We have no strategic positions on Italy. But we went there to check on our prejudices and met with a wide range of wise people. This confirmed that we should not short Italian sovereign debt right now - or anything else in Italy.
Macro Category
The strong upswing in Chinese consumer price inflation in November has a very straightforward explanation. The swine flu epidemic and the devastation this has inflicted on Chinese pig herds – reducing total numbers by over 40%. Indeed, meat prices are up 74% yoy, driven by pork which is now up 110% compared to the same period last year.
October retail sales registered a further deceleration in growth. The control group is still showing a decent rate of y/y expansion but other groups momentum has clearly reversed from the summer pick up. The industrial production report was bleaker reading.
Quite a slowdown in credit growth during October, certainly compared to the rate we saw last year. While the trend for shadow sector deleveraging continues there was also quite a sharp slowing of bank loans. Corporate bond issuance remained muted while there was a pronounced deceleration in the ‘other’ category, which now encompasses local government bond issuance.
A rather disappointing first assessment of US productivity in the third quarter. Non-farm productivity registered the first qoq decline since the end of 2015. On the positive side the yoy rate still looks a reasonable 1.4%, compared to a 5-year average of 1.1%, but the trend still lacks much conviction. Really, we’re still flatlining at best. Labour costs were stronger than expected, rising at a 3.6% annualised rate in the non-farm sector overall. That’ll raise the heckles of the hawks that view the tight labour market as a risk.
A modest bounce in German factory orders in September (+1.3% m/m wda), which has pared the yoy decline a little. But at -4.6% yoy orders are still clearly a weak spot, having recorded 13 consecutive months of yoy declines. That leaves total orders around 10% below their late 2017 peak.
We now have the final October purchasing managers indices for October and the data paints something of a mixed picture. That could be seen as slightly encouraging given our concerns that the economic soft spot was turning into something more damaging.
Solid payrolls report with 128k jobs added, with the strong upward revisions to September and August, which further dampened concerns about the labour market slowdown. Clearly there has been a deceleration in job creation, but it looks pretty mild based on these rough estimates (employment date subject to heavy annual revisions so not the best indicator of the real-time health of the labour market at potential turning points).
First glance shows positive surprises for Wednesday’s data releases. First, we had the October ADP report which recorded a 125k jobs gain versus the 100k consensus. But there was a decent downward revision to September (-42k) and the underlying rate of growth continues to decelerate.
While China’s 3Q GDP number was a little lower than expectations at 6.0% y/y the monthly production and activity series for September all improved. Retail sales growth picked up to 7.8% y/y from 7.5% while industrial activity rebounded to 5.8% y/y from 4.4% in August. Investment was perhaps the one area of disappointment, growth slowing to 5.4% y/y despite a further modest pick up on the State Owned side.
US industrial activity disappointed again in September, with output down -0.4% m/m. Although there was some better news in August, with production from then revised upward a little bit, the underlying trend remains weak. Manufacturing is still the focal point with the declines we’ve seen in non-durables spreading to durables this month.
The headline numbers might have missed expectations, with retail sales falling across most measures month to month. But this is really some giveback after better figures over the summer, including upward revisions to the August numbers. This is reflected in the firming of the y/y trend we’ve seen, underlying growth looking far stronger now that it was at the start of the year.
UK employment market continued to soften over the summer, recording another rise in the claimant count. This is unsurprising given the Brexit related uncertainty and generally slower global growth environment. Employment growth slowed, particularly for male workers and the participation rate has dropped back.
China’s trade balance continues to improve, a function of persistent weakness for imports which again outweighed soft, if patchy, export demand. The locus of the export demand problem remains the US which is being offset by ongoing growth from the Eurozone and parts of Asia, the exceptions being Japan, South Korea and Hong Kong, which have continued to contract.
Perfect jobs number for the optimists. While the headline rate was a bit below expectations upward revisions took the edge off the weak August and to a lesser extent July numbers. Meanwhile the unemployment rate fell further, from 3.7% to 3.5% while the U6 rate fell to 6.9% from 7.2%. But look a little deeper and things don’t look quite too hot.
Another weak ADP number, both for the current month but notably also the sharp downward revisions to the August release. The private sector survey suggested 135k jobs were added last month from a downwardly revised 157k in August. If we compare Q3 job creating this year to last year the total has slowed from 642k to 434k, t’s quite a drop.
While the headline numbers looked ok versus consensus, they reinforced some of the trends we’ve seen over the last few months. On the inflation side while there doesn’t seem much to worry about looking at the headline, there has been a build in core prices. Core PCE picked up to just under 1.8% y/y, which fits with the (stronger) increase we’ve seen in core CPI.
Eurozone saw a renewed uptick in money supply growth in August, but it was driven by a further increase in M1 rather than broader money. Credit growth seems to be on a firmer footing, with strength being driven by France and Germany while in Italy and Spain we’re still seeing deleveraging, notably on the corporate side. And deposits still growing faster, suggesting some caution. Quite positive from the ECB’s perspective, particularly with the latest easing package yet to factor.
Another weak IFO survey. The manufacturing sector remains particularly soft, offsetting what was a modest bounce on the (resilient) services side of things. The IFO clock moved further towards recession territory. While it might not yet be formally in this quadrant, the scale of the decline over the past year suggests we’re closer to, if not already in, a technical slump.
The spike in repo rates (Figure 1) in the US has drawn quite a bit of attention, sparking some concerns that this might be a sign of some kind of systemic risk. But the reality is somewhat more balanced, with the rise reflecting a number of specific factors and probably a rather sluggish response from the NY Fed, which conducts the open market operations of the Federal Reserve system, rather than any deeper seated problems.
