> Next Tuesday, the IMF will release its new forecasts. Comments are bearish, the global economic outlook will weaker than last spring or last July forecasts. In July, the world output growth was expected to be 3.2 % in 2019 and 3.5% in 2020. For the US, numbers were 2,6 and 1.9, for the Euro Area 1.3 and 1.6% and for China 6.2 and 6%.
> The other political event will be the European Summit on Brexit. It will take place on October 17 and 18. Two questions: will there be a new agreement between the UK and the European Union and will this agreement, if it exists, be voted by the Parliament in London ? If it is not the case, BoJo will have to ask for a delay. The Parliament want to postpone the Brexit until January the 30th , 2020. > The most important element this week on monetary policy will be the Fed’s Beige Book. Fed’s members are considering a new drop of the US central bank’s interest rate in December (according to the dots’ graph). It will depend on the economic outlook. The Beige Book will give information on this point for a foreseeable future. We will look specifically at elements associated with the international trade.
> Industrial production indices for September in the US (17) and in China (18). August figures were lower in August and negative in the US. We can’t expect a reversal. In the Euro Area the industrial production index for August will be released (14). Could be quite strong after German, Italian and Spanish numbers.
> The inflation rate will be confirmed at 0.9% in the Euro area for September (16). The major question on inflation will be for China as pig price has recently pushed up the inflation rate. It will be released on October 15. > Chinese foreign trade for the month of September (14). The dynamics of exports is still the key point of this statistic in order to perceive the impact of US tariff measures.
> Retail sales in the US (16), China (18) and the UK (17). These numbers have been rather strong in recent months notably in the US. We expect robust data in the US but weaker in the UK according to the BRC survey. In China the mild rebound seen recently should hold in September.
> Real estate data will be released in the US notably the Housing Starts figure. The data was stronger than expected in August. Will it last confirming the reversal of the real estate market ?
> The most important data of the week will be the US ISM survey for the manufacturing sector (October 1). It was at 49.1 in August down below the 50 threshold for the first time since 2016 (January). This is an important data as it may affect investors ‘ expectations on the downside if it remains below 50. The ISM profile is consistent with the YoY change of the industrial production index. The current consensus for September is above 50. This suggests that it follows the Markit index profile for the manufacturing sector which has rebounded in September (flash estimate).
> The Markit indices for the manufacturing sector will also be important but we already know (flash estimates) that Japan was weaker in September as was the euro area index with a very weak number in Germany This latter would be consistent with a strong negative number for the GDP growth in Q3 in Germany. The world index was up in August (but remaining in negative territory at 49.5. Chinese indices will be out on Monday 30 September. The services indices for the Markit and ISM surveys will be released on October the 3rd. On October the 1st, the Tankan survey will be released in Japan.
> The US employment for September will be released on Friday 4. The number was weak in August and we do not expect a strong rebound as households’ perception of the labor market was weaker in September (through the conference board consumer confidence survey). One remarks, the private sector momentum is the lowest since 2010. It’s probably the consequence of the 2018 surge but it can also reflect weaker expectations on companies’ side. In August, the number of public jobs was particularly high due to the 2020 Census. This may still be the case in September.
> Spanish growth second estimate for Q2 will be released on September 30 (the first was at 0.5% non annualized). The Bank of Spain has revised down its growth profile for 2019, 2020 and 2021. It now expects 2% in 2019, 1.7% in 2020 and 1.6% in 2021.
> The Euro Area inflation rate for September (October 1). It may be close to 1% for both the headline and the core. The convergence to 2% is not there yet. Inflation rates in Spain, in Germany and in Italy are also expected (September 30)
> Unemployment rate for August in the Euro area (September 30), German retail sales for August (September 30). Industrial production index for Japan for August (September 30). Retail sales in the Euro Area (October 3)
On a more political ground, the 70th anniversary of the People’s Republic of China (October 1st) will be a ceremonial event on the Tienanmen square in Beijing. Xi Jinping will give an address to the nation.
Markit surveys for September show a slow momentum in the Euro area and in the US. The synthetic index for the Euro Area (weighted average of the manufacturing and non manufacturing synthetic indices) is now close to 50 leading to weaker expectations for the Q3 GDP growth. This reinforces me that GDP growth for 2019 will be circa 1.1%. The impact of the new ECB monetary policy will not lead to an impulse on the upside.
In the US, the synthetic Markit index for the whole economy shows a meager rebound in September despite a stronger manufacturing index. The non manufacturing index has been quite weak in September at 50.9 after 50.7 in August. The services sector doesn’t counterbalance the lack of impulse of the manufacturing sector.The global index is now way below the level seen until last spring and is consistent with a slowdown in the US GDP growth as it was seen in 2016. The more accommodative US monetary policy will not change the picture.
In the short term, the main risk remains in the manufacturing sector. European indices are weak, notably in Germany. This may lead to a recession in this country with a contagion risk to the rest of the euro area. Nevertheless, in the case of a deep recession in Germany, the government would be more active on its fiscal policy, limiting therefore the risk of a recession for the whole zone. This would be the chance for the Eurozone. Inb September, the US is weak but stabilized. The risk of recession is still low at this moment.
> The ECB meeting will be the most important event of the week. Bazooka measures are expected with lower deposit rate (associated with a tiering depending on the size of the bank) and the resumption of the Quantitative Easing Program. > The lower deposit rate with tiering will help the banking system. The EONIA may even be higher than what is currently seen. The QE program will push down all interest rates and reinforce financial repression We do not expect strong impact on the Eurozone growth momentum or on its inflation.
> External trade in Germany will highlight the impact of the world trade lower momentum. Lower exports have pushed the German GDP change in negative territory during the second quarter. An extended slowdown of the world trade (as expected when we look at the worldwide lower exports orders in the Markit survey) would push Germany in recession.
> Retail sales in the US for August (13) are the last good numbers expected. In September, tariffs on Chinese consumer goods imported in the US will have a negative impact on consumers’ behavior. > JOLTS (10) will show the probable change in the US labor market trend > The UK economy had a negative change figure in the second quarter. This will have an impact of the labor market (10) for July.
The ECB will cut interest rates in September with probably a differentiated deposit rate regime depending on the amount of deposits. It is considering the resumption of asset purchases.
The analysis I was doing this morning always seems correct to me (see here).
I will add another remark nonetheless. The risk of recession appears low according to Draghi. What will the ECB do in the event of a recession? It will be necessary at all costs a proactive fiscal policy to get out. That’s a risky bet
Mario Draghi will most likely announce, for September, measures for a more accommodating monetary policy. A possible rate cut and the resumption of QE would lead to an increase in financial repression. Debt issuers will benefit to the detriment of the savers. This will give additional margins to euro area governments since they will be even less constrained by any financial element.
1- Will household behavior be affected? The drain on their savings will only be gradual via the decline in bond yields (I am thinking here of life insurance for example). Do not count on an acceleration of consumption. This has already occurred when the refi rate has fallen to 0%.
2- The rate on corporate bonds will remain very low especially if the QE includes purchases of companies’ securities. The risk is to have more fragile financial structures because the debt will not stop.
3- The financial repression favors governments which appropriates an additional part of the savings. The question is: what for? If it is to finance operating expenses then the efficiency will be zero and the monetary measure will only increase the discomfort. This means that expenditures must be on capital expenditures to expect the convergence to a higher growth trajectory. In this case, monetary policy will have been effective. This brings back Olivier Blanchard and Martin Uribe’s discussions.
4- These questions bring us once again to fiscal policy and its effectiveness. Draghi discusses this issue at each press conference. Eurozone fiscal policy will not exist for lack of support and not just from Germans.
This means that to be effective the measures announced by the ECB will have to reflect a strong fiscal awareness of all the countries in the zone. One can be dubious unless Germany enters a recession. In this case the purse strings would relax.
External trade for Germany is the statistics I will focus on this week (July 8). Since the beginning of the year, real exports are slowing down as a consequence of the trade war. Expectations are negative and this is a source of concern for the German growth momentum. The German government may have, in coming weeks, an opportunity to boost domestic demand to cushion this disruption.
The Chinese external trade will also be a major indicator (July 12) as a measure of the trade war impact.
The German industrial production index will also show a slowdown in May (July 8). This would be consistent with expectations on its external trade and with corporate surveys that reflect pessimism. The other point to mention here is that the UK industrial production will show a downward trend (July 11). This would be consistent with the Markit index for the manufacturing sector. In May the Markit synthetic index was at 49.4 (from 53.1 in April).
The US inflation rate for June (July 11) will slow as seen in European inflation rates for June (flash estimates) while the Chinese will remain strong (2.7% in May) as food price (pork price precisely) will continue to push up the price index.
Financial Stability Report by the Bank of England (July 11 at 1130 CET), Minutes of the last FOMC meeting (June 18-19) on July 10 (2000 CET) and Minutes of the last ECB meeting (June 5-6) on monetary policy (July 11 at 1330 CET)