Today’s commentary
The most recent economic data have been a bit soft. Below I take a brief look at what the data flow seems to be saying
Today’s daily commentary is going to be short. I want to stay away from central banks because I have been writing about them a lot. And there are a few central bank issues dominating headlines right now. Overall, my view is that the ECB seems to be loosening relative to the Fed and this is supportive of the dollar. And I agree with Tim Duy that the Fed is looking for any reason to taper and move beyond QE, which can be seen as a de facto tightening. Meanwhile the ECB is sounding more dovish every day, even the German ECB members sounds relatively dovish. So those are my thoughts on monetary policy for the day.
What about the real economy, though? The thesis I have been operating under is that private debt levels in North America and Europe are so high now that they restrain growth, combined with some real demographic slowing – especially in places like Germany, Italy and Greece – you have a built-in slow growth paradigm. Fiscal tightening only adds to slow this down. So that’s the baseline and it plays very much into the so-called secular stagnation theme that Larry Summers trumpeted this past weekend.
Previously I mentioned that I expect Q4 US GDP growth to come in below 2%. Banks are now cutting their estimates. SocGen cut in late October, but remained at a bullish 3.0% forecast. Bank of America was saying 2% (link here). More recently, the Capital Spectator put in what I see as a realistic estimate at 1.9%, which “represents a considerable deceleration in growth vs. this year’s third quarter pace”. Some of this is shutdown-related. Some of it is because higher mortgage rates are having a negative effect on retail spending. Some of it is also because consumers seem to be cautious ahead of the holiday shopping season. But a lot of it is because the trend growth has been buoyed by inventory accumulation. A lot of the pickup in Q3 was inventories and so we should expect retailers to wind those down as they do not want to leave the holiday season with excess inventories.
Jobless claims continue to signal a decent clip in the reduction of unemployment in the US. The last number was sub-330,000 again, which is really as low as it’s going to get. So the potential for the economy to build from here does exist. Goldman Sachs is saying GDP growth will accelerate to 3% in 2014, causing the Fed to taper at least by March. None of this speaks to recession anywhere on the horizon. At this point, in the US, the risks are to the upside in terms of the economy and markets. So I see this as short- to medium-term bullish for asset markets, despite the talk of froth and the overvaluation of US-based stocks on a cyclically adjusted basis. Caveat emptor.
Elsewhere, overnight we got the HSBC Flash PMI for manufacturing in China. The numbers were weak, 50.4 vs 50.8 expected and 50.9 prior. Looking forward, new orders fell to 49.4, which is below the 50.0 mark and denotes contraction. This compares very unfavourably to the 51.3 reading in the prior month. All I can say here is that the Chinese are committed to the 7.5% target and will do whatever it takes to reach it. So while economic growth has decelerated, nothing indicates it will decelerate further. And if it did, we would see the Chinese government work to bring growth back to 7.5%.
In Europe, Markit’s composite PMI for the Eurozone dropped to 51.5 from 51,9. This was below forecasts. Given the decelerating inflation numbers, this deceleration in the real economy makes all of the talk about deflation seem understandable. Remember that dropping below 50.0 is recession territory. So what these numbers are telling us is that Europe’s incipient recovery is very weak, vulnerable to any exogenous shock. Because fiscal policy remains hamstrung by the single currency, the ECB is the only agent that has any means of preventing a lapse back into recession or deflation. This is why they have moved to a dovish stance and are talking up negative interest on reserves, further rate cuts and quantitative easing as future policy options. My general view here is that all of these options are weak given the macro outlook for demand that fiscal tightening, high private debt, high unemployment and poor demographics imply. Europe will continue to lag in terms of growth.
As for Japan, I am not that bullish. In September, I wrote a pretty downbeat analysis of Abenomics and Japan’s disastrous macro plans. My view is that Abenomics so far as really only been about goosing demand via fiscal stimulus and QE. Nothing meaningful has been done to ensure the growth sticks. No structural reforms, corporate subsidy cuts or immigration policy tweaks have made their way through. Meanwhile, the Japanese have already turned to closing the deficit via a sales tax, something that derailed growth in 1997 and ushered in the present deflation. How is this going to work? Where is the growth going to come from? Japan has posted its biggest annual exports rise in three years but it also posted an enormous trade deficit in October as import prices rose due to the weak yen. And Japanese banks still are finding it hard to lend. That may be because households are finding it difficult to save. Japanese households without savings has climbed the most since 1963. So the QE is not having a measurable impact on credit growth. GDP growth is starting to flag as a result. I recommend you read this Reuters summary of the situation. It breaks down the challenges well. I anticipate weakness in Japan in 2014.
The global economy is putting along, not at a robust pace, but a measured one. And forecasters are actually cutting their forecasts for growth. I expect growth to continue but it won’t be spectacular.