What to expect next week ? (September 2 – September 8, 2019)

Highlights

> 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. 

The detailed document is here
NextWeek-September2-September 8-2019

What to expect next week ? (August 19 – August 25, 2019)

Highlights

> 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 document is here
NextWeek-August19-August-25-2019

3 points on the cyclical dynamics in Asia and the Euro zone in June

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.

What to expect next week ? (June 17 – June 21, 2019)

Highlights

  • 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.

The document can be found here NextWeek-June17-June21-2019

The ECB will be unable to normalize its monetary policy soon

The ECB will not start the normalization of its monetary policy in 2019. The interest rate level will remain stable, my bet is that the refi rate and the deposit rate will remain at the current level in 2019.
The lack of external impulse, the slower momentum in the manufacturing sector and the convergence of the headline inflation rate to the core inflation rate are three reasons that suggest that the ECB will not take risks in the management of its monetary policy. The monetary policy normalization, even the expectation of it, may weaken economic activity. Therefore it’s not the good policy when the inflation rate is way below the ECB target with no convergence to the target in a foreseeable future.

The framework I have in mind is the following: Due to more heterogeneous behaviors and uncertainty at the political level, global growth will become, in 2019, weaker than in 2017 and in 2018. Inside the Euro Area, there are no coordinated policies that may boost growth, therefore growth trajectories will converge to potential growth. This framework is not a source of monetary policy normalization. But we can add that the dramatic oil price drop in recent weeks (due to excess supply in the US and in Arabia) will push the headline inflation rate to the core inflation rate which has been close to 1% for months. It’s still way below the ECB target and therefore not a source of monetary policy normalization.  Continue reading