August PMIs: US / Euroland convergence

Posted on Friday, August 23, 2019 at 11:37AM by Registered CommenterSimon Ward | CommentsPost a Comment

Narrow money trends have been signalling US economic weakness but a stabilisation of momentum in Euroland, with no recession – see, for example, here. August flash PMI results are consistent with this scenario.

The US composite output index fell sharply in August, returning to its May low. The Euroland index bottomed in January and edged higher in August, moving back above the US level – see first chart.

The US output fall was driven by services activity but the manufacturing PMI slipped below 50, with the new orders component at a 10-year low – second chart.

The Euroland manufacturing PMI remains much weaker but edged up in August; services activity, meanwhile, is stronger than in the US – third chart. Manufacturing woes continue to be focused on Germany, reflecting the economy’s sensitivity to negative trends in the auto sector, global capex and China. The French manufacturing PMI is the strongest among the G7 – fourth chart.

US six-month real narrow money growth edged up in July but remains well below the latest Euroland reading, for June – fifth chart. Euroland growth, however, has cooled recently and a further decline in July data released next week would question the scenario of economic stabilisation.

Why the US yield curve recession signal could prove misleading

Posted on Tuesday, August 20, 2019 at 12:19PM by Registered CommenterSimon Ward | CommentsPost a Comment

Investors were spooked last week by a further inversion of the US Treasury yield curve but the manner of the inversion casts doubt on the validity of the associated recession warning.

Monetary trends are judged here to be a better guide to economic prospects than yield curve movements but the US curve has an impressive record of predicting recessions since the mid 1950s.

The headline development last week was a fall in the 10-year Treasury yield below the 2-year yield, although the cross-over subsequently reversed.

The 10-year / 2-year spread is the favoured curve measure of many market analysts but the 10-year / 1-year spread has a slightly superior historical forecasting record. The latter turned negative ahead of all 9 recessions since the mid 1950s, with only one false signal, in 1965-67 – see first chart. The 10-year / 2-year spread gave an additional false signal in 1998.

Source: Federal Reserve, NBER

The 10-year / 1-year spread turned negative in early August (it had done so briefly in March and May) and the inversion has persisted.

The recent inversion, however, is unusual because it has been driven solely by a decline in longer-term yields.

The second chart separates the 10-year / 1-year spread data according to whether the 1-year yield was higher (red) or lower (green) than 3 months before. All previous inversions, including the false signal in 1965-67, involved a rise in the 1-year yield in addition to or instead of a fall in the 10-year yield.

Source: Federal Reserve, NBER

This distinction suggests a higher risk that the current signal will prove to be false, unless the 1-year yield rises and the curve remains inverted.

Narrow money trends, while continuing to signal weak economic prospects, are not obviously recessionary. The third chart shows the behaviour of real (i.e. CPI-deflated) narrow money before and after the start of the last 9 recessions (red lines) and the 1966-67 slowdown associated with the false yield curve signal (green line). Real narrow money contracted in the 12 months preceding the recession / slowdown start dates but has risen over the past 12 months (blue line).

Source: Federal Reserve, BLS, NBER

Global money trends still downbeat

Posted on Monday, August 19, 2019 at 02:33PM by Registered CommenterSimon Ward | CommentsPost a Comment

Incoming narrow money data for July have been disappointing, suggesting that a global economic recovery will be delayed until Q2 2020.

The US, China, Japan, India and Brazil have released July monetary data, together accounting for two-thirds of the global (i.e. G7 plus E7) aggregate tracked here. Incorporating near-complete CPI data, six-month growth of global real narrow money is estimated to have fallen from 1.8% in June to 1.4%, the weakest since March – see first chart.

The July estimate is only slightly above a low of 1.1% reached in October / November 2018. Allowing for an average nine-month lead, the suggestion is that global six-month industrial output momentum will bottom in the current quarter but then bounce around at a weak level through April 2020.

The July reading is far below the 3% level judged here to be necessary to signal an economic recovery, in the sense of a return to trend growth or higher.

The July setback reflected a sharp fall in Chinese real narrow money growth, discussed in a post last week – second chart. Japanese and Brazilian readings were also softer, while US real money growth edged up but remains weak. The July outturn will depend importantly on Euroland and UK data released on 28 / 29 August.

Labour market watch: gathering UK weakness

Posted on Tuesday, August 13, 2019 at 04:38PM by Registered CommenterSimon Ward | CommentsPost a Comment

According to Gluskin Sheff economist David Rosenberg, recessions in the US “historically begin when the unemployment rate climbs 0.4 percentage points above its cycle low”. The UK single-month unemployment rate rose from a low of 3.7% in May to 4.1% in June, raising a recession warning flag.

The UK single-month rate is based on a small sample and is much more volatile than its US counterpart. A monthly rise of this size, however, is unusual: excluding the 2008-09 recession, an increase of 0.4 pp or more occurred in only 4% of months between July 1992 (the earliest available data point) and May 2019.

The ONS surveys largely the same group of individuals every three months, suggesting focusing on the three-month change in the single-month unemployment rate rather than the month-on-month change. The three-month increase was 0.3pp in June, the highest since 2015.

The suggestion of a trend reversal in unemployment is supported by an ongoing decline in the stock of job vacancies, which were down by 4.8% in July from six months earlier (three-month moving average). The six-month change is the most negative since the double-dip recession scare of 2011-12 – see first chart.

Other recent labour market developments have a recessionary flavour, including a fall in the employment shares of full-time workers and employees, a stagnation in total hours worked and a faster drop in temporary working. Part-time employees and the “self-employed” account for all of the rise in total employment over the last six months.

The consensus has played down the 0.2% Q2 GDP fall as payback for Q1 strength due to Brexit stockpiling. Two-quarter growth, however, declined to 0.3%, a post-GFC low, and corporate money trends are signalling a further slide to zero or negative during H2 – second chart. A recession remains the baseline scenario here regardless of Brexit developments.

Chinese policy easing still isn't working

Posted on Monday, August 12, 2019 at 03:12PM by Registered CommenterSimon Ward | CommentsPost a Comment

Chinese July money numbers were very disappointing, signalling that an economic recovery remains distant. More decisive monetary policy easing is urgently required but the authorities are constrained by a teetering RMB and surging food prices.

Six-month growth of narrow money dropped sharply in July, reversing a four-month improvement – see first chart. Broad money growth (not shown) was similarly weak. Broad credit expansion registered a smaller decline but had recovered by less previously.

Money / credit growth in real terms – i.e. relative to consumer prices – was additionally depressed by a rise in six-month inflation to an eight-year high, reflecting strong food prices, which were up by 9.1% in July from a year earlier. Real narrow money growth dropped back to near its late 2018 low – second chart.

Money / credit trends are weak mainly because a policy-driven fall in money market rates has not been transmitted to the wider economy. Average interest rates on banks’ enterprise loans and mortgages remained elevated in Q2, according to the PBoC’s just-released monetary policy report – third chart.

The limited pass-through may partly reflect official guidance to banks to avoid another lending splurge. In addition, the failure of Baoshang Bank in May resulted in a rise in funding costs for smaller institutions.

The authorities are relying on fiscal stimulus to boost the economy but may be forced to reopen the credit sluice gates. Such action, however, risks cratering the currency. As well as falling through 7 against the US dollar, the RMB has now breached 2017-18 lows against the official currency basket – fourth chart.