Markets Close Week On A High, But International Manufacturing Data Is Soft

 | Nov 03, 2019 01:23AM ET

Summary

  • International manufacturing data is still soft.

  • The US expansion continues apace.

  • The markets ended the week on a high note.

    • h2 Key International Data/h2

    China/Japan/Australia

    China

  • Manufacturing PMI 51.4-51.7

    • Japan

  • Manufacturing PMI 48.9-48.4

  • Retail sales up 9.1% Y/Y (There's a tax hike going into effect)

  • Industrial production +1.1% Y/Y

  • CPI +.2% Y/Y

  • Unemployment rate 2.4%

    • Australia

  • Manufacturing PMI - 50.3-50

  • CPI +1.7% Y/Y

    • Asia conclusion: the good news is that China's manufacturing picked up due to an increase in orders. Even though it's weak, it's still encouraging. But Japan's and Australia's indexes were softer, as were readings from most other Asian countries. The trade war is sill hurting.

    Canada/Mexico

    Canada

  • GDP +0.1% M/M

    • Mexico

  • GDP -0.4% Y/Y (Technical Recession)

    • Canada/Mexico conclusion: Although Canada is still growing, the Bank of Canada is projecting a slowdown in the next few quarters. Mexico is now in a technical recession.

    UK/EU

    EU

  • Unemployment rate 7.5%

  • CPI 0.7%

  • GDP + 1.1% Y/Y

  • Business Climate -19

  • Economic Sentiment -0.9 points

    • UK

  • Markit PMI 49.6

    • UK/EU Conclusion: The UK is still suffering from the negative impacts of Brexit, which is depressing order books and sentiment. Business is doing the least amount possible to keep their businesses running while not committing to major capital expansions. The EU is still expanding, but the manufacturing sector is still hurting from the trade war.

    Key Central Bank Actions

    The Bank of Canada kept rates at 1.75%. Here's how the bank described the Canadian economy (emphasis added):

    Growth in Canada is expected to slow in the second half of this year to a rate below its potential. This reflects the uncertainty associated with trade conflicts, continuing adjustment in the energy sector, and the unwinding of temporary factors that boosted growth in the second quarter. Business investment and exports are likely to contract before expanding again in 2020 and 2021. At the same time, government spending and lower borrowing rates are supporting domestic demand, and activity in the services sector remains robust. Employment is showing continuing strength and wage growth is picking up, although with some variation among regions. Consumer spending has been choppy, but will be supported by solid income growth. Meanwhile, housing activity is picking up in most markets. The Bank continues to monitor the evolution of financial vulnerabilities in light of lower mortgage rates and past changes to housing market policies.

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    After slowing in 4Q18 and 1Q19, the Canadian economy grew 3.7% in 2Q19. Although unemployment has fluctuated between 5.4% and 5.8% during the last 12 months, retails sales have been soft during the last four months, expanding between 0.7% and 1.4% Y/Y. The manufacturing PMI has been below 50 in four of the last six months, which explains the soft industrial production readings (data from tradingeconomics.com).

    The Bank of Japan voted to maintain its current rate program. They also re-issued the following statement about future interest rate policy:

    As for the policy rates, the Bank expects short-and long-term interest rates to remain at their presentor lower levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost.

    The Japanese economy lost momentum in the third and fourth quarter of 2018, only growing 0.1% and 0.3% Y/Y, respectively. Activity picked up during the 1H19, rising to a 1% Y/Y rate in the first and second quarters. Despite low unemployment, retail sales have been weak: they grew between 0.4% and 1.8% Y/Y since November 2018 (while they increased 9.1% in the latest month, this is due to a tax increase going into effect). The manufacturing PMI has been below 50 in eight of the last nine months, explaining why industrial production contracted in seven of the last 12 months. However, the service sector PMI has been above 50 for the last year. (data from trading economics.com)

    Brazil lowered rates 50 basis points to 5%. Brazil's central bank is only focused on price stability:

    Inflation expectations for 2019, 2020, 2021, and 2022 collected by the Focus survey are around 3.3%, 3.6%, 3.75%, and 3.5%, respectively;

    The Copom's inflation projections in the scenario with interest rate and exchange rate paths extracted from the Focus survey stand around 3.4% for 2019, 3.6% for 2020, and 3.5% for 2021. This scenario assumes a path for the Selic rate that ends 2019 at 4.50% p.a., remains at that level during 2020, and ends 2021 at 6.38% p.a. It also assumes a path for the exchange rate that ends 2019 at BRL/USD 4.00, remains at that level during 2020, and ends 2021 at BRL/USD 3.95; and

    Brazil's economy is weak for a developing country. GDP has grown at an annual pace between 0.5%-1.3% the last four quarters -- a low pace for an emerging economy. The unemployment rate has been stable at 11.8% since July. Retail sales have fluctuated between 0.1% and 4.5% since last October (they did contract 4.4% one month). Manufacturing sentiment has been above 50 the last three months; it contracted between May-July and the Service sector PMI exhibited the same pattern. Industrial production declined in 8 of the last 12 months. (data from tradingeconomics.com)

    Key US Data

    The Fed lowered rates 25 basis points to 1.5% from 1.75%. Here is how they described the current state of the US economy:

    Information received since the Federal Open Market Committee met in September indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.