Economic Facts – Presented by Brian Nash Monday 14th October 2019
Global Developments: With the trade war dragging on between the USA, China and the continued attacks by President Trump on the Federal Reserve and their stance on the USA’s monetary policy. And if there are one thing markets don’t like its policy uncertainty. When policy uncertainty increases, investors and markets flee to haven assets. Mostly gold and developed economies stock markets. The image below shows that this risk aversion has pushed up the gold price and has seen the emerging market stock markets under perform more developed markets.
Global Developments: The uncertainty in economic policy in some countries and sluggish growth in others has led to strange times in financial markets. With inverted yield curves and negative yields being the order of the day. The image below shows the US government bond yield spreads (10 yield – 2-year yields) as well as the value of negative yielding bonds which has seen a sharp increase during 2019.
The United States: Let’s begin with the September ISM manufacturing PMI report, which was below economists’ forecasts. US factory activity is rapidly shrinking (PMI below 50).
The United States: The service sector is expected to support economic growth in the near-term.
The United States: One way to think about the economy would be to divide it into two parts: making and serving. The first covers businesses like manufacturing, mining and construction, while the other includes fields like health care, education, retailing and technology. The service economy is much larger, but goods-making sectors often point to what lies ahead. In recent months, manufacturing had paltry job gains, even as service industries reported steady growth.
The United States: Upper-income households are becoming increasingly cautious. University of Michigan’s consumer sentiment survey showed that Americans’ expectations for the future fell substantially in June. Its index was 89.3, down from 93.5 in May. The Conference Board’s consumer confidence survey showed an even sharper decline in June from the month before. The result is that American consumers are carrying the burden of keeping the economy out of a significant slump or recession.
The United States: Some Fed officials have been concerned about commercial real estate prices, which have outpaced the GDP growth. With the decline in rates over the past year, however, property prices will continue to climb. Commercial real estate valuations, which have been an area of growing concern over the past year, rose further, with property prices continuing to climb and capitalisation rates decreasing to historically low levels.
The United States: Credit standards have been tightening. The U.S. Federal Reserve’s quarterly survey of senior loan officers also showed banks, were taking steps to curb potential losses from loans to firms that are exposed to the risks of economic trouble in Asia and Europe.
The United States: The latest figures from the ADP National Employment Report showed payrolls growth in September slowed, prompting traders to fret that the trade tensions are beginning to impact the strong labour market.
Eurozone: The Eurozone’s financial conditions have been easing. Does this trend signal a bottom in factory activity? Why is the economy not responsive to easier financial conditions? Maybe negative rates spur increased saving activity rather than the opposite. Draghi was clear in his rejection of this thesis in the EC hearing this week, but judged from the below chart, it seems as if we have seen a change in the reaction function to lower rates within households.
Eurozone: Once interest rates turn negative, it could be that simple savers start to save more, as the expected return on savings turns negative? If this is the case, then the ECB has shot themselves massively in the foot. ECB: Buy, buy, buy. People: Save, save, save.
Eurozone: German retail sales are facing some headwinds as sentiment soften German retail sales rose in June, the most in more than 12 years and unemployment edged up less than expected in July, offering a rare ray of hope that household spending will prop up Europe’s largest economy.
Eurozone: The next shoe to drop could be Germany’s labour market. Germany’s overall composite PMI, which includes the services sector and manufacturing industry, was supported by a services sector that continued to expand, though not enough to prevent the PMI slipping to 49.1 from 51.7 in August.
United Kingdom: UK households’ cash holdings are outpacing spending. A resolution of the Brexit impasse could unleash consumption. Concerns over Brexit and a possible recession also saw households become increasingly pessimistic about job security, with the survey posting the strongest degree of negativity since March.
United Kingdom: UK equities are close to their relative valuation lows versus the rest of the world since the early 1990s. How significant is the UK’s Brexit discount: Brexit related uncertainty has generated a UK valuation discount. This is most evident, for example, in commercial property where London prime yields are trading above those of other European cities. Historically London has typically traded with lower yields (i.e. higher valuations). In equities, on a standalone PE ratio, UK stocks are the cheapest that they have been since 2013.
Emerging Markets: There are many hurdles preventing faster economic growth. Emerging economies tend to be more open than advanced ones. Consequently, weaker trade momentum has greater repercussions on the EM outlook. The slowdown is not yet showing sustainable signs of bottoming out. Economic surprise indexes are still close to their lowest level since 2015-16 (2013 in the case of Latin America). Manufacturing PMIs are trending lower and financial conditions are prone to tightening as the trade war escalates.
China: The export orders component of the PMI index signals further weakening in the Chinese export cycle. The Chinese economy continued to enjoy resilient growth at the end of the third quarter despite increasing signs of weakening exports. However, other survey indicators point to a sombre outlook in coming months, amid rising concerns over trade wars.
China: Currently China may be (even more) important for the global cycle, and we have evidence similar to that in Germany that China is struggling to re-ignite the momentum despite easier financial conditions. If China does not manage to refuel the printing press, then you basically shouldn’t expect a further move higher in global equities.
China: Another powerful tool to offset decreasing exports due to increasing tariffs is to let markets take the CNY even lower. We have argued before that this is unlikely to be a strong and sudden move, in order to keep capital flows and financial markets in check. The fixing rate over the past few weeks shows Beijing’s dedication to stabilising the currency. We therefore forecast a gradual weakening path.
China: Rather than boosting spending in response to Beijing’s tax cuts, households have engaged in precautionary saving (right chart). The number of Chinese saving for retirement increased slightly in the past year, data from a new survey showed Thursday, as worries increased that the government’s scheme would run out of money before most younger workers retired.
Hongkong: Anti-government protests in Hong Kong are taking a sharp toll on an economy already hit by the U.S.-China trade war. The protests began as weekend marches but have become a daily phenomenon. As police tear gas has been countered by demonstrator petrol bombs, retail and tourism are taking a hit.
Hongkong: Surveys from the University of Hong Kong show that most people identify themselves as “Hong Kongers” – only 11% would call themselves “Chinese” – and 71% of people say they do not feel proud about being a Chinese citizen
Australia: The move by the Reserve Bank to cut the cash rate to its record low of 0.75% is a clear indicator that the economy is struggling mightily and that the bank feels the government has completely abandoned its responsibility for triggering economic growth, leaving the RBA alone to try to get things going.
Australia: The first six months of this year saw slightly stronger growth than the last six months of 2018. But even still, the growth from January to June this year was among the slowest we have experienced since the GFC – and GDP per capita was still falling.
Australia: The domestic stimulus in China to offset the trade dispute has contributed to a short-term boost to the Australian economy and significantly mitigated the impact of the trade disputes on us. How long this last will depend on the effectiveness and longevity of Chinese domestic stimulus.
Australia: The chart above shows the movement in average wage growth over the past decade. The lines for New South Wales and Victoria are slightly wider than the other states given, they currently have the lowest unemployment rates nationally. While tighter labour market conditions in Victoria saw wages growth increase further in the March quarter, the same cannot be said for New South Wales where the annual pace slowed, providing a mixed signal as to just how far unemployment needs to fall before wages growth begins to lift meaningfully.
Australia: Here’s a look at the proportion of Australian homes that sold for less than the original purchase price, which is particularly high in mining states. Outside of Sydney and Melbourne the trends are quite different, with the proportion of properties selling below the original list price holding reasonably firm. Hobart, where housing market conditions have been strong relative to the other cities, is the exception, with an ongoing reduction in the proportion of properties selling below the original list price.
Change In Dwelling Values
Australia: The September gains were once again driven by stronger conditions emanating from Sydney and Melbourne where dwelling values increased by 1.7% over the month; Australia’s two largest cities have seen a rapid bounce-back in home values over the past two months, with Sydney up a cumulative 3.3% and Melbourne up 3.2% in August and September. Housing values remain 11.9% below their July 2017 peak in Sydney and 7.9% below Melbourne’s November 2017 peak.