A look back over macroeconomic events for the week ending 26/02/2016. US fourth-quarter GDP was unexpectedly revised up with some other encouraging data, however the overriding theme in the US and Europe was the slowing activity in both the manufacturing and services sectors. This week we have US non-farm payrolls as well as some more PMI data from China and the US.
Storm clouds on the horizon for the US?
In the US on Friday, fourth-quarter GDP was unexpectedly revised up to 1.0% annualised from the previous estimate of 0.7%, compared to forecasts for a potential fall to 0.4%. This is still a slowdown from the third quarter, and was driven largely by further inventory build in the final quarter. This puts the full-year 2015 GDP growth figure at 2.4%, matching the full-year growth rate for 2014.
Thursday showed that durable goods orders also had a potent rebound in January, more than compensating for December’s -4.6% fall with +4.9% month-on-month growth, significantly ahead of the 2.9% forecast. Personal incomes and expenditures were also ahead of expectations, with month-on-month personal income up 0.5% (from 0.3% in December and forecasts of 0.4%). Spending was also improved to 0.5% month on month (from 0.1% and with 0.3% forecast).
However, this positive note at the end of the week was in contrast to earlier disappointment. The Conference Board Consumer Confidence Index slid from 97.8 to 92.2, significantly worse than the 97.0 expected, whilst flash PMI numbers from Markit undershot by quite some margin. Although subject to revision, Manufacturing PMI also slipped from 52.4 to 51 (forecast had been an effectively flat 52.3). This is only barely in expansionary territory, and the weakest reading since the middle of 2012.
Services PMI was worse – expectations were for a slight improvement, but the reading was sharply down for a second month from 53.2 to 49.8. This was only the second time the survey has been in contractionary territory since it was established at the end of 2009. Although the data around the US economic outlook is still clearly mixed, the storm clouds certainly appear to be gathering on the horizon.
A similar story in the Eurozone
There was little to cheer in the Eurozone as we saw a similar story. PMI readings generally dipped more than expected, with the composite measure falling from 53.6 to 52.7 (against forecasts of 53.3), and both services and manufacturing readings contributing to the disappointment. In Germany, whilst services are still showing strong signs, the manufacturing measure slipped from 52.3 to 50.2, also perilously close to becoming a contraction signal.
Meanwhile the German IFO business sentiment surveys ratified, to some extent, similar surveys from ZEW with the business climate index slipping from 107.3 to 105.7 (forecast was 106.7). The details suggested that although current conditions were reasonable, the outlook had deteriorated as the expectations index fell from 102.3 to 98.8.
Last week’s other events
- The second estimate of UK GDP in the fourth quarter was unchanged at 0.5% quarter on quarter (1.9% year on year). A number of analysts had suggested a downward revision given recent weakness in activity gauges for manufacturing and construction. Business investment slipped to 2.4% year on year in the fourth quarter, down from 4.5%.
- German headline inflation was flat at 0.0% year on year. The 0.4% month-on-month increase in February helped reverse some of the harm from the previous -0.8% fall.
- In Japan headline inflation also flatlined in January, coming in at 0.0% year on year as the month-on-month figure declined -0.4%. Industrial production continued to oscillate with a strong month-on-month rebound to 3.7% growth in January after two months of contractions.
Brexit talk hit sterling this week, but in other markets it was another case of equities and bonds generally rallying together.
Equities – Developed market equities continued to stabilise. In the UK the FTSE All-share gained +2.5% and in the US the S&P 500 advanced +1.6%. Both Europe and Japan were similarly up, with the FTSE Europe (ex-UK) and Topix up +0.6% and +1.6% respectively. There was further pressure in China though – although the Hang Seng in Hong Kong was up +0.4%, the mainland continued to suffer with the Shanghai composite falling -3.3% on the week.
Bonds – Once again there was little change to UK Gilts and US Treasuries, with the 10-year Gilt yields just 2 bps down to 1.41% and 10-year Treasuries unchanged at 1.76%. Government bond yields were sharply lower in Japan and Germany even as equities rallied. On Friday 10-year Japanese Government Bond yields were negative at -0.06%, whilst German 10-year Bund yields were down to just 0.15% (compared to 0.40% a month ago).
Commodities – Oil was a little stronger on the week with Brent last seen at US$35.10 per barrel, whilst gold took something of a breather and finished relatively unchanged at US$1,219.80 an ounce on Friday. Copper was similarly uneventful, remaining steady at US$2.12 per lb.
Currencies – Sterling weakness persisted as the Brexit campaign gathered pace. The pound was -2.70% weaker against the US dollar (US$1.39/£1, the lowest level since early 2009), -1.48% against the yen and -0.99% against the generally softer euro. The US dollar was generally stronger against a basket of currencies, gaining 1.75% against the euro and 1.25% against the yen.
The week ahead
We can look forward to US non-farm payrolls on Friday, which we expect at 190,000 after the 151,000 disappointment of last month. Ahead of this, it will be interesting to see whether the US PMI figures from the Institute of Supply Management (ISM) will move in the same direction as the Markit numbers discussed earlier. Wednesday and Thursday will see both the ISM releases and any revisions to the Markit data. It’s worth noting that ISM has had manufacturing PMI below 50 since October last year. Forecasts are that ISM manufacturing PMI will have improved from 48.2 to 48.6, with services PMI unchanged at 53.5. China will also report PMI from both the official bureau and the Caixin measures – both of which have highlighted contraction in the manufacturing sector. Elsewhere:
German retail figures are released first thing on Monday morning, along with UK house prices, consumer credit and mortgage approvals. The highlight of the day is likely to be Eurozone inflation, which is forecast to have slipped from 0.3% to flat at 0.0% for February, whilst the core inflation rate is expected to have fallen from 1.0% to 0.9%. In the afternoon US pending home sales data are released, then last thing at night Japan will update on employment and household spending.
On Tuesday morning Chinese Manufacturing PMI is reported, with both the National Bureau of Statistics and the more independent Caixin measures expected to show the sector still in contraction. Forecasts are for readings of 49.3 and 48.2 respectively (from 49.4 and 48.4). The official non-manufacturing figures will also be out, which have remained in the mid-50s for the last two years. Later in the morning Eurozone employment data is released along with UK manufacturing PMI, which is expected to have slipped from 52.9 to 52.2. As mentioned above, in the afternoon the US will report ISM manufacturing PMI and revisions to the Markit Manufacturing PMI. Still in the US, “Super Tuesday” will also likely be in the headlines – which could impact sentiment.
We have a relatively quiet midweek – on Wednesday morning UK construction PMI is forecast to have accelerated to 55.5 from 55.0, then in the afternoon the US Federal Reserve releases its ‘beige book’ of anecdotal reports on the state of the economy.
On Thursday the Caixin measure of Chinese Services PMI is released overnight, which was last seen at 52.4. Later in the morning UK Services PMI is expected to have slipped from 55.6 to 55.1, followed by Eurozone retail sales figures which are forecast to be 0.1% weaker at 1.3% year on year. In the afternoon the ISM non-manufacturing PMI series is released, as well as revisions to the Markit PMI numbers and data on unit labour costs and productivity ahead of the main non-farm payroll event on Friday.
On Friday we have a quiet morning, before we launch into the non-farm payroll data set in the afternoon. As mentioned above, the market is looking for 190,000 jobs added after the significant miss last month. Unemployment, average earnings and the participation rate will also be released.