Macro Weekly – Stronger growth ahead

by: Han de Jong

141121 - Macro Weekly - Stronger growth ahead ()

Last week’s date releases were mixed. But there were enough positives to stick firmly to our optimistic view. As we have said before, a number of forceful tailwinds are set to provide further support to the recovery. Markets for risky assets are right to be cheerful.

Weaker PMIs all around

Economic data releases were mixed last week. The preliminary PMIs in various countries disappointed. The composite PMI in the eurozone fell from 52.1 in October to 51.4 in November with the services sector being the main culprit. The manufacturing PMI for the US also weakened: 54.7, versus 55.9 a month earlier. The Japanese equivalent fell from 52.4 to 52.1. The HSBC manufacturing PMI for China was also a touch weaker in October. This is not good news, but some points need to be made here. First, the absolute level of all these measures is pointing to continued economic growth, not contraction. Second, these preliminary numbers are prone to revision. Third, these series do not have a particularly long track record. And last, but not least, other indicators are pointing in a different direction.

But remarkable strength in several other indicators

Two other confidence indicators showed a remarkable strengthening in November. The Philly Fed index in the US, which measures business confidence in the district of the Philadelphia Federal Reserve, jumped to 40.8 in November, up from 20.7 in October (the long-run average of this series is 9.1). The November reading was the fifth highest since the late 1960s! This may, of course, be an incident and a reversal may happen next month.

141121 - US Philly Fed

But at the same time, the German ZEW index registered a large jump. This series measures confidence related to the German economic outlook among economists and analysts. It is not the most reliable indicator in my view, but a jump from -3.6 to +11.5 after ten consecutive monthly declines is noticeable all the same.

141121 - German ZEW

Some Asian economies are typically ‘early cyclical’, so it is worthwhile following them. Growth of Taiwanese export orders have been on an upward trend in recent months and they showed a further improvement in October, rising 13.4% yoy, the best since early 2011 (excluding volatility around Chinese New Year). This is consistent with the message from Japanese export data. Growth of exports accelerated for a second consecutive month and amounted to 9.6% yoy in October.

Other indicators broadly supportive of our cautious optimism

Other economic indicators strengthen us in our view that the global economy is in the early phase of accelerating. US jobless claims continue to trend lower, indicating a sustained improvement in the US labour market. The US housing market is also continuing its recovery. Existing home sales rose 1.5% mom in October and have recovered in a steady trend from the downturn they suffered last year when mortgage rates rose during the so called ‘taper tantrum’. At that time bond yields rose sharply after Ben Bernanke said that the Fed would start reducing its purchases of bonds. Housing starts fell in October, though this followed a much larger rise in September and building permits reached their highest level since 2008.

141121 - US home sales

Japanese GDP the odd one out

Japanese GDP numbers for Q3 fell short of expectations. Total output contracted at an annualised pace of 1.6%, following a very poor Q2 when output fell 7.3% annualised. All this follows the hike in VAT in April and the data suggests that the economy was hit hard by the tax hike. It is most likely reason for the Japanese government to postpone the tax hike planned for next year. In addition, it is reason to assume that the Bank of Japan will add up its already aggressive policy approach. The yen weakened further in anticipation. We think that the weaker yen and the fallen oil price will provide enough stimulus to put the Japanese economy back on a growth trajectory soon, if that has not already happened.

Don’t belittle the recovery in ‘peripheral’ eurozone economies

European car sales strengthened a little further in October: +6.5% yoy. Registrations in the eurozone were up 4.4% yoy, from 4.2% in September. A breakdown per country sheds some interesting light on differences per country. One has to be a little careful interpreting the national data as tax changes and other regulatory changes can distort the data. Nevertheless, the table below shows that the countries that have needed financial assistance in the past and that went through the deepest recessions are recovering. Admitted, in some cases sales levels were really depressed and it is easy to grow from depressed levels. However, the countries involved are registering remarkably big pluses. I see this as another sign that the gloom over Europe is not warranted. It seems to me that many are ignoring or denying the recovery taking place in these countries. That is a mistake.

141121 - Car sales

FOMC struggling to find the right approach to communication

The minutes of the latest meeting of the US Federal Reserve’s policy committee revealed that the committee is struggling with the question how best to prepare financial markets participants for the start of the process of monetary tightening. With the economy growing above trend and the labour market tightening steadily, there is no need for the extreme monetary accommodation currently in place. So it is clear the Fed will start raising rates before too long. Having said that, the inflation outlook continues to be very good, particularly as oil prices are still falling. In addition, economic conditions in the rest of the world are relatively weak and the appreciation of the euro is doing some of the tightening for the Fed. Last, the Fed raised rates (with hindsight, prematurely,) in 1937, pushing the economy back into recession and they are presumably keen not to make the same mistake this time around. The bottom line is that rate increases are inevitable and we think the Fed will start raising rates in June next year.

Draghi continues verbal easing

ECB president Mario Draghi indicated that the ECB stands ready to step up its support for the economy. This was enough to push the currency a little lower, which, most likely, was his intention. Risky assets also benefitted. It remains to be seen what policy measures the ECB will implement in the near future. We still think that the arguments to engage in buying sovereign bonds are not overwhelmingly strong and that the cost of such action, further division within the ECB Governing Council and repulsion by the German population, is too high a price to pay for the benefits. But we have to admit that Draghi is implicitly promising the market to start buying government bonds and it is a risky business to disappoint markets. So our conviction that the ECB will not buy sovereign bonds is not that strong.

A surprise rate cut in China

China’s central bank, unexpectedly, cut interest rates. It had last moved its interest rates over two years ago. What this indicates is that the policy makers feel the economy needs further support. Perhaps it is also an indication that they are not happy to see their currency strengthen further against the US dollar when most other currencies are moving in the opposite direction.

141121 - table