Macro Weekly – Very messy

by: Han de Jong

  • A large number of uncertainties have erupted or intensified, suddenly
  • Divergence of growth continues
  • Asia trade data soft
181207-Macro-Weekly.pdf (251 KB)

It is amazing how much uncertainty has suddenly erupted around the globe. Our own country seems quiet enough, but political changes are happening all around us. The Belgian government is likely to fall over the Marrakesh Pact. Germany’s CDU is electing a new leader with possibly significant consequences not only for Germany but also the EU. The Brexit vote in the UK is likely to solve very little in a very chaotic debate and process and nobody knows if there is much life left in the May government. The “gilet jeunes” in France may bring their prime minister down. Opec does not quite know what to do with itself as the US appear to have gained leverage over Saudi as a consequence of the Khashoggi murder. As though that wasn’t enough, Canadian authorities arrested Huawei CFO Meng Wenzhou at the request of the US on allegations that Huawei has violated the US Iran sanctions. The arrest happened just days after the Trump-Xi dinner at the Argentina G20 where the two presidents agreed a truce in their trade war. The arrest of Ms Meng surely must feel like a terrible humiliation to President Xi. It is hard to see how the trade negotiations can make much progress any time soon against that background.

US remains strong

That is not an exhaustive list. It is only political, too. Meanwhile, the global economy has not exactly been producing stellar data recently. The US remains the most resilient of the key economies. US business confidence, as measured by the ISM indices, strengthened in November both in manufacturing (59.3, up from October’s 57.7) and outside manufacturing (60.7, from 60.3). Both indices are at high levels and indicate ongoing, above-trend growth.

The November jobs report was generally positive. The US economy added another 155,000 jobs (net) in November. This was slightly below what was expected and the October data was revised down a little. However, 237,000 jobs in October and 155,000 in November are decent numbers.

Average hourly earnings were up 0.2% mom (after a downwardly revised 0.1% in October). Base effects had pushed the yoy rate in October to 3.1, up from 2.8% in September. This had fed concern that the tight labour market is leading to stronger wage gains which will, before too long, boost inflation. I am sceptical of that line of argument and I feel vindicated (at least for now) by the November data. The yoy rise of average hourly earnings stayed at 3.1% but looks likely to ease in December.

The development of inflation and therefore wages is important as an unexpected rise in inflation, which some economists are forecasting, would lead to an unexpected monetary tightening by the Fed. That would be unwelcome for markets for risky assets. Last week I referred to a discussion among Fed watchers about the exact meaning and implication of the observation by Fed chair Powell that US official rates are ‘just below the range of where most economists think neutral is”. This week Atlanta Fed president Bostic also commented on this issue. He said that rates are currently within ‘shouting distance’ from neutral. It confirms me in my conviction that the additional number of hikes in this cycle is limited.

Soft Asian trade data

Recently released Asian trade data was very soft. Korean exports were up 4.5% yoy in November, following 22.7% in October. Imports were growing at an 11.4% yoy rate in November, against 27.9% previously. Trade data may be volatile and the timing of holidays may affect the numbers. But the export data in particular are not looking so good. Exports to China/Hong Kong were down 2.5%. The Korean PMI fell sharply in November: 48.6 against 51.0.

Taiwan’s data wasn’t better. In fact, they were worse. Taiwanese exports were down 3.4% yoy in November, down from +7.3% in October. Exports to China/Hong Kong were down 8% yoy. The manufacturing PMI in Taiwan eased a little further: 48.4 against 48.7 in October.

The Taiwanese and Korean data beg the question what it says about China. The logical conclusion would be that the Chinese economy is slowing. That conclusion, however, was not underscored by recently released business confidence data in China. The NBS data released a little earlier were nothing to write home about, but the Caixin version of the PMI was firm, in particular the services sector PMI, which jumped back up to 53.8 from 50.8.

German industrial production and orders data was still ‘disappointing, but not a complete disaster’. Orders were up 0.3% mom in October, particularly thanks to orders from abroad. But the yoy rate worsened: -2.7%, against -2.6%. Industrial production declined by 0.5% mom in October but the yoy rate improved from +0.7% to +1.6%.

Despite the soft data in Asian trade and also in Europe, we still think recessions are not likely. Economies don’t just fall into recession for no reason. And I simply cannot see the reason why recession would occur. As said above, everybody was optimistic at the start of the year when the economy was looking good. And we have all been disappointed. Now the economy is a lot weaker and everybody is gloomy. Might we therefore get pleasant surprises in 2019?