Economic Facts Presented by Brian Nash Monday 9th December 2019
Global Developments: Green shoots in global manufacturing? Global manufacturing is looking a little brighter heading into the end of the year, with a pickup in China and Germany validating calls that global growth is stabilising. The better factory numbers from China in November filtered across Asian economies including South Korea, Japan and Malaysia, all of which saw their Purchasing Managers’ Indexes nudge higher. In Europe, Germany’s reading came in stronger than initially estimated, rising for a second month.
Credit: According to Goldman, owning “quality” in US credit and equity markets has rarely been this expensive. What to do? – remain diversified, with an emphasis on dollar-cost averaging into quality/value/yield stocks for solid risk-adjusted returns, a portion of tech exposure for extra growth, emerging markets exposure for the long term, and some cash and precious metals for defence and potential future buying opportunities.
Equities: March S&P 500 put options outstanding keep climbing. (Put options are the right, but not the obligation, to sell an asset at a specified price. More put options outstanding can be seen as more negative sentiment in the market.)
Rates: While the Fed has taken steps to bring order back to the repo adding liquidity by buying Treasury bills and doing overnight repo operations many feel that it won’t be enough to keep rates under control.
United States GDP growth rate: (GDP) growth rate and it was revised upward to 2.1% year-on-year for the third quarter, compared to the previous estimate of 1.9%. The upgrade was primarily due to upward revisions to inventory and business investment. The 2.1% pace represented a marginal improvement on the 2.0% pace in the second quarter and this in turn was slightly better than the 2.0% pace consensus estimate.
The United States: The ISM Manufacturing PMI report was surprisingly bad, with key sub-indices coming in below market expectations (PMI below 50 means contraction Manufacturing is considered a reliable bellwether for how the rest of the economy is doing, though it accounts for only about one-fifth of GDP.
The United States: Growth in small business employment has been slowing. The unemployment rate is at a 50-year low and wages are increasing. Business owners may be getting more cautious due to trade and political uncertainty and growth may be slow, but consumers keep spending and the punch bowl still seems full.
The United States: The unemployment rate stands at 3.5%, the lowest rate in a half-century, according to the latest figures released Friday 6th by the Bureau of Labour Statistics. Wall Street. Investors usually balk at the idea of low unemployment because it adds pressure to the Federal Reserve to raise interest rates and make it more expensive to borrow money. Higher interest rates cause government bonds to become more appealing compared to stocks.
The United States: Economists remain concerned about slowing business investment. The pullback began as trade tensions escalated last fall, leaving companies unsure about their supply chains, pricing and profits. It has continued amid signs of slowing global growth and increasing consumer concerns about the future.
The United States: According to Bloomberg, the market still expects another rate cut next year (chart above). Some economists see more than one.
The Eurozone: Despite eight years of monetary stimulus with measures including bond purchases and negative interest rates, the previous president, Mario Draghi, was unable to reignite inflation. Price growth has slipped below 1% and forecasts for coming years have repeatedly been cut.The chief problem, the officials said, is that no one is really sure how inflation — and associated models such as the Phillips Curve, which describes the link with unemployment and wages — works any more.
The Eurozone: Negative rates have been a drag on European bank shares. The ECB hopes that a tiering system would soften the blow. Reserves of up to 6x the amount of minimum reserve requirements are exempt from negative interest rates.
The Eurozone: Germany’s consumer price inflation is expected to hold steady at 1.1% year-on-year in November 2019, the lowest level since February 2018, and below market expectations of 1.3%, a preliminary estimate showed. Inflation should also remain below the ECB’s target level for the seventh month in a row, on energy price deflation, although a bright spot is that services and food prices are set to increase at a faster pace.
The Business Climate Indicator: The Business Climate Indicator for the Euro Area also fell slightly, by 0.03 points from the previous month to -0.23 in November 2019, missing market expectations of -0.14. This is as managers’ assessments of overall order books and, in particular, past production deteriorated.
The Eurozone: The Markit PMI report showed potential signs of stabilisation in the Eurozone’s factory sector. However, service-sector growth continues to slow.
Europe: Have European earnings expectations reached a turning point? In Europe, too, there has been a much stronger reaction to positive news than to negative. Of the Euro Stoxx 600 companies that have reported so far, the shares that have beaten expectations have, on average, risen nearly 2.5%. Yet shares in companies that have missed forecasts have fallen by less than 1%.
China: Data from mainland China over the weekend was positive with the manufacturing PMI ticking up to 50.2 in November from 49.3 in October and topping the consensus estimate of 49.5. It was the first expansion in factory activity since April and underpins our view that manufacturing activity has bottomed out.
China: Chinese cement prices are rising, outpacing steel prices over the past year. the government pledged more investment in infrastructure, just as plants began to cut capacity to meet environmental rules. Last week the government said it would speed up spending on infrastructure investment in a policy shift towards the domestic economy amid a trade spat with the US escalated.
China: According to Gavekal, Chinese cities have limited their sales of land ahead of pending changes to rules which could make low-cost land available in the future. As a result, supply was restricted this year, causing developers to bid up prices for land.
China Inflation Rate
China: China’s annual inflation rose to 3.8 percent in October 2019 from 3 percent in the previous month and above market expectations of 3.3 percent. This was the highest inflation rate since January 2012, mainly due to persistently high pork prices following an outbreak of African swine fever.
China: Corporate bond defaults have become the new normal. China is hurtling toward another record year of onshore bond defaults, testing the government’s ability to keep financial markets stable as the economy slows and companies struggle to cope with unprecedented levels of debt.
China: China’s corporate debt to GDP ratio, a measure of corporate leverage, is now among the very highest globally. It has risen nearly 65 percentage points within a decade, the fastest increase among the major economies.
Emerging Markets: According to BCA, the key force driving EM currencies and risk assets lower has been the weakness in Chinese import volumes. Emerging markets equities performance in the third quarter was overwhelmed by macroeconomic factors, including weakening growth data, sporadic trade negotiations, and considerable geopolitical uncertainty.
Asia-Pacific: South Korea’s November report on trade showed no indication of a meaningful rebound in exports. However, the manufacturing PMI index shows signs of stabilisation.
Industrial production: A preliminary print for Industrial production was weak, declining 7.4% year-on-year and that weighed on sentiment. In Japan, like many other countries in 2019 factory activity has been soft.
Japan retail sales (YoY): Retail sales fell a sharp 14.4% month-on-month in October, following on the heels of an upwardly revised 7.2% increase in September. Exacerbating the fall was the new sales tax that came into effect from the beginning of October, which would have pulled purchases forward. Nonetheless, it was a much sharper fall than expected. Year-on-year retail sales were down 7.1%, following the 9.1% increase in September and below the 4.4% fall expected. It was the biggest year-on-year decline in retail trade since March 2015. The fall was broad-based.
Australia: The latest GDP figures released on Wednesday suggest on the surface the overall economy is doing better, but further inspection highlights the underlying weakness.
Australia: In the September quarter the economy grew by 0.4% (seasonally adjusted), or 0.5% (trend), still below average, but what is important is where this growth is being generated. The biggest driver was net exports – contributing 0.35% pts of that growth. Mostly this came not from surging exports but another big decline in imports:
Australia: Metals are increasingly exposed to the trade war. In the face of impending tariffs, markets forecast weaker global demand, and prices have fallen. Mr Trump’s latest round of tariffs announced in August affected metals prices more than previous announcements did. Metals are also more closely correlated with the business cycle than farm goods. Copper, for instance, is considered a bellwether because it is used in housing and construction. In September it reached a two-year low.
Australia: The reason we are importing less is because both private-sector businesses and households are slowing their growth of spending. And that is not a good thing. In the past 12 months household consumption grew by a mere 1.2% – less than half the long-term average:
Australia Household Saving Ratio
Australia: Off the back of the tax cuts. Clearly we have chosen to save more rather than spend, which is also reflected by the savings ratio increasing from 3.5% to 4.0%.The treasurer and prime minister have both suggested this is fine – they argue it is up to people to decide how to spend their money – but it reflects a generally negative outlook.
Australia: At its 3 December monetary policy meeting, the Reserve Bank of Australia (RBA) kept the cash rate unchanged at 0.75%, an all-time low. December’s decision, Chief economist Bill Evans suggested it was because the RBA kept rates on hold this month compared with a cut in October. “The result supported the general view that consumers were somewhat unnerved by the announcement of low rates and media controversy around the banks’ responses,” he said.