Labour market watch: negative UK data

Posted on Wednesday, October 16, 2019 at 11:46AM by Registered CommenterSimon Ward | CommentsPost a Comment

Slack is opening up in the UK labour market, strengthening the case for a rate cut regardless of Brexit developments.

Total hours worked (reported as a three-month moving sum) fell further in August and are down 0.5% from an April peak. This casts doubt on current official estimates showing monthly GDP rising above its prior February / March high in July / August.

Falls in employment and hours worked had been signalled by a downturn in vacancies, which peaked in January (three-month moving average). The decline continued in September, albeit at a slower pace, while redundancies in the three months to August were the highest since 2016 – see first chart.

The unemployment rate ticked up to 3.9% over June-August and would have risen by more but for a contraction of the labour force, reflecting an increase in “inactivity” – second chart.

Benefit claims data suggest a further pick-up. The old claimant count measure has been distorted by the roll-out of universal credit but the Department for Work and Pensions calculates an adjusted series, based on modelling what the count would have been if the current benefits system had been in place since 2013. This “alternative” count bottomed as long ago as February 2018, with a three-month increase of 43,000 in August the highest since inception – third chart.

Chinese money trends still weak

Posted on Tuesday, October 15, 2019 at 02:18PM by Registered CommenterSimon Ward | CommentsPost a Comment

Chinese September monetary numbers are a mixed bag but will probably be interpreted positively by the market.

The monthly flow of total social financing was above expectations, while six-month growth of the outstanding stock returned to its mid-year high – see first chart.

The bad news is that six-month narrow money growth fell back sharply. Note that the latest data point for true M1 incorporates an estimate of household demand deposits, which are released several days after the headline money numbers.

As the chart shows, growth rates of TSF and narrow money usually move in the same direction, making the September divergence difficult to interpret. The money numbers are more volatile, suggesting playing down the apparent negative signal and waiting to see if there is a rebound in October (or a relapse in TSF).

Broader money measures don’t help to clarify the issue. Six-month growth of headline M2 was slightly higher but growth of the preferred measure here, which excludes deposits of financial institutions, was unchanged after its recent fall, echoing the cautionary signal from narrow money – second chart.

From a longer-term perspective, money trends appeared to be responding to policy easing in early 2019 but the pick-up aborted after the failure of Baoshang Bank in May, which disrupted the interbank market and led to a reduction in credit supply to private firms. Consistent with this narrative, the corporate financing index from the Cheung Kong Graduate School of Business monthly survey reached a record high in April and plunged through August, recovering marginally in September – third chart.

Global six-month narrow money growth is estimated to have picked up significantly in September despite the disappointing Chinese number, mainly reflecting a US surge, part of which pre-dated the Fed’s repo operations – fourth and fifth charts.

Global leading indicators less downbeat

Posted on Wednesday, October 9, 2019 at 02:59PM by Registered CommenterSimon Ward | Comments1 Comment

The OECD’s leading indicators support the signal from monetary trends that global industrial momentum is probably bottoming but will remain weak into 2020.

The chart shows the six-month rate of change of a global leading indicator derived from the OECD’s country indicators for the G7 and major emerging economies. Turning points in this rate of change have led turning points in six-month industrial output momentum by five months on average historically.

The six-month leading indicator change bottomed in February, suggesting a Q3 low in industrial output momentum. This accords with the signal from six-month real narrow money growth, which bottomed in November 2019 and leads by nine months on average.

The growth rates of the leading indicator and real narrow money were still low in August, consistent with economic momentum remaining weak through January and May 2019 respectively. Real money growth, however, is expected to have picked up significantly in September – a preliminary estimate will be available by early next week.

A "monetarist" perspective on current equity markets

Posted on Tuesday, October 8, 2019 at 10:04AM by Registered CommenterSimon Ward | CommentsPost a Comment

Previous quarterly commentaries suggested that global economic momentum would fall into a low around Q3 2019. Recent news is consistent with the scenario but money trends have yet to give a clear signal of economic recovery. A bottoming of momentum, however, may be sufficient to warrant rotating away from defensive investment strategies that have prospered over the last 18 months.

The expectation of a Q3 momentum low was based on monetary and cycle analysis. Global six-month real narrow money growth bottomed in late 2018 and leads economic momentum by nine months on average. The global stockbuilding cycle, meanwhile, last bottomed in Q1 2016 and has an average length of 3.5 years, suggesting another low in Q3 2019.

Incoming business survey data are consistent with the forecast. The global purchasing managers’ manufacturing new orders index recovered to a four-month high in September, while a survey-based indicator of the rate of change of G7 stockbuilding reached a seven-year low, consistent with the cycle being at or near a trough – see first chart.

Economic momentum may be bottoming but money trends argue against a significant near-term recovery. Global six-month real narrow money growth stood at 1.7% in August, above a low of 1.1% in October-November 2018 but below the 3% level judged here to be consistent with a return to trend economic expansion – second chart.

From a cycles perspective, a prospective turnaround in the stockbuilding cycle may be offset by further weakness in the business investment cycle, which may not trough until early 2020 – the last bottom was in Q2 2009 and the cycle can stretch out to 11 years.

The baseline scenario is that economic momentum will remain weak into Q1 2020 before picking up more convincingly into mid-year. The latter forecast requires confirmation from a rise in real narrow money growth over the next three months but this is judged likely. Cycle analysis suggests that the global economy will grow solidly in H2 2020: the business investment cycle as well as the stockbuilding cycle should by then be in a recovery phase, while the upswing in the longer-term housing cycle is likely to have regained momentum in response to falling mortgage rates in 2019.

Real money trends are expected to strengthen in late 2019 for three reasons. First, narrow money usually responds with a lag to changes in long-term interest rates. Secondly, the global aggregate has been pulled down by US narrow money weakness but weekly US numbers for September indicate a pick-up. Thirdly, global six-month consumer price inflation is likely to moderate if commodity prices remain at current levels, implying a boost to real money growth unless nominal money trends weaken.

Readers have pushed back against the view that global economic momentum is bottoming because of an apparent recession signal from the inversion of the US Treasury yield curve. The 10-year / 12-month yield spread has an excellent forecasting record, turning negative before the last nine US recessions with only one false signal. Those recessions, however, were also preceded by a contraction of US real narrow money, which has expanded – albeit weakly – over the last 12 months.

The prior moves into inversion, moreover, were all at least partly driven by a rise in the 12-month yield. The current inversion is unusual because the whole curve has shifted down but with longer yields falling by more. This may disrupt the historical forecasting relationship.

Another push-back is that unemployment is likely to rise in lagged response to output weakness, depressing consumer spending and offsetting a turnaround in the stockbuilding cycle. This is valid but the effect is unlikely to dominate – economic recoveries have occurred historically despite rising unemployment as falling interest rates have stimulated spending on consumer durables and pushed down the saving ratio, cushioning the drag from slowing incomes.

How should investors position for the baseline economic scenario outlined above? Market trends over the last 18 months have in most respects been typical of historical behaviour during stockbuilding cycle downswings, with quality stocks and the defensive US market outperforming, commodity prices and emerging market equities weakening, the US dollar strengthening and Treasury yields falling. Historically, these trends have weakened or reversed following the stockbuilding cycle trough.

The case for the suggested portfolio rotation would be strengthened by a rise in global real narrow money growth, which would confirm a 2020 economic recovery scenario. A possible strategy is to start by adjusting exposures that have outperformed or underperformed by more than the historical average for stockbuilding cycle downswings. This would argue for adding to Euroland and emerging market equities at the expense of the US, and cutting back overweight quality exposure in favour of value.

A more optimistic assessment of Euroland economic and market prospects is supported by regional monetary and cycle analysis: six-month real narrow money growth recovered first in Euroland and is relatively strong – third chart – while GDP stockbuilding data and business survey inventory responses are consistent with an earlier cycle trough than in the US.

In emerging markets, a recovery in Chinese narrow money growth in early 2019 stalled after the failure of Baoshang Bank in May, which disrupted interbank funding and credit supply to private firms. A food-driven inflation spike has dragged down real growth more recently, though is likely to reverse in late 2019. Money trends are solid or improving in most other MSCI constituent countries, with notable pick-ups recently in Russia, Mexico, the Philippines, Thailand and Chile.

One feature of recent market behaviour at odds with previous stockbuilding cycle downswings has been the resilience of global equities in aggregate, although the MSCI All Country World Index (ACWI) has made no progress since January 2018. This may reflect strong corporate demand for equities coupled with investors buying quality growth stocks as an alternative to low- or negatively-yielding government bonds. Value stocks have weakened in line with the historical average for cycle downswings – ACWI Value was down by 7.5% in the 18 months to end-August.

The corollary is that global equities may have less upside than usual as the stockbuilding cycle turns and could weaken if bond yields back up sharply, undermining the safety bid for quality stocks. Equity purchases by US non-financial corporations, meanwhile, are normalising after the boost from 2018 tax changes – Q2 buying was the least since Q1 2010.

The monetary backdrop, while improving, is not yet favourable for equities. The return on global equities relative to cash was highest historically when global real narrow money growth was above both industrial output growth and its long-term average. The former condition has been met, reflecting industrial output weakness, but real money growth remains low relative to history. Mixed signals were associated with lacklustre returns on average historically.

UK data wrap: CBI confidence slump, money trends stabilising

Posted on Tuesday, October 1, 2019 at 12:11PM by Registered CommenterSimon Ward | CommentsPost a Comment

The CBI’s Q3 financial services survey released overnight rounds out a bleak message from earlier surveys covering industry, other services and distribution, supporting the view here that the economy has probably already entered a recession – first chart.

A simple average of optimism measures across the four surveys is at its lowest since 2009 and below all other troughs over the past 20 years. The Monetary Policy Committee eased policy via rate cuts and / or QE on all occasions when the average fell below -15. It undershot this level in Q2 and now stands at -31 – second chart.

August money data released yesterday, meanwhile, were marginally less negative: six-month growth of real non-financial M1 recovered, with the corporate component moving back above zero – third chart. This could suggest economic stabilisation from Q2 2020 but does not negate the earlier signal of weakness in late 2019 / early 2020.

Readers have noted that the six-month change in real corporate M1 turned negative in 2010-11 without the economy falling into a recession (although GDP slowed sharply in 2011). Weakness then, however, was partly payback for a surge in 2009, while a VAT hike in January 2011 resulted in a spike in consumer price inflation. The six-month change in nominal corporate M1 remained positive in 2010-11 but was negative in early 2019.

Money trends remain much weaker in the UK than in Euroland, where six-month real non-financial M1 growth was stable in August, with the corporate component surging further – fourth chart. This suggests much greater UK vulnerability to a no-deal Brexit. A Euroland economic recovery, meanwhile, could have a smailler-than-normal positive impact on the UK as EU customers continue to switch to other suppliers.

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