- Asian trade data suggest economies are getting through the soft patch
- This should be good for Europe
- US inflation stays muted
- The US pulls out of the nuclear deal with Iran
- Argentina makes a wise move
This week’s Macro Weekly appears on Wednesday180509-Macro-Weekly-EN.pdf (82 KB)
Like many others we have been surprised by the softness in economic confidence indicators, and harder data for that matter, in Europe. Apart from temporary factors such as the weather during the winter, strikes and the flu, we have highlighted the effect that developments in Asian trade may have had. This is not so much an exchange-rate issue, although the strengthening of the euro since early last year will have played a role as well. But what has been more important to my sense is the slowdown in world trade and my best guess is that this has been driven by China. Unfortunately, Chinese trade data tend to be distorted early in the year due to the timing of Chinese New Year. Most Chinese economic indicators show a remarkable stability, but not the trade data. And while one can be sceptical about the accuracy of Chinese economic statistics, the Chinese trade data tie in reasonably well with the data produced by other countries.
Strong April trade data in China
On a year-on-year comparison, Chinese imports (in USD) were up a stunning 37.1% in January, mostly due to base effects. Base effects also pushed the February growth rate down to 6.2%. But March and April have produced encouraging numbers: 14.4% and 21.5%, respectively. Of the European countries, Germany appears most directly affected. While the German statisticians are still working on the breakdown of their country’s March data, the Chinese statisticians have already released numbers showing that Chinese imports from Germany were up 28.3% yoy in April, after 13.1% in March and 8.0% in February.
Good for Europe
This is encouraging for Europe. Perhaps the first sign of the soft patch moving into the past came from German industrial production data for March. Output was up 1.0% mom and 3.2% yoy (after 2.2% in February). It must be said that the March industrial orders data were weak, falling 0.9% mom, the third consecutive monthly decline. The Asia April trade data suggest that we can be hopeful that activity will pick up.
Robust US growth and low inflation
US economic data has remained relatively robust. While non-farm payrolls only rose by a modest 164,000 in April, after 135,000 in March, the labour market is tight. The so called JOLTS reports showed the number of job openings at more than 6.5 million in March, the highest level ever. Still, inflation pressures remain subdued. Average hourly earnings only rose only 0.1% mom in April and 2.6% yoy, unchanged during the last three months. Producer price indices were also encouraging in April, rising 0.1% mom and 2.6% yoy, down from 3.0% in March. Core PPI was up 0.2% mom and the yoy rate decelerated from 2.7% in March to 2.3% in April. All this suggests that there is no reason for the Fed to deviate from its strategy of gradual rate increases.
New sanctions against Iran unlikely to push oil prices up
US President Trump has pulled the US out of the nuclear deal with Iran. While the effect is not immediate, one must assume then the US will reinstate sanctions. This will lead to a very complicated situation as other countries appear to be still committed to the deal. Fears that oil prices must now rise as Iran will be unable to sell large quantities of oil into the world market are unfounded, in our view. We think that other countries will easily be able to step up production sufficiently.
Wise decision by Argentine government to seek support now
The government of Argentina has decided to request financial support from the IMF. We think that is very positive. The IMF is not popular in Argentina and many governments wait with knocking on the IMF door until they are in a full-blown crisis. Admittedly, as the central bank has had to hike rates to 40%, it is fair to say that the situation is precarious, but I still think it was a bold and wise move. Also nice for world financial markets. It remains to be seen if the move will calm markets and prevent any contagion, but we are hopeful that it will. The facility discussed does not come with strong conditionality, so would not lead to social unrest. It is more like a credit line that should work as a safety net.