What to expect next week ? (July 15 – July 21, 2019)

Highlights


> The Chinese GDP growth number for the second quarter (July 15). During the first three months of the year growth was at 6.4% It should be lower as monthly date on industrial production and imports show a poor momentum.
> Retail sales and Industrial production in the US (July 16). They will show the strength of the US economy. These will be important benchmark that may influence the Fed’s strategy. Powell just mentioned this week that there was no improvement despite the strong labor market report.
Associated to these numbers, the Fed’s beige book (July 17) will highlight the Fed’s perception of the economy at a regional level.
> The NY Fed (July 15) and the Phylli Fed (July 18) indices on economic activity will also provide data on the business cycle strength.

> ZEW index in Germany (July 16). A weak number following weak numbers in recent months may force the government to adopt a more proactive economic policy.
> Employment numbers in the UK (July 16) and CPI in the UK (July 17)
Weaker numbers on employment are still to come and will be seen after this summer with the strong slowdown expected in the manufacturing sector.

The document is available here NextWeek-July15-July21-2019

What to expect next week ? (July 8 – July 14, 2019)

Highlights

  • 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)

The document is available here NextWeek-July8-July14-2019

 

Lower ZEW index implies turmoil in Germany

The drop of the #ZEW survey increases the downside risk for the #German economy. It is linked with the rapid slowdown of the world trade. As no agreement is expected rapidly (even with the Trump/XI meeting at the G20), the risk of recession is increasing for Germany.

The current conditions index is far from its recent highs but the June important fact is the strong change in expectations.The 1st component reflects the drop in German exports(-5% in April vs March and -3% in real term since Dec 2018).The momentum will not improve (expectations)
Mario Draghi said in Sintra that the ECB will ease if necessary. It may be sooner than usually expected

Business investment profile is still worrisome

The pace of capital goods orders in Germany in March suggests a further slowdown in investment in OECD countries over the coming months.
Orders are down 5.9% year-on-year and this indicator is closely correlated with the investment profile of OECD countries.

This slowdown in orders is global.
The rebound in the Euro zone is limited since over a year the decline in orders is still -6.5%. The rest of the world does not look encouraging either.

This is why I have doubts on the investment profile published by INSEE yesterday for the manufacturing sector for France. A 11% growth is expected for 2019 after 0% in 2018. This seems excessive since the survey shows a rapid slowdown in the second half. This means that the first semester has to be very strong. This is not necessarily consistent with what we see in the pace of investment of non-financial companies in the first quarter.
The survey is probably a bit too optimistic. Capital goods orders continue to contract in April 2019. I do not imagine strong investments in France while the rest of the world is rather in an investment slowdown.

The shock in the manufacturing sector in Germany: IFO vs Markit

The modest rebound in the IFO index in March is sometimes interpreted as the counterpoint to the drop of the Markit index released last Friday.
There is indeed an opposition in March between the pace of the two indicators. One goes up again while the other is down.

However, what shocked in the Markit survey is the sharp downturn in the manufacturing sector, while the services sector was doing quite well. The manufacturing index was 44.7 against 47.6 in February. It contracts for the third month in a row. In contrast, the composite services indicator (calculated as the non-manufacturing ISM) is stable in March at 53.7 as in February.
The culprit is the manufacturing index. Yet when comparing the manufacturing index of Markit and that of the IFO we have exactly the same profile.

The peak of the two indices is almost the same and the break observed since the beginning of 2018 is similar.
The shock on the German economy reflects the rapid slowdown in the world trade momentum. The impact on the German economy is through the manufacturing sector whether measured by IFO or Markit.
The pace of service between the two measures is not the same and this is what differentiates synthetic indicators from the two surveys. But services are more reflective of the domestic market than the sensitivity of the German economy to world trade via the manufacturing sector.
The external shock is strong and brutal in Germany and it has first to be stabilized before the beginning of a recovery. It will take time and this justifies the pessimistic forecasts for Germany.

American pressure: the issue is the possible use of Chinese 5G by the Germans

Tensions between China and the US are about technological leadership. The Chinese, whose technological catch-up has been rapid in recent decades, is now rather ahead of 5G and Artificial Intelligence. The US does not accept, rightly, this change of equilibrium.
The standoff will continue and I can not imagine a quick trade agreement because it would assume that one of the two countries accepts the leadership of the other. This seems totally illusory and that is why the global environment will remain volatile.
The US is pressuring its allies to limit Chinese influence.
To be convinced, read this article of the Wall Street Journal published this afternoon (March 11). It indicates the pressure of the Americans on the Germans in the adoption of a Chinese 5G technology for the renewal of their mobile network.

The article “Drop Huawei or See Intelligence Sharing Pared Back, U.S. Tells Germany” is available here 
Here is the first paragraph 
“BERLIN—The Trump administration has told the German government it would limit the intelligence it shares with German security agencies if Berlin allows Huawei Technologies Co. to build Germany’s next-generation mobile-internet infrastructure.”….