Continues to decelerate from the tariffs, and this is before the virus:
Also decelerating before the virus:
Before the virus, the downtrend is obvious as it remains below 50:
Exports and imports both slowing as global trade continues to wind down:
GDP forecast to decelerate, before the virus:
Unsold inventory piling up:
Gone negative well before the virus:
Both imports and exports falling as per the global trade collapse. Falling imports are also an indication of consumer weakness:
New orders heading south with tariffs:
Familiar pattern:
Fire related maybe:
Australia Construction PMI Contracts Further
The Ai Group Australian Performance of Construction Index declined to 38.9 in December 2019 from 40 in the previous month, falling to the lowest level since May 2013 and adding weight to calls for fiscal stimulus. The activity index fell sharply again in December with its biggest monthly drop in 12 months (down 4.4 points to 36.5). second month (up 0.8 points to 50.8). In contrast, apartment building remained deep in negative territory (up 0.9 points to 37.4). There is now a clear danger of a self-Meanwhile, new orders declined 0.6 to 36.9 points. Of the four construction sectors, house building was the best performing sector with activity showing stability for a reinforcing downturn across significant parts of the domestic economy,” Ai Group Head of Policy, Peter Burn, said.
Chart still looking lower:
The ISM Non-Manufacturing PMI for the US increased to 55 in December of 2019 from 53.9 in November, slightly beating market forecasts of 54.5. The reading pointed to the biggest expansion in the services sector in four months as production and inventories rose faster while new orders, new export orders and employment slowed. Companies are positive about the potential resolution on tariffs and capacity constraints have eased a bit although difficulties with labour resources remain, according to Anthony Nieves, Chair of the ISM.
The global slow motion train wreck continues:
Japan:
Core machinery orders in Japan, which exclude those of ships and electrical equipment, declined 6.0 percent from a month earlier in October 2019, following a 2.9 percent fall in September and compared with market expectations of a 0.9 percent increase. It marked the longest period of month-on-month contraction since a similar stretch to January 2009, mainly due to lower demand for fabricated metal products (-44.3 percent), information & communication electronics equipment (-43.7 percent), ship building (-31.9 percent), iron & steel (-21.1 percent), business oriented machinery (-15.2 percent) and general-purpose and production machinery (-10.9 percent).
Mexico Industrial Output Falls the Most in 5 Months
Mexico’s industrial production fell 3 percent from a year earlier in October 2019, following a 1.8 percent decline in the previous month and above market forecasts of a 2.1 percent decrease. manufacturing production dropped 1.2 percent, after rising 0.8 percent in September; and construction output declined further (-9.3 percent compared to -8.3 percent).
May just be from the Thanksgiving holiday and reversed next week:
The private sector tends to be pro cyclical- tightening as the economy slows, thereby making it worse:
Tariffs have caused a global economy (that has a pro cyclical bias) to turn south.
It’s always an unspent income story. When decisions to not spend income (decisions to ‘save’) are not sufficiently ‘offset’ by agents spending more than their incomes GDP (sales/income) decelerates until said deficit spending- private or public- expands to fill the gap.
Just a partial recap of today’s releases as the tariff induced global trade collapse continues:
Japan Exports Fall for 8th Month
Exports from Japan dropped 1.6 percent from a year earlier to JPY 6.64 trillion in July 2019, the eighth straight month of decrease and compared to market expectations of 2.2 percent fall, amid weakening global demand and the US-China trade dispute.
An Economic Warning Sign: RV Sales Are Slipping
Elkhart, Ind., is flashing a warning sign that a recession could be just ahead.
Capital of the country’s recreational-vehicle industry, the northern Indiana city and the surrounding area are watched by economists and investors for early indications of waning consumer demand for luxury items, often the first sign of economic anxiety.
Shipments of recreational vehicles to dealers have fallen about 20% so far this year, after a 4.1% drop last year, according to data from the RV Industry Association. Multiyear drops in shipments have preceded the last three recessions.
Aides got Trump to delay tariffs by telling President it could ‘ruin Christmas’
(CNN)- President Donald Trump’s trade advisers were searching last week for a strategy to forestall his threatened tariffs on China, they struck upon a novel approach: appeal to his Christmas cheer.
Under pressure from retailers to prevent a move that would likely have caused prices of popular consumer goods to spike, the President’s team came to him during a meeting last week with a warning. Applying new tariffs on all Chinese imports, they cautioned, could effectively “ruin Christmas,” according to people familiar with the matter.
It was a tactic that worked: Trump announced the tariffs would be delayed until December 15.
Deep into global industrial contraction:
Not that rate cuts are expansionary, of course, but that they think they are. As the barber quipped, ‘no matter how much I cut off, it’s still too short’ :
Central Banks Across Asia Cut Interest Rates
The Reserve Bank of India cut its benchmark repo rate for a fourth straight meeting by a deeper-than-expected 35bps to 5.4%; the Reserve Bank of New Zealand slashed its official cash rate/OCR by a larger-than-expected 50bps to a fresh record low of 1%; and the Bank of Thailand unexpectedly lowered its policy rate by 25bps to 1.5%.
As previously discussed, exports are falling and imports climbing, with lots more to go:
Highlights
Trade looks to be a major negative that will be holding down fourth-quarter GDP. The advance trade deficit in goods widened sharply for a second straight month in November, to $65.3 billion following a revised $61.9 billion deficit in October that was nearly $5 billion higher than the last month of the third quarter, September.
Exports have been very weak so far this fourth quarter, down 1.0 percent in November following October’s 2.5 percent shortfall. Food exports have been especially soft as have vehicle exports, and capital goods exports fell very sharply in the latest report.
Widening the gap have been sharp increases in imports, up 1.2 percent on top of October’s upward revised 1.5 percent increase. Imports of industrial supplies posted a very sharp increase in November as did food imports. Most other readings on the import side are narrowly mixed.
Slowing sales growth caused inventories to increase, which leads to production cuts, as per the cuts in automobile production previously discussed:
Highlights
Wholesale inventories jumped a preliminary 0.9 percent in November following an upward revised 0.1 percent decline in October. Retail inventories also jumped, up 1.0 percent in November following an unrevised 0.4 percent decline in October. The build in wholesale inventories is split evenly between durable and nondurable goods with the build on the retail side concentrated in vehicles. The increases in this report are a surprise and, though a positive for the fourth-quarter GDP calculation and an offset to this morning’s widening in the goods trade gap, will revive talk of unwanted inventories.
All of this ties into proposed trade policies designed to reduce imports and increase exports, for the further purpose of increasing domestic output and employment:
The questions begin with what this would do to the value of the $US. Mainstream theory concludes that, all else equal, the $ would appreciate to offset the price effects of the ‘border adjustments’. While I agree $ appreciation would offset the price effects, given the forces currently at work I don’t see them pushing things in that direction.
First, mainstream theory would say the current trade balances should ‘fundamentally’ be driving the dollar lower. The US has a large and growing trade deficit, while the euro zone has a large and growing trade surplus, with China also in surplus and Japan working its way back to surplus, etc.
However, while trade has been ‘fundamentally’ working against the $, portfolio shifting, a ‘technical’ force, has been going the other way. (Personally I often use the term ‘savings desires’ to indicate the various desires to hold financial assets of a particular currency.) As previously discussed, for example, the euro area had ‘capital outflows’ of over 500 billion euro over the last year or so, which means portfolio managers of all types with euro financial assets sold them and switched to financial assets denominated in other currencies, such as $US, yen, and Swiss francs (with the Swiss National Bank then selling maybe half of the euros they bought and buying $US). This would be analogous to a crop failure such as the corn crop being reduced by drought, for example. The drop in supply would be a force that would put upward pressure on the price of corn. However, is a company with a very large warehouse full of corn decided to sell it, that selling could dominate and drive the price lower, until the warehouse was empty. Only at that point would the effects of the crop failure dominate, and then drive the price higher.
So technicals (portfolio shifting) can overwhelm fundamentals (trade balances) for long periods of time until the technical force has run its course, and the warehouse is either empty or as low as the portfolio manager wants it to be. In fact, this time around, while the trade flows were presumed to reduce the US trade deficit via lower prices for imported oil, and therefore be supportive of the $, it didn’t work out that way, however, as lower oil prices were partially ‘offset’ by reductions of global income from the lower oil prices, which reduced US exports, and increasing US consumer related imports.
Second, I’m not comfortable with the idea that US export prices will go down if the revenues are no longer taxed. Prices in this case are ‘world prices’ and to the extent the US exporters are ‘price takers’ I don’t see how a lower cost of goods will necessarily result in a drop in global prices any more than, for example, reducing income taxes on oil would cause the price of oil to fall. Yes, longer term, lower costs might bring out more supply, but that’s a different and much longer term story.
Nor do I see the quantities of US exports going up even if the proposed border tax policy results in a reduction in the price of US exports, given the general weakness of global demand. And more specifically, who would buy more US exports if prices were maybe 15% lower, for example? China? Japan? India? I don’t see it.
Third, I do see US imports softening with the proposed import tax, which means an equal reduction of $ revenues to the rest of the world, which means they are likely to buy fewer US exports. This is similar to what happened when the price of oil fell, and the US spent less buying oil from the rest of the world, and that reduction of $ income reduced the demand for US exports.
This is also a strong channel for a general reduction in global aggregate demand.
Now back to the value of the $. Yes, the border tax policy could over time reduce the US trade deficit and thereby be a fundamental force that works towards $ appreciation. However, current fundamentals- the growing US trade deficits- have been and are currently working in the other direction. So what I happening would be a moderation of the fundamental trade flows that have been and are currently working to weaken the $, even as the portfolio managers- the technical forces- continue to deplete their non $ currencies and buy $. And when those currency warehouses are depleted, current trade flows will take over and drive the $ down until they reverse, with the proposed border tax policy perhaps slowing the $’s fall.
To sum up, the way I see it is the current fundamentals overwhelmingly negative for the $, with the proposed border adjustment tax policy at best a much smaller force in the other direction.
Not to mention I’m categorically against it all for more macro reasons. Imports are real benefits and exports real costs, the difference being real terms of trade, which are optimized by running as large a trade deficit as possible. And any lack of aggregate demand for domestic goods and services that results in undesired unemployment if instead best addressed by a fiscal adjustment- lower taxes or more public spending. But in a world where that understanding doesn’t exist, we get these types of highly counterproductive proposals that ultimately and necessarily make things worse.
Post script:
Seems to me it’s just a matter of time before Trump proposes the US start buying and building foreign exchange reserves to counter the strong $, which he has said many time is about ‘currency manipulation’. With the general notion that his other proposals, such as repatriation, will also have strong $ biases, seems to me it’s just a matter of time until we see fx purchases proposed?
