Fed Puts Interest Rate Cut In Play Powell’s comments suggest central bank is focusing now on whether and when to lower rates
Powell was speaking at the “Conference on Monetary Policy Strategy, Tools, and Communications Practices” in Chicago, “part of a first-ever public review by the Federal Open Market Committee of our monetary policy strategy, tools, and communications (…) to share perspectives on how monetary policy can best serve the public.” Powell is embarking on a crusade to modify the Fed’s inflation target.
For some reasons, he felt he had to begin reiterating the Powell put:
I’d like first to say a word about recent developments involving trade negotiations and other matters. We do not know how or when these issues will be resolved. We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.
He went on discussing his topic but that was all the market needed, like a Powell tweet confirming there’s a crew ready to offset whatever damage the guy in the house does. But the market says the damage has already been done and needs immediate remedy:
(…) financial conditions have already tightened by about 50bp, and we attribute some of the weakness in the survey data in late May to the impact of the escalating trade war. On the back of these developments, we are lowering our H2 GDP forecast by about ½pp to 2%. (Goldman Sachs)
- The market’s expectations of rate cuts generally did not overshoot in the past. (The Daily Shot)
Source: @SvendsenAnders
Could it be that right when the FOMC seeks to cut its inflation target, its long-standing 2% goal will be met?
The trade war is likely to become increasingly visible in the inflation numbers. Our new core PCE forecast incorporates a ½pp tariff boost and sees inflation climbing from 1.57% in April to 2% in August and to 2.3%-2.4% in early 2020, before diminishing under our assumption of tariff removal. If all proposed tariffs are implemented, we estimate a peak core inflation boost of +1¼pp! (Goldman Sachs)
U.S. Factory Orders Retreat as Durable Goods Orders Backpedal
Manufacturers’ orders declined 0.8% (+1.0% y/y) during April following a 1.3% March gain, revised from 1.9%. Orders in February declined 1.0%, revised from -0.3%. Orders for durable goods fell 2.1% and were unchanged y/y. Transportation equipment orders fell 5.9% (-0.1% y/y), led by a one-quarter decline in civilian aircraft & parts orders. Factory orders excluding the transportation sector improved 0.3% (1.2% y/y). (…)
Order backlogs in the manufacturing sector slipped 0.1% (+2.1% y/y) and reversed the March gain. Transportation equipment backlogs were little changed (1.9% y/y) after a 0.2% rise. Unfilled orders outside of transportation eased 0.1% (+2.7% y/y), the third straight month of slight decline. (…)
There were huge downward revisions in New Orders for February and March. In effect, New Orders for Q1 suddenly went from +1.7% (+7.0% annualized) to +0.4% (+1.6% annualized), all erased by April’s –0.8%. As a result, backlog declined and inventories accumulated at a 4.0% annualized rate in the last 3 months.
Markit’s manufacturing PMI’s preview for May said new orders fell in May on “weak client demand’ and that manufacturers needed to “readjust stock levels in light of softer demand conditions”.
COMPOSITE PMIs
U.S. Services new business expansion eases to slowest since March 2016
The latest survey data signalled only a marginal expansion in business activity across the U.S. service sector in May. The rise was the slowest since the current period of growth began in February 2016, amid softer demand conditions in domestic and foreign markets. A slower rise in input costs and greater competition for new work led to broadly unchanged output charges.
Meanwhile, firms expressed the lowest degree of confidence since mid-2016, with service providers more uncertain with regards to output growth over the coming year. Nonetheless, firms continued to increase workforce numbers at a moderate pace despite unchanged levels of outstanding business.
The seasonally adjusted final IHS Markit U.S. Services Business Activity Index registered 50.9 in May, down from 53.0 in April. The latest headline figure was the lowest since the current sequence of expansion began in February 2016, and signalled only a marginal upturn in business activity. Where a rise in output was reported, panellists linked this to a further increase in new business. Some firms, however, stated that greater competition and softer demand conditions had, in part, driven the slowdown.
At the same time, new orders received by service providers increased at only a marginal rate in May. The rise was the softest since March 2016 as firms commonly stated that less robust demand conditions weighed on new business growth. Meanwhile, new export orders were broadly unchanged during May, with the respective seasonally adjusted index posting fractionally above the 50.0 no change mark.
Subsequently, service sector firms registered a lower degree of optimism towards output over the coming 12 months. Business confidence was at its lowest level since June 2016 as service providers highlighted concerns surrounding softer demand conditions and uncertainty around ongoing global trade tensions. The level of positive sentiment was well below the series trend and muted overall.
Less robust client demand put pressure on firms to remain competitive as companies left output charges broadly unchanged in May. The respective seasonally adjusted index dipped below to crucial 50.0 neutral mark for the first time since February 2016, as some companies sought to retain clients through price discounting.
Input prices increased at a softer and only marginal pace in May. The rise in cost burdens was the slowest since September 2016, with firms stating that any increases in purchase prices and wage costs were only slight overall.
Finally, pressure on capacity at service providers was subdued in May as backlogs of work remained the same as those seen in April. Nevertheless, a sustained increase in new work drove firms to employ greater workforce numbers. The rise in staffing levels was stronger than that seen in April and moderate overall.
The Composite PMI Output Index registered 50.9 in May, down from 53.0 in April. The slowdown in private sector growth was driven by a softer service sector output expansion. The overall rise in business activity was the slowest since May 2016 and only marginal overall.
Similarly, the upturn in new business across the service sector eased for the fourth successive month to a marginal rate. Alongside a contraction in manufacturing new orders, less robust demand in the service sector led to the slowest overall expansion since March 2016. Foreign demand was lacklustre, with manufacturers registering a fall in new export orders, and service providers signalling broadly unchanged new business from abroad.
Manufacturing and service sector employment growth was moderate overall, with the rate of job creation accelerating in the latter. At the same time, backlogs of work were unchanged across the private sector. On the price front, input price inflation eased further in May and was subdued in the context of the series history. As such, manufacturers raised their factory gate charges only slightly, and service providers noted broadly unchanged charges.
Finally, business confidence dipped to its lowest since June 2016 amid concerns about global trade tensions and less robust demand conditions.
Chris Williamson, Chief Business Economist at IHS Markit:
The final PMI data for May add to worrying signs about the health of the US economy. With the exception of February 2016, business reported the weakest expansion for five and a half years as a trade led slowdown continued to widen from manufacturing to services.
Inflows of new business showed the second-smallest rise seen this side of the global financial crisis as the steepest fall in demand for manufactured goods since 2009 was accompanied by a further marked slowdown in orders for services.
The survey data indicate a deterioration of annualised GDP growth to just 1.2% in May, down from 1.9% in April, putting the second quarter on course for a 1.5% rise.
Employment growth has come off the boil in line with weaker than expected sales and gloomier prospects for the year ahead, albeit still showing some resilience. The survey data are running at a level broadly consistent with around 150,000 jobs being added in May.
The slowdown has also seen inflationary pressures fade rapidly. Despite upward pressure on prices from tariffs, the rate of increase of average prices charged for goods and services barely rose in May, in marked contrast to the strong rises seen earlier in the year, as increasing numbers of companies competed on price amid weak demand.
As with manufacturing, the biggest change in recent months has been a sharp deterioration in growth of orders and output at larger companies, linked in part to worsening export trends, trade war worries and rising geopolitical uncertainty.
Eurozone private sector growth remains subdued during May
May saw the continued expansion of the euro area private sector, albeit at a modest pace. After accounting for seasonal factors, the IHS Markit Eurozone PMI® Composite Output Index rose to 51.8 in May, up from April’s 51.5 and slightly better than the earlier flash reading (51.6). The latest index reading was the highest for three months, and extended the current period of continuous growth to just under six years.
In line with the recent trend, it was the service sector that provided the impetus to overall growth during May, expanding at a solid pace. In contrast, manufacturing output fell for a fourth successive month, albeit at the slowest pace since February.
By country, Germany saw growth improve to a three-month high and, despite recording its weakest expansion for five-and-a-half years, Spain continued to expand solidly. In France, output increased modestly, but Italy remained just inside contraction territory for a second successive month.
Modest growth of the private sector economy occurred at a time when levels of incoming new business were rising only slightly for the third month running. With activity increasing solidly, firms were subsequently able to reduce their overall backlogs of work for a third consecutive month.
Companies were also able to keep on top of their workloads thanks to the continued expansion of the private sector workforce. May’s survey indicated a solid rise in staffing levels, albeit a slower pace than in April. All nations covered by the survey registered employment gains. Germany remained a strong performer, though overall job creation purely reflected a strongly performing services economy as manufacturing jobs continued to fall.
May’s survey signalled that firms continued to face higher operating expenses, although inflation eased since April to its second-weakest in the past two-and-a-half years. Output charges were also increased at a slower rate, with the degree of inflation easing to its weakest level since November 2016.
Finally, business confidence, undermined by ongoing worries over Brexit, US-China trade and European political instability, fell in May to its lowest level since the start of the year. German companies signalled by far the lowest level of confidence about activity over the coming year.
May’s IHS Markit Eurozone PMI® Services Business Activity Index signalled ongoing growth of the euro area’s service sector. After accounting for seasonal factors, the index recorded 52.9, a little higher than April’s 52.8 and better than the earlier flash reading of 52.5.
Solid growth occurred in spite of a slowdown in the rate of new business expansion to a three-month low. Germany and Spain both recorded notably weaker gains in new work, whilst there was a decline seen in Italy. May’s survey data nonetheless indicated some pressure on capacity as signalled by a slight increase in backlogs of work for the first time in three months.
This encouraged companies to continue to take on additional staff. Employment in the service sector continued to rise markedly over the month, extending the current run of continuous expansion to over four-and-a-half years. Jobs continued to be created at the sharpest rate in Germany. Demand for staff led to further upward pressure on wages, and this was a key component behind a sharp increase in overall service sector costs.
Competitive pressures, however, meant that firms could only pass on a modest fraction of their higher operating expenses. Latest data showed that output charges rose at the weakest pace since August 2017.
Finally, business sentiment remained subdued in May, falling to its weakest level for four months. Firms operating in Germany were the least confident of a rise in activity in the coming year.
Chris Williamson, Chief Business Economist at IHS Markit:
The final eurozone PMI for May came in higher than the flash estimate, indicating the fastest growth for three months, but the overall picture remains one of weak current growth and gloomier prospects for the year ahead. While the service sector has seen business conditions improve compared to late last year, growth remains only modest, in part reflecting a spill-over from the trade led downturn in the manufacturing sector.
Despite output at goods and service providers collectively rising at a slightly faster rate in May, the survey data are merely indicating a modest 0.2% rise in GDP in the second quarter. Furthermore, there seems little prospect of any immediate improvement: new orders barely rose in May, painting one of the gloomiest pictures of demand seen over the past six years, and companies’ expectations of growth over the coming year likewise fell to one of the lowest in six years.
The survey also brought further signs that companies are having to increasingly compete on price to sustain sales growth, dampening inflationary pressures to the lowest for two-and-a-half years. (…)
Chinese business activity expands modestly in May
The Caixin China Composite PMI™ data (which covers both manufacturing and services) showed that business activity in China rose for the thirty-ninth month running in May. The rate of expansion was moderate overall, as signalled by the Composite Output Index edging down from 52.7 in April to a three-month low of 51.5.
The lower headline index reading was partly driven by a softer increase in service sector activity. The seasonally adjusted Chinese Services Business Activity Index fell from April’s recent high of 54.5 to a three-month low of 52.7 in May. Nonetheless, the reading was consistent with a strong rise in output overall amid reports of firm client demand. At the same time, manufacturing output was broadly stable, following a three-month sequence of expansion.
Total new business received by services companies also rose at a softer, but still solid, rate during May. According to panellists, new product launches and promotional activities supported a further increase in sales. Factory orders meanwhile rose at a slightly faster, albeit still marginal, pace. At the composite level, new orders expanded at a moderate rate that was the least marked for three months.
New orders received from abroad rose slightly across both the manufacturing and service sectors in China during May. For services companies, this marked a notable slowdown from the sharp rate of growth seen during April. However, this signalled a renewed increase in export sales for manufacturers following a slight reduction in the previous month.
On the employment front, services companies continued to add to their workforce numbers, but manufacturers registered a further decline. Job creation in the service sector was generally linked to rising business activity, though the rate of payroll expansion eased to a marginal pace. Manufacturers meanwhile cut their staffing levels only slightly. Consequently, composite employment fell for the first time in three months, albeit at a fractional rate.
Higher staff numbers and efforts to reduce outstanding business underpinned a further fall in backlogs of work at service providers. That said, the rate of backlog depletion remained marginal overall. At the same time, unfinished workloads at goods producers continued to expand slightly in May. As a result, the level of work-in-hand (but not yet completed) at the composite level remained broadly unchanged.
Services companies registered a solid increase in operating expenses during May, despite the rate of inflation easing since April. According to panel members, greater costs for labour and raw materials pushed up input prices in the latest survey period. Average cost burdens rose only slightly for manufacturing companies. Measured across both sectors, average input prices rose at a modest pace that remained weaker than the historical average.
Efforts to remain competitive and attract new business limited the overall pricing power of Chinese companies during May. Notably, services companies raised their output charges marginally, despite a strong rise in input costs. Factory gate prices were meanwhile unchanged from the previous month, thereby ending a three-month sequence of inflation.
Latest survey data indicated that overall confidence towards the year ahead weakened to the lowest on record, which was primarily driven by weaker sentiment at manufacturers. Furthermore, expectations at goods producers were the least upbeat since the series began in April 2012, while services firms registered the lowest degree of confidence since July 2018. Subdued expectations were often linked to the ongoing China-US trade dispute and relatively subdued global demand conditions.
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Investors face $647bn China banking blind spot Delays by rural and city banks in reporting results signal potential bad-debt build-up
Global Economy Cools Faster Than Expected as Trade Tensions Rise, World Bank Says Global growth forecast for 2019 lowered to 2.6%, from 2.9% in January forecast
With nearly half a year of data under its belt, the World Bank lowered its global growth forecast to 2.6% from 2.9% in January—and cut its forecast for growth in trade to 2.6% from 3.6%.
“There’s been a tumble in business confidence, a deepening slowdown in global trade, and sluggish investment in emerging and developing economies,” World Bank President David Malpass told reporters. “This is worrisome because subdued investment weakens the foundations for sustained growth.” (…)
Forecasts for the U.S. and China, which already incorporated a sharp slowdown, were unchanged in the latest update. The U.S. is forecast to slow to 2.5% in 2019 from 2.9% in 2018, while China is expected to slow to 6.2% from 6.6%.
Thus the surprise in the World Bank’s forecast wasn’t the damage the world’s two largest economies are doing to each other in their trade conflict—but the extent of international fallout from that rift in trade and withering of global business confidence.
All six global regions of emerging and developing economies tracked in the forecast—East Asia and the Pacific; Europe and Central Asia; Latin America and the Caribbean; Middle East and North Africa; South Asia; and sub-Saharan Africa—saw their growth prospects wither in the first half of the year.
The forecast, however, doesn’t incorporate the effects of the U.S. threat to apply 25% tariffs to an additional $300 billion of Chinese goods, which could begin later this month—nor its threat to apply tariffs that could rise to 25% against Mexico’s $350 billion of imports, which could begin next week. (…)
Washington’s Anti-Growth Turn Policies matter, and they’re changing for the worse in both parties.
(…) But as he focuses on re-election, Mr. Trump is returning to the issues that marked the worst moments of his 2016 campaign. He is restrictionist on immigration, increasingly protectionist on trade, and more interventionist in regulating business. He favors price controls on drugs, a mandate for paid family leave, and his regulators are revving up what looks like it could become the largest federal antitrust campaign since the 1970s.
Meanwhile, House and Senate Democrats are advancing their own election agenda that includes higher taxes and new regulation on finance and industry. The only pro-growth measure that could pass would be Mr. Trump’s renegotiated Nafta deal, but that is in greater jeopardy after last week’s tariffs on Mexico. Gridlock will probably prevail through 2020, but investors will have to start discounting the chance that Democrats could implement much of their agenda in 2021. (…)
Mr. Trump seems to believe the Federal Reserve can make everything great again by cutting interest rates, and he may get the rate cuts he wants this year. (…) But the Fed can’t offset bad trade policy by itself. (…)
Mr. Trump campaigned in 2016 on reviving the economy, and the surge of growth has helped to offset his personal unpopularity. Bad policies operate at the margin and their effect is cumulative. The initial tariffs were dwarfed by the growth effects of tax reform and deregulation, but the damage from tariffs will rise if they increase in severity and are imposed impulsively. Sooner or later bad policies always exact a high economic and political cost.
Trump warns ‘foolish’ Republican senators in rare clash over Mexico tariffs Lawmakers in president’s own party voice firm opposition to threat over Mexico
(…) But with the tariffs set to start next Monday, and Trump declaring them “more likely” than not to take effect, fellow Republicans in Congress warned the White House they were ready to stand up to the president. (…)
At a lengthy closed-door lunch meeting at the Capitol, senators took turns warning Trump officials there could be trouble if the GOP-held Senate votes on disapproving the tariffs. Congressional rejection would be a stiff rebuke to Trump, even more forceful than an earlier effort to prevent him from shifting money to build his long-promised border wall with Mexico.
“Deep concern and resistance” is how Senator Ted Cruz of Texas characterized the mood. “I will yield to nobody in passion and seriousness and commitment to securing the border, but there’s no reason for Texas farmers and ranchers and manufacturers and small businesses to pay the price of massive new taxes.”
Ron Johnson of Wisconsin, who was among the senators who spoke up, said: “I think the administration has to be concerned about another vote of disapproval … I’m not the only one saying it.” (…)
“By what we have seen so far, we will be able to reach an agreement,” the foreign minister, Marcelo Ebrard, said during a news conference at the Mexican embassy in Washington. “That is why I think the imposition of tariffs can be avoided.”
Trump, during a press conference in London, offered mixed messages.
“We’re going to see if we can do something,” he said on the second day of his state visit to Britain. “But I think it’s more likely that the tariffs go on.” He also said he doubted Republicans in Congress would muster the votes against him. “If they do, it’s foolish.” (…)
“The Trump Administration last year recognized the importance of rare earths elements – albeit as an after-thought – when it pulled them off a list of Chinese imports to be hit with US tariffs. China mines about 80% of the 17 elements that appear on the Periodic Table, and has a lock on about 90% of rare earth processing.”
Source: “How the US lost the plot on rare earths” – a good primer on rare earths, at http://www.mining.com/web/us-lost-plot-rare-earths/ .The Trump trade war expansion has reached a new and higher risk threshold. It is not just about China and rare earths; China’s threat to play the rare-earths card could mark a turning point.
In addition to complicating the China dispute, the Mexico round has intensified the adverse reactions among Republicans in the US Senate to Trump’s trade-war jingoism. Grassley is now a critical person. We shall see how these politics unfold.
Meanwhile, Mexico’s retaliation is likely to target US agriculture and add to what is certainly a shock to bilateral US-Mexico trade. Launching a tariff war with Mexico while simultaneously attempting to ratify the USMCA is incomprehensible. Many are labeling it a colossal Trump blunder. News reports infer Mnuchin and Lighthizer recommended against Mexico tariffs.
Our view from the perspective of portfolio management is that we must focus on the global rise of protectionism and nationalism and the use of jingoistic weapons. Trump has already changed the global paradigm. Diplomats had a code of negotiation behavior. It is destroyed.
The history of jingoistic rhetoric and behavior is not encouraging. Here’s what the Encyclopaedia Britannica has to say about the origins of jingoism:
“Jingoism, an attitude of belligerent nationalism, the English equivalent of the term chauvinism. The term apparently originated in England during the Russo-Turkish War of 1877–78 when the British Mediterranean squadron was sent to Gallipoli to restrain Russia and war fever was aroused. Supporters of the British government’s policy toward Russia came to be called jingoes as a result of the phrase ‘by jingo,’ which appeared in the refrain of a popular song:
We don’t want to fight, yet by jingo, if we do,
We’ve got the ships, we’ve got the men,
And got the money, too!”(Source: https://www.britannica.com/topic/jingoism)
Now jingoism has become a term relevant to portfolio management. This is true in America, China, Mexico and elsewhere. Jingoism raises risk premia.
TECHNICALS WATCH
Lowry’s Buying Power Index crossed back above the Selling Pressure Index yesterday. The S&P 500 shot back up above its declining 200-d m.a.. Same with Nasdaq and the Wilshire 5000. Smaller caps also bounced but remain well below their 200-d m.a.
At today’s opening of 2823:
