US GDP grew 2.0% annualized in Q3, below expectation of 2.6%. The increase in real GDP in the third quarter reflected increases in private inventory investment, personal consumption expenditures (PCE), state and local government spending, and nonresidential fixed investment that were partly offset by decreases in residential fixed investment, federal government spending, and exports. Imports, which are a subtraction in the calculation of GDP, increased.
The latest Eurozone PMI Services data brings both a glimmer of optimism and a note of caution to an economic region. The finalized PMI Services for September stood at 48.7, marking an increment from August’s 47.9. Composite index also saw a marginal uplift to 47.2 from the previous month’s 46.7. While the numbers reflect an uptick, the fragility of the recovery becomes apparent when examining the country-specific data and underlying factors.
A look at the composite PMI output index reveals a contrasting scenario among the countries. Ireland tops the chart with a two-month low of 52.1, while France lags at a 34-month low of 44.1. Germany (46.4) and Italy (49.2), despite being on a multi-month high, are still not out of the woods, pointing towards a segmented recovery pattern.
Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, offers a balanced perspective. “The HCOB Composite PMI for the Eurozone did rebound a bit. However, we can’t jump on the hope train yet,” he cautioned. The declining new business, especially in powerhouse economies like Germany and France, underscores this sentiment, indicating a continual decline in outstanding business and a drop in business expectations.
In the corridors of ECB, where deliberations over the next interest rate decision are underway, the latest PMI data could act as a double-edged sword. The hawks find solace in the Input Price Index, propelled by wages and energy costs, marking a four-month pinnacle. In contrast, the doves might highlight the moderated pace at which service prices are increasing – the slowest since the summer of 2021.
“Prices are nevertheless still climbing the ladder rather fast, a weird twist when the economy is singing the blues,” de la Rubia noted.
RBNZ left OCR unchanged at 1.00% as widely expected. The overall statement was balanced with easing bias. However, there is no clear indication of another imminent rate cut. Most importantly, RBNZ noted that “developments since the August Statement had not significantly changed the outlook for monetary policy”. It suggests that the central bank is still on wait-and-see mode, for observing the impact of the -50bps rate cut in August.
Nevertheless, easing bias is maintained as “there remains scope for more fiscal and monetary stimulus, if necessary, to support the economy and maintain our inflation and employment objectives.” But the statement is seen more as urging the government for fiscal stimulus. And the level of monetary stimulus needed might depend on how much the government would do.
NZD/USD extends the recovery from 0.6255 after the release and hit as high as 0.6348 so far. Such recovery is seen as a corrective move and should be limited well below 0.6450 resistance. Break of 0.6255 is expected at a later stage and that would resume larger down trend to 0.6102 (2015 low).
US Markit PMI manufacturing rose 0.1 to 55.5 in July, matched expectation. PMI services dropped 0.3 to 56.2, slightly below expectation of 56.3. PMI composite dropped 0.3 to 55.9, hit a 3-month low.
Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:
“The July survey data indicate that the US economy sustained strong growth momentum after what looks to have been a solid second quarter, representing a good start to the second half of 2018. Although down from June, the July flash PMI is in line with the average for the second quarter and indicative of the economy growing at an annualised rate of approximately 3%.
“Buoyant domestic demand helped the service sector maintain particularly impressive growth and has helped cushion the goods producing sector from wilting demand in export markets, with goods export orders down for a second successive month in July.
“Trade frictions have clearly become a major cause of concern, especially among manufacturers. Firms have become increasingly worried about the impact of tariff and trade wars on demand, prices and supply chains. July saw the steepest rise in prices charged for goods and services yet recorded by the surveys as firms passed rising costs on to customers, in turn frequently linked to tariffs. What’s more, supply chain delays also hit a record high amid rising shortages of key inputs, which is usually a harbinger of further price rises.”
ECB chief economist Peter Praet said in Geneva today:
Released last week, Eurozone CPI flash slowed to 1.2% yoy in April, down from 1.3%. Core CPI was worse, slowed to 0.7% yoy, down from 1.0% yoy.
US initial jobless claims fell -1k to 202k in the week ending January 6, lower than expectation of 215k. Four-week moving average of initial claims fell -250 to 207.75k.
Continuing claims fell -34k to 1834k in the week ending December 30. Four-week moving average of continuing claims fell -8k to 1862k.
Eurozone CPI was finalized at 6.1% yoy in May, down from April’s 7.0% yoy. CPI core (all-items ex energy, food, alcohol & tobacco) was finalized at 5.3% yoy, down from prior month’s 5.6% yoy.
The highest contribution to the annual Eurozone inflation rate came from food, alcohol & tobacco (+2.54%), followed by services (+2.15%), non-energy industrial goods (+1.51%) and energy (-0.09%).
EU CPI was finalized at 7.1% yoy, down from prior month’s 8.1% yoy. The lowest annual rates were registered in Luxembourg (2.0%), Belgium (2.7%), Denmark and Spain (both 2.9%). The highest annual rates were recorded in Hungary (21.9%), Poland and Czechia (both 12.5%). Compared with April, annual inflation fell in twenty-six Member States and rose in one.
In the latest Spring Economic Forecasts, European Commission downgrade 2019 Eurozone GDP growth projections slightly by -0.1%. Though, it would be the seventh year of growth in a row. And despite continuing global uncertainties, domestic dynamics are expected to support the European economy. More importantly, the Commission expects growth to bottom in 2019 and pick up again in 2020.
Eurozone projections (Winter forecasts):
Germany projections
France projections
Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union, said: “The European economy is showing resilience in the face of a less favourable external environment, including trade tensions. Growth is set to continue in all EU Member States and pick up next year, supported by robust domestic demand, steady employment gains and low financing costs. Yet risks to the outlook remain pronounced. On the external side, these include further escalation of trade conflicts and weakness in emerging markets, in particular China. In Europe, we should stay alert to a possible ‘no-deal Brexit’, political uncertainty and a possible return of the sovereign-bank loop.”
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said:“The European economy will continue to grow in 2019 and 2020. Growth remains positive in all our Member States and we continue to see good news on the jobs front, including rising wages. This means that the European economy is holding up in the face of less favourable global circumstances and persistent uncertainty. Nonetheless, we should stand ready to provide more support to the economy if needed, together with further growth-enhancing reforms. Above all, we must avoid a lapse into protectionism, which would only exacerbate the existing social and economic tensions in our societies.”
US initial jobless claims rose 4k to 210k in the week ending February 15, matched expectations. Four-week moving average dropped -3.25k to 209k.
Continuing claims rose 25k to 1.726m in the week ending February 8. Four-week moving average of continuing claims dropped -5.25k to 1.772m.
AUD/NZD is extending the decline from 1.1489 after RBNZ’s rate hike today. For the near term, outlook will stay bearish as long as 1.1043 resistance holds, even in case of recovery.
In the bigger picture, whole up trend from 0.9992 (2020 low) should have completed with three waves up to 1.1489. Current down side momentum argues that fall from 1.1489 is an impulsive move. But at this point, it’s viewed as a leg inside the long term sideway pattern that started in 2015. Even in such case, AUD/NZD would try to hit 61.8% retracement of 0.9992 to 1.1489 at 1.0560 before forming a bottoming.
ECB Vice President Luis De Guindos said in an interview that by holding interest rates steady "at their current level", ECB anticipates a significant impact on taming inflation to target of 2%.
This comes as a positive sign for the markets that have seen inflation rates soar over the past year, with a peak above 10% that has since eased to 2.9%. With core inflation also showing signs of moderation, ECB’s tightening campaign seems to be bearing fruit.
However, de Guindos emphasized a "prudent and cautious" approach because of "risks around the outlook for inflation over the next few months." This underlies ECB’s stance to consider interest rate decisions on a "meeting-by-meeting" basis, guided by unfolding economic data.
De Guindos also pointed out that "leading indicators point to the growth outlook being somewhat more negative than we previously projected." Nonetheless, he believes that inflation may align closely with their September projections.
Minneapolis Fed President Neel Kashkari, a known dove, sounded cautious in on interest rates on his comments again. He said in a radio interview yesterday that “one of my concerns is that if we preemptively raise interest rates, and it’s not in fact necessary, we might be the cause of ending the expansion”.
He reiterated that Fed should “pause and see how the economy continues to evolve.” Also, he said “I’m not seeing signs that the U.S. economy is overheating, so I don’t think we need to preemptively raise interest rates.”
US exports in goods and services rose 6.6% mom to USD 200B in March. Imports rose 6.3% mom to USD 274.5B. Trade deficit widened to USD 74.4B, slightly above expectation of USD 73.4B.
Trade deficit with China increased USD 6.7B to USD 36.9B. Exports increased USD 0.9B to USD 11.3B and imports increased USD 7.6B to USD 48.2B.
Trade deficit with the European Union decreased USD 2.1B to USD 16.9 B in March. Exports decreased USD 0.5B to USD 20.1B and imports decreased USD 2.6B to USD 37.0B.
Germany GDP stalled in Q1 (price, seasonally and calendar adjusted), below expectation of 0.1% qoq growth. GDP was up a price adjusted 0.2% compared with the first quarter of 2022. The price and calendar adjusted GDP was -0.1% lower because there was one working day more than in the same period a year earlier.
The final consumption expenditure of both households and government declined at the beginning of 2023, according to the Federal Statistical Office (Destatis). Positive contributions, in contrast, came from capital formation and exports.
RBA Governor Philip Lowe said it’s “plausible” for interest to be lifted from the current 0.1% this year. “It would be prudent to plan for an increase,” he added. “For many borrowers that’s going to come as quite an unwelcome development, although I know from the letters that I get every day when I turn up at work that many depositors have a different view,”
Meanwhile, he said “I don’t feel mounting pressure,” on raising rates. “We do what we think is the right thing at each of our meetings, so the pressure, it’s great for media stories, but I don’t feel that myself.”
US Conference Board Consumer Confidence rose to 89.3 in December, up from 87.1, above expectation of 88.9. Present Situation Index dropped from 87.2 to 84.4. Expectations Index rose from 87.0 to 92.5.
“Consumers’ appraisal of present-day conditions weakened further in January, with COVID-19 still the major suppressor,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board.
“Consumers’ expectations for the economy and jobs, however, advanced further, suggesting that consumers foresee conditions improving in the not-too-distant future. In addition, the percent of consumers who said they intend to purchase a home in the next six months improved, suggesting that the pace of home sales should remain robust in early 2021.”
Swiss GDP contracted -2.6% qoq in Q1, worse than expectation of -2.2% qoq. “Due to the coronavirus pandemic and the measures to contain it, economic activity in March was severely restricted. The international economic slump also slowed down exports.”
By production approach, manufacturing dropped -1.3% qoq. Construction dropped -4.2% qoq. Trade dropped -4.4%. Accommodation and food dropped -23.4% qoq. Business services dropped -1.9% qoq. Health and social activities dropped -3.9% qoq. Arts, entertainment and recreation dropped -5.4% qoq. On the other hand, finance and insurance rose 1.5% qoq. Public administration rose 0.8% qoq.
By expenditure approach, private consumption dropped -3.5% qoq. Equipment and software investment dropped -4.0% qoq. Construction investment dropped -0.4% qoq. Export of services dropped -4.4% qoq. Import of goods dropped -1.1% qoq while imports of services dropped -1.2% qoq. On the other and, government consumption rose 0.7% qoq. Exports of goods rose 3.4% qoq.
China Caixin PMI Services rose from 50.3 to 54.9 in July, well above expectation of 54.9. PMI Composite rose from 50.6 to 53.1.
Wang Zhe, Senior Economist at Caixin Insight Group said: “As the July surveys of Caixin China PMIs were conducted after the epidemic in Guangdong province was brought under control, and before Covid-19 resurged in Jiangsu province, the services sector expanded rapidly, though the manufacturing sector was slightly weaker.
The resurgence of the epidemic in some parts of China at the end of July is expected to hurt August’s PMI readings. China’s official second-quarter economic figures were in line with expectations, but the Caixin China PMIs in July suggest that the economic recovery is not on sure footing. The economy still faces enormous downward pressure, and we need to ensure business owners remain confident.”
Germany Ifo Business Climate rose slightly from 88.6 to 90.2 in January, below expectation of 90.5. Current Assessment ticked down from 94.4 to 94.1, below expectation of 95.0. Expectations index, on the other hand, improved from 83.2 to 86.4, above expectation of 85.0.
By sector, manufacturing rose from -5.7 to -0.7. Services rose from -1.2 to 0.2. Trade rose from -20.0 to -15.4. Construction also rose slightly from -21.9 to -21.6.
Ifo said: “Sentiment in the German economy has brightened. The ifo Business Climate Index rose to 90.2 points in January, up from 88.6 points in December. This is due to considerably less pessimistic expectations. Companies were, however, somewhat less satisfied with their current situation. The German economy is starting the new year with more confidence.”
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UK Hammond rejected CBI’s call for customs union after Brexit
UK Chancellor of Exchequer Philip Hammond rejected the call from business leaders on customs union after Brexit. Hammond said that government shared the CBI’s desire to “minimise frictions and burdens, to avoid new barriers in Ireland and to grow British exports”.
However, he emphasized that “we do not agree that staying in the customs union is necessary to deliver them.” And he tried to persuade the business leaders that ministers were “confident we can develop a solution that will allow us to move forward while meeting your concerns”.
This was in response to CBI President Paul Drechsler’s speech in the in the group’s annual dinner. There Paul Drechsler urged US Prime minister Theresa May to “break the Brexit logjam and fast”. And he added that UK should remain in the customs union with the EU “unless and until an alternative is ready and workable”.