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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.
In about 100 days, the LatAm economy and financial markets will face a defining moment in the face of uncertainty, namely, the outcome of the U.S. presidential election.
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 one line: More evidence that China's PMI upturn is filtering into U.S. manufacturing.
The apparent thaw in the U.S.-China trade dispute is great news for LatAm, particularly for the Andean economies, which are highly dependent on commodity prices and the health of the world's two largest economies
The U.S. Presidential election will set the tone for LatAm's markets this week. Hillary Clinton's dwindling lead over Donald Trump in recent polls has unleashed pressure on EM assets.
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.
The U.S. coronavirus outbreak is not slowing. The curve is not bending much, if at all. Confirmed cases continue to increase at a steady rate, averaging 23% per day over the past three days.
The U.S. pulled the trigger on Friday, following through on President Donald Trump's tweeted threat to raise the tariffs on $200B-worth of Chinese goods, under the so-called "List 3", to 25% from 10%.
Our chief economist, Ian Shepherdson, set out our initial thoughts on the rising tensions between U.S. and Iran here.
The U.S. Reopening Will Not All Be Smooth...But The Economy Will Be Much Better By Summer's End
By the close on Friday, the initial reaction in U.S. markets to the U.K. Brexit vote could be characterized as a bad day at the office, but nothing worse. Not a meltdown, not a catastrophe, no exposure of suddenly dangerous fault lines.That's not to say all danger has passed, but the first hurdle has been overcome.
U.S. H1 2019 Outlook
The U.S. in 2018: How might it all go right?
In one line: Spending is better than it looks, but sustainability depends on the U.S. not suffering a major coronavirus outbreak.
The U.S. faces greater uncertainty now than at the start of any previous year in recent memory...
Ian Shepherdson on U.S. Manufacturing Activity
Chief U.S. Economist Ian Shepherdson discussing the Fed and the Coronavirus
Ian Shepherdson in U.S. Employment for May
Ian Shepherdson, chief economist at Pantheon Macroeconomics, examines the state of the U.S. economy. He speaks with Bloomberg's Tom Keen on "Bloomberg Surveillance."
Ian Shepherdson, chief economist at Pantheon Macroeconomics, previews the U.S. Payroll data for June
Chief U.S. Economist Ian Shepherdson on U.S. the impact of the Coronavirus on the U.S. Economy
In one line: The calm before the storm.
In one line: Could have been worse. Q4 probably will be.
In one line: Starts have further to rise, given the rebound in new home sales.
In one line: Trade will be a small drag on Q2 GDP growth.
In one line: Grim; no sign of hitting bottom despite better regional surveys.
In one line: The trend is rising, despite the September dip; new cycle highs likely by year-end.
In one line: Recovery continues; further gains ahead.
In one line: Better, but still much lower than it should be, thanks to the trade war.
In one line: Surging employment index means payroll weakness likely will be temporary
In one line: Not as good as it looks.
In one line: Headlines flattered massively by multi-family surge, but core single-family numbers decent too.
In one line: Little sign of the feared trade hit on Q2 GDP growth, so far.
In one line: Ignore the headline; what matters is the emerging rising trend in single-family permits.
In one line: Ignore the headline declines; core picture is improving.
In one line: Strong, and further gains coming.
In one line: Homebuilders still wary, but construction activity will rise over the summer.
In one line: Calendar quirks explain the drop in manufacturing output; expect a rebound in May.
In one line: The trend remains stable and very low.
In one line: Tariff effects held the deficit down; it will rebound sharply in Q4.
In one line: Depressed by the GM strike, but the underlying picture is grim too, and still deteriorating.
In one line: Wrecked by the GM strike, but the underlying picture is soft too.
In one line: Looks great but it won't last.
In one line: Headlines are misleading; core activity stable.
In one line: The one bright spot in the economy shines again.
In one line: Hugely overstating the national manufacturing picture.
In one line: Philly details are much stronger than the headline.
In one line: Hit by the Mexico tariff debacle; next month will be better.
In one line: Philly surge looks great, but it's not definitive.
In one line: Consumption rocketing; core PCE deflator returning to target on a quarterly annualized basis.
In one line: Spending growth is set to slow in Q4.
In one line: Noisy components depress the headlines, but hospital prices are accelerating.
In one line: Healthcare inflation is accelerating; will it be sustained?
In one line: Upside inflation risks are elsewhere.
In one line: Goods inflation falling; some signs of upward pressure in services.
In one line: Core sales have surged in Q3, but expect a much weaker Q4.
In one line: Core services prices jump, but it's noise not signal.
In one line: Recent declines in y/y rates for core goods and services won't continue.
In one line: Consumption on track for 3-to-3.5% in Q2; core inflation mean-reverting.
In one line: Spending growth is slowing; expect hefty Q3 GDP forecast markdowns.
In one line: The rebound is consolidating; expected steady spring/summer sales.
In one line: The trend in sales is rising, and inventory is falling.
In one line: Ouch, but not as bad as it looks.
In one line: Better, and scope for further gains.
In one line: Tariff fears strike again?
In one line: Small firms don't like the trade war.
In one line: Make the most of this; it won't last.
In one line: A correction; the trend is rising
In one line: Core PCE deflator back on track; Q2 consumption headed for 3%.
In one line: Weak and still falling, but not in meltdown.
In one line: Better but still weak; capex uptick is very welcome.
In one line: Small business owners responding to the Jan-Apr stock market rally with the usual lag.
In one line: Claims noise likely insignificant; hefty upward revisions to Q1 capex.
In one line: Not enough alone to stop the Fed easing this month.
In one line: Overstates the trend, but also raises the chance of a big official print Friday .
In one line: Boeing's woes and trade are hurting.
Pantheon Macroeconomics is pleased to make available to you our Outlooks for the second half of 2017 for the US, Eurozone, UK, Asia, and Latin America. These reports present our key views, giving you a concise summary of our economic and policy expectations. If you are interested in seeing publications which you don't already receive, please request a complimentary trial
Data last Friday showed Japan's labour market trends deteriorating.
China's trade surplus bounced back strongly in May, rising to $40.1B on our adjustment, from $35.7B previously.
In recent client meetings the first and last topic of conversation has been the market implications of the possible departure of President Trump from office.
In one line: Trade deficit has stabilized, provided the China talks don't fall apart.
In one line: Disconnected from the rebound in China's surveys by the trade war.
In one line: Selling prices surge after tariffs on Chinese imports rise.
In one line: Technical factors mean June official payrolls likely will be stronger than ADP
In one line: The clouds over housing are lifting.
In one line: The trend is back to the cycle low.
In one line: Disappointing but a rebound is coming.
Serious downside risks to growth are mounting...but the fed can't ignore rising inflation risks
A Grinding Slowdown Is Now Our Base Case....But Higher Inflation Will Constrain The Fed
How and when will the Fed respond to Fiscal Easing?
The Fed is fretting over fiscal easing......upside risk to growth, inflation and interest rates
Mixed Surveys, Mixed Data; Contradictions Abound....No Wonder The Fed Wants To Do Nothing
Brace for the Fed's Pushback...But only when Fiscal Easing is in front of Congress
The domestic business cycle doesn't matter, yet: Global Growth and the Trade War are driving the Fed
Clarity Emerging As Hard Data Beat The Surveys...The Fed Has No Reason To Ease Further
No further easing needed, if a trade deal is done...but this is a dovish fed, on a hair-trigger
More Public Spending and Higher Rates in 2017...Whoever Wins
Peak Trade War Likely Has Passed....But Existing Tariffs Are Dampening Growth
The Economy Is Past The Covid Low, Just...But The Way Back Will Be Long And Painful
Covid-19 Will Force Further Fed And Fiscal Easing...Timing/Speed Of The Eventual Rebound Is Unknowable
The Fed Is On Course For Four Hikes This Year...And Another Four In 2018
In one line: Grim, but probably overstates payroll weakness.
In one line: Likely overstating the official number, which will be hit by the GM strike.
In one line: Ominous, in more ways than one.
In one line: Solid, but subordinate to politics.
In one line: Much stronger than the ISM, but the gap is not necessarily about to close.
In one line: More evidence that the manufacturing downshift is stabilizing.
In one line: Surging core capex orders suggest non-manufacturing firms are spending.
In one line: A welcome partial rebound, but a real recovery is unlikely before the fall.
In one line: Spectacular, thanks in large part to the Amazon Prime event.
In one line: Could have been worse; expect better ahead.
In one line: A decent month, but much better to come later in the year.
In one line: Encouraging.
In one line: Disappointing, but the trend is turning higher.
In one line: Job growth is set to slow much further.
In one line: Good, but the future is much darker.
In one line: No bottom yet for core orders.
In one line: Core orders soft, but likely to be even softer in Q4.
In one line: Expectations are softening as the trade war continues, but housing is the bright spot.
In one line: Details indicate that downside pressure is much less than headlines suggest.
In one line: The recovery from the Q4 stock market hit continues apace.
In one line: Grim all round.
In one line: Both better than expected, but downside risk is not over.
In one line: Looks bad, but the trend is not--yet--running at 0.3% per month.
In one line: Not yet an accelerating trend, but labor cost and tariff pressures are visible.
In one line: The core capex picture is deteriorating.
In one line: Soft, but the outlook is for a much worse numbers in Q4 and beyond.
In one line: Expect a rebound in the October core; too late to prevent a Fed easing this month.
In one line: Used car prices a drag yet again, but they'll stop falling soon.
In one line: Tariffs, labor costs, and tight rental home supply pushing up core inflation, plus some noise.
In one line: Moving sideways, but not for much longer; expect a strong second half.
Yellen's Patience is Running Out..Rates to Rise Sharply Next Year
In one line: Homebuilders are becoming nervous.
In one line: A huge hit, but not a record low.
In one line: Thank the S&P.
In one line: Awful, especially in services, with worse to come.
In one line: Previously unimaginable.
In one line: No words for this.
In one line: Further gains ahead as the housing market reopens.
In one line: A correction; the trend is rising and new cycle highs are coming.
In one line: Disappointing, but not a change in the trend.
In one line: Noise not signal; the housing market is strengthening.
In one line: The biggest one-month drop in more than six years, but April will be much worse.
In one line: Housing is the strongest major sector of the economy; more to come.
In one line: Bottoming-out.
In one line: Boosted by mild winter weather, but the underlying trend is rising strongly too.
In one line: Back to trend.
In one line: This week's drop is quite modest, most of the action is in the revision to last week.
In one line: The calm before the storm.
In one line: Good news, but it won't last.
In one line: The details are significantly worse than the headline.
In one line: Not sustainable.
In one line: The post-tariff plunge in imports is starting to reverse.
In one line: Covid-19 is shredding trade flows.
In one line: Ouch. The manufacturing recession continues.
In one line: Less terrible, but still terrible nonetheless.
In one line: Rising activity from a low base is not enough to lift employment.
In one line: A smaller drop than we hoped for but next week should be better.
In one line: Not as good as the headlines.
In one line: Headline weakness hides employment rebound, but is it real?
In one line: Yet more evidence that the economy was less-bad in May than in April.
In one line: Housing was on a tear before the virus.
In one line: Well on the way to full recovery, unlike the rest of the economy.
In one line: Disappointing near-real-time claims are more important than the good retail sales data.
In one line: Horrendous.
In one line: Don't worry about the soft control number.
In one line: Data from another world.
In one line: Worst month ever, but this is the floor.
In one line: Solid Dec but downward revisions will hit Q4 GDP estimates.
In one line: Startling, in a good way.
In one line: Slightly disappointing, but further declines are coming.
In one line: Headed for sub-1M by mid-June
The U.S. Economy: Navigating Through the Coronavirus Outbreak
In one line: Still terrible, but a bit less terrible each week.
In one line: Good news, but continuing claims aren't as good as they look.
In one line: Regular claims still far too high, and Pandemic Unemployment Assistance claims are rising again.
In one line: Both terrible, but could have been worse.
In one line: Productivity growth has peaked; expect a clear H1 slowdown.
In one line: Half the storm.
In one line: Recovery underway, but a long and uncertain way to go.
In one line: Rising spending through Q2 means base effects guarantee a big increase in Q3.
In one line: Solid income and spending, and rising core PCE inflation before the virus. But...
In one line: April consumption no more disastrous than expected.
In one line: Consumption and core PCE inflation will both rebound in Q1.
In one line: Spending growth slowing in Q4, but it's only a correction.
In one line: Core PPI inflation will soon plummet; jobless claims will rise.
In one line: Core PPI inflation is trending down, but this overstates the decline.
In one line: Could have been worse, but what matters is the next couple of years.
In one line: No overall PPI threat, but airline fares jump will lift the core PCE deflator.
In one line: The intensity of the immediate downward shock to prices won't persist.
In one line: Underlying PPI trends aren't as weak as Nov headlines; claims hit holdiay seasonal noise.
In one: Both headlines are misleading.
In one line: GM drives up production; core manufacturing is stagnant.
In one word: Ignorable.
In one line: Rents and heathcare lift the core; they are the key risks for 2020.
In one line: Core inflation is stable for now, but will rise in H1.
In one line: The last Covid-driven monthly drop in the core?
In one line: Calamitous, but the core won't keep falling at this pace.
In one line: Mean-reversion in the core, but rent increases are slowing sharply.
In one line: Manufacturing starting to rebound, but full recovery is a long way off.
In one line: Terrible, but could have been even worse.
In one line: Could have been even worse; will be (much) worse.
In one line: Manufacturing is back in recession.
In one line: Recovery continues, though not for Boeing.
In one line: The calm before virus storm.
In one line: Before the deluge, the trend in core orders was flat.
In one line: Housing still strong, but confidence data point to slowing spending growth.
In one line: The second wave has hit confidence.
In one line: Soft, and no rebound likely near-term.
In one line: Exports crushed.
Lower Rates are a Mistake Unless the Trade War Intensifies
In one line: Soft, but quite likely to be revised upwards.
In one line: The consumer is firmly back on track; Q1's softness was misleading.
In one line: Core sales growth is slowing after unsustainable strength.
In one line: The plunge in the deficit is over, but exporters still under pressure.
In one line: The first step towards mean reversion; the deficit will rise further in Q1.
In one line: Still solid, but vulnerable to the drop in stock price and virus fears.
In one line: Still very solid overall, but auto buying plans weak.
In one line: Horrible, and consumer confidence likely has further to fall.
In one line: Boeing, probably.
In one line: Headline is flattering, but in any event trade is not the story now.
In one line: Catastrophe, enumerated.
In one line: Meh. But the trend is *much* better than surveys suggest.
In one line: Worse to come in housing; Philly Fed near the bottom.
In one line: Don't worry about the undershoot; housing is strengthening rapidly.
In one line: Recovery continues, more to come.
In one line: Great, but not for much longer.
In one line: Housing construction likely has hit bottom.
In one line: Spectacular but clearly unsustainable.
In one line: A sustained surge is underway.
In one line: Big percentage increases from a depressed base = still depressed.
In one line: Very bad, but worse to come.
In one line: Manufacturing beginning to recover, but a long way to go.
In one line: Manufacturing is still stagnating.
In one line: More ancient history.
In one line: Decent core manufacturing hidden by weather-driven utility plunge.
In one line: Don't worry about the consumption slowdown; will rebound in Q1.
In one line: Grim, but much grimmer is coming.
Grim, but this is only the start.
In one line: Rather startling.
In one line: Make the most of the good news.
In one line: A relief after ADP, but August will be weaker; No V here.
In one line: Pre-virus, the labor market was strong, if weather-assisted. Now, trouble is coming, fast.
In one line: Unsustainable, but the trend is still pretty strong.
In one word: Astonishing.
In one line: A bit disappointing, but expect rising sales over the next few months.
In one line: Old news; April will be much worse.
In one line: The rebound from the tax hit continues, fitfully.
In one line: Great, before the virus.
In one line: Both volumes and prices have further to rise.
In one line: Expect the rebound to start in May.
In one line: A 4% quarter for consumers' spending does not make a compelling case for easier money.
In one line: The housing recovery continues; more to come.
Many analysts were alarmed earlier this week by news from across the pond that the U.S. treasury is planning to break the bank in the fight against Covid-19.
The Conference Board's index of leading economic indicators appears to signal that the U.S. economy is plunging headlong into recession.
As it became clear that Donald Trump would beat Hillary Clinton to win the U.S. presidency, EM currencies came under severe pressure, fearing his economic and immigration policies. Some of the initial pressure is easing as markets digest the news and following Mr. Trump's conciliatory tone in his victory speech. But the proposals have been made and the MXN and other key LatAm assets likely will remain very stressed in the near term.
Brace yourselves; GDP growth forecasts are being slashed left and right, as our colleagues take stock of the economic damage Covid-19 likely will inflict in the U.S. and across Europe, where outbreaks and containment measures have escalated significantly.
One way or the other, the post-referendum lurch in sterling will make its recent gyrations pale by comparison. If the U.K. votes to remain in the E.U.--as we continue to expect--then sterling likely will jump up to about $1.48 immediately afterwards. As our first chart shows, the gap between sterling and the level implied by the current difference between overnight index swap rates in the U.S. and Britain is currently about $0.05.
The trade war with the U.S. has taken its toll on the RMB.
Mexico's survey data have improved significantly over the last few months, reaching levels last since before Donald Trump won the U.S. election in November. This suggest that the economy is in much better shape than feared earlier this year. Consumer confidence, for instance, has continued its recovery.
Just over four weeks after Mike Pence's spectacularly badly-timed Wall Street Journal Op-ed, entitled "There Isn't a Coronavirus Second Wave", the U.S. recorded 465K new cases in the week ended Saturday, easily the worst week of the pandemic to date.
We're very comfortable with the idea that the coronavirus is a broad deflationary shock to the U.S. economy.
Speculation mounted yesterday that the MPC will follow the U.S. Fed and cut interest rates before its next meeting on March 26.
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.
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.
Beyond the immediate wild swings in prices for food, clothing, hotel rooms and airline fares, the medium-term impact of the Covid outbreak on U.S. inflation will depend substantially on the impact on the pace of wage growth.
Federal Reserve Chair Janet Yellen's testimony this week reinforced our view that the first U.S. rate hike will be in June. The transition to higher U.S. rates will require an unpleasant adjustment in asset prices in some LatAm countries.
We aren't materially changing our U.S. economic forecasts in the wake of the U.K.'s Brexit vote, though we have revised our financial forecasts. The net tightening of financial conditions in the U.S. since the referendum is just not big enough--indeed, it's nothing like big enough--to justify moving our economic forecasts.
We have argued consistently for some time that the next year will bring a clear acceleration in U.S. wage growth, because the unemployment rate has fallen below the Nairu and a host of business survey indicators point to clear upward wage pressures. Nominal wage growth has been constrained, in our view, by the unexpected decline in core inflation from 2012 through early 2015, which boosted real wage growth and, hence, eased the pressure from employees for bigger nominal raises.
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.
President Trump tweeted yesterday that he wants to re-introduce tariffs on steel and aluminium imports from Brazil and Argentina, after accusing these economies of intentionally devaluing their currencies, hurting the competitiveness of U.S. farmers.
The growing perception that the U.K. MPC will lag further behind the U.S. Fed in this tightening cycle than previously has pushed sterling down to $1.49, a long way below its post-recession peak of $1.72 in mid-2014. But this has done little to enhance the overall competitiveness of U.K. exports, and net trade still looks likely to exert a major drag on real GDP growth in 2016.
The U.S. Federal Reserve didn't quite deliver the shock-and-awe yield curve control this week which some observers had been expecting, but the message was clear enough.
Here's the bottom line: U.S. businesses appear to have over-reacted to the impact of the trade war in their responses to most surveys, pointing to a serious downturn in economic growth which has not materialized.
We have been quite bullish on U.S. economic growth this year.
We have argued for a while that China and the U.S. will not reach a comprehensive trade deal until after the next election.
Whatever you might think about the state of the U.S. economy, it is not as volatile as implied by the past few months' payroll numbers. Assuming steady productivity growth in line with the recent trend, the payroll data suggest the economy swung from bust to boom in one month, with not even a pause for breath.
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 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.
Banxico left Mexico's benchmark interest rate at 3.25% last week, after increasing it by 25bp in December, when the U.S. Fed raised rates. Banxico's board maintained its neutral tone and indicated that the balance of risks has deteriorated for growth and short-term inflation. As usual, policymakers reiterated the importance of following the Fed closely to avoid financial instability, which in turn could spill over to inflation.
The Fed rate hike on Wednesday is fully priced in to LatAm markets, so we expect no significant immediate reaction when the trigger is pulled. But as markets gradually come around to our view that future U.S. rate risk is to the upside, markets will come under renewed pressure.
In recent years we have argued consistently that investors and the commentariat overstate the importance of the dollar as a driver of U.S. inflation. Only about 15% of the core CPI is meaningfully affected by shifts in the value of the dollar, because the index is dominated by domestic non-tradable services.
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.
We look for the Fed to increase rates today by 25bp to a range of 0.25%-to-0.50%. The FOMC will likely say that policy remains very accommodative and that rate hikes will be slow. Unfortunately, this will provide only temporary relief to LatAm. According to our Chief Economist, Ian Shepherdson, faster wage gains next year in the U.S. will disrupt the Fed's intention to move gradually. If wages accelerate as quickly as we expect, the Fed will need to raise rates more rapidly than it currently expects, which is also faster than markets anticipate. That, in turn, will put EM markets and currencies under further pressure.
Outside the U.S., global oil production is dominated by national oil companies, which are effectively arms of their states. State actors respond differently to private oil producers when prices fall, especially in states where oil revenues are the key element of government cashflow.
Analysts have fiercely debated the consequences of the U.S. Treasury's plan to break the bank in Q2 with a whopping €3T issuance of new debt to cover the initial costs of Covid-19.
The single most surprising U.S. economic report ever published likely is explained very simply: We know a great deal about the numbers of people losing jobs, but not much about people finding jobs.
So far, the MPC has been more timid with unconventional stimulus than other central banks. At the end of May, central bank reserves equalled 29.7% of four-quarter rolling GDP in the U.K., compared to 32.7% in the U.S. and 46.7% in the Eurozone.
Few Eurozone investors are going blindly to accept the rosy premise of last week's relief rally in equities that both a Brexit and a U.S-China trade deal are now, suddenly, and miraculously, within touching distance. But they're allowed to hope, nonetheless.
The first round of trade talks between the U.S.and China kicked off in Beijing on Monday, marking the first face-to-face meeting between the two sides since Presidents Donald Trump and Xi Jinping struck a "truce" in December.
Sentiment has been improving gradually in Mexico in recent weeks, reversing some of the severe deterioration immediately after the U.S. presidential election. Year-to-date, the MXN has risen 10.3% against the USD and the stock market is up by almost 8%. We think that less protectionist U.S. trade policy rhetoric than expected immediately after the election explains the turnaround.
In our Monitor on January 27 we speculated that the new U.S. administration would see Germany's booming trade surplus as a bone of contention. We were right. Earlier this week, Peter Navarro, the head of Mr. Trump's new National Trade Council, fired a broadside against Germany, accusing Berlin for using the weak euro to gain an unfair trade advantage visa-vis the U.S.
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 ECB's decision to go all-in and buy sovereign debt has three key consequences for U.S. markets. First, Treasuries will no longer benefit from safe-haven flows, because shorting Eurozone government debt has just become a fantastically risky proposition.
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.
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 truce in trade relations between the U.S. and China, agreed at the G20, is good news for LatAm, at least for now.
Turkey has all the problems you don't want to see in an emerging market when the U.S. is raising interest rates.
Predictably, last weekend's G7 meeting in Canada ended in acrimony between the U.S. and its key trading partners.
Advance data indicate that Q1 annualized GDP growth in the U.S. was a trivial 0.2%. And in the U.K., annualized growth is estimated to have slowed to 1.2%, from 2.4% in Q4.
As we head to press, investors are holding their breath over whether today's trade talks between the U.S. and China will be enough for Mr. Trump to step back from his pledge to increase tariffs on $200B of Chinese goods to 25%.
We have been asked recently why we rarely talk about the signal from the U.S. money supply numbers, in contrast to the emphasis we give to real M1 growth in our forecasts for economic growth in both the Eurozone and China.
The S&P 500 index chalked up a new record on Wednesday by going 3,453 days without a 20% drawdown, making it the longest equity bull-run in U.S. history.
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.
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.
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.
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.
The U.K.'s unexpected vote for Brexit means a stronger dollar for the foreseeable future, a sharp though likely containable drop in U.S. stock prices, and a further delay before the Fed next raises rates. The vote does not necessarily mean the U.K. actually will leave the EU, because the policy choices now facing leaders of Union have changed dramatically. An offer of substantial concessions on the migration issue--the single biggest driver of the Leave vote-- might be enough to trigger a second referendum, but this is a consideration for another day.
If the plunge in the stock market last week, and especially Friday, was a entirely a reaction to the slowdown in China and its perceived impact on other emerging economies, then it was an over-reaction. Exports to China account for just 0.7% of U.S. GDP; exports to all emerging markets account for 2.1%. So, even a 25% plunge in exports to these economies-- comparable to the meltdown seen as global trade collapsed after the financial crisis--would subtract only 0.5% from U.S. growth over a full year, gross.
The sell-off in risky assets intensified while we were away, driven by China's decision to loosen its grip on the currency, and looming rate hikes in the U.S. The Chinese move partly shows, we think, the PBoC is uncomfortable pegging to a strengthening dollar amid the unwinding investment boom and weakness in manufacturing.
Difficult though it is to tear ourselves away from Britain's political and economic train-wreck, morbid fascination is no substitute for economic analysis. The key point here is that our case for stronger growth in the U.S. over the next year is not much changed by events in Europe.
LatAm assets and currencies enjoyed a good start to the week, following the agreement between the U.S. and China to pause the trade war.
Chief U.S. economist Ian Shepherdson comments on U.S Q4 GDP
The U.S. housing market stumbled into 2015 as a leading indicator of home sales dipped in December
Chief U.S. Economist Ian Shepherdson discussing Durable Goods Orders in May
Chief U.S. Economist Ian Shepherdson on U.S. Durable Goods Orders
Ian Shepherdson on positive data from U.S. Home-Builders
European Central Bank's Bond-Buying Will Help U.S. Tourists and Investors...
Ian Shepherdson, Chief Economist at Pantheon MacroEconomics, on U.S. Consumer spending
U.S. Document Vault
U.S. Webinar Vault
Powell is a growth bull, not an inflation hawk...Interest rate risk is greater for 2019 than 2018
"Cross-Currents" Will Keep the Fed Safe For Now....But The Headwinds Already Are Starting To Ease
Don't be distracted by weak first quarter GDP...The Fed doesn't care (much)
Chief U.S. Economist Ian Shepherdson on U.S. economy growth
Fed hawks are in the ascendancy,..but they won't be fully in charge until next year
The Fed plans to keep on hiking...falling unemployment is the key, not the softer CPI
The cycle is peaking as higher rates begin to bite...but the next downturn is still some way off
The Payroll "Slowdown" Won't Last... The Fed Will Hike This Month, and Again Later This Year
"Gradual" normalization continues, for now...No fourth dot until September
The fed is in a double bind: what to expect, and what to do
Ian Shepherdson, founder and chief economist at Pantheon Macroeconomics, and Paul De Grauwe, London School of Economics professor and former Belgian MP, talk about confusion surrounding the Trump administration's approach to the U.S. dollar.
Harvey and Irma will shred late q3/q4 data... ...if the fed doesn't hike in December, they will in march
The Fed is Not Nearly Done...Real Rates are Still Far Too Low; No Slowdown in Sight
Freya Beamish, chief Asia economist at Pantheon Macroeconomics, discusses U.S.-China trade talks and the domestic state of the Chinese economy. She speaks with Francine Lacqua on Tom Keene on "Bloomberg Surveillance."
Chief U.S. Economist Ian Shepherdson on August Employment data
A Serious Slowdown is Still Some Way Off...So the Fed has to Keep Turning the Screws
Yellen's inner hawk escapes...Expect a December hike, and four more next year
Sub -4% Unemployment is coming, and soon...How will the Fed respond?
Chief U.S. Economist Ian Shepherdson on today's Payroll report
Slower Growth This Year Is Invevitable...But That Doesn't Make Zero Hikes Inevitable Too
Q1 Growth Is Unsustainable...But The Labor Market Will Continue To Tighten
Growth Has Peaked as the Tax Cut Boost Fades...But the Labor Market is Keeping the Fed on Track
Chief U.S. Economist Ian Shepherdson on U.S. Consumer Sentiment
Growth, inflation to challenge the Fed in 2018...faster wage growth will push them too
The fed will keep hiking each quarter...they are chasing unemployment, not inflation
Fed tightening is deferred, not cancelled...Expected a December hike after robust fall data
Don't be Deceived by the Consumer Slowdown...It's a One-Time Transition to Sustainability
The Tightening Labor Market is all that Matters...Expect the Fed to Hike at Each Quarter-End
Trade talk and falling stocks are hurting...but the fed is still on course for four hikes this year
The Slowdown Story is Overdone...If a China Deal is Done, the Fed Will Keep Hiking
Chief U.S. Economist Ian Shepherdson on U.S. Producer Prices
Chief U.S. Economist Ian Shepherdson on U.S. Jobless Claims
Strong growth, rising inflation greet Powel...but is productivity growth finally picking up?
Chief U.S. Economist Ian Shepherdson on U.S. Unemployment
The Fed Is All-In On The Slowdown Story...But They're Playing With Fire In The Labor Market
Has the wages dam finally burst? If it hasn't, it will soon
Chief U.S. Economist Ian Shepherdson discussing the latest from the Fed
Chief U.S. Economist Ian Shepherdson on U.S. Weekly Jobless Claims
Chief U.S. Economist Ian Shepherdson on the U.S. Trade Deficit
Chief U.S. Economist Ian Shepherdson on Corporate Tax Cuts
Chief U.S. Economist Ian Shepherdson on the record-breaking number of U.S. Unemployment Claims this week
Chief U.S. Economist Ian Shepherdson on the latest from the Fed
What does the Covid Second Wave Mean for the Economy, Policy and Markets?
Are there any signs of a Chinese recovery yet? Freya Beamish discusses
Chief U.K. Economist Samuel Tombs on U.K. Retail Sales in October
Ian Shepherdson comments on strong construction data
Chief Eurozone Economist Claus Vistesen on the effects of a no-deal Brexit on the EU
Ian Shepherdson comments on US Home-builders data
Ben Laidler, Tower Hudson Research CEO, thinks U.S. equities are in much better shape than many people think they are. Ian Shepherdson, Pantheon Macroeconomics Chief Economist, thinks the Fed could be close to the point of taking action on the coronavirus. Gina Martin Adams, Bloomberg Intelligence Chief Equity Strategist, says market uncertainty makes in almost impossible to take a three-year view. Dr. Peter Hotez, Baylor College of Medicine Dean, breaks down the most recent efforts to combat the coronavirus. Kevin Cirilli, Bloomberg Chief Washington Correspondent, says tonight's debate is most critical for Joe Biden.
Chief U.S. Economist Ian Shepherdson on today's U.S. Unemployment data
Chief U.S. Economist Ian Shepherdson on the latest from the U.S. Economy
he services sector is seeing "job losses that will not be quickly recovered," says Ian Shepherdson, chief economist at Pantheon Macroeconomics, as he examines the impact of the coronavirus pandemic on the U.S. labor market. He speaks with Bloomberg's Francine Lacqua on "Bloomberg Surveillance."
Chief U.S. Economist Ian Shepherdson on Donald Trump's comments in Davos
Chief U.S. Economist Ian Shepherdson with the latest on the trade war
Chief U.S. Economist Ian Shepherdson on the U.S. Housing Sector
Chief U.S. Economist Ian Shepherdson on the effect of Covid19 on the U.S. Economy
Chief U.S. Economist Ian Shepherdson on the U.S. Trade War with China
Chief U.S. Economist Ian Shepherdson on Q3 GDP
Chief U.S. Economist Ian Shepherdson on the U.S. China-Trade War
Chief U.S. Economist Ian Shepherdson on U.S. GDP in Q4
Freya Beamish, chief Asia economist at Pantheon Macroeconomics, and Christian Schulz, economics team director at Citigroup, discuss President Donald Trump's trade tariffs and their impact on the Chinese and U.S. economies.
Chief U.S. Economist Ian Shepherdson discussing Global debt
Chief U.S. Economist Ian Shepherdson on U.S. Jobless Claims
Chief U.S. Economist Ian Shepherdson on U.S. Housing starts
Chief U.S. Economist Ian Shepherdson on U.S. Consumer Confidence
Freya Beamish, chief Asia economist at Pantheon Macroeconomics, outlines her expectations from the impending Sino-U.S. trade talks.
Freya Beamish, Chief Asia economist at Pantheon Macroeconomics, discusses the U.S.-China trade deal
Chief U.S. Economist Ian Shepherdson on the latest employment data.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, joins 'Squawk Box' to discuss how the tensions between the U.S., Iran and China might impact the economy.
Chief U.S. Economist Ian Shepherdson discussing U.S. Durable Goods Orders
Chief U.S. Economist Ian Shepherdson on the latest Covid-19 data from the U.S.
Chief U.S. Economist Ian Shepherdson on U.S. Home Sales
Chief U.S. Economist Ian Shepherdson on U.S. Unemployment
Isabelle Mateos Y Lago, official institutions group deputy head at BlackRock, and Freya Beamish, chief Asia economist at Pantheon Macroeconomics, discuss U.S.-China trade concerns and their impact on investing. They speak with Lisa Abramowicz on "Bloomberg Surveillance."
Chief U.S. Economist Ian Shepherdson with the latest Covid-19 data
Chief U.S. Economist Ian Shepherdson on the latest NFIB data
Freya Beamish, chief Asia economist at Pantheon Macroeconomics, discusses how China's economy can influence a U.S. trade agreement and looks forward to U.S.-European trade talks.
Central banks in Mexico and Colombia kept their main interest rates on hold last week, due to recent volatility in the currency markets. Policymakers acknowledged the downside risks to growth, particularly from low commodity prices, but inflation fears, triggered by currency weakness, mean they will not be able to ease if growth slows.
Banxico left its benchmark interest rate on hold at 7.0% at last Thursday's policy meeting.
Fed Chair Powell's comment on Sunday's "60 Minutes", that a recovery in the economy "may take a while... it could stretch through the end of next year" did not prevent a 3% jump in the S&P 500 yesterday.
We're reasonably happy with the idea that business sentiment is stabilizing, albeit at a low level, but that does not mean that all the downside risk to economic growth is over.
Investors have become more concerned about a no-deal Brexit.
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.
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.
Last week's unprecedented surge in initial jobless claims, to 3,283K from 282K, prompted a New York Times front page for the ages; if you haven't seen it, click here.
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.
As the impeachment hearings gather momentum, we have been asked to provide a cut-out-and-keep guide to the possible outcomes.
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.
One of the key positive signs in the Eurozone data since the virus hit has been the evidence that households' liquid money balances have been well supported by job retention schemes, extended unemployment insurance, and aggressive monetary stimulus.
The May auto sales numbers probably will be released just after our deadline at 4pm eastern time today, but all the signs are that a hefty rebound will be reported after April's plunge to just 8.6M, not much more than half the pre-Covid level.
We keep hearing that the auto market is struggling, but that idea is not supported by the recent sales numbers.
Japan's trade balance remained in the red in June, though the deficit narrowed sharply, to -¥269B from -¥838B in May.
The BoJ kept its main policy settings unchanged yesterday, in another 7-to-2 split.
Korea's fledgling export recovery seemingly hit a roadblock this month.
Complacency and wishful thinking seem to be creeping back into the government's approach to containing Covid-19.
High interest rates and inflation, coupled with increasing uncertainty, put Mexican consumption under strain last year.
LatAm's economies are gradually rebounding, boosted by easier monetary policy in most countries, falling inflation, and a relatively calm external backdrop.
If the only manufacturing survey you track is the Philadelphia Fed report, you could be forgiven for thinking that the sector is booming.
Data on Friday showed that the EZ current account surplus fell to €25.3B in September, from a revised €29.2B in August. The trade and services surpluses were unchanged, but the income balance slipped after rising in the previous months.
The Eurozone's external surplus recovered a bit of ground mid-way through the third quarter.
We remain very bullish on the housing market, given sustained 11-year highs in applications for new mortgages to finance house purchase.
Today brings only the May existing home sales report, previewed below, so we have an opportunity to look over the latest near-real-time data on economic activity. The picture is mixed.
Back-to-back elevated weekly jobless claims numbers prove nothing, but they have grabbed our attention.
Most LatAm currencies have been under pressure recently, with the Brazilian real and the Chilean peso breaking all-time lows versus the USD in recent weeks.
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.
Last week's enormous €1.3T take-up in the ECB's first post-virus TLTRO auction was hardly a blip for financial markets, consistent with the reactions to previous auctions.
We are hearing a great deal about the threat of a second wave of Covid-19 infections, caused either by the reopening of the economy, or the arrival of cooler weather in the fall, or both.
Japanese trade remained in the doldrums in October, keeping policymakers on their toes as they repeat the refrain of "resilient" domestic demand.
The year so far in EZ equities has been just as odd as in the global market as a whole.
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.
Investors have been treated to good news in the past week, at least if they've managed to side-step the barrage of terrible economic data.
The recent increases in single-family housing construction are consistent with the rise in new home sales, triggered by the substantial fall in mortgage rates over the past 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.
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.
The possibility of a Corbyn-led Labour Government has been highlighted by some analysts as a major economic risk. Mr. Corbyn, however, has little practical chance of being elected soon.
Colombia's oil industry--one of the key drivers of the country's economic growth over the last decade--has been stumbling over recent months, raising concerns about the country's growth prospects. But the recent weakness of the mining sector is in stark contrast with robust internal demand and solid domestic production.
Argentina's inflation ended 2019 badly, and it is still too early to bet on a protracted downtrend, even after the renewed economic slowdown.
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.
Data released on Friday confirmed that Colombian activity lost momentum in Q4, following an impressive performance in late Q2 and Q3. Retail sales rose 4.4% in November, down from 7.4% in October and 8.3% in Q3.
The coronavirus ordeal continues in LatAm as a whole.
We have been puzzled in recent weeks to see clear indications of softening economic activity--falling restaurant diner numbers, fewer small firms open for business and falling employment, and reduced footfall at businesses--while data from the travel business continued to improve.
The FOMC kept policy unchanged at April's meeting-- rates stayed at zero, and all the market valves are wide open, as needed--but policymakers spent considerable time pondering what might happen over the next few months, and how policy could evolve.
Japan's February trade data were a shocker, but not for the reasons we expected, given the signal from the Chinese numbers.
Colombia is one of the few larger economies in Latin America to have enjoyed solid, positive economic growth over the past two years. But lower commodity prices and last year's central bank tightening, to curb high inflation generated by strong growth, have started to become visible in the main economic data.
Just as we turned more positive on the labor market, following three straight months of payroll gains outstripping the message from an array of surveys, the Labor Department's JOLTS report shows that the number of job openings plunged in November.
China's Loan Prime Rate was unchanged this month, at 4.15%, with consensus once again expecting a reduction to 4.10%.
Under normal circumstances, the 0.23% increase in the core CPI, reported earlier this month, would be enough to ensure a 0.2% print in today's core PCE deflator.
This week's labour market report--primarily reflecting conditions in March, though some data refer to April--will lift the veil on the initial economic damage from Covid-19, though the full horror will emerge only later.
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.
Hard data for Brazil and Mexico, released last week, support the case for further interest rate cuts.
Today brings a wave of data which will help analysts narrow their estimates for first quarter GDP growth, and will offer some clues, albeit limited, about the early part of the second quarter.
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.
Friday's data added further colour to the September CPI data for the Eurozone.
It's hard to know what to make of the October CPI data, which recorded hefty increases in healthcare costs and used car prices but a huge drop in hotel room rates, and big decline in apparel prices, and inexplicable weakness in rents.
The 0.242% increase in the January core CPI left the year-over-year rate at 2.3% for the third straight month.
Inflation in Brazil Ended 2019 Above the BCB's Target; 2020 will be Fine
We have no argument with the FOMC's view that the Covid crisis is a disinflationary event, but the run of three straight outright month-to-month declines in the core CPI likely came to an end in June.
The details of the substantial pay raises being offered to some 18K JP Morgan employees over the next three years are much less important than the signal sent by the company's response to the tightening labor market. In an economy with 144M people on payrolls, hefty raises for JP Morgan employees won't move the needle in the hourly earnings data.
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.
Industrial production in Eurozone had a decent start to the fourth quarter. Output ex-construction rose 0.6% month-to-month in October, pushing the year-over-year rate up to 1.9% from a revised 1.3% in September. Production was lifted by gains in the major economies, and surging output in the Netherlands, Portugal and Lithuania. Across sectors, increases in production of capital and consumer goods were the main drivers, but energy output also helped, due to a cold spell lifting demand and production in France.
The surge in Covid-19 case and hospitalizations-- and, in due course, deaths--in some southern states since they began to reopen probably is not a sign of what is likely to happen as the populous states in the Northeast and Midwest reopen too.
Recent industrial data for Mexico point to renewed upside risks for GDP growth, despite the likely headwind to consumption from high inflation and depressed confidence.
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.
Data released yesterday from Brazil support our view that the economic recovery continues, but progress has been slow.
Mexico's industrial recession deepened in April, though some leading indicators suggest that the worst is over as the economy gradually reopens. But downside risks have increased dramatically in recent weeks, as the pandemic seems to be gathering renewed strength.
When the dust settles after today's wave of data, we expect to have learned that core retail sales continued to rise in June, core inflation nudged back up to its cycle high, and manufacturing output rebounded after an auto-led drop in May. None of these reports will be enough to push the Fed into early action, but they will add to the picture of a reasonably solid domestic economy ahead of the U.K. Brexit referendum.
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.
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.
China's trade surplus plunged to $46.4B in June, from $62.9B in May, largely in line with our below- consensus forecast.
The costs of the government's failure to lock down quickly in response to the Covid-19 pandemic, ultimately necessitating long-lasting restrictions, were visible in May's GDP figures.
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.
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.
Today's November retail sales numbers are something of a wild card, given the absence of reliable indicators of the strength of sales over the Thanksgiving weekend, and the difficulty of seasonally adjusting the data for a holiday which falls on a different date this year.
The underlying trend in the core CPI is rising by just under 0.2% per month, so that has to be the starting point for our January forecast.
Quarter-on-quarter GDP growth last year was buffeted by the accumulation, and subsequent depletion, of inventories, around the two Brexit deadlines in March and October.
Thursday's CPI report in Mexico showed that inflation is edging lower. We are confident that it will continue to fall consistently during Q1, thanks chiefly to the subpar economic recovery, low inertia and the effect of the recent MXN rebound.
LatAm economies this year have faced a tough external environment of subdued commodity prices, weaker Chinese growth, the rising USD, and the impending Fed lift-off. At the domestic level, lower public spending, low confidence, and economic policy reform have clashed with above-target inflation, which has prevented central bankers from loosening monetary policy in order to mitigate the external and domestic headwinds. In these challenging circumstances, LatAm growth generally continues to disappoint, though performance is mixed.
If the Phase One trade deal with China is completed, and is accompanied by a significant tariff roll-back, we'll revise up our growth forecasts, but we'll probably lower our near-term inflation forecasts, assuming that the tariff reductions are focused on consumer goods.
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.
The 0.1% dip in the core CPI in March was the first outright decline in three years, but we expect another-- and bigger--decline in today's April numbers.
All major EZ governments are now in the process of lifting lockdowns, but investors should expect less a grand opening, more of a careful tip-toeing.
Financial assets of all stripes are, by most metrics, expensive as we head into year-end, but for some markets, valuations matter less than in others. The market for non-financial corporate bonds in the euro area is a case in point.
Investors in Eurozone banks continue to face uncertain times, despite the ECB's best efforts to prop up the economy and financial markets via QE. The latest hit to confidence comes from the bail-in of selected senior debt in Portugal's Banco Espirito Santo. When the troubled lender was restructured in mid-2014, the equity and junior debt were left in a "bad" bank--and were virtually wiped out--while the deposits and senior debt went into the "good" bank Novo Banco. Senior debt holders expecting to recoup their money, however, were startled earlier this month by the decision to "re-assign" five selected bonds with total face value of €2B from Novo Banco to the bad bank, in effect wiping out the investors.
Friday's June inflation data in Brazil confirmed that the ripples from the worst of the Covid shock were still being felt at the end of the quarter.
More depressing economic numbers in LatAm have been released in recent days, and high frequency data continue to show a near-term bleak outlook.
Brazil's outlook is still improving at the margin, as positive economic signals mix with relatively encouraging political news.
We argued a couple of weeks ago that the stock market could suffer a relapse, on the grounds that valuations hadn't fallen far enough from their peak to reflect the extent of the hit to the economy; that hopes for an early re-opening were likely to prove forlorn; and that investors were likely to be spooked by the incoming coronavirus data.
We're doing a wrap-up of the data that were released last week while we were away, and the Chinese numbers were both a hit and a miss.
Analysis of the economy's potential to recover later this year from extreme weakness in Q2 has focussed largely on the extent to which virus-related restrictions will be lifted.
LatAm currencies have suffered in recent weeks. Each country has its own story, so the currency hit has been uneven, but all LatAm economies share one factor: Fear of the start of a Fed tightening cycle.
The second Covid wave has not yet crested, but it won't be long. That might sound preposterous, given the endless headlines about record numbers of new cases and deaths in southern and western states.
We expect Greece to do what it needs to do by Wednesday to secure its third bailout, and, judging by her speech in Cleveland last Friday, so does the Fed Chair. It's always risky to assume blithely that European politicians will do the right thing in the end, and they seem absolutely determined to humiliate Greece before writing the checks, but a completed deal is the most likely outcome.
LatAm governments and policymakers are bracing for a more dramatic and longer virus-led downturn than initially expected.
The NY Fed's announcement yesterday restarts QE. The $60B of bill purchases previously planned for the period from March 13 through April 13 will now consist of $60B purchases "across a range of maturities to roughly match the maturity composition of Treasury securities outstanding".
China's September imports missed expectations, but commentators and markets tend to focus on the year-over-year numbers.
The New York Times called the China trade agreement reached Friday "half a deal", but that's absurdly generous.
Barring a disaster, the four-year cyclical upturn in the euro area will continue in the coming quarters. Inflation is a lagging indicator and therefore should rise, and investors should be adjusting their mindset to higher interest rates. But the reality today looks very different. Final inflation data confirmed that the Eurozone inflation slipped to -0.2% year-over-year in February, from 0.2% in January.
The turmoil in Washington has begun to hit markets. We don't know how this will end, but we do know that it isn't going away quickly.
Yesterday's detailed Mexican GDP report confirmed that growth was relatively resilient in Q2, despite the lagged effect of external and domestic headwinds.
In recent client "meetings" we have been emphasizing the idea that a sustained recovery in the economy over the summer depends on the solidity of a three-legged stool.
China's data on Monday were beyond dire, leading to a dramatic downward revision of our already grim Q1 GDP forecasts for the country.
The establishment of the Fed's commercial paper funding facility, announced yesterday, replicates the first wave of asset purchases undertaken after the crash of 2008.
Boeing's announcement that it will temporarily cut production of 737MAX aircraft to zero in January, from the current 42 per month pace, will depress first quarter economic growth, though not by much.
The BoJ is likely to stay on hold this week for all its main policy settings.
Japanese policymakers have a wary eye on the weakness in industrial production and exports.
Japan's trade deficit has bottomed out. The unadjusted shortfall narrowed to -¥833B in May,
Data released on Friday confirmed an appalling end to the first quarter for the Brazilian and Colombian economies. In Brazil, the March IBC-Br, a monthly proxy for GDP, plunged 5.9% month-to-month, close to expectations.
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.
The next couple of rounds of business surveys will capture firms' responses to the Phase One trade deal agreed last week, though the news came too late to make much, if any, difference to the December Philly Fed report, which will be released today.
Yesterday's German ZEW investor sentiment survey provided the first clear evidence of the coronavirus in the EZ survey data.
We keep hearing that the surge in Covid-19 infections in the South is not a big deal, because the number of cases and the subsequent hospitalizations are still very low when compared to the nightmare suffered in New York and other states, which had thousands of deaths.
The gradual reopening of the major EZ economies continues, a process which is now accompanied by the inevitable concern that the virus is regaining a foothold.
The PBoC reduced its 14-day reverse repo by 5bp to 2.65% in a routine operation yesterday.
Our colleagues have been telling some unpleasant stories recently.
Some shoes never drop. But it would be unwise to assume that the steep plunge in manufacturing output apparently signalled by the ISM manufacturing index won't happen, just because the hard data recently have been better than the survey implied.
he ECB governing council gathered last week under the leadership of Ms. Lagarde for the first time to lay a battle plan for the course ahead.
The declines in headline housing starts and building permits in September don't matter; both were driven by corrections in the volatile multi-family sector.
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.
Banxico will meet tomorrow, and we expect Mexican policymakers to cut the main interest rate by 25bp, to 7.25%.
The beleaguered EZ car sector finally enjoyed some relief at the end of Q3, though base effects were the major driver of yesterday's strong headline.
The Covid-19 crisis has turned the tables on the Spanish economy.
The House passage of a stimulus bill last Friday, seeking to ameliorate some of the damage done by the coronavirus outbreak, will not be nearly enough.
The further improvement in labor market conditions and the jump in core inflation means that the economic data have given the Fed all the excuse it needs to raise rates today. But the chance of a hike is very small, not least because the fed funds future puts the odds of an action today at just 4%, and the Fed has proved itself very reluctant to surprise investors-- at least, in a bad way--in the past.
Mexico's domestic conditions don't warrant an imminent rate hike in the near term. Headline inflation continues to fall, reaching an all-time low of 2.5% in October. It should remain below 3% in the coming months. And core prices remain wellbehaved, increasing at a modest pace, signalling very little pass-through of the MXN's depreciation. Economic activity gained some momentum in Q3-- this will be confirmed on Friday's GDP report--but demand pressures on inflation are absent and the output gap is still ample. Under these conditions, policymakers should not be in a rush to hike, but they have signalled once again that they will act immediately after the Fed.
We agree with the majority of economists that the MPC will announce on Thursday another £100B of asset purchases, primarily of gilts, once it has completed the £200B of purchases it authorised on March 19.
Ahead of the release of the retail sales report for December 2018, markets expected to see unchanged non-auto sales.
The big difference in this round of stimulus is in the complete lack of easing on the shadow banking side.
The "Phase One" China trade deal announced late last week is a step in the right direction, but a small one. With no official text available as we reach our deadline, we're relying on media reporting, but the outline of the agreement is clear.
Central banks in Chile, Peru, and Mexico hogged the market spotlight last week. Chile left its main interest rate at 3.0% on Thursday, for the fourth consecutive meeting.
The BoJ is likely to be thankful next week for a relatively benign environment in which to conduct its monetary policy meeting.
Yesterday's final inflation data in France for September were misleadingly soft.
Tariffs are a tax on imported goods, and higher taxes depress growth, other things equal.
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.
Here's something we didn't expect to write: The control measure of retail sales in May was slightly higher than in February.
The split between the reality reflected in the economic data and market pricing has never been wider in the euro area
We were not hugely surprised to see stocks tank again yesterday.
The trend in manufacturing output probably is about flat, with no real prospect of any serious improvement in the near term.
Brazil's consumer resilience in Q3 continued to November, but retail sales undershot market expectations, suggesting that the sector is not yet accelerating and that downside risks remain.
The Mexican labor market has remained relatively healthy in recent months, despite many external and domestic headwinds. Formal employment has increased by 2.1% year-to-date and by 3½% in the year to July, according to the Mexican Social Security Institute.
The November industrial production numbers will be dominated by the rebound in auto production following the end of the GM strike.
Incoming activity data from Colombia over the past quarter have been surprisingly strong, despite many domestic and external threats.
China's activity data outperformed expectations in November.
The BoE has lived up to its reputation again as one of the most unpredictable central banks.
Sterling is well below its $1.57 average of the last five years, despite rallying this month to about $1.45, from a low of $1.38 in late February. But hopes that cable will bounce back to its previous levels, after a vote to remain in the E .U., likely will be dashed.
Yesterday's data provided further evidence of the rising costs of supporting the EZ economy through the Covid-19 shock.
The advance indicators of July payrolls are wildly contradictory, so you should be prepared for anything from a consensus-busting jump to a renewed outright drop, in both Friday's official numbers and today's ADP report.
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 recent March economic activity reports for Chile have been terrible, showing the first signs of the Covid-19 shock, and worse is to come.
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.
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.
We aren't in the business of trying to divine the explanation for every twist and turn in the stock market at the best of times, and these are not the best of times.
We're hearing a lot about permanent changes to the economy in the wake of Covid-19, but that might not be the right description. Not much is permanent, and assuming permanence in just about anything, therefore, is risky.
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.
Korea's manufacturing PMI fell for a fourth straight month in April, dropping to 41.6, which is the lowest reading since January 2009.
China is facing a nasty mix of spiking CPI inflation and ongoing PPI deflation.
Chilean GDP growth hit bottom in August, but activity is now picking up and will gather speed over the coming quarters. The tailwinds from lower oil prices and fiscal stimulus will soon be visible in the activity data.
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.
It's hard to overstate the geopolitical importance of Friday's assassination of Qassim Soleimani, architect of Iran's external military activity for more than 20 years and perhaps the most powerful man in the country, after the Supreme Leader.
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%.
Brazil's industrial sector is on the mend, but some of the key sub-sectors are struggling.
A range of indicators show that the pace of the economic recovery shifted up a gear in July, when all shops were open for the entire month, and most consumer services providers finally were permitted to reopen.
The simultaneous decline in both ISM indexes was a key factor driving markets to anticipate last week's Fed easing.
Factory orders in Germany probably jumped in September, following a string of losses in the beginning of Q3. We think new orders rose 1.0% month-to-month, pushing the year-over-year rate slightly lower, to 1.8% from 2.0% in August. A rebound in non- Eurozone export orders likely will be the key driver of the monthly gain, following a 14.8% cumulative plunge in the previous two months. The rise will be concentrated in capital and consumer goods, and should be enough to offset a fall in export orders within the euro area. Our forecast is consistent with new orders falling 2.0% quarter-on-quarter in Q3, partly reversing the 3.0% surge in the second quarter, and raising downside risks for production in Q4.
Our hopes of another solid increase in payrolls in July were severely dented by yesterday's ADP report, showing that private payrolls rose only 167K in July.
The key story in Brazil this year remains one of gradual recovery, but downside risks have increased sharply, due mainly to challenging external conditions.
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.
French consumer confidence and consumption have been among the main bright spots in the euro area economy so far this year.
The Bank of Korea's two main monthly economic surveys were very perky in January.
Yesterday's first estimate of full-year 2019 GDP in Mexico confirmed that growth was extremely poor, due to domestic and external shocks.
It's a myth that the 10-ye ar decline in the unemployment rate has not driven up the pace of wage growth.
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.
Markets see a strong possibility, though not a probability, that the BoJ will cut rates on Thursday.
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.
The Fed made no changes to policy yesterday, as was almost universally expected.
The massive hit from low oil prices, Covid-19 and President AMLO's willingness to call snap referendums on projects already under construction is putting pressure on Mexico's sovereign credit fundamentals and ratings.
Yesterday's first estimate of Q2 GDP in Mexico confirmed that the economy has been under severe stress in recent months.
As we showed in yesterday's Monitor--see here--EZ governments and the ECB have thrown caution to the wind in their efforts to limit the pain from the Covid-19 crisis.
The fundamentals underpinning our forecast of solid first half growth in consumers' spending remain robust.
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.
In one line: Likely to rise again next week, then flatten.
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.
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.
Data released yesterday confirm that Brazil's recovery has continued over the second half of the year, supported by steady capex growth and rebounding household consumption.
Yesterday's final EZ manufacturing PMIs for July extended the run of gains since the nadir during lockdown.
Under normal circumstances, sustained ISM manufacturing readings around the July level, 54.2, would be consistent with GDP growth of about 2% year-over-year.
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.
The economic calendar in Mexico was relatively quiet over Christmas, and broadly conformed to our expectations of poor economic activity in Q4.
Governor Bailey signalled a potential shift in the Bank of England's approach to withdrawing monetary stimulus--whenever the time comes--last month in an article for Bloomberg Opinion.
It is becoming increasingly safe to say that any bounce in private consumption following the end of Japan's state of emergency will be muted and difficult to sustain.
We have had a modest rethink of our June payroll forecast and have nudged up our number to 150K, still below the 180K consensus. Our forecast has changed because we have re-estimated some of our models, not because of the 172K increase in the ADP measure of private payrolls. ADP is a model-based estimate, not a reliable survey indicator.
Manufacturers in Germany endured another miserable quarter in Q3.
Headline inflation in Brazil remained low in October, and even breached the lower bound of the BCB's target range.
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.
Colombia was the fastest growing LatAm economy in 2019, due mostly to strong domestic demand, offsetting a sharp fall in key exports.
The Brazilian Senate concluded last week the first vote- of-two- on the pension reform.
Good news keeps on coming from Mexico, and the outlook is still favourable. Overall inflation pressures remain subdued and the domestic economy remains reasonably solid, despite a modest slowdown in recent months. Job creation remains robust, and real wages have been growing at a solid, non-inflationary pace.
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.
Markets clearly love the idea that the "Phase One" trade deal with China will be signed soon, at a location apparently still subject to haggling between the parties.
The RMB has been on a tear, as expectations for a "Phase One" trade deal have firmed.
China's trade surplus jumped to a record high in May, defying expectations for a fall by spiking to $69.2B.
Traders looking for a sustained move in the euro have been left disappointed in the past six-to-12 months, but it is now teasing investors with a break to the upside against the dollar.
A third wave of Covid-19 outbreaks is now underway. The first, in China, is now under control, and the rate of increase of cases in South Korea has dropped sharply. The other second wave countries, Italy and Iran, are still struggling.
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.
China's GDP report for the second quarter is due a week from today, and the prevailing wisdom is that the bounce-back was strong enough for headline growth to return to the black.
For the MXN, last year was especially harsh. The currency endured extreme volatility, plunging 17% against the USD. So far, this year is off to a rocky start too. The MXN fell close to 2.5% during the first week of 2017.
We have two competing explanations for the unexpected leap in November payrolls. First, it was a fluke, so it will either be revised down substantially, or will be followed by a hefty downside correction in December.
Data released on Friday showed that November inflation was in line with, or below, expectations in Brazil, Colombia and Chile.
The German manufacturing sector appears to have settled into an equilibrium of sustained misery.
One bad month proves nothing, but our first chart shows that October's auto sales numbers were awful, dropping unexpectedly to a six-month low.
India's PMIs for October were grim, indicating minimal carry-over of energy from the third quarter rebound.
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.
Emerging evidence suggests that the economy has passed the period of peak Covid-19 pain.
The PBoC finally moved yesterday, cutting its one-year MLF rate by 5bp to 3.25%, whilst replacing around RMB 400B of maturing loans.
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%.
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.
Chancellor Sunak faces a tough first gig on Wednesday, when he delivers the long-awaited Budget.
Let's get straight to the point: It's very unlikely that July's payroll numbers will be as good as June's. Too many direct and indirect indicators of employment and broader economic activity are now moving in the wrong direction.
The shock of the weak May payroll report means that the June numbers this week will come under even greater scrutiny than usual. We are not optimistic that a substantial rebound is coming immediately. The headline number will be better than in May, because the 35K May drag from the Verizon strike will reverse.
We think today's February payroll number will be reported at about 140K, undershooting the 175K consensus.
Over the past six months, payroll growth has averaged exactly 150K. Over the previous six months, the average increase was 230K. And in the six months to August 2015--a fairer comparison, because the fourth quarter numbers enjoy very favorable seasonals, flattering the data--payroll growth averaged 197K.
The final Monitor before our summer break is characterized by great uncertainty.
The short answer to the question posed by our title is: We don't know. But that's the point, because we shouldn't be needing to ask the question at all.
Recent economic indicators in Mexico have been terrible. The worst of the recession seems to be over, but recent hard data have underscored the severity of the shock and made it clear that the recovery has a long way to go.
The next couple of months likely will see some activity data rebound to close to pre-Covid levels, fuelling hopes of a V-shaped recovery.
We have argued frequently that the ADP employment report is not a reliable advance payroll indicator--see our Monitor of May 4, for example-- so for now we'll just note that it is generated by a regression model which includes a host of nonpayroll data and the official jobs numbers from the previous month. It is not based solely on reports from employers who use ADP for payroll processing, despite ADP's best efforts to insinuate that it is.
Yesterday's economic reports in the Eurozone were solid across the board.
The jump in oil prices over the past two trading days eventually will lift retail gasoline prices by about 35 cents per gallon, or 131⁄2%.
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 startling November international trade numbers, released yesterday, greatly improve the chance that the fourth quarter saw a third straight quarter of 3%- plus GDP growth.
Chile's near-term economic outlook is still negative, but clouds have been gradually dispersing since late Q4, due mostly to better news on the global trade front, China's improving economic prospects, and rising copper prices.
Chile's economy is showing the first reliable signs of improvement, at last. December retail sales rose 1.9% year-over-year, up from 0.4% in November, indicating that household expenditure is starting to revive, in line with a pick-up in consumer confidence and the improving labor market.
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.
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.
Data released yesterday confirmed that Mexico's economy ended Q4 poorly, confounding the most hawkish Banxico Board members.
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.
All eyes will be on the core PCE deflator data today, in the wake of the upside surprise in the January core CPI, reported last week. The numbers do not move perfectly together each month, but a 0.2% increase in the core deflator is a solid bet, with an outside chance of an outsized 0.3% jump.
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.
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 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.
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.
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.
A trade deal with China is in sight. President Trump tweeted Sunday that the planned increase in tariffs on $200B of Chinese imports to 25% from 10%, due March 1, has been deferred--no date was specified-- in light of the "substantial progress" in the talks.
Sterling's rough first half of this year--cable has depreciated to $1.24, from $1.33 at the end of 2019--is hard to reconcile with its normal macroeconomic determinants.
The Andean countries were quick to implement significant measures in response to the initial stage of the pandemic, adopting a broad range of economic and social policies to ease the effects.
Inflation in Mexico surprised to the upside in April, but the underlying picture has improved rapidly over recent months.
The closer we look at the data, the less concerned we are at the painfully slow decline in the number of new daily confirmed Covid-19 cases.
Short-term interest rates in the Eurozone continue to imply that the ECB will lower rates further this year. Two-year yields have been stuck in a very tight range around -0.5% since March, indicating that investors expect the central bank again to reduce its deposit rate from its current level of -0.4%. This is not our base case, though, and we think that investors focused on deflation and a dovish ECB will be caught out by higher inflation.
We've suspected that China's GDP targeting system was on its last legs for some time now.
The second estimate of Q1 GDP made for grim reading. Quarter-on-quarter GDP growth was revised down to 0.2%--the joint-slowest rate since Q4 2012--from the preliminary estimate of 0.3%.
The extent to which the Covid wave in the South and West--plus a few states in other regions--will constrain the recovery is unknowable at this point.
Q1 is not over yet, and we still await a lot of important data.
The consensus for today's first post-apocalypse jobless claims number, 1,500K, looks much too low.
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.
Britain's Covid-19 data have continued to improve, despite the partial reopening of the economy.
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.
Economists' forecasts are changing almost as quickly as market prices these days, and not for the better.
The bad news just keeps coming for Brazil's economy. The mid-month CPI, the IPCA-15 index, rose 1.2% month-to-month in March. Soaring energy prices remain the key contributor to the inflation story in Brazil, pushing up the housing component by 2.8% in March, after a 2.2% increase in February.
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.
Policymakers and governments are gradually deploying major fiscal and monetary policy measures to ease the hit from Covid-19 and the related financial crisis.
The Covid-19 shock to the real economy in China, and now the world, is colossal. Asia is leading the downturn, both because the outbreak started in China, but also because of its place in the supply chain.
China's loan prime rates were unchanged for a second straight month in June, as expected.
Hot on the heels of yesterday's grim-looking-- temporarily--existing home sales numbers for May, we see upside risk for today's new sales data.
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.
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.
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.
Mexican policymakers likely will stick to the script tomorrow and vote by a majority to cut the main rate by 50bp to 5.00%, which would be its lowest level since late 2016.
China's export data for April were a mixed bag, to say the least.
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.
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.
U.K. equities are falling ever further out of favour.
Korea's GDP report for the second quarter was a huge let-down.
We can't yet know how bad the spread of the coronavirus from the Chinese city of Wuhan will be.
Brazilian inflation is off to a bad start this year, but January's jump is not the start of an uptrend, and we think good news is coming.
The ECB conformed to expectations today, at least on a headline level.
Mexico's final estimate of third quarter GDP, released yesterday, confirmed that the economy is still struggling in the face of domestic and external headwinds.
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.
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.
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.
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 limited data available on the state of the labour market, since the government forced businesses to close two weeks ago, paint a disconcerting picture.
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.
For now, the U.K. government still insists that the Brexit transition period will end in December, regardless of whether a new trade deal has been negotiated with the E.U. or not.
Data released this week have confirmed that the Mexican economy is struggling and that the near-term outlook remains extremely challenging.
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.
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.
Korean trade ended the year strongly, salvaging what was shaping up as a dull fourth quarter for the economy.
Policymakers in Colombia last Friday took aim at inflation by hiking interest rates by 50 basis points to 7.0%. The consensus expectation was for a 25bp increase. BanRep's bold move, which came on the heels of six consecutive 25bp increases since November, took Colombia's main interest rate to its highest level since March 2009.
This week's main economic data from Korea--the last batch before the BoK meets on the 16th--missed consensus expectations, further fuelling speculation that it will cut rates for a second time, after pausing in August.
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.
Yesterday's FOMC , announcing a unanimous vote for no change in the funds rate, is almost identical to December's.
Something of a debate appears to be underway in markets over the "correct" way to look at the coronavirus data.
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.
The data in LatAm were all over the map while we were out.
The end of Korea's first Covid-19 wave, coupled with the government's economic support measures, has been a boon for the retail industry.
On the face of it, the outperformance of gilts compared to government bonds in other developed countries this year suggests that Brexit would be a boon for the gilt market. In the event of an exit, however, we think that the detrimental impact of higher gilt issuance, rising risk premia and weaker overseas demand would overwhelm the beneficial influence of stronger domestic demand for safe-haven assets, pushing gilt yields higher.
The stock market did not like the renewed closure of bars in Texas and Florida, announced Friday morning.
We argued in the Monitor on Friday--see here--that the Fed likely will increase the pace of its Treasury purchases, in order to ensure that the wave of supply needed to finance the next Covid relief bill does not drive up yields.
Data released yesterday in Brazil support our base case that the IPCA inflation rate will remain relatively stable over the coming months, hovering around 2%.
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.
The last few years have thrown up surprise after surprise for establishment parties. Mr. Abe's Liberal Democrat Party is about as establishment as they come.
The Fed will soon have to step in to try to put a firebreak in the stock market.
The U.K.'s unexpected decision to vote to leave the E.U. will have serious ramifications for the global economy, and LatAm economies are unlikely to emerge unscathed. It is very difficult to quantify the short-term effects due to the intricacies of the financial transmission channels into the real economy.
Net trade in India likely contributed positively to headline GDP growth in the lockdown-plagued second quarter, but for all the wrong reasons.
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.
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.
With just five days of July remaining, it seems likely that the trends in most of the key near-real-time indicators will end the month close to the levels seen at the end of June.
Retail sales in Mexico fell in Q4, but we think households' spending will continue to contribute to GDP growth in the first quarter, at the margin.
Core durable goods orders in recent months have been much less terrible than implied by both the ISM and Markit manufacturing surveys.
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.
Net foreign trade was a drag on GDP growth in the second quarter, subtracting 0.7 percentage points from the headline number.
Brazil's external accounts were a relatively bright spot again last year.
Brazil's external accounts remain relatively solid, making it easier for the country to withstand any potential external or domestic threat.
The latest profits data out of China were grim, as we had expected.
Unconventional indicators of economic activity suggest that the recovery from the Covid-19 shock is gathering momentum.
Mexico's central bank, Banxico, will hold its first monetary policy meeting of this year tomorrow. It will break with tradition, holding the meeting on Thursday at 1:00 p.m, local time, instead of the previous 9:00 a.m slot.
Data released yesterday in Mexico highlighted the volatility in international trade resulting from the pandemic.
Tracking the consumer services sector has become more important since Covid-19, as it was flattened by the lockdown in Q2 and it might prove to be an incubator of new infections, if it becomes too busy.
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.
Judging from our inbox, economy bulls are pinning a great deal of hope on the idea that the collapse in the Help Wanted Online index is misleading, because the index is subject to distortions caused by shifts in pricing behavior in the online job advertising business. These distortions were analyzed in a recent Fed paper--click here to read on the Fed's website-- which makes a convincing case that at least some of the decline in the HWOL over the past half-year represents a change in recruiters' behavior rather than slowing in labor demand.
Inflation data in Brazil, Mexico and Chile last week reinforced our view that interest rates will remain on hold, or be cut, over the coming meetings. The recent fall in oil prices, and the weakness of domestic demand, will offset recent volatility caused by the FX sell-off, driven mostly by the coronavirus story.
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 reported 225K jump in payrolls in January was even bigger than we expected, but it is not sustainable. The extraordinarily warm weather last month most obviously boosted job gains in construction, where the 44K increase was the biggest in a year
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.
Recent inflation and activity data in Mexico were dovish.
The year-long surge in CPI inflation in China will soon end.
Yesterday's industrial production report in Germany was much better than implied by the poor new orders data--see here--released earlier this week.
We would be surprised, but not astonished, if the Fed were to announce a shift to explicit yield curve control at today's meeting.
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.
We were happy to see initial jobless claims fall to a 15-week low of 1,314K yesterday, but the labor market is still in a terrible state.
Yesterday's trade data in Germany added to the evidence of a relatively slow rebound as the domestic and European economies emerged from lockdown.
We expect May's GDP report, released on Tuesday, to provide an early blow to hopes that the economy will embark on a V-shaped recovery this year.
Japan's GDP growth was revised up, to 0.4% quarter-on-quarter in Q3, from 0.1% in the preliminary reading.
Slowly but surely, it is becoming respectable to argue that central bank policy in the developed world is part of the problem of slow growth, not the solution. We have worried for some time that the signal sent by ZIRP--that the economy is in terrible shape--is more than offsetting the cash-flow gains to borrowers.
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 March ADP employment report likely will catch the leading edge of the wave of job losses triggered by the coronavirus.
While we were out, monetary policy in Latin America was unchanged, except in Brazil, where the Monetary Policy Committee--Copom--this week raised the Selic rate by 50bp to 13.25%, in line with expectations. Looking ahead, we now expect no changes in policy in Brazil or elsewhere over the next few months, or at least until the Fed starts hiking rates.
Mexico's economy lost some momentum in Q4, due mainly to weakness in industrial and agricultural activity, but this was partly offset by the strength of the services sector as consumers' spending again carried the economic recovery. Real GDP rose 0.6% quarter-on-quarter in Q4, after a 0.8% expansion in Q3, the tenth consecutive increase. Year-over-year growth dipped marginally to 2.5% from 2.6% in Q3, but the underlying trend remains stable. In 2015 as a whole the economy expanded by 2.5%, up from 2.3% in 2014.
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.
The big story in global macro over the past 18 months or so has been the gigantic transfer of income from oil producers to oil consumers. The final verdict on the net impact of this shift--worth nearly $2T at an annualized rate--is not yet clear, because the boost to consumption takes longer than the hit to oil firms ' capex, which began to collapse just a few months after prices began to fall sharply. But our first chart, which shows oil production by country as a share of oil consumption, plotted against the change in real year-over-year GDP growth between Q2 2014 and Q2 2015, tells a clear story.
The entire 10.5% increase in personal income in April, reported on Friday, was due to the direct stimulus payments made to households under the CARES Act.
June's trade figures yesterday highlighted that it takes more than just a few months for exchange rate depreciations to boost GDP growth. The trade-weighted sterling index dropped by 9% between November and June as the risk of Brexit loomed large and the prospect of imminent increases in interest rates receded.
China's FX reserves were relatively stable in March, with the minimal increase driven by currency valuation effects.
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.
Most countries in LatAm are now fighting a complex global environment; a viral outbreak of biblical proportions and plunging oil prices, after last week's OPEC fiasco.
Yesterday's national accounts showed that the downturn in the economy on the eve of the Covid-19 outbreak was sharper than first estimated.
Mexico's inflation remains the envy of LatAm, having consistently outperformed the rest of the region this year. Headline inflation slowed marginally to 2.5% in October, a record low and below the middle of Banxico's target, 2-to-4%, for the sixth straight month. The annual core rate increased marginally to 2.5% in October from 2.4% in September, but it remains below the target and its underlying trend is inching up only at a very slow pace. We expect it to remain subdued, closing the year around 2.7% year-over-year. Next year it will gradually increase, but will stay below 3.5% during the first half of 2016, given the lack of demand pressures and the ample output gap.
The undershoot in the September core CPI does not change our view that the trend in core inflation is rising, and is likely to surprise substantially to the upside over the next six-to-12 months.
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.
Hideous though the official April payroll numbers were, the chances are that they'll be revised down.
It's just not possible to forecast the reaction of businesses and consumers to the coronavirus outbreak.
Yesterday's economic reports in the Eurozone were ugly.
The FOMC did mostly what was expected yesterday, though we were a bit surprised that the single rate hike previously expected for next year has been abandoned.
We have drawn attention over the past couple of weeks in our daily Coronavirus Update to the rising trend in new cases in some states, mostly in the South.
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.
Central bankers globally are full of market- appeasing but conditional statements.
The latest GDP data confirm that the economy ended last year on a very weak note.
This has been a very complicated week for LatAm policymakers, who are particularly uneasy about the performance of the FX market.
Yesterday's minutes of the February 4-to-5 COPOM meeting, at which Brazil's central bank, the BCB, cut the benchmark Selic rate by 25bp to 4.25%, reaffirmed the committee's post-meeting communiqué.
The collapse in oil prices was the immediate trigger for the 7.6% plunge in the S&P 500 yesterday, but the underlying reason is the Covid-19 epidemic.
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.
Many investors probably will be scratching their heads in the wake of next week's labour market report, which will reveal the Covid-19 hit to employment and wages in April, as well as showing how much further the claimant count soared in May.
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.
The MPC's asserted its independence in the minutes of December's meeting, firmly stating that there is "no mechanical link between UK policy and those of other central banks". Markets have interpreted this as supporting their view that the MPC won't be rushed into raising interest rates by the Fed's actions. Investors now expect a nine-month gap between the Fed hike we anticipate next week, and the first move in the U.K.
China's November money and credit data were a little less grim, with only M2 growth slipping, due to unfavourable base effects.
The clear threat to demand posed by the coronavirus and China's efforts at containment have sent a shock wave through commodities markets.
A reader pointed out Friday that the standard measurement of the impact of the weather on January payrolls--the number of people unable to work due to the weather, less the long-term average--likely overstated the boost from the extremely mild temperatures.
At first glance, the continued weakness of domestically-generated inflation, despite punchy increases in labour costs, is puzzling.
The German trade data on Friday completed a poor week for economic reports in the Eurozone's largest economy. The seasonally adjusted trade surplus fell to €22.1B in May, from €24.1B in April, mainly due to a 1.8% month-to-month fall in exports. Imports, on the other hand, were little changed.
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.
In one line: Pause signalled; further easing requires weaker growth.
In one line: Uncertainty reigns.
In one line: A grudging ease makes one-and-done a decent bet, data permitting.
In one line: Split decision guarantees nothing; trade is the key.
In one line: Bottoming, but still very weak.
In one line: No pushback on the July ease, but it's still a bad idea.
In one line: Terrible.
In one line: Split, but move doves than hawks and few tariff pass-through fears.
In one line: Patience persists.
In one line: Likely bottoming, but no real recovery in sight.
In one line: Much better, but still soft, and downside risks ahead.
In one line: The Fed will use its room for maneuver to ease again next month, but the data don't justify aggressive rate cuts.
In one line: Further declines unlikely, but signals slower payroll gains
In one line: The calm before the export storm?
In one line: Grim; trade war and Boeing woes to blame.
In one line: Terrible.
In one line: Nothing to lose sleep over.
In one line: Awful but likely just a temporary response to the Mexico tariff fiasco.
In one line: Mexico tariff fears hit sentiment and raised inflation expectations; expect a reversal.
In one line: Solid; AHE hit be calendar quirks and will rebound.
In one line: Philly Fed soars; Empire State steady; Richmond Fed tanks; which to believe?
In one line: Confidence high and stable; inflation expectations steady.
In one line: Grim. Thank the trade war, which means no improvement is likely anytime soon.
In one line: Capex orders and trade are net neutral for Q2 GDP estimates.
In one line: Noisy, but the trend seems to have levelled off; signals upside potential for October ISM.
In one line: Sentiment still very elevated; inflation expectations dip.
In one line: The trend is softening; blame the trade war.
In one line: Exports softening broadly.
Risks To The Markets' View of Fed Policy: If You Expect Nothing, Prepare To Be Surprised
The End is Coming...But When, How, and What Will It Look Like?
In one line: Disappointing, but the trend is still rising.
In one line: Better, but still an incomplete recovery.
In one line: The consumer is just fine; recent softness in spending is temporary.
In one line: Trade wars have consequences.
In one line: A correction; the trend is stable, for now.
In one line: The trend is low and stable; all the payroll slowdown is due to reduced hiring activity.
In one line: Consumers are mostly still quite happy, but no sustained improvement is likely.
In one line: Holding up, but for how much longer?
In one line: Solid, and new highs likely over the next few months.
In one line: Undershoot compared to mortgage demand; expect a rebound.
In one line: Treading water, but should strengthen markedly soon.
In one line: Policy uncertainty is not lifting layoffs.
For the record, we think the Fed should raise rates in December, given the long lags in monetary policy and the clear strength in the economy, especially the labor market, evident in the pre-hurricane data.
Net exports in the euro area likely rebounded in Q4. The headline EZ trade surplus rose to €22.7B in November from €19.7B in October. Exports jumped 3.3% month-to-month, primarily as a result of strong data in Germany and France, offsetting a 1.8% rise in imports. Over Q4 as a whole, we are confident that net exports gave a slight boost to eurozone GDP growth, adding 0.1 percentage points to quarter-on-quarter growth.
Last week's import price data, showing prices excluding fuels and food fell in January for the fourth month, support our view that the goods component of the CPI is set to drop sharply this year.
The absence of an internationally agreed set of guidelines for easing lockdowns means that such decisions ultimately are political in nature.
Fed Chair Yellen said nothing very new in the core of her Monetary Policy Testimony yesterday, repeating her view that rates likely will have to rise this year but policy will remain accommodative, and that the labor market is less tight than the headline unemployment rate suggests. The upturn in wage growth remains "tentative", in her view, making the next two payroll reports before the September FOMC meeting key to whether the Fed moves then.
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.
The imposition of 25% tariffs on $50B-worth of imports from China, announced Friday, had been clearly flagged in media reports over the previous couple of weeks.
We understand the desire of investors and individuals to see the economy re-opening as soon as possible, but the data right now support only a limited opening in some parts of the country and, hence, a limited late spring/summer rebound in the economy.
The inevitable--more or less--correction from August's 14-year high is no big deal.
Is the Fed Right to Worry About Future Inflation Risk?
Mexico's latest industrial production data were worse than we expected. Output rose just 0.1% month-to-month in September, pushing the year- over-year rate down to -1.3%, from a downwardly revised +0.2% in August.
All policymaking is about trade-offs; very few government decisions confer only benefits. Someone, or more likely some group, loses. Monetary policy is no exception to the trade-off rule.
Focussed on the Macro: The Fed will soon hike, despite soft manufacturing
The economic momentum evident late last year carried into 2015, the Labor Department said Friday, with American employers adding 257,000 jobs in January as wage growth rebounded and more people joined the workforce
Brace for slow growth, absent a trade fix...And look out for tariff pass-through to inflation
Focussed on the Macro: The Fed will soon hike, despite soft manufacturing
The FOMC is split on everything......but a clear majority will vote to hike in December
If the CPI measure of core consumer goods inflation were currently tracking the same measure in the PPI in the usual way, core CPI inflation would now be at 2.3%, rather than the 1.7% reported in November.
External demand for the Eurozone's largest economy is going from strength to strength. Seasonally adjusted German exports rose 3.4% month-to-month in December, equivalent to a solid 7.5% increase year-over-year.The revised indices show that the annualised surplus rose to an all-time high of €218B, or 7% of GDP, last year, indicating that the level of external savings remains a solid support for the economy.
Fed interrupted? But not for long
The economy is bifurcating. Manufacturing is weak, and likely will remain so for some time, though talk of recession in the sector is overdone. Even more overdone is the idea that the softness of the industrial sector will somehow drag down the rest of the economy, which is more than seven times bigger.
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.
Fears of a Chinese hard landing have roiled financial and commodity markets this past year and have constrained the economic recovery of major raw material exporters in LatAm.
EZ investors hoping for a quiet session yesterday due to the U.K. bank holiday were left disappointed.
The meta game between China and Mr. Trump started as soon as he had any possibility of winning the election in 2016.
Global economic conditions have been improving for LatAm over recent quarters.
We are not political analysts or psephologists, but we note that each of the nine separate election forecasting models tracked by the New York Times suggests that Hillary Clinton will be president, with odds ranging from 67% to greater than 99%.
It is still premature to make fundamental changes to our core views for the global or LatAm economy, following President Trump's plan to slap hefty tariffs on steel and aluminium imports, potentially escalating into a global trade war.
In one line: The trend is slowing, but September payrolls likely to be better than August's.
In one line: Solid, but it won't last.
The advance trade data for February make it very likely that today's full report will show the headline deficit rose by about $½B compared to March, thanks to rising net imports of both capital and consumer goods, which were only partly offset by improvements in the oil and auto accounts.
Modern Money Theory has come up at two consecutive BoJ press conferences.
Should you be feeling in the mood to panic over inflation risks--or more positively, benefit from the markets' underpricing of inflation risks--consider the following scenario. First, assume that the uptick in wages reported in October really does mark the start of the long-awaited sustained acceleration promised by a 5% unemployment rate and employers' difficulty in finding people to hire. Second, assume that the rental property market remains extremely tight. Third, assume that the abrupt upturn in medical costs in the October CPI is a harbinger o f things to come. And finally, assume that the Fed hawks are right in their view that the initial increase in interest rates will--to quote the September FOMC minutes--"...spur, rather than restrain economic activity". Under these conditions, what happens to inflation?
Data released on Monday showed that Chile's external accounts remained under pressure at the start of the year, and trade tensions mean that it will be harder to finance the gap.
Japan's trade surplus rebounded to ¥522B in April, on our adjustment, from ¥390B in March, around the same level as the official version, though from a higher base.
The re-opening of businesses in Georgia, South Carolina and Tennessee, starting this week and expanding next week, comes as the rate of increase of confirmed Covid-19 infections in these states remains much faster than in European countries where lockdowns have started to ease.
After many years in which the phrase "twin deficits" was never mentioned, suddenly it is the explanation of choice for the weakening of the dollar and the sudden increase in real Treasury yields since the turn of the year, shortly after the tax cut bill passed Congress.
The euro has so far defied the most bearish forecasters' predictions that it is on track for parity with the dollar. Currencies can disregard long-run parity conditions, however, for longer than most investors can hold positions.
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.
Markets currently judge that U.K. interest rates will rise about six months after the first Fed hike. But the Bank of England seldom lagged this far behind in the past. Admittedly, the slowdown in the domestic economy that we expect will require the Monetary Policy Committee to be cautious. But wage and exchange rate pressures are likely to mean six months is the maximum period the MPC can wait before following the Fed's lead.
It is becomingly increasingly clear that the trade war with China is hurting manufacturers in both countries.
In one line: The advance goods deficit rose to $71.4B in April from $70.9B in March, better than the consensus, $73.0B.
In one line: Manufacturing is enduring a mild recession, but it probably won't deepen much further.
In one line: Grotesque, but the peak is past.
In one line: Core inflation was stable--maybe nudging up a bit--before the virus. Expect it to slow over the next few months.
In one line: U.S. deaths rocketing; Italy's are falling, with other western Europe not far behind.
In one line: Progress has slowed in the U.S. and Europe; Japan is miles behind.
In one line: Stubborn case growth and low testing makes U.S. re-opening risky.
In one line: Easing lockdowns in the southern U.S. likely will trigger faster case growth.
In one line: U.S. cases rising steadily but should drop next week; Europe improving but Spanish case growth is stubborn.
In one line: The jump in U.S. cases yesterday looks like an outlier... we hope.
In one line: New U.S. cases per million will soon be at the levels which prompted easing lockdowns in Italy, Spain and Austria.
Trends in U.S. Cases and Deaths are Falling, Despite Yesterday's Jumps
In one line: Germany is not the U.S.
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.
In one line: As U.S. testing increases, the rate of growth of confirmed cases could rise again for a time.
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.
Cases and Deaths Falling; U.S. Testing Still Inadequate
Daily U.S. Deaths Should Drop Clearly this Week
In one line: U.S. testing finally gathering pace, but still behind the best in Europe.
In one line: Vastly increased testing is finding more U.S. cases, but deaths are falling.
In one line: U.S. Deaths set to reach 100K by late May, even as case numbers fall.
In one line: If the uptick in U.S. new cases is real, deaths will follow; don't bet on it.
In one line: Disappointing U.S. data yesterday, but not disastrous; Florida's uptick is disconcerting.
In one line: The downward trend in U.S. cases continues, but at a slower pace.
In one line: U.S. Cases are falling, and it's not just a New York story.
In one line: Disappointing U.S. numbers yesterday no cause for alarm; Germany has almost beaten Covid-19.
In one line: U.S. testing hits new highs, but cases still falling, just.
In one line: U.S. data likely distorted by holiday lags, but a second wave may be emerging in parts of the South.
In one line: Falling U.S. deaths are a good sign as increased testing reveals more cases.
In one line: Most U.S. states seeing slower case growth, despite increased testing.
In one line: If it bleeds, it leads: Alarmist media are missing the continued slowdown in U.S. case growth.
In one line: U.S. case growth now well below the pace at the time Germany announced lockdown easing.
In one line: The overall U.S. picture is improving slowly, but hotspots are worrying.
Both China and U.S. look for good will on opposite side and find none; political and economic constraints will soon kick in. BoJ QE remains neutralised by negative yields
Latam Economic Prospects Are Improving...A Trade Deal Between The U.S. And China Will Help
The plunge in Russia's financial markets, in response to targeted U.S. sanctions--see here--against Russian oligarchs and government officials, was the main EU news story yesterday.
The next few months, perhaps the whole of the first quarter, are likely to see a clear split in the U.S. economic data, with numbers from the consumer side of the economy looking much better than the industrial numbers.
The FOMC minutes showed both sides of the hike debate are digging in their heels. As the doves are a majority--rates haven't been hiked--the tone of the minutes is, well, a bit do vish. But don't let that detract from the key point that, "Most participants continued to anticipate that, based on their assessment of current economic conditions and their outlook for economic activity, the labor market, and inflation, the conditions for policy firming had been met or would likely be met by the end of the year." Confidence in this view has diminished among "some" participants, however, worried about the impact of the strong dollar, falling stock prices and weaker growth in China on U.S. net exports and inflation.
A reader sent us last week a series of five simple feedback loops, all of which ended with the Fed remaining "cautious". For example, in a scenario in which the dollar strengthens--perhaps because of stronger U.S. economic data--markets see an increased risk of a Chinese devaluation, which then pummels EM assets, making the Fed nervous about global growth risks to the domestic economy.
Market participants and analysts have gradually softened their cautious stance towards Mexico, as concerns about the new U.S. administration's trade and immigration policies have eased, and risks of a credit rating downgrade have lessened.
Donald Trump's victory casts a shadow of political uncertainty over what had appeared to be a decent outlook for the U.S economy. The U.K.'s trade and financial ties with the U.S., however, are small enough to mean that any downturn on the other side of the Atlantic will have little impact on Britain.
The border security agreement between the U.S. and Mexico has strengthened hopes that the Sino- U.S. trade war will end soon.
If Brent oil prices remain at their current $41 through the end of the second quarter--a big ask, we know, but you have to start with something--the average price of petroleum products imported into the U.S. will rise at an annualized rate of about 70% from their first quarter level.
China's 1.8% downshift in the RMB/dollar reference rate will make only a microscopic difference to the pace of U.S. economic growth and inflation. It will not deter the Fed from raising rates if the domestic labor market continues to tighten, as all the data suggest. The drop in the RMB merely restores the nominal exchange rate to its fall 2012 level, since which time the real exchange rate has risen by some 20%, according to the BIS.
China's State Administration of Foreign Exchange-- SAFE--yesterday refuted claims, made earlier in the week, that senior government officials had recommended slowing or halting purchases of U.S. Treasuries.
The escalation in the U.S.-Chinese trade wars has understandably pushed EZ economic data firmly into the background while we have been resting on the beach.
Friday's weekly report on the assets and liabilities of U.S. commercial banks will complete the picture or March and, hence, the first quarter. It won't be pretty. With most of the March data already released, a month-to-month decline in lending to commercial and industrial companies of about 0.7% is a done deal. That would be the biggest drop since May 2010, and it would complete a 1% annualized fall for the first quarter, the worst performance since Q3 2010. The year-over-year rate of growth slowed to just 5.0% in Q1, from 8.0% in the fourth quarter and 10.3% in the first quarter of last year.
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.
Uncertainty about the U.S. economic and political outlook, following Donald Trump's presidential win, likely will cast a long shadow over EM in general and LatAm in particular. On the campaign trail, Mr. Trump argued for tearing up NAFTA and building a border wall.
The pressures on U.S. manufacturers are changing. For most of this year to date, the problem has been the collapse in capital spending in the oil business, which has depressed overall investment spending, manufacturing output and employment. Oil exploration is extremely capital-intensive, so the only way for companies in the sector to save themselves when the oil prices collapsed was to slash capex very quickly.
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.
We have written a good deal recently about the likely impact of the sudden explosion of U.S. soybean exports on third quarter GDP growth.
In one line: Lockdowns in Europe and the U.S. knock out exports
Asia supported by U.S. demand in Q3...while domestic demand weakens in China and Japan
The Big Picture on Sino - U.S. Trade Wars...The Immediate Threat and the Medium-Term Risks
Sharper energy and education deflation offset a jump in food prices in Tokyo. Lockdowns in Europe and the U.S. knock out Korean exports in April.
U.S. profligacy will extend Asia's cycle...but domestic demand to struggle this year and next
Mexican manufacturing sector kicked off the year on a soft note, due mainly to the sharp drop in oil prices, and the sharp weather-induced slowdown in the U.S. Mexico's northern neighbor is its largest trading partner, by far, accounting for about 85% of total exports last year and close to 80% of total non-oil exports.
The 2.4% depreciation of the yuan over the past month has not been quite as big as the 3.0% move on August 11, and it's not a big enough shift to make a material difference to aggregate U.S. export performance. Market nerves, then, seem to us to be largely a reflection of fear of what might come next. China's real effective exchange rate--the trade-weighted index adjusted for relative inflation rates--has risen relentlessly over the past decade, and to restore competitiveness to, say, its 2011 level, would require a 20%-plus devaluation.
A mix of political and economic events have triggered outflows of capital from emerging markets this year. Tensions in Europe, due to the "Grexit" saga, together with China's slowdown and concerns about Fed lift-off have weighed on EM flows. In recent months, though, some of the pressure on EM currencies has eased as the markets have come to expect fewer U.S. rate hikes in the near term.
In one line: Is the U.S. on the brink of a sustained drop in new Covid-19 cases?
Yesterday's first estimate of full-year 2016 GDP in Mexico indicates that growth gathered momentum over the second half of last year. But risks are now tilted to the downside, following the U.S. election. GDP rose 0.6% quarter-on-quarter in Q4, after a 1.0% increase in Q3. Growth was much slower in the firs t half, as shown in our char t below.
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.
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.
Chief U.S. Economist Ian Shepherdson discussing U.S. Economy
In one line: Positive U.S. tests dip below 5% as new case numbers start to tumble.
In one line: State-by-state picture still very mixed even as U.S. national cases flatten.
In one line: Flattening U.S. hospitalization curve validates the signal from the new case data
In one line: The second U.S. wave is cresting, but some states still seeing sharp increases in cases.
In one line: Better weekend U.S. data were no fluke; cases are peaking
In one line: Disappointing U.S. data yesterday, but the rate of spread of Covid has peaked.
In one line: The U.S. second wave curve is bending; hospitalizations falling.
In one line: The U.S. second wave has crested, but the picture is varied across states.
In one line: New U.S. cases are now falling; deaths will peak by mid-August
In one line: Light at the End of the U.S. Tunnel; and Why are Swedish Cases Plunging?
In one line: Hotspots on the U.S. Coasts, and the South; elsewhere, mostly improving.
In one line: U.S. Case growth is slowing; daily new cases to start falling in mid/late July
In one line: U.S. data distorted by the holiday weekend, but some glimmers of hope.
In one line: U.S. new cases falling slowly; deaths will rise until mid-August
In one line: U.S. hospitalizations are now falling, but progress is very uneven.
In one line: Have U.S. second-wave deaths peaked already?
In one line: U.S. cases are still rising, but aren't accelerating; hospitalizations steady.
Case Growth Slowing, but the U.S. Need to do Much More Testing
In one line: The fall in U.S. new cases is overstated by reduced testing.
The U.S. Curve is a Week Behind Austria's; Can it Stay on Track?
Case Growth Slowing but Still Rapid in the U.S. and Much of Europe
In one line: The U.S. meat industry is the source of most new infection hotspots.
Slowing Growth in Cases Across the U.S.; Exceptions are PA, LA
In one line: New cases and hospitalizations now falling in most U.S. states.
In one line: The fall in new U.S. cases is real; it's not just due to reduced testing.
In one line: U.S. deaths are starting to rise, but new cases in Arizona have peaked.
In one line: U.S. Deaths Rising Steadily but Daily Hospitalizations have Stabilized
In one line: The rate of increase of U.S. cases is slowing; daily new cases to dip in late July?
In one line: U.S. deaths seem to have flattened; expect a clear drop by month-end.
In one line: U.S. cases probably aren't falling as fast as the data suggest
In one line: U.S. regional split deepens; Germany reports rising cases.
In one line: Steady overall new U.S. cases hide two very different stories.
In one line: U.S. case growth is rapid but seems to be slowing, and beware the risk of explosive new hotspots.
In one line: No slowdown yet in U.S. case growth; risk of explosive outbreaks in NJ, FL, LA.
Are there any signs that the U.S. tax cuts and/or regulatory relaxation are stimulating increased non-residential fixed investment?
In one line: The U.S. Covid-19 Curve isn't bending yet.
Chief U.S. Economist Ian Shepherdson with a guest column in The Hill on U.S. Manufacturing
Two Straight Days of Better News from Italy; U.S. Still Deteriorating
In one line: Case growth is slowing in the U.S. and Europe, but Big Risks Remain
In one line: Better news across most of Europe and the U.S., but some states stil face uncontained case growth.
In one line: U.S. Case growth is slow and slowing; what will reopening bring?
The U.S. Commerce Department on Tuesday released a list of Chinese imports, with an annual value of $200B, on which it is threatening to impose a 10% tariff, after a two-month consultation period.
In one line: U.S. cases are falling, outside the meat-packing hotspots.
In one line: New global cases rising steadily, not exponentially, but Europe and U.S. outbreaks worsening.
Chief U.S. Economist Ian Shepherdson on U.S. hiring
Chief U.S. Economist Ian Shepherdson on the recent elections in Argentina
Still Waiting for Results from Europe's Lockdowns; U.S. Cases Soaring
U.S. inflation gauges are sliding toward negative territory for the first time in more than five years. But the oil-fueled tumble in prices is far from the kind of growth-sapping episodes of deflation that tend to worry economists
In one line: Rising southern U.S. cases easily outweighing declines elsewhere.
In one line: New U.S. cases up an astounding 55% yesterday; hospitalizations rising.
In one line: Southern U.S. hospitalizations are far below the NY peak, but there's no plan in place to stop them rising.
In one line: The southern U.S. Covid picture is deteriorating rapidly.
In one line: More U.S. testing but falling positive rate is good news.
In one line: Surging cases in parts of the U.S. south are straining hospitals; restrictions are coming.
In one line: U.S. Hospitalizations up 5% Yesterday; Further Big Increases are Inevitable
In one line: The second U.S. wave is spreading, and accelerating.
In one line: U.S. hospitalizations still falling steadily post-reopening, so far.
Chief U.S. Economist Ian Shepherdson on U.S. Q1 GDP
In one line: New U.S. cases are rising rapidly, but has the rate of increase peaked?
In one line: The proportion of positive U.S. tests may be flattening; good news, if it persists.
In one line: Expect more U.S. reopenings to pause as cases and hospitalizations soar.
In one line: U.S. deaths are falling, but the rise in testing seems to have stalled.
New U.S. Case have Peaked but Europe and ANZ Doing Much Better
This is the final U.S. Economic Monitor of 2017, a year which has seen the economy strengthen, the labor market tighten substantially, and the Fed raise rates three times, with zero deleterious effect on growth.
Global monetary policy divergence has returned with a vengeance. In the U.S., despite recent soft CPI data, a resolute Fed has prompted markets to reprice rates across the curve.
Currency markets often make a mockery of consensus forecasts, and this year has been no exception. Monetary policy divergence between the U.S. and the Eurozone has widened this year; the spread between the Fed funds rate and the ECB's refi rate rose to a 10-year high after the Fed's last hike.
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."
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.
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.
With the MXN up more than 7% since the low of 21.9 against the dollar in January, investors are pondering just how high the Mexican currency can go. We believe that the MXN will continue to hover around its recent range, 20.1-to-20.5, in the near term, but will come under pressure again as protectionist policies in the U.S. take real shape in the spring or summer.
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.
LatAm investors' concerns about U.S. monetary policy expectations and the broad direction of the USD should on the back burner until the Fed hikes again, likely in September. This will leave room for country-specific drivers to take centre stage. That should support Mexico's MXN, which already has risen 14% year-to-date against the USD, erasing its losses after the US election last November.
A very light week for U.S. data concludes today with four economic reports, which likely will be mixed, relative to the consensus forecasts. The recent run of clear upside surprises and robust-looking headline numbers is likely over, for the most part.
LatAm's relatively calm market environment has been thrown into disarray over the last few weeks.New fears of a slowdown in China, political turmoil in the U.S. and, most importantly, the serious corruption allegations facing Brazil's President, Michel Temer, have triggered a modest correction in asset markets and have disrupted the region's near-term policy dynamics.
Global current account imbalances are back on the agenda. In the U.S., economic policies threaten to blow out the twin deficit, while external surpluses in the euro area and Asia are rising.
China reportedly has offered President Trump a $200B reduction in its annual trade surplus with the U.S., engineered by increasing imports of American products, among other steps.
The U.S. and Eurozone economies differ in many ways, but for economists, the biggest contrast is between the two regions' labour market data.
Markets were jolted yesterday by news that the U.S. Fed is mulling ending, or at least slowing, the reinvestment of Treasuries and mortgage-backed securities later this year. Such a move would reduce liquidity in global markets that has underpinned soaring equity prices in recent years.
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.
We are surprised by the EU's reaction to Mr. Trump's announcement that the U.S. will impose tariffs on steel and aluminium.
Regular readers will know that we are very skeptical of the reliability of the quarterly GDP data. We just don't believe that the U.S. economy is as volatile over short periods as the data suggest.
The balance of risks to activity in Mexico this year is still tilted to the downside, even though recent data have been mixed. Key indicators show that the manufacturing sector is gathering strength on the back of lagged effect of the MXN's sell-off last year, and the improving U.S. economy.
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.
A long period of extremely accommodative U.S. monetary policy generated sizable capital inflows and asset price appreciation in EM countries.
We have long argued that the U.S. and China will reach a trade deal this spring, because it is in the interests of both sides, economically and politically, to do so.
Monday will see 5% tariffs going into effect on Mexican exports to the U.S.--which totalled about USD360B last year--unless President Trump steps back from the brink.
U.S. President Trump on Wednesday signed an executive order aimed at delivering on his campaign pledge to build a wall on the U.S.-Mexico border. The executive order also includes measures to boost border patrol forces and increase the number of immigration enforcement officers. As previous U.S. presidents have discovered, however, signing an executive order is one thing and fulfilling it is something else. President Obama, for instance, signed an executive order to close the Guantanamo detention facility on his second day in office.
In terms of one-day moves, the drop in U.S. equities yesterday and Asian equities in the past two days has been pretty bad.
According to the official data presented in the JOLTS report, the number of job openings across the U.S. rose gently from 2011-to 13, rocketed in 2014, trended upwards much more slowly from 2015-to-17, and then, finally, unexpectedly jumped to record highs in the spring of this year.
The sell-off in equity markets and increases in volatility have put EM assets under pressure. EM equities and bonds, however, have been outperforming their U.S. and global market counterparts.
As we go to press, equities in the Eurozone are having a bad day following the collapse in U.S. and Asian equities earlier.
The plunge in oil prices me ans that U.S. oil imports are set to drop much further over the next few months, flattering the headline trade deficit. The trend in imports has been downwards since early 2013, as our first chart shows, reflecting the surge in domestic production. That surge is now over, but as falling prices become the dominant factor in the oil import story, the trend will remain downwards.
In the years before the crash of 2008, if you wanted to know what was likely to happen to the pace of U.S. economic growth, all you needed to know was what happened to corporate bond yields a year earlier. The correlation between movements in BBB industrial yields--not spreads--and the changes in the rate of GDP growth, lagged by a year, was remarkably strong from 1994 through 2008, as our first chart shows. Roughly, a 50 basis point increase in yields could be expected to reduce the pace of year-over-year GDP growth--the second differential, in other words--by about 1.5 percentage points.
In recent years only one event has made a material difference to the growth path of the U.S. economy, namely, the plunge in oil prices which began in the summer of 2014. The ensuing collapse in capital spending in the mining sector and everything connected to it, pulled GDP growth down from 2½% in both 2014 and 2015 to just 1.6% in 2016.
Markets remain convinced that the U.S. faces no meaningful inflation risk for the foreseeable future.
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."
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.
Sterling has begun this year on the front foot, rising last week to its highest level against the U.S. dollar since June 2016.
The response of U.K. producers and consumers to lower oil prices could not have been more different to those on the other side of the Atlantic. Counter-intuitively, U.K. oil production has grown strongly over the last year, while investment hasn't collapsed to the same extent as in the U.S., yet. Meanwhile, U.K. households have thrown caution to the wind and already have spent the windfall from the previous drop in oil prices, unlike their more prudent--so far--U.S. counterparts. With the costs still to come but most of the benefits already enjoyed, lower oil prices will be neutral for 2016 U.K. GDP growth, at best.
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.
The July trade deficit likely fell significantly further than the consensus forecast for a dip to $42.2B from $43.8B in June, despite the sharp drop in the ISM manufacturing export orders index. Our optimism is not just wishful thinking on our p art; our forecast is based on the BEA's new advance trade report. These data passed unnoticed in the markets and the media. The July report, released August 28, wasn't even listed on Bloomberg's U.S. calendar, which does manage to find space for such useless indicators as the Challenger job cut survey and Kansas City Fed manufacturing index. Baffling.
We have focussed on the role of the trade war in depressing U.S. stock prices in recent months, arguing that the concomitant uncertainty, disruptions to supply chains, increases in input costs and, more recently, the drop in Chinese demand for U.S. imports, are the key factor driving investors to the exits.
The solid 0.2% increase in January's core CPI, coupled with the small upward revision to December, ought to offer a degree of comfort to anyone worried about European-style deflation pressures in the U.S.
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".
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.
President Trump made official his plan to impose tariffs on up to $60B of annual imports from China, as well as limitations on Chinese investments in the U.S.
Why should Japan, the U.S., the Euro Area, the U.K. and Japan all have the same inflation target?
The core economic narrative in U.S. markets right now seems to run something like this: The pace of growth slowed in Q1, depressing the rate of payroll growth in the spring. As a result, the headline plunge in the unemployment rate is unlikely to persist and, even if it does, the wage pressures aren't a threat to the inflation outlook.
After three days of jaw-dropping actions from President Trump, the position seems to be this: The U.S. will apply 15% tariffs on imported Chinese consumer goods, rather than the previously promised 10%, effective in two stages on September 1 and December 15.
The rising trend in U.S. oil production was interrupted only briefly by the hurricanes.
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 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.
For analysts with a broadly positive view of the U.S. economy, it is tempting to argue that the slowdown in payroll growth this year reflects supply constraints, as the pool of qualified labor dries up.
The theory of spontaneous combustion of the U.S. economy appears to be making something of a comeback, if our inbox and market chat is to be believed. The core idea here is that expansions die of old age, and can be helped on their way to oblivion by factors like falling corporate earnings and rising inventory. The current recovery, which began in June 2009 and is now 63 months old, already looks a bit long-in-the-tooth.
The latest trade data from Korea underscore the unfortunate timing of the resumption of the U.S.-China tit-for-tat tariff war.
The gap between U.K. and U.S. government bond yields has continued to grow this year and is approaching a record.
The recovery of some key commodity prices, policy action in China, and stronger expectations that the U.S. Fed will start hiking rates later during the year, have helped reduce volatility in LatAm financial markets. Oil prices have rise by around 20% year-to-date, iron ore prices are up about 60% and copper has risen by 7%.
Banxico's quarterly inflation report, released last week, underscored concerns over growth as well as the weakness of the MXN and the risks p osed by the Fed's imminent tightening. Policymakers downgraded Mexico's GDP forecast for 2017 to 2.3-to-3.3% year-over-year, from 2.5-to-3.5%. Weaker-than-expected U.S. manufacturing activity is behind the downshift.
A less rapid tightening of monetary policy in the U.K. than in the U.S. should ensure that gilt yields don't move in lockstep with U.S. Treasury yields over the coming years. But the outlook for monetary policy isn't the only influence on gilt yields. We expect low levels of market liquidity in the secondary market, high levels of gilt issuance and overseas concerns about the possibility of the U.K.'s exit from the E.U. to add to the upward pressure on gilt yields.
The U.S. household sector carries substantial gross debts, even after the sustained deleveraging since the crash of 2008. The gross debt-to-income ratio stood at 105.3% in the second quarter of this year, down from the 135% peak in late 2007 but still well above the 88% average recorded in the 1990s, which was not a decade of restraint on the part of consumers.
The trade war with China is not big enough or bad enough alone to push the U.S. economy into recession.
Barely a day passes now without an email asking about "evidence" that the U.S. economy is slowing or even heading into recession. The usual factors cited are the elevated headline inventory-to-sales ratio, weak manufacturing activity, slowing earnings growth and the hit from weaker growth in China. We addressed these specific issues in the Monitor last week, on the 23rd--you can download it from our website--but the alternative approach to the end-of-the-world-is-nigh view is via the labor market.
Our Chief Eurozone Economist, Claus Vistesen, is covering the Italian situation in detail in his daily Monitor but it's worth summarizing the key points for U.S. investors here.
We learned last week that the U.S. no longer has a coherent dollar policy.
Mexico's risk profile and financial metrics have improved in recent days, following news of a preliminary bilateral trade deal with the U.S. on Monday.
Recent bond market volatility has left a significant mark on Eurozone credit markets. The recent slide in the Bloomberg composite index for Eurozone corporate bonds is the biggest since the U.S. taper tantrum in 2013. The prospect of a Fed hike later this year and rising inflation expectations in the Eurozone have changed the balance of risk for fixed income markets.
The latest data from the Energy Department show that the feared collapse in U.S. oil production in the wake of the plunge in crude prices has no t started yet. The number of rigs in operation is falling sharply, but our first chart shows it is not yet approaching the collapse seen after the financial crash.
Following Chinese retaliation against new U.S. tariffs last week, the U.S. responded last night, as promised, setting in train the process to slap tariffs on the remaining approximately $300B of imports from China.
The story of U.S. retail sales since last summer is mostly a story about the impact of the hurricanes, Harvey in particular.
In our Monitor of January 10, we argued that the market turmoil in Q4 was largely driven by the U.S.- China trade war, and that a resolution--which we expect by the spring, at the latest--would trigger a substantial easing of financial conditions.
Colombia is one of the fastest growing economy in LatAm but over the last few quarters the collapse in oil prices, the depreciating currency--fearing higher U.S. interest rates--and rising inflation, have depressed confidence and dragged down economic activity.
Inflation in the Eurozone jumped in December, and will surge further in Q1 as base effects from last year's crash in oil prices push energy inflation higher. Higher inflation in the U.S. and surging Chinese factory gate prices indicate that this isn't just a Eurozone story.
We can see no hard evidence, yet, that the expanding trade war with China and other U.S. trading partners is hitting business investment.
This week's Fed meeting eased many LatAm investors' minds, fuelling rallies in most of the region's currencies. We think the U.S. labour market is going through a genuine soft patch but will regain momentum over the coming months, prompting policymakers to hike rates in September.
Multiple factors have shaken LatAm financial markets this week. China's market turmoil, commodity price oscillations, currency volatility, and political mayhem in every corner of the region, have all conspired against markets. But market chaos has also driven some central banks to rethink their monetary policy plans. For EM, in particular for LatAm, the stance of the Federal Reserve is key, given the region's close ties to the U.S., and the dollar.
At the end of last year, U.S. homebuilders were more optimistic than at any time in the previous 18 years, according to the monthly NAHB survey.
China and the U.S. are officially to restart trade talks, according to China's Ministry of Commerce, after previous negotiations stalled in June.
Last week's packed political agenda in Europe confirmed that political relations between the U.S. and the major Eurozone economies remain difficult.
LatAm markets reacted well to the U.S. Fed's decision to increase the funds rate by 25bp, to 1-to-1¼%, on Wednesday. Currencies moved only slightly after the decision and asset markets were relatively stable. Yesterday, some currencies retreated marginally as investors digested the relatively hawkish message from the Fed and Chair Yellen's press conference.
Upbeat survey data, a competitive MXN, and the strong U.S. manufacturing sector indicate that Mexican industry should be rebounding.
The January core CPI numbers are consistent with our view that the U.S. faces bigger upside inflation risks than markets and the Fed believe.
Jim Bullard, the St. Louis Fed president, said last week that Phillips Curve effects in the U.S. are "weak", and that nominal wage growth is not a good predictor of future inflation.
November production data in Mexico, released Monday, showed that the industrial economy remained quite soft in the last part of last year. The collapse in capital spending in the oil sector, slowing public spending, and weaker growth in EM and the U.S. manufacturing sector have combined to hit Mexican industrial output quite hard. Total production rose just 0.1% year-over-year in November, down from an already weak 0.5% in October, and below the 1.3% average increase in Q3. Output fell 0.5% month-to-month, the biggest drop since May, reflecting broad-based weakness.
Today's producer price report for March likely will show a further increase in core goods inflation, which already has risen to 2.0% in February, from 0.2% in the same month last year. The acceleration in the U.S. PPI follows the even more dramatic surge in China's PPI for manufactured goods, which jumped to 6.6% year-over-year in February, from minus 4.9% a year ago. China's PPI is much more sensitive to commodity prices than the U.S. series, so there's very little chance that core U.S. PPI goods inflation will rise to anything like this rate.
While we were out--but not going anywhere--the data broadly were as awful as we expected, though the rate of growth of coronavirus infections in the U.S. and most other developed countries continued to slow.
The imposition of 10% tariffs on $200B-worth of Chinese imports is not a serious threat either to U.S. economic growth--the tariffs amount to 0.1% of GDP--or inflation.
The verdict is not yet definitive, but prudence dictates we must now assume victory for Donald Trump. The immediate implication of President Trump is global risk-off, with stocks everywhere falling hard, government bonds rallying, alongside gold and the Swiss franc. The dollar is the outlier; usually the beneficiary when fear is the story in global markets, it has fallen overnight because the risk is a U.S. story.
Markets are still discounting Banxico rate increases in the near term, despite the fact that Mexico's inflation is under control. Unless the MXN goes significantly above 18.7 per USD in the near term, or activity accelerates, we see little scope for rate increases until after the Fed hikes. After May's soft U.S. payrolls, and in light of the economic and financial risk posed by the U.K. referendum, we think a hike this week is unlikely.
Straight-line extrapolations are always risky--nothing lasts forever--but if you allow us the indulgence, our first chart suggests that domestic U.S. oil production will breach 10M barrels per day by the summer.
Markets are beginning to grasp that President-elect Trump's economic plans, if implemented in full--or anything like it--will constitute substantial inflationary shock to the U.S.
Our view on the trade data last week was that U.S. tariff hikes have caused minimal damage, so far. China's tariff increases on imports to date have resulted in stockpiling, with little evidence in the CPI of any inflationary pressure.
The near-term U.S. inflation outlook is benign, but it is not without risk.
Eurozone investors will be looking anxiously across the pond overnight as the results of U.S. elections come in. Our assumption is that Hillary Clinton will be elected president and that risk assets will celebrate accordingly today.
Yesterday, China finally retaliated against Mr. Trump's Friday tariff hikes, promising to increase tariffs on around $60B-worth of U.S. goods.
The current account surplus in the Eurozone is well on its way to stabilising above 3% of GDP this year. The seasonally adjusted surplus rose to €29.4B in September from a revised €18.7B in August, lifted by a higher trade surplus, thanks to rebounding German exports. The services balance was unchanged at €4.5B in September, while the primary income balance edged higher to €4.8B from €4.0B. The improving external balance has been driven mostly by a surging trade surplus with the U.S. and the U.K., as our first chart shows.
The Fed's insistence this week that U.S. rates will rise only twice more this year helped to ease pressures on LatAm markets this week, particularly FX. The way is now clear for some LatAm central banks to cut interest rates rapidly over the coming months, even before U.S. fiscal and trade policy becomes clear. We expect the next Fed rate hike to come in June, as the labor market continues to tighten. If we're right, the free-risk window for LatAm rate cuts is relatively short.
As we're writing, the price of U.S. crude oil is only about 50 cents per barrel lower than on Thursday, when markets began to anticipate an OPEC deal to cut production over the weekend. The failure of the Doha talks generated an initial sharp drop in oil prices, but the damage now is very limited, as our first chart shows.
At the headline level, much of the recent U.S. macro dataflow has been disappointing. January retail sales, industrial production, housing starts, and both ISM surveys--manufacturing and non-manufacturing-- undershot consensus, following a sharp and unexpected drop in December durable goods orders.
The U.S. reached a trade agreement with Canada on Sunday, adding its northern neighbour to the pact sealed a month ago with Mexico.
We can't recall a time when we have disagreed so strongly with the consensus narrative, in both the media and the markets, about the state of the U.S. economy. We think both investors and the commentariat are too bearish on growth and too complacent about inflation risks, and as a result, insufficiently worried about the speed with which interest rates will rise over the next couple of years.
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.
China has a nuclear option in the face of pressure from U.S. tariffs, namely, to devalue the currency.
The global economy is heading towards a new scenario, triggered by the impending start of the monetary policy normalization process in the U.S. In some major economies, notably the Eurozone, the Fed's actions will not derail or even jeopardize the cyclical economic upturn.
If you gave us $100, we'd put $90 on inflation, headline and core, being higher a year from now than it is today. Our view, however, is not universally shared, and some commentators continue to argue that the U.S. faces deflation risks. Exhibit one for this view is our first chart, which shows a high correlation between the PPI for finished goods prices and the CPI inflation rate, ex-shelter.
The September Banxico minutes restated that the U.S. Fed's first interest rate hike is the key event awaited by Mexican policymakers. Banxico's board of governors voted unanimously on September 21st to keep the main interest rate at a record-low 3%.
It seems reasonable to think that manufacturing should be doing better in the U.S. than other major economies.
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.
If you need more evidence that the U.S. economy is bifurcating, look at the spread between the ISM non- manufacturing and manufacturing indexes, which has risen to 3.5 points, the widest gap since September 2016.
In our Friday Monitor, we came to the conclusion that prescriptions arising from Modern Money Theory have been designed primarily with the U.S. in mind.
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.
Perhaps the single strongest U.S. economic data series in recent months has been construction spending, which has risen by more than 1%, month-to-month, in four of the past five months.
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.
The winds of global politics are changing, and the major Eurozone countries could be forced to take heed. Donald Trump's foreign policy position remains highly uncertain. Our Chief Economist, Ian Shepherdson, expects the U.S. to increase defence spending next year; see the U.S. Monitor of October 20.
We have argued consistently since oil prices first began to fall that U.S. consumers would spend most of their windfall, so real spending would accelerate even as nominal retail sales growth was dragged down by the drop in the price of gas and other imported goods. At the same time, we argued that capital spending in the oil business would collapse, and that exports would struggle in the face of the stronger dollar.
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.
After 29 straight weekly declines, the number of oil rigs in operation in the U.S. rose to 640 in the week ended July 2, from 628 the previous week, according to oil services firm Baker Hughes, Inc. If today's report for the week ended July 9 shows the rig count steady or up again, it will b e much easier to argue that the plunge in activity since the peak--1,601 rigs, in mid-September--is now over.
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.
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."
Investors have endured a severe test of their resolve in the last few months. Global equity markets have sunk more than 10%, eclipsing the previous low in September, and credit spreads have widened. The bears have predictably pounced and, as if the torrid price action hasn't been enough, media headlines have been littered with advice to "sell everything" and warnings of a 75% fall in U.S. and global equities. When "price is news" we recognise that views from well-meaning economists--often using lagging and revised economic data to describe the world--are of little value.
Mexico's economic outlook has dimmed recently, a point driven home by sentiment data released last week. Still, we think GDP growth will slow only marginally in Q4, to about 11⁄2% year-over-year. Consumers' spending likely will remain strong in the near term, thanks mainly to rising remittances from the U.S., driven by fear of policy changes under the Trump administration.
The plunge in oil prices in recent weeks is not a threat to the overall U.S. economic growth story in the near term--we have always expected growth to slow, but remain decent, once the boost from the tax cuts fades--but it will make a difference, at the margin.
The imposition of tariffs on a further $200B-worth of Chinese imports is not a game-changer on the U.S.
The June Banxico minutes restated that the U.S Fed's first interest rate increase is the main event awaited by Mexican central bank. Banxico's five member board of governors voted unanimously on June 4th to keep the overnight lending rate target at a record-low 3%, but showed again that board members are fretting over when to hike, as at previous meetings.
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.
Donald Trump's inauguration on Friday might mark the beginning of a new era for both the U.S. and the global economy. For commodity-producing Latam countries, such as Chile, Peru and Colombia, attention will shift to Trump's proposed tax reforms, pro-business agenda and planning infrastructure spending. Mexico, on the other hand, will be grappling with Mr. Trump's trade and immigration policies.
Chief U.S. Economist Ian Shepherdson on U.S. payroll gains
Chief U.S. Economist Ian Shepherdson on Bloomberg Surveillance
Ian Shepherdson, founder at Pantheon Macroeconomics, and Jeff Saut, chief investment strategist at Raymond James, look forward to a potential Federal Reserve rate hike on December 16 and how markets and the U.S. economy may react in the year ahead.
Pantheon Macroeconomics Founder Ian Shepherdson discusses the price of oil, the U.S. economy and the Greek crisis. He speaks on "Bloomberg Surveillance."
Founder and chief U.S. Economist Ian Shepherdson on the U.S. economy and U.K. Inflation
Chief U.S. Economist Ian Shepherdson on Bloomberg Surveillance
Chief U.S. Economist Ian Shepherdson discussing U.S. Q1 GDP
Chief U.S. Economist Ian Shepherdson on U.S. Employment in November
Chief U.S. Economist Ian Shepherdson on the Fed
Chief U.S. Economist Ian Shepherdson speaking about Donald Trump's plans for sweeping tax cuts
Chief U.S. Economist Ian Shepherdson comments on the Fed Monetary Policy Meeting in March
Ian Shepherdson, Pantheon Macroeconomics founder and chief U.S. economist, joins "Squawk Box" to discuss how the partial government shutdown is impacting the economy.
Chief U.S. Economist Ian Shepherdson on the U.S. and European Economies
Ian Shepherdson, Pantheon Macroeconomics founder and chief U.S. economist, provide insight to the broader markets and interest rates ahead of the FOMC meeting.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, speaks about how the U.S. Federal Reserve will react to the latest jobs data.
Ryan Payne, Payne Capital Management president, and Ian Shepherdson, Pantheon Macroeconomics founder and chief U.S. economist, discuss what to expect for the markets and economy after a shaky October.
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.
Ian Shepherdson, founder at Pantheon Economics, discusses rising U.S. inflation expectations and his outlook for the Federal Reserve in response to President-Elect Donald Trump's economic plan. He speaks on "Bloomberg Surveillance."
Chief U.S. Economist Ian Shepherdson on U.S. housing starts
Chief U.S. Economist Ian Shepherdson on the Fed's growth forecast
Ian Shepherdson's mission is to present complex economic ideas in a clear, understandable and actionable manner to financial market professionals. He has worked in and around financial markets for more than 20 years, developing a strong sense for what is important to investors, traders, salespeople and risk managers.
Chief U.S. Economist Ian Shepherdson on U.S. interest rates
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Chief U.S. Economist Ian Shepherdson named Market Watch forecaster of the month for July
Chief U.S. Economist Ian Shepherdson on the U.S. Economy
Ian Shepherdson, Pantheon Macroeconomics chief economist, discusses his outlook on the U.S. economy and the long-lasting bull market.
There has been a "meaningful upturn" in core inflation in the U.S., Ian Shepherdson, chief economist at Pantheon Macro, said.
Founder and chief U.S. Economist Ian Shepherdson on U.S. Fiscal Policy and the upcoming jobs report.
Ian Shepherdson, founder and chief economist at Pantheon Macroeconomics, discusses low job growth, the continuing recovery from the financial crisis and the state of the U.S. economy. He speaks on "Bloomberg Surveillance."
Ian Shepherdson, chief economist at Pantheon Macroeconomics, discusses the impact of recent market volatility and fiscal reform in the U.S.
Chief U.S. Economist Ian Shepherdson on US Retail Sales
Chief U.S. Economist Ian Shepherdson discussing U.S. Employment
Chief U.S. Economist Ian Shepherdson discussing Durable Goods Orders in May
Chief U.S. Economist Ian Shepherdson on the latest ISM Non-Manufacturing data release
Chief U.S. Economist Ian Shepherdson on U.S.-China Trade Wars
Chief U.S. Economist Ian Shepherdson on Bloomberg Surveillance
Chief U.S. Economist Ian Shepherdson on ISM Non-Manufacturing
Chief U.S. Economist Ian Shepherdson on NAHB
Chief U.S. Economist Ian Shepherdson on U.S. Employment
Ian Shepherdson, chief economist at Pantheon Macroeconomics, discusses the outlook for U.S. inflation and labor market with Bloomberg's Joe Weisenthal and Julia Chatterley on "What'd You Miss?"
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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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