Last week provided further tangible signs that the trade-induced slowdown in the global economy was finally filtering through to the United States, which seemingly should make US President Trump more prepared to strike a deal with China sometime soon. Adding to the trade angst last week was the World Trade Organisation’s decision to let the US impose tariffs on EU aircraft imports – owing to the latter’s unlawful Airbus subsidies.
In my view, if these festering trade tensions are not resolved soon, a global recession – and ugly bear market – awaits us by early 2020. The stakes are now that high. The world’s 4th largest economy – Germany – is now in recession, with factory orders slumping further overnight.
In focus last week, the US ISM manufacturing index slumped to 47.8 in September – the lowest since mid-2009 – with the export orders component especially abysmal at only 41. We can take some heart from the fact that manufacturing now directly accounts for only 10% of measured US GDP, but its tentacles stretch far and wide and it’s something of a “canary in the coal mine” when it come to assessing the US economy. On a brighter note, the Markit US manufacturing index was at a healthier 51.1 in September, but it’s still down on levels earlier this year. The ISM non-manufacturing index also remains at a healthier 52.6, but it too has been declining from much more robust levels earlier this year.
Of course, further good news is the fact that the US labour market is also still holding up reasonably well. The 136k September jobs gain was close to expectations (145k) and there was a 45k upgrade to employment growth in the previous two months. Even more miraculously, even though the unemployment rate hit a 50-year low of 3.5%, annual growth in average hourly earnings slowed back to only 2.9%. Last years concern of rising US wages is for now at least a distant memory.
The net result of this emerging US economic weakness is that the market now attaches an 80% chance to a Fed rate cut at the October 29-30 meeting. I don’t disagree, with a Fed move now seemingly more likely than not.
The focus this week will clearly be on US-China trade talks which are due to formally recommence on Thursday. Sensing a weakening US hand, there are already reports China is prepared to sign a deal – but with key areas such as industrial subsidies off the table.
Local stocks bore the brunt of global woes last week, with the S&P/ASX 200 down 3% despite the RBA cutting rates to 0.75%. Still soft data did not help, with retail sales up only a modest 0.4% in August despite bigger tax refunds and lower rates. Home building approvals also dropped a further 1% in August after a 9.7% slump in July.
Of course, rate cuts are helping in one area at least, with the Core-Logic measure of house prices showing Sydney and Melbourne prices rose a further 1.7% in September. After having declined by 12.7% from late-2017 to mid-2019, Sydney prices have now bounced back by a cumulative 3%. While firmer property prices could help buoy consumer spending, working the other way are growing signs of labour market weakness, with the unemployment rate now up to 5.3%.
We’ll get some key updates on the state of the economy this week, with the NAB business survey and ANZ Job ads out today, consumer confidence on Wednesday and housing finance on Thursday. Expect a sluggish theme to prevail, which keeps on the RBA on track to cut rates again in coming months.