Macroeconomic update: Is that bottoming out?

• Business activity in Europe remains weak
• With higher NFP in the US, is the Fed right to stop lowering rates?
• Emerging markets see recessionary signals  
   

Europe – is this a bottoming out?

There is an increasing number of theories that coordinated global monetary stimulus will help avoid recession and that a cyclical low is already past us. This is clearly the theory favoured by the markets as the indices in Europe and US are storming to fresh highs, completely discarding the data. The “recovery” scenario is not impossible but so far the data has not confirmed it. In Europe and US the PMI/ISM indices have generally stabilized, albeit at levels close to decade lows. Meanwhile many key emerging markets have seen business sentiment plummet in October – that includes all key regions: Europe (Poland), Asia (India) and Americas (Mexico). While there are few PMIs still to be published in non-manufacturing sectors (most notably in the US), our global composite is headed for the lowest print since 2012.   

By now, the German DAX is clearly pricing the “recovery” scenario. Source: xStation5

Key economic event this week: industrial output in Germany (Thursday, 7am GMT)

US – what does the stronger NFP means?

November started in bright moods on the markets, partly on the back of the NFP report that we got on Friday. Employment gain of 128k might not be very impressive but it was clearly above the consensus (85k) and previous two months saw a combined revision of +95k. What can we say about it? First, we’ve seen an unprecedented period of job market stability in the US – that’s good for the consumer and demand prospects. However, the NFP has been a very poor provider of warning signals ahead of major market slumps. On many occasions the markets slumped right from the peak of the labour market conditions. What it means however, is that Fed will be more comfortable with its “pause” concept and will delay any rate cuts.

Historically, strong labour market has provided no guarantee of equity market performance. Source: Macrobond, XTB Research

Key economic event this week: ISM services (Tuesday, 3:00pm GMT)

Asia – judging consequences of the tax hike in Japan

You’d think that a moment when business activity is around multi-year lows is not ideal to increase tax rates. But in Japan the government clearly had a different view as it proceeded with a planned sales tax hike in October. Yes, Japanese public finances could use higher revenues to reduce a massive public debt (held mostly by the Japanese themselves and recently also by the Bank of Japan) but at the time when global trade dents orders for the Japanese exports and monetary policy has ran out of ammo, this change is risky. In isolation, it’s not enough to derail a possible global recovery but it has already impacted business sentiment – as evidenced by the PMIs.

Japan and emerging markets are responsible for another slump in our global PMI composite. Source: Macrobond, XTB Research

Key economic event this week: PMI services in China (Tuesday, 1:45am GMT)