brexit vote. Households have yet to endure the hiring freeze and pay squeeze indicated by surveys of employers, or the price surge signalled by sterling's sharp depreciation. The real test for consumers' spending lies ahead.
CPI inflation held steady at 1.5% in November, marking the fourth consecutive below-target print, though it was a tenth above both the MPC's forecast and the consensus.
The PBoC reduced its 14-day reverse repo by 5bp to 2.65% in a routine operation yesterday.
Yesterday's IFO data in Germany heaped more misery on the Eurozone economy.
Japan's trade surplus is set to fall in coming months, as domestic demand remains robust, while recent oil price increases will be a drag, lifting imports.
The Yellen Fed acted--or rather, didn't act--true to form yesterday, preferring to take its chances with inflation one or two years down the line rather than surprising the markets by hiking rates and risking the consequences. Even before Dr. Yellen's tenure, the Fed has long been reluctant to defy market expectations on the day of FOMC meetings. Engineering a shift in market views of the likely broad path of policy is one thing, but shocking investors with unexpected action on specific days is another matter altogether.
The ongoing weakness in DM has been a feature of the global landscape over the last year.
China's investment slowdown went from worrying to frightening in October. Last week's fixed asset investment ex-rural numbers showed that year- to-date spending grew by 5.2% year-over-year in October, marking a further slowdown from 5.4% in the year to September.
Eurozone inflation pressures remained subdued in April. Today's final data likely will show that inflation fell to -0.2% year-over-year in April, from 0.0% in March. The main story in this report will be the reversal in services inflation from the March surge, which was due to the early Easter.
Historical evidence suggests that we should be worried about the relative weakness in the Eurozone's manufacturing sector. Industrial production ex-construction has historically been a key indicator of the business cycle, despite accounting for a comparatively modest 19% of total value-added in the euro area. In all three previous major downturns, underperformance in the manufacturing sector sounded the alarm six-to-nine months in advance that the economy was about to slip into recession.
Rapidly increasing food inflation is creating all sorts of dilemmas for policymakers in Asia's giants.
Our colleagues have been telling some unpleasant stories recently.
Our first impression of the proposed Brexit deal between the EU and the U.K. is that it is sufficiently opaque for both sides to claim that they have stuck to their guns, even if in reality, they have both made concessions.
India's industrial production data last week are the last set of key economic indicators for the fourth quarter, before next week's Q4 GDP report.
The headline employment numbers masked an otherwise sub-par December labour market report.
The probability of a rate hike on June 14, as implied by the fed funds future, has dropped to 90%, from a peak of 99% on May 5.
Yesterday's sole economic report showed that the EZ trade surplus rebounded slightly at the start of the year, rising to €17.0B in January, from a revised €16.0B in February, lifted by a 0.8% increase in exports, which offset a 0.3% rise in imports.
The uncertainty over the strength and speed of the economic rebound is still a concern for investors in terms of putting money to work.
April's consumer prices report, released on Wednesday, likely will show that CPI inflation plunged and is heading quickly to a near-zero rate by the summer.
Upbeat survey data and relatively resilient consumer spending numbers indicate that the Mexican economy is in good shape, despite a marginal slowdown in most of Q2.
Italy's economy is still bumping along the bottom, after emerging from recession in the middle of last year.
We doubt that this week will see the MPC joining the list of other major central banks that have abandoned plans to raise interest rates this year.
Chancellor Sunak announced further emergency support measures for the economy on Tuesday and pledged to do more soon.
We can't finalize our forecast for residential investment in the second quarter until we see the June home sales reports, due next week, but in the wake of yesterday's housing starts numbers we can be pretty sure that our estimate will be a bit below zero.
Yesterday's ECB bank lending survey suggests that credit conditions remain favourable for the EZ economy. Credit standards eased slightly for business and mortgage lending and were unchanged for consumer credit.
The Spanish economy remains the star performer among the majors in the Eurozone.
The spike in the May core CPI, and its likely echo in the core PCE, won't stop the Fed easing at the end of this month.
We doubt there will ever be a fail-safe leading indicator of when a recession is about to hit, but asset prices can help us to assess the risks, at least.
Friday's second Q1 GDP estimate confirmed that lockdowns to halt the spread of Covid-19 hurt the EZ economy in Q1. Real GDP plunged by 3.8% quarter-on- quarter, following a 0.1% rise in Q4, in line with the first estimate.
China's official GDP data, published on Monday, showed year-over-year growth edging down to 6.7% in Q2, from 6.8% in Q1.
Evidence of slowing growth in Brazil consumers' spending continues to mount.
The case for the MPC to hold back from implementing more stimulus was bolstered by September's consumer prices figures.
As warned--see our Monitor April 7--economic data in the Eurozone disappointed while we were away. Industrial production, ex-construction, in the euro area slipped 0.3% month-to-month in February, and the January month-to-month gain was revised down by 0.6 percentage point to +0.3%.
Former Chancellor George Osborne famously quipped after last year's general election that Theresa May was "a dead woman walking and the only question is how long she remains on death row".
The half-way point of the quarter is not, alas, the half-way point of the data flow for the quarter.
The February activity report in Colombia showed a modest pick-up in manufacturing activity and strength in the retail sales numbers.
The Monetary Policy Board of the Bank of Korea voted yesterday to lower its policy base rate to 1.25%, from 1.50%.
Evidence in support of our view that the U.S. industrial slowdown is ending continues to mount, though nothing is yet definitive and the re-escalation of the trade war is a threat of uncertain magnitude to the incipient upturn.
When economic historians look back at the bizarre trade war of 2018-to-19, we think they will see Tuesday June 4 as the turning point, after which the threats of fire and brimstone were taken much less seriously, and markets began to ponder life after tariffs.
The outlook for growth in the EZ economy is currently both stable and relatively uncomplicated, at least based on the most widely-watched leading indicators.
The MPC will have to issue fresh, dovish guidance in order to satisfy markets on Thursday, which now think the Committee is more likely to cut than raise Bank Rate within the next six months.
The People's Bank of China cut its seven-day reverse-repo rate yesterday, to 2.50% from 2.55%.
The latest survey evidence strongly supports our view that momentum is building in the industrial economy, but the official production data continue to lag. Yesterday's March Philly Fed survey was remarkably strong, with the correction in the headline sentiment index -- inevitable, after February's 33-year high -- masking increases in all the subindexes.
Signs that the economy has been crippled by people's response to the Covid-19 outbreak continued to emerge yesterday.
Japan's July adjusted trade surplus rebounded to ¥337.4B from ¥87.3B in June, far above consensus. On our seasonal adjustment, the rebound is slightly smaller but only because we saw less of a drop in June.
Yesterday's final EZ CPI data for March confirmed the message from the advance report that inflation pressures eased last month.
May's activity data underline the weakness of Colombia's economic growth. Domestic demand still is under pressure due to the lagged effect of the deterioration in the terms of trade and other temporary shocks in 2016, and the VAT increase in January this year.
The labour market remains healthy enough to persuade the MPC to keep its powder dry over the coming months.
Colombia has been one of LatAm's outperformers this year.
Japanese policymakers have a wary eye on the weakness in industrial production and exports.
Hard data on Mexico's industrial sector for the last couple of months have highlighted major divergences across sectors.
China's data on Monday were beyond dire, leading to a dramatic downward revision of our already grim Q1 GDP forecasts for the country.
We've continuously warned that Japan's national accounts weren't sitting easily with the underlying signals from survey data, and monetary conditions, through last year.
Data released yesterday confirmed that economic activity is improving in Brazil.
The idea that the ECB will use its forthcoming strategic policy review to include a measure of real estate prices in its inflation target has been consistently brought up by readers in recent meetings.
Data yesterday added further evidence of a slow recovery in Eurozone auto sales.
Spain heads to the polls on Sunday, but unlike the chaos that descended on Europe following Greece's elections earlier this year, we expect a market-friendly outcome. The key political story likely will be the end of the two-party system, as polls indicate neither of the two largest mainstream parties--Partido Popular and PSOE--will be able to form a majority. Markets' fears have been that the fall of the established parties would allow anti-austerity party, Podemos, to lead a confrontation with the EU, but this looks very unlikely.
The BoJ is likely to stay on hold this week for all its main policy settings.
Brazil's December economic activity index, released last week, showed that the economy ended the year on a relatively weak footing. The IBC-Br index, a monthly proxy for GDP, fell 0.3% month- to-month, pushing down the adjusted year-over- year rate to 0.3%, from a downwardly-revised 0.7% increase in November.
Today's labour market report looks set to be a mixed bag, with growth in employment remaining strong, but further signs that momentum in average weekly wages has faded.
The government remains on course to lose next Tuesday's Commons vote on the Withdrawal Agreement--WA--by a huge margin.
Sterling fell to $1.38, from $1.39, in the hour following the EU's publication of a draft Article 50 withdrawal treaty, which set out the practical consequences of the principles the U.K. agreed to in December.
The Prime Minister is in a position on Brexit all chess players dread: zugzwang.
The return of Chinese PPI inflation in 2016 helped to stabilise equities after the boom-bust of the previous year.
As we write, 25 Conservative MPs have confirmed publicly that they have submitted no-confidence letters to the Chairman of the 1922 Committee. That's 23 short of the 48 required to trigger a leadership contest, though some MPs might have submitted letters without making it public.
It's hard to read the minutes of the April 30/May 1 FOMC meeting as anything other than a statement of the Fed's intent to do nothing for some time yet.
Japan's CPI inflation was unchanged, at 0.2% in February.
Yesterday's news that the business activity index of the Markit/CIPS services survey fell again in January, to just 50.1--its lowest level since July 2016--has created a downbeat backdrop to the MPC meeting; the minutes and Q1 Inflation Report will be published on Thursday.
British politics remains a complete mess, with many outcomes, ranging from no-deal Brexit to revoking Article 50, possible in the second half of this year.
The Fed's announcement, at 11.30pm Wednesday, that it will establish a Money Market Mutual Fund Liquidity Facility--MMLF--to support prime money market funds, is another step to limit the emerging credit crunch triggered by the virus.
The Fed deferred, but did not cancel, the start of its rate normalization last week. As a consequence, December is now the most likely meeting for the first hike. The Fed's core view of the U.S. economy remains the same, but policymakers want a bit more time to see how global developments affect the U.S. Our Chief Economist, Ian Shepherdson, expects the strength of the employment data, better Chinese numbers and calm financial markets to prevent any further postponement beyond Q4.
After three straight lower-than-expected jobless claims numbers, we have to consider, at least, the idea that maybe the trend is falling again. This would be a remarkable development, given that claims already are at their lowest level ever, when adjusted for population growth, and at their lowest absolute level since the early 1970s.
At the October FOMC meeting, policymakers softened their view on the threat posed by the summer's market turmoil and the slowdown in China, dropping September's stark warning that "Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term." Instead, the October statement merely said that the committee is "monitoring global economic and financial developments."
The April FOMC statement dropped the March assertion that "global economic and financial developments continue to pose risks" to the U.S. economy, even though growth "appears to have slowed". Instead policymakers pointed out that "labor conditions have improved further", perhaps suggesting they don't take the weak-looking March data at face value. We certainly don't.
Consumption and investment spending by state and local government accounts for just over 10% of the U.S. economy, making it more important than exports or consumers' spending on durable goods, and roughly equal to all business investment in equipment and intellectual property.
At the October FOMC meeting, policymakers softened their view on the threat posed by the summer's market turmoil and the slowdown in China, dropping September's stark warning that "Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term." Instead, the October statement merely said that the committee is "monitoring global economic and financial developments."
Recent global developments lead us to intensify our focus on trade in LatAm.
Yesterday's economic data provided the first glimpse of the crash in EZ sentiment at the start of Q2, ahead of today's more substantial barrage of numbers, including French INSEE data, GfK confidence numbers in Germany and the advance PMIs.
As we reach our deadline--4pm eastern time--media reports indicate that a debt ceiling agreement is close.
Colombia's trade deficit continued to narrow in Q3; a postive development now that EM are back in the firing line. Assuming no revisions, the marginal year-over-year dip in the September trade deficit means that the third quarter deficit was USD3.1B, down from US4.6B a year ago.
Financial markets and economic survey data have been sending a downbeat message on the Eurozone economy so far this year. The composite PMI has declined to a 12-month low, consumer sentiment has weakened, and national business surveys have also been poor.
Centrist politicians and markets breathed a sigh of relief yesterday as the results of the Dutch parliamentary elections rolled in. The incumbent conservatives, led by PM Mark Rutte, lost ground but emerged as parliament's biggest party with 33 seats out of the total 150.
Recent global developments lead us to intensify our focus on trade in LatAm.
Economic survey data this week will give the first clear evidence on whether recent market volatility has dented Eurozone confidence. The key business and consumer surveys dipped in January, and we now expect further declines, starting with today's PMI data. We think the composite index fell slightly to 53.0 in February from 53.6 in January.
The stand-out development in yesterday's labour market report was the drop in the he adline, three-month average, unemployment rate to just 4.0% in June--its lowest rate since February 1975--from 4.2% in May.
We're pretty sure our forecast of a levelling-off in capital spending in the oil sector will prove correct. Unless you think the U.S. oil business is going to disappear, capex has fallen so far already that it must now be approaching the incompressible minimum required for replacement parts and equipment needed to keep production going.
French industrial production data surprised to the upside yesterday. Output rose 0.1% month-to-month in September, a solid gain following an upwardly-revised 1.7% rise in August, and also higher than the consensus, forecast for a 0.4% fall. The details, however, were less upbeat than the headline. Transport equipment fell, as expected, following production being pushed forward ahead of the Summer holidays. But this story was overshadowed by a 22.5% month-to-month jump in oil refining-- included in manufacturing--as refineries resumed full production following maintenance over the summer.
We remain confident in the success of legislation designed to compel the PM to request a further extension of the U.K.'s E.U. membership on October 19, in the overwhelmingly likely scenario that an exit deal is not agreed at next week's E.U. Council meeting.
The May NFIB survey and the April JOLTS report, both released yesterday, paint a coherent, if not yet definitive, picture of labor market developments which should alarm the Fed. The data suggest that the true labor supply, in the eyes of potential employers, is much smaller than implied by the BLS's measures of broad unemployment.
The Federal Reserve said Wednesday it would keep short-term interest rates near zero until at least the middle of the year. The central bank's policy committee also signaled caution about low inflation and nodded to overseas uncertainty by including new language that it would monitor international developments. Here's how economists reacted
All the regional PMI and Fed business surveys we follow suggest that today's national ISM manufacturing report for November will be weaker than in October
The single most startling development in the labor market data in recent months is acceleration in labor force growth. The participation rate has risen only marginally, because employment has continued to climb too, but the absolute size of the labor force is now expanding at its fastest pace in nine years, up 1.9% in the year to September.
The four-quarter average growth trend in private investment, excluding dwellings, fell to 0.1% in Q4, and the recent improvement in the PMIs indicates only a modest upturn in Q2. The dearth of investment by non-financial corporates remains one of the biggest threats to long-term growth in the Eurozone.
The combination of weather effects and the meltdown in the oil sector make it very hard to spot the underlying trend in manufacturing activity. The sudden collapse in oil-related capital spending likely is holding down production of equipment, but the data don't provide sufficient detail to identify the hit with any precision.
The latest developments on the coronavirus outbreak are not encouraging; for LatAm markets and economies.
After the drama of the last few days, Brexit developments now are set to proceed at a slower pace.
French industrial production data offered a bit of relief last week following a string of woeful German data, and news of monthly falls in Italian and Spanish manufacturing output. Industrial production jumped 1.6% month-to-month in August, but the headline was flattered by a 0.3% downward revision of the July data. The monthly jump pushed the year-over-year rate higher to 1.6%, from a revised 0.9% fall in July. All sectors performed strongly in August, but the key story was a hefty increase in transport equipment manufacturing, due to a 11.9% surge in vehicle production.
The recent plunge in oil prices is another positive development, alongside looser fiscal policy and the striking of a Brexit deal with the E.U., pointing to scope for GDP growth to pick up next year.
Sterling weakened further yesterday as anxiety grew that PM Theresa May will indicate she is seeking a "clean and hard Brexit" in a speech today. This could mean the U.K. leaves the EU's single market and customs union, in order to control immigration, shake off the jurisdiction of the European Court and have a free hand in trade negotiations with other countries.
Japan's services PMI points to Q2 GDP contraction. China's Caixin services PMI highlights the reasons for official concern over employment. Korea's current account slips into deficit for the first time since 2012.
China's Caixin services PMI for December surprised well to the upside, providing a glimmer of hope that the economy isn't losing steam on all fronts.
Political developments are clouding the horizon in Mexico, at least temporarily. Mexico's Finance Minister Luis Videgaray, the mastermind behind President Enrique Peña Nieto's most important economic reforms, resigned on Wednesday. José Antonio Meade, a former finance chief, has been tapped to replace him.
Mexico's economy is not accelerating, but it is holding up well in extremely difficult circumstances for EM. Growth is reasonably healthy, inflation is under control and the labor market is resilient. In short, Mexico is a success story, given the backdrop of plunging oil prices. The contrast with the disaster in Brazil is stark. Last week's survey and hard data continued to tell an upbeat story on Mexico's economy. The IMEF manufacturing index, Mexico's PMI, rose to 52.1 in November up from 51.6 in October, lifted mainly by gains in the employment and deliveries indexes.
Fed Chair Powell yesterday said about as little as he could without appearing to ignore the turmoil in markets since the President announced his intention to apply tariffs to imports from Mexico: "We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective."
The rebound in the ISM manufacturing index was a relief, after the sharp drop in October, though the strength in last week's Chicago PMI meant that it wasn't a complete surprise.
A general election this year now looks inevitable, after the defection of Phillip Lee MP from the Tories to the Lib Dems, and the PM's threat to seek an election if MPs take control of the Order Paper on Tuesday evening.
In one line: Wage growth was slowing ahead of the Covid-19 shock; is the record m/m slide in ZEW a sign for the PMIs?
In one line: Much better than the PMIs.
In one line: Consistent with falling manufacturing output and a small drop in the PMI.
In one line: Another positive sign, though the survey is not a precise guide to the PMI.
In one line: More evidence that China's PMI upturn is filtering into U.S. manufacturing.
Idiosyncratic developments have driven market volatility in LatAm in recent weeks.
In one line: Exports hit by slowdown in shipments to Asia and the rest of Europe.
In one line: A no-deal Brexit remains an unlikely outcome, even with a "true" Brexiteer PM.
Six developments over the summer have increased the likelihood that the government will make concessions required to preserve unfettered access to the single market after formally leaving the EU in March 2019.
In one line: Don't take the PMI's recession signal literally.
Yesterday's IFO report reinforced the message from the PMIs that the Eurozone economy stumbled slightly at the beginning of the first quarter. The headline business climate index fell to an 11-month low of 107.3 in January, from a revised 108.6 in December, hit mainly by a drop in the expectations component. Intensified market volatility and worries over further weakness in the Chinese economy likely were the main drivers. Last week's dovish message from Mr. Draghi, however, came after the survey's cut-off date, leaving us cautiously optimistic for a rebound next month.
The official data lag developments in the real economy even at the best of times, but on this occasion the gap has turned into a chasm.
If we had known back in June 2014 that oil prices would drop to about $30, the collapse in capital spending in the oil sector would not have been a surprise. Spending on well-drilling, which accounts for about three quarters of oil capex, has dropped in line with the fall in prices, after a short lag, as our first chart shows. We think spending on equipment has tracked the fall in oil prices, too.
Of all the regional Fed and PMI business surveys, the Richmond Fed index appears to be the most sensitive to U.S. trade policy.
The sharp decline in Mexico's leading indicators highlights the dramatic scale of the economic and financial hit from the coronavirus. High frequency data and the PMIs are the first numbers to capture the lockdown, and they signal that the services activity-- the bulk of Mexico's GDP--dropped sharply.
After a week--yes, a whole week!--with no significant new developments in the trade war with China--it's worth stepping back and asking a couple of fundamental questions, which might give us some clues as to what will happen over the months ahead.
It's hard to imagine that Fed Vice-Chair Dudley would choose to say yesterday that he finds the case for a September rate hike "less compelling than it was a few weeks ago" without having had a chat beforehand with Chair Yellen. Mr. Dudley pointed out that the case "could become more compelling by the time of the meeting", depending on the data and the markets, but he also argued that developments in markets and overseas economies can "impinge" on the U.S., and that there "...still appears to be excess slack in the labor market". These ideas, especially on the labor market but also on the impact of events overseas, are not shared by the hawks, but we can't imagine Mr. Dudley disagreeing in public with Dr. Yellen. We have to assume these are her views too.
The chaos in Greece was identified as the main culprit for yesterday's soft IFO report. The headline business climate index fell to 107.4 in July, down from 108.1 in May, driven by declines in respondents' views on the current economy and their expectations for the future. We expected a dip in the he adline IFO, but we were surprised by the fall in the manufacturing sub-index, given the firmer PMI earlier this week.
Developments over the last month have heightened our concern about the near-term outlook for households' spending.
The FOMC flagged recent market developments as a source of risk to the U.S. economy yesterday, unsurprisingly, but didn't go overboard: "The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook."
We argued in the Monitor yesterday that the plunge in capital spending on equipment in the oil sector could cost about 300K jobs over the course of this year. Adding in the potential hit from falling spending on structures, which likely will occur over a longer period, given the lead times in the construction process, the payroll hit this year could easily be 500K, or just over 40K per month.
Recent political and economic developments in Brazil make us more confidence in our forecast of a gradual recovery. On Wednesday, interim President Michel Temer scored his first victory in Congress, winning approval for his request to raise this year's budget target to a more realistic level. Under the new target, Brazil's government plans to run a budget gap, before interest, of about 2.7% of GDP this year.
China's total debt stock is high for a country at its stage of development, relative to GDP, but it is sustainable for country with excess savings. China was never going to be a typical EM, where external debtors can trigger a crisis by demanding payment.
The Fed yesterday toned down its warnings on the potential impact on the U.S. of "global economic and financial developments", and upgraded its view on the domestic economy, pointing out that consumption and fixed investment "have been increasing at solid rates in recent months". In September, they were merely growing "moderately". Policymakers are still "monitoring" global and market developments, but the urgency and fear of September has gone. The statement acknowledged the slower payroll gains of recent months--without offering an explanation--but pointed out, as usual, that "underutilization of labor resources has diminished since early this year" and that it will be appropriate to begin raising rates "some further improvement in the labor market".
Chief U.K. Economist Samuel Tombs on the U.K PMIs
Chief U.K. Economist Samuel Tombs on U.K. PMI data in November
Samuel Tombs has more than a decade of experience covering the U.K. economy for investors. At Pantheon, Samuel's research is rigorous, free of dogma and jargon, and unafraid to challenge consensus views. His work focuses on what matters to professional investors: The links between the real economy, monetary policy and asset prices. He has a strong track record of getting the big calls right. The Sunday Times ranked Samuel as the most accurate forecaster of the U.K. economy in both 2014 and 2018. In addition, Bloomberg consistently has ranked Samuel as one of the top three U.K. forecasters, out of pool of 35 economists, throughout 2018 and 2019. His in-depth knowledge of market-moving data and his forensic forecasting approach explain why he consistently beats the consensus. Samuel's work on Brexit goes beyond simply reporting developments and is always analytical and unbiased, enabling investors to see through the noise of the daily headlines. While his analysis points to a particular path that politicians will take, he acknowledges the inherent uncertainty and draws out the economic and financial market implications of all plausible Brexit scenarios. Samuel holds an MSc in Economics from Birkbeck College, University of London and an undergraduate degree in History and Economics from the University of Oxford. Prior to joining Pantheon in 2015, he was Senior U.K. Economist at Capital Economics. In 2011, Samuel won the Society of Business Economists' prestigious Rybczynski Prize for an article on quantitative easing in the UK. He is based in London but frequently visits our other offices. Recent key calls include: 2018 - Correctly forecast that GDP growth would slow and inflation would undershoot the MPC's initial forecast, prompting the Committee to shock investors and almost other economists by waiting until August to raise Bank Rate, rather than pressing ahead in May. 2017 - Argued that the MPC was wrong to expect CPI inflation to stay below 3% following sterling's depreciation. He also highlighted that economic indicators pointed to the Conservatives losing their outright majority in the snap general election.
Chief Eurozone economist Claus Vistesen comments on the Eurozone PMIs
Chief U.K. Economist Samuel Tombs on the U.K. PMI data, April
Chief U.K.. economist Samuel Tombs comments on U.K. PMI
Pantheon Macroeconomics Chief Eurozone economist Claus Vistesen discusses the latest survey data and political developments in the Eurozone economy.
Payroll growth rebounded to 223K in May, after two sub-200K readings, and we're expecting today's June ADP report to signal that labor demand remains strong.
Machine tool orders in Japan are still in the doldrums.
Chief U.K. Economist Samuel Tombs on U.K. GDP
Chief U.K. Economist Samuel Tombs on U.K. Manufacturing
Are there any signs that the U.S. tax cuts and/or regulatory relaxation are stimulating increased non-residential fixed investment?
Pantheon Macroeconomics' Chief Economist Dr. Ian Shepherdson provides unbiased, independent economic intelligence to financial market professionals.
Freya Beamish produces the Asia service at Pantheon. She has several years of experience in covering the global economy, with a particular focus on China, Japan and Korea. Previously, she worked at Lombard Street Research (now TS Lombard), where she delivered research on Asia and the Global economy for over five years, latterly as the manager of the Macroeconomics group.
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