Macro Weekly – Bottoming out

by: Han de Jong

There has been plenty to worry about in recent months. The trade conflict, the Brexit process, the new Italian government, the collapse of the Spanish government, the pressure on the German government, the drop in EM currencies, Fed tightening, the ECB ending its QE and I am sure I am forgetting things. The consequences for financial markets have been modest. Well, apart from some EM currencies, Italian government bonds and perhaps several other. But the key risk markets have simply remained in a range recently. Market participants are either incredibly complacent or they have decided that there is also plenty of positives around. The main positive is that global growth is reasonable, inflation remains unthreatening and central banks are relatively predictable. But the growth picture has been increasingly challenged in recent months. A number of economies have shown a material deterioration in cyclical conditions. This has been my main theme for the last couple of weeks and I am not going to quit now.

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Eurozone PMIs bottoming out

The eurozone preliminary June readings of the Markit PMI were slightly better than expected. Unfortunately, the manufacturing PMI for the eurozone continues to fall in June, but at least the drop was small. The services sector PMI actually rose, against expectations. I would suggest we do not claim victory just yet. The services sector normally follows the industrial cycle, it does not tend to lead. Nevertheless, the composite PMI was up in June, the first time in months. While my tone may be a little negative, I want to stress that these confidence indices had fallen for months, but their level is still high. At 55.0 for the eurozone manufacturing PMI and 54.2 for the composite gauge, the implication still is growth at a decent clip, just not to strong as late last year.

The PMIs are not enough by themselves to be convinced that the slowing of the eurozone economy is abating. France’s statistics bureau INSEE produced the results of it June business confidence survey. I couldn’t help noting that the assessment for the “own-company production outlook” had jumped to 22, up from 17 in May and stronger than we have seen in a long time.

The shock that turned out not to be a shock

One of the reasons the eurozone economy is softening while the US is not, is that the eurozone economy depends more on world trade growth which has slowed significantly in the course of this year. Regular readers know that I closely track trade data, as they are the pulse of the economy, particularly in Asia. The reason is that the Asian economies are ‘early cyclical’ and that their data is available quicker than other countries’ data. The most timely data on trade is released in Korea, where the statisticians manage to release data on trade flows during the first 20 days of the month before the month has ended. The June release came as a horrible shock. Export growth has collapsed to -4.8% yoy against +14.8% in May. Before I had a chance to get moody over it, my colleague Arjen van Dijkhuizen had looked more closely at the news and that produced interesting results. Turns out that export growth to China was up 29% yoy, to the US 16% and Japan 12%. So why was the overall number so negative? Apparently, this is all due to vessels, though I have no idea where they are exported to. Vessel exports were down 89% yoy, most likely reflecting the continued excess capacity in shipping. Of course, the fact that we can explain the poor -4.8% yoy for June doesn’t really make it any better. But I look at this data partly to gauge China’s influence on the global cycle. Korea itself is not unimportant, but it isn’t that significant either. I look at it as a gauge to assess what is going on overall.

May trade data from other Asian economies was actually solid. Japan’s exports were up 8.1% against 7.8% in April. India’s exports were 20.2% higher in May than a year earlier. Taiwan’s export orders were up 11.7% yoy against 9.8% in April. Last, Singapore’s non-oil domestic exports were growing at a 15.5% yoy rate, against 11.8% a month earlier.

The picture emerging from Asian trade numbers for May, and where available June, is very encouraging. It looks like trade growth is leaving the soft patch behind and is accelerating.

US first cracks?

The US economy has more or less ignored the softness in Europe and elsewhere. But recent days have seen some cracks appear. Business confidence in the Philly Fed district dropped sharply in June: 19.9, versus 31.4 in May. The June Markit PMI also eased. The manufacturing series tumbled from 56.4 to 54.6, erasing several months of gains. I wouldn’t worry about it. In fact, it is in a way comforting that the manufacturing PMIs in Europa have stopped diverging.