What to expect next week ? (July 1 – July 7, 2019)

Highlights

  • The ISM index for the manufacturing sector (July 1) will be the main indicator in the coming week. The slowdown in the US business cycle may be confirmed in June. 
  • The US labor market is the other main indicator (July 7). Its dynamics has recently changed as it adjusts to the new business cycle shape.
  • The Markit indices for the manufacturing sector (July 1) and for the services sector (July 3) will show the risk of a global recession for the manufacturing sector. The hope for the Eurozone is a strong services sector index that will allow an extension of the growth momentum.
    The Tankan survey in Japan will be out on July 1.
  • Employment in Germany for June (July 1) and retail sales for May (July 3) will show the possibility of maintaining a robust domestic demand or if it is necessary to have a stronger economic policy to cushion the impact of world trade negative shock on the German economy.
  • Retail sales in the Euro Area (July 4) for May will be a good proxy on the strength of the internal demand for the Euro zone.

    The document is here NextWeek-July1-July7-2019

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

What to expect next week ?

Highlights
  • Chinese trade figures, industrial production and retail sales for May are key to see how China cushions the negative international trade shock. Weak number would imply new measures to support domestic demand
  • The US economy is slowing down on industrial side. This was shown by the ISM manufacturing index in April and the industrial production index is trending downward since the beginning of the year. A negative figure on industrial production for May (June 14) may accelerate the Fed’s monetary policy change (next meeting June 19).
  • This change in the Fed’s strategy may also reflect a lower inflation rate. CPI figure will show a lower headline inflation (2% in April) and stable core inflation rate. Retail sales (June 14) are volatile reflecting a weaker domestic demand. This could add up to CPI and industrial production in the Fed’s decision in June.
  • After weak figures in the in April, the Euro Area industrial production index (June 13) will be down. May be is it the signal Draghi mentioned yesterday in his press conference to move the ECB monetary policy on a more accommodative ground

The document is available here NextWeek-June10-June14-2019

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.”….

Just a remark on the US growth profile in 2019

US growth is expected at 2.9% on average in 2018. This corresponds to a growth rate of 0.7/0.8% in Q4 (non-annualized figures). This view is consensual, as is the consensual perceived robustness of the economy and the slowdown to an average growth of 2.5% in 2019.
Making all of these elements compatible is interesting.
If the 2.9% of 2018 is ok (with 0.8% in Q4), it is necessary to think about 2019.
The average quarterly growth rate needed to converge to 2.5% is 0.5% (non annualized) The slowdown in the US economy is strong from the very beginning of the year. This figure must be compared to 0.8% which is the average quarterly growth in 2018.
The assumption of maintaining robust growth in the first half of 2019 (0.8% per quarter) implies a rapid decline from the summer. Convergence to 2.5% implies a contraction of -0.2% per quarter from the summer.
If growth is robust at the beginning of 2019, then to be compatible with the consensus forecasts, it will take a break from the summer

Large US trade imbalance and the Fed’s tightening

The US external trade is weakening rapidly. Its deficit has never been so important (measured in real terms and ex oil trade). Imports have a strong momentum. It reflects the White House fiscal strategy and it is done at the expense of American citizens. Not the good strategy. This large imbalance is also a good reason for the Fed to maintain its tightening bias in order to limit the domestic demand momentum. Powell has spoken many times of the non sustainable fiscal policy of the White House. This trade imbalance is just an illustration of it.

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