Macro Weekly – Im Westen nichts Neues, im Osten eigentlich auch nicht

by: Han de Jong

  • Markets are drip-fed news about the US-China deal
  • Recent data provide some hope…
  • … but not much more than that, just hope, well, grounds for hope
191108-Macro-Weekly.pdf (179 KB)

We have seen this all before. News coming from the US-China negotiations appears to be encouraging. They are, apparently, approaching a deal. It will not solve all the issues, but it is a start. The deal, according to the rumours, will include rolling back some of the tariffs already imposed. In the Spring, they two parties appeared also close to a deal. But it all fell apart in May. This could happen again. On the other hand, the both know the damage that was done following the collapse of the talks in May, so you would think they won’t let that happen again, wouldn’t you? There isn’t much we can do but wait and see. Investors do not have that luxury. The equity market seems to think that a deal will be done, forcing investors to make up their minds whether or not they agree.

Is the bond market trying to tell us something?

Meanwhile, bond yields are rising too. 10yr US Treasury yields are back at the end-of-July level, some 50bp above the low of early September. 10yr Bund yields have also risen by some 50bp since their trough in August. These are material moves and the question is if the market is telling us something here. Of course, any move in bond yields may we caused by technical or some re-positioning. But if the market is telling us something more fundamental, it must be an expression of optimism that an improvement in cyclical conditions is coming. We must therefore scrutinise the data like a hawk to see if there is anything in the data to support optimism, however cautious that optimism is. Even if we can’t find anything in the data, that does not mean the markets isn’t right. The market is forward looking and all the economic data cover the past.

German factory orders good, industrial output bad

There is little ground to be particularly optimistic about the near-term future, but some drivers may lead to some cyclical improvement in the course of next year. I highlighted last week that a couple of indicators may be suggesting that the Chinese growth stimulus measures are starting to have an impact. While the evidence is far from overwhelming, recent data includes some more ground for hope. German factory orders rose 1.3% mom in September, although they were still down 5.4% yoy, a little better than August’s -6.7%. Capital goods orders were very strong: +3.1% mom, particularly foreign orders: +3.5%. Mind you, this data is very volatile and the positives in the September report may just be noise. But an improvement as registered is what you would expect if global trade and Chinese economic growth improves. German data on exports for September was also positive, gaining 1.5% mom.

Dutch industrial production: best since November 2018

While German monthly industrial orders data was strong, industrial production disappointed. Output fell 0.6% mom and 4.3% yoy. The yoy decline is set to ease significantly in the months ahead due to base effects as industrial production fell sharply in October and November last year. Meanwhile, French industrial production grew 0.3% mom in September and was up 0.1% yoy. The gap between Germany and France has existed for some time and reflects the typical structure of the German economy: more open than the French (more focussed on exports) and more focussed capital goods and cars. Dutch manufacturing also had a good months in September. Output increased by 1.7% mom. The yoy growth rate amounted to 1.2%, the best since November 2018. Eurozone retail sales are showing an improving trend. They were up 0.1% mom in September, but the yoy rate increased from +2.7% to +3.1%, the highest since November 2017. It is hard to see this sort of improvement maintained in the months and quarters ahead as the labour market is bound to soften.

China still a drag

Chinese imports were down 6.4% yoy in October, after -8.3% in September. This wasn’t a great number, though it wasn’t particularly bad either. But someone like me, who is scrutinising the data for signs that Chinese policy measures are starting to have an impact had hoped for more from the October import data. Exports were down 0.9% yoy an improvement from September’s -3.2%, but close to the year-to-date average of -0.6%. While Chinese exports have thus declined so far by 0.6% yoy in 2019, imports have fallen by 5.3%. While this data should be interpreted with some caution due to composition and price effects, this gap suggests that China has effectively been a drag on the rest of the world economy this year.

Grounds for hope, not yet more

All in all, there isn’t much news in recent data. The global economy is growing at a sluggish pace and the near-term outlook isn’t exactly brilliant. However, as the drivers that have contributed to the slowdown that started in 2018 are slowly but surely turning, so should the fortunes of the global economy. Recent data releases provide some ground for hope that an improvement in cyclical conditions will occur next year. So far, though, it isn’t more than that and any acceleration in growth is likely to be relatively modest.