Slowdown

Genevieve Signoret

Macro Views

Activity

Signs are everywhere that economic activity slowed down in quarter three everywhere, though especially in emerging economies and in particular in manufacturing and international trade. China’s GDP slowed to a quarter-on-quarter annual rate of 6.9% in quarter three. Brazil’s economic activity index had contracted again in August. We find persuasive the arguments set forth by JPMorgan and others that the manufacturing slump is stemming from a mere inventory correction. These happen when companies overshoot in their demand forecast and build up unwanted inventories, which they then have to shed. This fits jobs market data, which do not speak of layoffs.

This week’s slew of global manufacturing PMIs and, for Korea and the UK, first estimates of Q3 GDP will clue us in as to whether output is recovering in quarter 4.

Balance of payments

Turkey is better braced for a Fed hike than it was back in May 2013 when then Fed Chair Ben Bernanke first mentioned tapering. Last week, Turkey reported shrinkage in its current account deficit to a trailing 12-month August ratio of 5.5% of GDP (US$43.1 bn) from a prior 5.8% ($45.1 bn). JPMorgan wrote in last Friday’s Global Data Watch that the August deficit marked the country’s narrowest for August in 11 years and the narrowest overall in six years. Explaining the drop was an improved trade balance driven chiefly by a plunge in the value of imports—itself driven on the volume side by a sharply weakened Turkish lira and on the import price side by sharply lower international energy prices. Turkey’s August current account deficit was covered entirely by capital inflows; no reserves were lost.

Prices

Although September year-on-year U.S. headline consumer price inflation was nil, the core rate accelerated slightly to 1.9% from the August 1.8%. This number still falls short of the Fed’s 2% inflation target. Also, the rate for Fed’s preferred measure, core PCE, stood at only 1.3% in August.

Consumer price inflation in China slowed down sharply in September to 1.6% from the previous 2.0%. This slide gives leeway for monetary policy loosening already this quarter.

Policy: monetary

The near consensus within the FOMC to hike rates this year seems to be breaking down, with powerful Board of Governors members Lael Brainard and Daniel Tarullo and Federal Open Market Committee (FOMC) Vice Chairman and New York Fed President William Dudley cautioning so loudly against premature tightening that their speeches are being interpreted as a mini rebellion (see Brainard drops a policy bomb, by Tim Duy, and The Fed board is now seriously split, by Gavyn Davies). While we acknowledge that uncertainty is high and suffer from it ourselves, we hold to our call that the Fed will hike rates to 0.25–0.50% in March, not before.

We see the Fed as the only major developed market central bank likely to raise interest rates soon and expect the central banks of Japan and the euro area to extend or speed up quantitative easing in the next 15 months, with Japan’s moving first. For this week, we forecast that the European Central Bank (ECB) will leave rates and the pace of quantitative easing both unchanged from last month. By our reading of recent ECB communication, monetary policy committee members judge the current asset purchase program to be working.

In emerging markets, we anticipate loose monetary policy stances till the Fed hikes, then a slew of copycat rate hikes to protect currency valuations. An exception is the People’s Bank of China, which we think will cut rates and its required reserve ratio this quarter. This means that Brazil and Turkey on Wednesday will hold rates unchanged next week.

Policy: fiscal

The U.S. Congress has not yet suspended or raised the debt limit. The deadline has passed but the Treasury says it won’t run out of cash until about November 3. If not resolved soon, Treasury bond market volatility could rise. We would see that as a buying opportunity, for we gauge the risk of a default to be virtually zero.

Moody’s cut Brazil’s rating to BBB–, which is still one notch above junk status. It left its outlook negative. Moody’s specifically cited political uncertainty as a factor in its decision. Rousseff has been unable to pass a package of austerity measures amid the ongoing corruption scandal at Petrobras and her abysmal approval ratings. The deficit is at 9.2% of GDP in August; its gross debt is projected to rise to 70% of GDP this year, from 62% just two years ago. Standard & Poor’s now rates Brazilian sovereign debt junk, while Fitch and Moody’s continue to call it investment grade.

Politics

The USA still has no House speaker to replace John Boehner. The Republican party controls the lower chamber but is split into hardline conservatives who prefer ideological purity over actual governing and moderates who will cut deals with Democrats if need be to get things done.

Polls show that analysts and Democratic voters saw Hillary Clinton as having won the first Democratic Party debate. Vice President Joseph Biden has not yet decided whether to run. He would be a much more formidable contender than her current opponents are, as he matches her mastery of policy detail. Given the weak field of Republican candidates, we expect a Democrat to win the presidency again in 2016. But this view has no bearing on our market view and won’t till we also have a view on which parties will control the two legislative chambers. It’s too early for that.

Brazil’s Supreme Court made rulings that will make it harder for Congress to impeach President Dilma Rousseff. Her government is scrambling to squelch rumors that Brazil’s finance minister, Joaquim Levy, is about to resign. Brazil is experiencing stagflation resulting, in our view, from the popping of a private credit bubble, fiscal imprudence (which the central bank has had to offset by raising interest rates even in the face of economic weakness at first, contraction subsequently), weakened demand from China, and falling world commodity prices.

Geopolitics

Tensions remain high in Syria, where Russia could clash accidentally with the USA or its NATO ally, Turkey; and the South China Sea, where the U.S. Navy says it will send ships to patrol inside the 12 nautical miles of the “islands” China has built on top of reefs to make clear the U.S. position that these are international waters and hence must be kept open to a free flow of trade and navigation.  Although both these risks are small, they bear watching.

Next four weeks

Ongoing

• China: Low inflation opens space for more monetary policy loosening. We anticipate both a rate cut and a cut in the required reserve ratio. Monetary policy meetings are not preannounced.
• Middle East: Russia–U.S. and Russia–Turkey (a NATO member) could inadvertently clash in Syria. Probabilities are small.
• South China Sea: China–USA could clash, as U.S. Navy ships approach islands built artificially by China. Probabilities are small.
• USA: Budget crisis. Volatility could resurge in bond markets. The U.S. Treasury will run out of money around November 3 if Congress doesn’t raise the debt ceiling on time. This issue is entangled with the Republicans’ struggle to elect a House speaker now that John Boehner has announced his resignation from that job. No one seems to want the job. 

Tuesday 20

• Mexico: Central bank reserves (prior week).

Wednesday 21

• Brazil: Consumer price: IPCA (Sep, consensus: 9.7% y/y), monetary policy decision (TransEconomics and consensus: no change).
• Japan: International trade: customs cleared (Sep). Expected to show a decline. This is a nominal indicator so it reflects changes in prices as well as volumes. Later this month, the Bank of Japan will report real trade. We expect both reports to show declines.
• Mexico: Retail sales (Sep).
• Turkey: Monetary policy decision (TransEconomics and consensus: no change). Even though y/y inflation has accelerated to 8% in September from 7.1% in August and 6.8% in July, the Central Bank of the Republic of Turkey will probably stay on hold till after the Fed raises rates.

Thursday 22

• Brazil: Unemployment rate (Sep).
• Euro Area: ECB monthly report, monetary policy decision. TransEconomics: No change. By our reading of recent ECB communication, monetary policy committee members judge the current asset purchase program to be working.
• USA: FHFA house price index (Sep).

Friday 23

• Euro Area: Markit services PMI (Sep, flash).
• Global (Japan, USA, Euro Area): Markit manufacturing PMIs (Oct, flash).
• Korea: GDP (Q3, first estimate).

Tuesday 27

• Euro Area: Money supply (Sep).
• Mexico: International trade (Sep).
• UK: GDP (Q3, first estimate).
• USA: Consumer confidence (Nov), FHFA house price index (Aug), Markit services PMI (Oct, flash).

Wednesday 28

• USA: CNBCRepublican Debate among candidates running for president (7:00 PM Mexico City time). Candidate with at least 3% polling average appear in prime time, the rest in an undercard 5:00 PM.
• Japan: Industrial production (Sep), Shoko Chukin survey of business sentiment (Oct).
• USA: Monetary policy decision (TransEconomics and consensus: no change), durable goods orders (Sep), S&P/Case-Shiller house price index (Aug), Conference Board consumer confidence (Oct).

Thursday 29

• Germany: Unemployment rate (Sep), CPI (Oct).
• Japan: Industrial production (Sep), monetary policy decision (TransEconomics and consensus: no change). The Bank of Japan seems to be watching not its traditional core inflation measure, which excludes food alone, but rather one which excludes food and energy both. This more conventional measure of core inflation has risen to over 1%.
• Korea: Industrial production, flash (Oct, flash).
• Mexico: Monetary policy decision (TransEconomics and consensus: no change). Banco de México continues to signal that it will postpone hiking till the Fed does. Inflation pressures appear to be low, despite peso weakening from a year ago and low unemployment.
• UK: Money supply (Sep).
• USA: GDP (Q3, first estimate).

Friday 30

• Euro Area: Unemployment rate (Sep).
• Korea: Industrial production (Sep).
• Russia: Monetary policy decision.
• Spain: GDP (Q3, first estimate).
• Turkey: Internationaltrade (Sep).
• USA: Personal income (Sep), University of Michigan consumer confidence and inflation expectations (Oct, final).

Sunday November 1

• Turkey: Parliamentary elections.

All week

• USA: The Treasury runs out of money if Congress doesn’t raise its debt ceiling.

Monday 2

• Global: Markit manufacturing PMI (Oct).
• Korea: International trade (Oct), consumer price index (Oct), balance of payments (Oct).

Tuesday 3

• Brazil: Markit manufacturing PMI (Oct), international trade (Oct).
• Mexico: Markit manufacturing PMI (Oct).

Wednesday 4

• Global: Markit services PMI (Oct).
• Japan: Monetary policy meeting minutes (Oct 5–6).
• Turkey: Consumer price index (Oct).
• USA: International trade(Oct).

Thursday 5

• Brazil: Markit services PMI (Oct).
• Germany: Industrial production (Sep).
• Russia: Markit services PMI (Oct).
• UK: Monetary policy decision (TransEconomics and consensus: no change).

Friday 6

• Euro Area: Industrial production (Sep).
• UK: Industrial production (Sep), international trade (Sep).
• USA: Unemployment rate and nonfarm payrolls (Oct), Fed’s Bullard.

Sunday 8

• China: International trade (Oct). Imports & export both expected to drop.

Monday 9

• Mexico: Consumer price index (Sep), consumer confidence (Nov).
• Turkey: Industrial production (Sep).

10–15 November

• China: Money supply (Nov).

10–16 November

• India: International trade (Nov).

Tuesday 10

• China: Consumer price index (Oct).
• India: International trade (Oct).
• Korea: Unemployment rate (Oct).
• USA: Fox Business/WSJ Republican debate among candidates running for president.

Wednesday 11

• China: Retail sales (Oct), fixed investment (Oct), industrial production (Oct).
• Korea: Unemployment rate (Oct).
• Turkey: Balance of payments (Sep).
• UK: Unemployment rate (Sep).

Thursday 12

• Euro Area: Industrial production (Sep).
• Global: OPEC monthly oil market report.
• India: consumer price index (Oct), industrial production (Sep).
• Korea: Monetary policy decision.
• Russia: GDP (Q3, first estimate).

Friday 13

• Global: IEA release monthly oil market report.
• Euro Area: GDP (Q3, first estimate).
• Japan: Industrial production (Sep, final).
• UK: RICS house price index. House prices are bubbling again in the UK. (Also in Canada.)
• USA: Retail sales (Oct).

Saturday 14

• USA: CBS NewsDemocratic Party primary debate among candidates running for president.