US Macro: NY Fed manufacturing capex outlook cools significantly – The New York Fed’s Empire State manufacturing index declined in July by a less-than-expected 2.4 points, to 22.6 from 25.0 in June (consensus was for a 4 point decline). While the headline print was solid, the 6-months ahead capex index fell 10 points to 17.1 – the weakest in almost a year (August 2017). This index can be volatile, and it represents only a regional snapshot from manufacturers in New York State. However, it is precisely these indices that we need to watch closely over the coming months for signs of uncertainty over trade policy dampening investment. While the fundamentals in the US remain broadly very strong – helped by tax cuts, fiscal stimulus and elevated business and consumer confidence – the anecdotal signs of a dampening impact from trade tensions have increased (see here), and while not our base case, the risk is that this translates to materially slower investment growth than we have been projecting. (Bill Diviney)
China Macro: Latest data confirm resumption of gradual slowdown – Official GDP growth dropped marginally in Q2 to 6.7% yoy, versus 6.8% yoy in the preceding three quarters, remaining above the 6.5% target for 2018. This outcome was in line with market expectations, including ours. The slowdown reflects the impact of the financial deleveraging campaign – with for instance a crackdown on shadow banking – and a slowdown in infrastructure spending. The growth contribution of consumption rose further to 78.5% in 1H2018, illustrating the economy’s ongoing rebalancing. Given the lack of volatility in official growth, we look to alternative indicators including Bloomberg’s monthly GDP tracker. For Q1 and Q2 as whole, this tracker remained stable around 7%. In June, it slowed by 0.3%-points to 6.7% yoy, the lowest reading since February 2016 (although not out of sync with official growth).
The monthly activity data published this morning also confirm the resumption of a gradual slowdown. Industrial production and fixed investment cooled further (both to 6.0% yoy). Retail sales recovered to 9.0% yoy, with the drop in May (to 8.5%) partly being explained by temporary factors. All in all, we expect China’s gradual slowdown to continue in the coming quarters, with external risks rising as tensions with the US escalate (see our report published last week). However, we do not foresee a sharp slowdown, as the authorities have already shown a commitment to softening their targeted tightening approach and we think they are willing to do more (including stepping up fiscal support) if needed to safeguard a soft landing. For more background on the latest macro data for China, see our Short Insights report published earlier today. (Arjen van Dijkhuizen)