What to expect this week (14 October – 20 October 2019)

Highlights

> 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 detailed document is here
NextWeek-October14-October20-2019

Recession risks in the Euro Area, not yet in the US

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.

What to expect next week ? (September 23 – September 29, 2019)

Highlights

> Corporate surveys will highlight the business cycle foreseeable future. The IFO will be released on Tuesday 24 as will be the French Climat des Affaires. The French momentum is currently higher than in Germany as this latter is more exposed to the international backdrop. The Italian survey on corporate confidence will be out on September the 27th and may show the impact of a pro-European government on corporate confidence.

> Markit surveys, flash estimates, will be released on Monday the 23rd for the Euro Area, France, Germany and the US. The Japanese release will be done on September the 24th. These surveys are important but I will carefully look at the New Export Order indices in the Euro Area, US and Japan. Its average is clearly consistent with the world trade profile. In August it was as low as 46.6 giving a signal of continuous contraction in trade. September date will be important.

> Consumer confidence in the US (24 for the conference board and 27 for the Michigan), in France (25), Germany(26) and Italy (27). The US conference board will give us relevant signals on the US labor market dynamics. France index will remain above its average, way above the level it has a year ago when the yellow vests demonstrations started.

> Consumption expenditures in the US (27) and Fed’s preferred measure for inflation for August will be released on August the 27th. Consumers’ behavior is the strongest support of the current US growth momentum. Nevertheless it can be very volatile. We expect that it will be strong in August, consistently with retail sales. No strong expectations on inflation. The July core inflation rate is 1.6%.

> Inflation for September in France and Spain.
> New Home sales in August in the US. The real estate market has been stronger recently. A confirmation is expected as interest rates were low in August.

The document is available here
NextWeek-September 23- September 29-2019

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

Some thoughts on Hong Kong

Massive demonstrations in Hong Kong have set inhabitants of the Chinese-controlled territory (handover on July 1, 1997) against the Chinese government, with 1.7 million people involved in demonstrations on August 18, equating to 25% of the population.

The key issue at stake here is the shift in the political landscape in Hong Kong after the region’s government announced plans to amend its extradition law, as Hong Kong inhabitants fear Chinese control over the HK legal system, giving rise to concerns that they could lose their independence from Beijing. This means the risk that Hong Kong could lose some of its special status (one country, two systems since the agreement implemented in 1997), jeopardizing the personal safety of all HK inhabitants.

Hong Kong Chief Executive Carrie Lam stated on July 8 that the extradition bill was dead, but this did not appease demonstrators, who are calling for her resignation: not only was she was the instigator of the proposed amendment, but she is also not democratically elected – rather she is appointed by a 1,200-member election committee, mostly appointed by Beijing. The Chief Executive should be appointed via elections based on universal suffrage, but since the umbrella revolution in 2014, Beijing’s approach to HK has changed and the Chinese government no longer seems to want to comply with the initial democracy agreements. 
This public backlash against political changes in HK is also due to the fact that the Chinese government meddles in legislative elections, stepping in to rule against one candidate or another. 
China has taken a firm stand to quash this social unrest, and troops are barracked at the border with Hong Kong, involved in maneuvers although not intervening. 

It is interesting to look back in time to understand what is happening and gain some insight into the Chinese government’s heavy-handed reaction. 
During the UK handover of Hong Kong to China in 1997, it was agreed that there would be one country, two systems i.e. Hong Kong would remain subject to market forces and China would maintain a socialist system. China would be in charge of HK’s defense and foreign affairs, but the region would have its own constitution with a strong degree of autonomy from China, maintaining freedom of the press, freedom of assembly and the right to demonstrate, etc.
The agreement that came into force on July 1, 1997 was signed for a duration of 50 years – i.e. until 2047 – after which the one country, two systems set-up could become one country, one system.

But this is the very issue that is attracting concern in Hong Kong: the initial idea was that the two systems would converge, based on the assumption that China would develop economically and its political system would evolve towards the HK system, not vice versa. This was the idea put forward by Samuel Pisar i.e. greater economic affluence would lead to the gradual implementation of a more liberal and democratic political system.
However, judging by moves from Beijing, residents of Hong Kong look on as their system shifts and moves towards the Chinese political system. They are concerned that they will gradually be incorporated into this system and become just another Chinese province among others, which would mean access to information being more restricted and freedom of speech becoming much more limited than it is now: Hong Kong has a lot to lose.

The government in Beijing does not want to take the risk of allowing social unrest to gain a foothold, and has not shied away from repressing any demonstrations that take place across the country. To avoid this type of situation, the Chinese authorities take a very active approach to applying economic policy, and are strict in ensuring that social instability does not take root. This is one of the factors underpinning the widespread development of electronic surveillance in China, as facial recognition and the social credit system are ways of curbing these risks in a type of digital dictatorship engineered to avoid social strife.
This need for the authorities to curb unrest is exacerbated by the fact that growth is slowing and the Chinese economy is struggling to create all the necessary jobs.

In other words, the authorities in Beijing do not want the Hong Kong demonstrations to spread to the rest of China, which is fettered by more sluggish growth. This is a dangerous situation, as citizens in both Shenzhen and Guangzhou are closely watching how the Hong Kong-Beijing relationship pans out: a number of Shenzhen residents work in Hong Kong, so there is no longer a strict separation between the territory and the rest of China.

This battle of wills raises a number of questions.
Chinese military intervention in Hong Kong is one of the list of potential options, but this kind of political move could well draw parallels with the Tienanmen Square events in the spring of 1989.
This would be damaging for China as its international expansion has been exponential since 1989 and moves aimed at extending the country’s influence – such as the Belt and Road Initiative – would be threatened by military intervention. This would also be a major risk as that the country is involved in a stand-off with the US and is able to offer technological capabilities that could help skew the world balance in China’s favor: in this respect, the Huawei affair is symbolic as the company has the wherewithal to replace mobile telephone networks and swiftly migrate all European countries to Chinese 5G technology.
So this kind of move would trigger hefty risks at a time when China wants to challenge the US both economically and politically.
Meanwhile, a deterioration in Hong Kong’s status resulting from Chinese intervention and putting it on a par with other Chinese regions would increase mistrust of Beijing from all other world capitals. 

However, this mistrust may only last a short while, and China can hope that its economic and technological firepower would ensure that it emerges as leader over the years ahead, with intervention having a limited effect over time. After all, the events of Tienanmen Square did not stop China growing and extending its influence in the world over the past 30 years.

Ultimately, the issue at stake here is China’s role in the world, as the country stands against the US in a worldwide economic and political battle of wills. Technological, economic and political leadership is being played for, and Washington has not managed to put an end to its contest with Beijing after Chinese retaliation forced Donald Trump to back down last week when he delayed border tariffs on electronic consumer goods to December 15.
China is also currently finding its domestic balance, and keeping Hong Kong’s current status would mean maintaining access to the rest of the world and allowing the rest of the world to have access to China. This communication is vital, although HK admittedly only accounts for 3% of China’s GDP as compared with 20% in 1997. 
China could well be on the way to becoming the economic heavyweight it was before the industrial revolution in Europe. The choices it makes in addressing the demonstrations in Hong Kong will be a harbinger of just how it plans to act in this leadership role in today’s globalized world. 

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

What to expect next week ? (August 12 – August 18, 2019)

Highlights

=> The recent volatility on financial markets, through lower interest rates, was the consequence of lower expectations on global growth after the White House announcements. In the coming week, there will be data on retail sales in the US (15), China (14) and UK (15). These data will show the robustness of the domestic demand. If these data are strong in the US and in China, financial arbitrage may be modified in favor of risky assets

=> GDP growth in Germany will be, in the Euro Area, the most important indicator of the week (14). The industrial production index dropped dramatically in the second quarter (-7.5% at annual rate) and this downturn is consistent with a negative growth figure (probably more than the consensus at -0.1%).
The ZEW survey for August (13) will highlight the duration of this drop —Employment figures in the Euro Area and the detail for GDP will be released on August the 14th.

=> Employment figures will be important as the unemployment rate is low now (7.5% in June) and the economic dynamics is lower.

 

 

NextWeek-August12-August18_2019