More challenging times for the Eurozone – weekly update 26 November

A look back over macroeconomic and market events for the week ending 23 November 2018. Markets remained in risk-off mode last week, with the sour sentiment not helped by some poor PMI survey results, particularly in Europe. This week, the G20 meeting starting on Friday is likely to generate some trade war newsflow, but otherwise it is a relatively light week.

Ben Seager-Scott Ben Seager-Scott
26 November 2018

PMI results are the latest challenge for the Eurozone

It was another challenging month for the Eurozone as the Purchasing Managers Index (PMI) survey results fuelled concerns that the slowdown in the region was becoming entrenched. The composite PMI reading fell from 53.1 to 52.4, well below consensus forecasts for a marginal slip to 53.0.

As the chart below shows, this continues a clear trend of slowing activity through the year as economic momentum has cooled and concerns around regional politics and US protectionism have started to manifest in the data. The slowdown has generally been most pronounced in the Manufacturing component (which fell from 52.0 to 51.5, against forecasts for no change) but there is now some evidence that the malaise is spreading to the Services component as well, where the headline PMI reading fell from 53.7 to 53.1 (again, a marginal slip to 53.6 was expected).

Given these are forward-looking measures, the fact that the new orders components were the key disappointments for each sub-index adds to the concern. Other data did little to help the mood, with Eurozone Consumer Confidence deteriorating from -2.7 to -3.9 (-3.0 was expected), whilst the OECD downgraded its forecasts for economic growth this year and next year. This continued slowdown could make life harder for the European Central Bank (ECB) as it looks to end its asset purchase programme next month.

Eurozone Purchasing Managers Index (PMI)

Source: Bloomberg.

US results fall short of expectations

There was also disappointment from the US, as durable goods orders and PMIs fell short of expectations, though the overall state of the economy appears far more robust. In October, Durable Goods Orders slipped from a downwardly revised -0.1% to -4.4% month on month, some way below the -2.6% forecast.

The slowdown in durable goods has raised some concerns that the weakness in third-quarter business investment may be continuing into the final quarter, though it seems too early to call much of a trend.

The PMI readings from Markit also fell short of expectations. Manufacturing PMI slipped from 52.0 to 51.5 (no change was expected), whilst Services PMI dipped from 53.7 to 53.1 (53.6 was expected). The broader backdrop remains strong, however, and the diverging economic paths continue, with Europe appearing to be stalling.

Brexit discussions continue

Political discussions around Brexit continued apace. The UK and EU agreed a political declaration on their future trading relationship, in an attempt to build momentum and get approval of the current withdrawal agreement (the political declaration is non-binding and largely aspirational).

The EU side met over the weekend and formally approved the withdrawal agreement, largely as expected, though an eleventh hour threat from Spain over the future of Gibraltar added some excitement at the end of the week. In the UK, Prime Minister Theresa May began a publicity campaign to build support for the Brexit deal, seen by many as an attempt to go ‘over the heads’ of MPs and appeal to the public at large, with the vote likely in the next few weeks.

Rumours continue to circulate of a high-risk two-vote strategy by the Government, which would see the first vote fail as expected, and the resulting market turmoil used to leverage Parliament into agreeing a second time around (as happened in the US around their ‘TARP’ bailout programme in the middle of the global financial crisis).

Last week’s other events

  • The UK house price index from Rightmove showed prices slipping -0.2% from a year earlier, the first year-on-year fall since 2011. The Confederation of British Industry reported Trends Total Orders jumping from a reading of -6 to 10 (-5 was expected), though the series is notoriously volatile
  • Japan’s CPI inflation rose as expected from 1.2% to 1.4% year-on-year (yoy), whilst the core measure, which strips out fresh food and energy, was unchanged at 0.4%, in-line with expectations

The markets

Markets remained in risk-off mode last week, with equities slipping further and core sovereign bonds continuing to benefit from elevated caution.

Source: Lipper.

Equities

It was another relatively poor week for equities, with the US leading markets down as the S&P 500 shed-3.8%. Continental Europe was down -1.4% (MSCI Europe ex-UK index), whilst the UK slipped -0.8%. Of the main markets we cover, Japan was the best performer (flat on the week) whilst the MSCI Emerging Markets index fell -1.7%.

Bonds

10-year UK gilt yields slipped 3 basis points (bps) to finish the week at 1.38%. The equivalent US Treasury yields were down 2 bps to finish at 3.04% whilst ten-year German bund yields were down 3 bps to 0.34%.

Commodities

The continuing slide in the oil price was the main story of the week, with Brent crude falling below US$60 per barrel by the end of Friday, to close at US$58.80 per barrel. Gold finished the week unchanged at US$1,223 per ounce whilst copper weakened to US$2.77 per lb.

Currencies

The euro slipped through the week, down -0.6% against sterling, whilst most other currencies were little moved. Sterling closed on Friday at US$1.28, €1.13 and ¥145.

The week ahead

It’s a fairly quiet week ahead for the macroeconomic data calendar. The US Personal Consumption Expenditure (PCE) release on Thursday will likely get some attention as the Federal Reserve’s (Fed’s) preferred measure of inflation, with forecasts suggesting a headline reading of 2.1% yoy from 2.0%. On Friday, Eurozone CPI will likely add to the discussion around monetary policy – a slight cooling from 2.2% to 2.1% yoy is expected. Friday will also give us the official PMI readings for China as well as the start of the G20 meeting, where all eyes will be on the meeting between US President Donald Trump and Chinese President Xi Jinping. The daily breakdown is as follows:

Monday: Early in the morning, Japan will report Manufacturing PMI, and in the afternoon the Dallas and Chicago Federal Reserves provide updates on manufacturing activity.

Tuesday: It’s a quiet day, with only the US Conference Board’s Consumer Confidence report of note.

Wednesday: In the UK, the British Retail Consortium reports the Shop Price index a minute after midnight. In the afternoon, the US reports Wholesale Inventories and we also have the second estimate of third-quarter GDP to look out for. Late in the evening, Japan will update retail sales numbers.

Thursday: UK consumer credit and lending numbers are out in the morning, as are the economic confidence readings for the Eurozone. In the afternoon, as well as the PCE data covered above, the US will also report Personal Income and Spending activity before releasing the minutes from the latest Federal Open Market Committee meeting later in the evening. Just before midnight, Japan will report jobless data and the latest Industrial Production numbers alongside the inflation data, covered above.

Friday: A minute after midnight, the UK releases the GfK Consumer Confidence numbers as well as the Lloyds Business Barometer reading. This is followed by the official PMI indicators from China. Still before breakfast, Japan will have updated consumer confidence, housing starts and construction orders growth. Friday will also give us UK house price growth, this time from Nationwide, with Eurozone CPI inflation also due out. The G20 meeting also kicks off, with the focus on the US-China leaders’ meeting.

Important information

Data correct as at 26/11/2018.

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This is not a personal recommendation or advice to invest. Past performance is not a guide to future performance.

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