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December Global Macro so far

06744 CC Trader Talk V2

(This article was written by Antoine Briffa)

US data remains consistent with an ideal solid growth scenario. The non-manufacturing conditions ISM index fell in November and this may be due to hurricane-related distortions, however, in any case, it remains very strong.

Meanwhile, jobs data indicated that payrolls rose a stronger-than-expected 228,000 in November, with unemployment remaining very low at 4.1% and may push below 4.0% in the months ahead. However it was another case of an ideal situation, with wages growth coming in weaker-than-expected at 2.5% year-on-year.

Small business confidence surged to near its 1983 all-time high, retail sales remain very strong, the December Markit business conditions PMIs remain solid, industrial production rose with upwards revisions to October, jobless claims are still falling and readings for job openings, hiring and quits remain very strong.

In fact, the level of job openings is now around the level of people unemployed, highlighting just how tight the US labour market is. Against this, core CPI inflation surprised on the downside yet again, with a fall back to 1.7% year-on-year from 1.8%. However, rising producer price inflation and the very tight labour market highlights the upside risks to US inflation.

While the US Federal Reserve remains on track to continue hiking (because the tight labour market will eventually boost wage inflation), it can remain gradual compared to past cycles.

The UK and European Union have finally reached a deal to allow divorce negotiations around issues like trade to begin with, however there is a long way to go yet. The risk of a referendum on a final deal seeing a rejection, and even a reversal of Brexit is significant.

The European Central Bank indicated more confidence in the growth outlook, but is still waiting for “a sustained upward trend” in inflation. Views remain that a rate hike from the ECB won’t happen until 2019, after quantitative easing ends in late 2018. So the ECB is likely to remain supportive for Eurozone shares and negative for the euro for some time to come.

Japanese Gross Domestic Product growth for the September quarter was revised up to 0.6% quarter-on-quarter from 0.3%, helped by stronger business investment and adding to evidence that the Japanese economy is getting stronger despite Japan’s population continuing to fall.

Japan looks to be jumping on the corporate tax-cutting bandwagon with a plan to cut its corporate tax rate from 30% to 20%. However there’s a catch – it will only apply to companies who boost wages by 3% and investment. It wouldn’t be a bad idea though, if they can get it to work. The December Tankan and Nikkei PMI both showed a further rise in already strong business conditions.

The Chinese Caixin services conditions PMI rose in November and export and import growth was robust and stronger than expected; consistent with continuing solid growth this quarter.

Chinese activity data was a bit mixed with a slight slowing in industrial production however with an uptick in retail sales growth and fixed asset investment, with the latter helped by property and infrastructure-related investment. While growth looks to have slowed a bit in the current quarter, the slowdown looks marginal. Meanwhile, following the US Fed’s latest hike, the People’s Bank of China moved to raise short-term interest rates, but only by 5 basis points.

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