>The ECB meeting (October 24) will be the most important event of the week. During last meeting, the ECB adopted a very accommodative monetary policy stance. This led to important discussions notably on the resumption of the QE and on the forward guidance as these measures will remain until the EA inflation converges to the ECB target. Nothing new is expected?
>This meeting will be the last for Mario Draghi. He will quit the ECB at the end of this month and be replaced by Christine Lagarde. Draghi has given to the ECB the soul and the instruments that are necessary for an independent and influential central bank (more details on Draghi’s impact on the ECB in the document).
> Many corporate surveys for October will be released during the week. The French “climat des affaires” (23), the German Ifo (25), the Markit flash estimate (24) and CBR orders in the UK (21) The current mood in developed countries is pessimistic and this will not reverse rapidly. The IMF forecasts was a synthetic view of this backdrop. A Brexit deal would have had a positive impact but the Parliament has not allowed for it. BoJo has ask for a new delay until the end of next January. This increases uncertainty as we don’t know what will happen in the next three months. Do we converge to a new referendum ? Will Bojo force the Brexit before the end of next January ? Will there be general elections ? No one knows. Many would like to write the future but the recent past has shown that the foreseeable future is not predictable. There are uncertainties also coming from the discussions between China and the US. Discussions, last week was mainly on agriculture as there is a necessity for the US to reverse the trend coming from the trade war. China now buys soybean in Brazil rather than in the US. This weakens Trump future presidential campaign. The risk associated with this negotiations’ failure is a source of supplementary weakness. The uncertainty for the future is still high and is a constraint for the economic activity.
>Durable goods orders in the US for September (24). These numbers have not been strong recently and could reflect a weakness in corporate investment in coming months. > Existing homes sales in the US for September (22) This statistic is important as it reflects a kind of wealth effect. Thera are more house owners in the US than people having a large portfolio of risky assets. Movement in the real estate has therefore more impact on consumers’ behavior than the stock market can have. The existing home sales is for me the most important statistic that shows this wealth effect. Recent improvement was supportive for consumers’ expenditures.
Reduction in new export orders is the most important economic phenomenon for the business cycle in recent months. It cannot be ruled out that measures to constrain international trade have had a negative effect on trade and growth. In the monthly Markit manufacturing survey, the new orders index for developed countries was at 47.4 in September. Order flows have contracted continuously since January. In these circumstances, it is not surprising that the pace of manufacturing output is also degraded in most countries. In August, it contracts in the US over a year. In emerging markets, the new orders flow index reflects a contraction at 48.7. Since the beginning of the year, the average index is at 49.7. The ISM survey export order flow index is at its lowest since the 2009 recession (the previous low point was March 2009). This reflects a particular situation that in the past has penalized the US economy. The shock is severe and international trade is no longer a source of impetus for the economic activity as in the past, but rather a constraint that permanently penalizes growth. On the graph, we observe the change of regime throughout the year 2018. Tariff measures, non-cooperative strategies and the political consequences of insufficient growth explain this change in trend. Spontaneously, we do not perceive a rapid reversal of the trend.
The other source of concern in the manufacturing sector is employment . After a strong improvement until early 2018, especially in developed countries, it is now contracting. This means that the solvent demand, which improves with the increase in employment, is deteriorating. Internal dynamics fades.
The growth of the manufacturing sector is now strongly constrained. It no longer has a strong impetus from international trade and the solvency of domestic demand is deteriorating due to the low momentum in the labor market. We can expect a negative contribution from the manufacturing sector to growth in the coming months. The only question now is whether services can compensate for this effect. Generally this is not the case. This argues for a further slowdown in activity.
> 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.
> The global economy is slowing very rapidly and the world trade was contracting in June. To anticipate the immediate future on the economic activity, companies’ surveys are key. Next week, the Markit and ISM surveys will be released. On September the 2nd, manufacturing sector surveys for Markit will be out. The ISM will be out on September the 3rd. These number will highlight the short term momentum of the global activity and the future dynamics of world trade.
> On September the 4th the Markit service sector survey will be released and the 5th it will be the ISM survey on services. In the US, the services survey no longer re balance the weakness of the manufacturing sector. The flash estimate for the Markit survey is now below 51. Fragility leading to recession?
> US employment for August will be released on September the 6th. Recent numbers on jobs creation have been revised down (annual revision) leading to a lower dynamics. This change is consistent with the change in trend seen in the JOLTS survey.
> Industrial Orders in Germany for July (September 5) will be another source of information on the strength of the global momentum as this indicator has a profile consistent with the OCDE corporate investment. Recent data show a rapid slowdown. > Recent developments in the Middle East with higher tensions, this week-end, between Israel, Lebanon and the West Bank.
> Discussions on trade war between China and the US have been the main trigger for financial markets last week. It will continue as China is ready for retaliation. That’s the way we must interpret the recent change in the White House measures. It has postponed new tariffs to December the 15th. It was said to ease Xmas gifts but it was more probably the consequences of the discussions between the two countries. After December the 15th, 96.8% of Chinese exports to the US will have tariffs. That’s a terrible change compared to the 5.3% seen in 2013. The situation between the two countries and the Chinese announcement of retaliation are a source of concern and of lower interest rates. The risk is to jump into a global recession. With the deep slide seen on interest rate this week (August 12) after the discussion on trade, the main question is to anticipate until which level they will be able to go in negative territory in the Eurozone.
> The impact of this trade war is already seen in exports figures for Japan. In real terms, the exports are already down more than 2% in YoY comparison. The figure for July (August 19) will probably confirm this trend implying new risks for the Japanese growth.
> The Markit indices for August will be released as flash estimates for Japan, Euro Area, Germany, France and the US on August the 22nd. We will look carefully at the manufacturing sector where the world index (will not be released next Thursday) is already in the contraction zone and where all indices for larges developed countries are close or below the 50 threshold.
> In the UK, the CBI survey on new orders may confirm the risk of a deep recession (August 20). The recent drop of this index is already impressive as accumulated inventories for the Brexit limit the possibility of a supplementary demand.
> The last point to look at will be the US housing market. The Existing Home Sales figure will be released on August the 21st. This is an important data as it supports a wealth effect for US households. Recent figures do not show an improvement even with lower mortgage rates. New Homes Sales will be released on August the 23rd. > August 19 Final CPI release for July in the Euro Area. August 21, the German consumer confidence for August and CPI for Japan on August the 23rd.
The first point is the rapid slowdown in manufacturing activity in Asia. It is contracting in the 4 major countries, from China to Japan, South Korea and Taiwan. The movement is even faster for countries that are more dependent on China for product assembly. This is the case for Taiwan and Korea.
This negative shock is a consequence of Trump’s trade measures and weighs very heavily on Asia in general and China in particular. The postponement of the sanctions planned for US imports from China, which were due to take effect on 2 July, is a good thing. However, if the resumption of the Sino-American dialogue makes it possible to avoid the worst, nothing seems to be resolved on the merits and uncertainties will remain. (With regard to the Vietnam index, are you surprised by the recent interest of the American administration? Chinese activity has moved there)
Synthetic indices on economic activity and new export orders, world trade will continue to slow in the coming months as Asia has been the region most affected by the US measures.
The dynamics of the Eurozone are slowing down quickly. The advanced estimate published last week for the Euro zone has been revised downwards. In the flash estimate it still showed a contraction to 47.8 but slightly improved compared to May (47.7). The final version is 46.6. Activity is slightly worse than in May. The decline in activity is faster. In addition to the contraction in activity already observed in Germany, there are now also those in Spain and Italy. The Spanish index plunges to 47.9 and that of Italy to 48.4. The French index, although revised downwards by 52 in the estimate at 51.9, is improving compared to spring developments. Three of the four major countries in the Euro zone have rapidly contracting manufacturing activity. Will growth forecasts have to be revised downwards?
With regard to the dynamics of foreign trade, it can be seen that the profile is the same as that of synthetic indices. Germany is pulling the whole thing down and Italy and Spain are now making a significant contribution to the contraction in orders.
The German situation will continue to deteriorate. The dynamics of world trade will not reverse rapidly, further penalizing the manufacturing sector. But in addition, the slowdown in the cycle, measured here by the IFO index) will result in a slowdown in the labor market. Employment dynamics will slow down and this inflection will be all the more important as the downward nature of the cycle lengthens. As a result, domestic demand in the German economy will be weaker and could encourage the government to pursue a more flexible policy to offset the negative effects of the international environment. Let us not doubt then that all the countries in the area would benefit from it. The risk is that we really have to go into the negative part of the cycle for the Germans to react. Moreover, even if the ECB is active, as Draghi suggested last week, this will not be enough to reverse the trend.
The main focus this week will be the Fed’s meeting. I don’t expect a announcement for a rapid drop in the Fed’s rate.
The Fed must show its independence when macro data are still robust while the inflation rate remains low.
The inversion of the yield curve will continue and I expect a drop in the Fed’s rate next fall as macro data will be weaker.
The US housing market is key in the short term dynamics. Existing home sales is a proxy for a wealth effect on this market. Its recent downside trend may be consistent with a slower consumption pace on consumers’ side
Flash estimates of the Markit survey will highlight the depth of the US slowdown in the manufacturing sector and the profile of New Export Orders which are consistent with the world trade momentum
The ZEW and the Markit survey for June in Germany will reflect the impact of the world trade slowdown. It has already been important on exports. More may be expected.