Macro Weekly – Better

by: Han de Jong

  • US imposes tariffs on USD 34 bn worth of Chinese imports; China retaliates
  • PMIs are improving
  • German industrial sector has found the way up
180706-Macro-Weekly-2.pdf (249 KB)

Financial markets were not shocked when the US actually imposed a 25% tariff on imports from China worth USD 34 bn of trade. We knew this was coming. China immediately retaliated. We knew they would. This is not a big deal. It is a nuisance, but moves in the exchange rate, input costs and profit margins can easily compensate. Also, USD 34 bn is not big. So these tariffs will not seriously disrupt world trade, let alone the world economy. On the other hand, imposing tariffs is a big deal as this is just the first step (or the third step if you include the tariffs on solar panels and washing machines imposed earlier, and the tariffs on steel and aluminium). What is also new here is that the tariffs are targeting imports from a single country. The risk of a further escalation is real. The US are looking at more tariffs on Chinese goods, said to cover a flow worth USD 200 bn, and tariffs on imported cars. It is not possible to identify where the point will be reached when economists will have to lower their growth forecasts specifically because of imposed tariffs. President Trump drives a hard bargain, but we are all assuming he is interested in doing some sort of a deal. Eventually, that is. But when will that be? Political considerations may be part of his considerations, with mid-term elections for Congress coming up in November. He may want to hold out until then just to show the electorate what a tough guy he is. Or he may do a deal before the elections and celebrate them as a victory. Unfortunately, I cannot look inside the president’s brain.

Soft patch or worse?

I can look at economic data. Looking at the most recent data, I am becoming a little more optimistic. The world economy, though in particular world trade and Europe and to a lesser extent Asia, have been hit by softness. This has raised the question if this was just a soft patch or something worse. We had initially taken the view that the weakness in some data was going to be very temporary. That proved to be incorrect as the softness continued. The problem with this softness is that it is hard to determine what exactly is causing it. We have taken the view that, whatever the cause, it wouldn’t last. That view appears to be correct. The most recent set of PMIs show that business confidence in June generally strengthened globally.

German industrial sector: finally some good news

Particularly positive was the data for Germany’s industrial orders and production for May. Orders rose 2.6% mom after a drop of 1.6% in April (originally reported as a drop of 2.5%). Domestic orders bounced back sharply from April when they fell 4.4% mom. They rose 4.3% in June. Foreign orders rose a more modest but still robust 1.6% after +0.4% in April. The yoy rate bounced back to a healthy 4.4%. Industrial production showed a similar trend as output rose 2.6% mom in May, after -1.3% in April. The yoy rate rose from 1.4% in April to a decent 3.1% in May.

Too early to claim victory

It is obviously too early to claim that the soft patch is behind us, but the odds of that turning out to be the case are shortening significantly. That will be a pleasant surprise for many market participants who have turned bearish on the economic outlook. Given all the uncertainty and turmoil, some genuinely good news is long overdue.

As regular readers know, I keep a close eye on trade flows in Asia. South Korea released June trade numbers a couple of days ago. The export data was a shocker. Export growth fell back from 13.5% yoy to -0.1%. One must be careful dismissing data that doesn’t fit one’s story. However, in this case I feel confident saying that this data does not correctly reflect that is going on. Korea’s export data can be erratic, so one must always be careful. The import data does not reflect the same weakness, suggesting there is a specific issue with the export data. Import growth stood at 10.7% yoy in June against 12.6% in May. Also, Korea’s PMI strengthened noticeably In June and Korean companies were particularly positive about export orders.


I highlighted last week that pressure on a range of currencies in emerging economies has increased since the middle of June and that this trend could be dangerous. The pressure is persisting. This is risky as it puts pressure on all EM assets and if unaddressed, could lead to financial instability. On the positive side, officials of the PBoC (People’s Bank of China) have come out recently with statements aimed at calming down things. They have gone on record saying that, if needed, the PBoC will act and has plenty of tools to stabilise the currency at its equilibrium. It was not indicated where that equilibrium is, but still.

Pipeline inflation pressures

Eurozone producer prices rose 0.8% mom in May and 3.0% yoy, the highest since early 2017. The acceleration of inflation at the producer level was largely driven by oil prices. I wouldn’t worry about it, but it may suggest that pipeline pressures for headline CPI inflation are building somewhat. This is not restricted to the eurozone, but is a worldwide phenomenon.


Holiday break – better data

I will attend an economists conference next week and will be on holidays the following two weeks. It means I will not be writing this weekly comment for three weeks. Normal service resumes after that. I wish you happy holidays and my guess is the economic news will continue to improve during my absence.