Tug of War Continues
Summary: Worries about global growth and the slowdown in manufacturing in the spotlight
Asian stocks edged higher today, but it was a muted day of trade following a lacklustre session on Wall Street overnight.
There is an ongoing tug of war in equity markets between optimism on trade and monetary easing which soothes sentiment, but this is offset by persistent confirmation of the ongoing deterioration in global growth which curbs enthusiasm regarding the aforementioned.
Worries about global growth and the slowdown in manufacturing were in the spotlight overnight as weak German and French PMI numbers soured sentiment and all but confirmed Germany is likely already in recession. Germanys manufacturing PMI contracted at the fastest pace in a decade under the weight of the trade war and global manufacturing recession. And services also declined as the slowdown begins to deepen.
▪ Flash Germany PMI Composite Output Index (1) at 49.1 (Aug: 51.7). 83-month low.
▪ Flash Germany Services PMI Activity Index(2) at 52.5 (Aug: 54.8). 9-month low.
▪ Flash Germany Manufacturing PMI(3) at 41.4 (Aug: 43.5). 123-month low.
▪ Flash Germany Manufacturing Output Index(4) at 42.7 (Aug: 45.8). 86-month low.
Services not Immune
The US services PMI also came in at the lowest on a quarterly basis since Q1 2016. This is of concern as it sparks fears of contagion from the manufacturing led slowdown into the services sector which would have a greater drag on economic growth. The problem is that the manufacturing sector typically leads the services sector lower, which represents a larger part of the economy and is where the bulk of employment sits, so heightens the impact on consumption and raises recession risk. To date recessionary dynamics in the manufacturing sector have not yet bled into the services sector more broadly, with the impact being limited to trade sensitive services as we have highlighted back in July. But with the ongoing deterioration in services PMIs illustrated by the French, German and US data overnight it appears the risks are increasing, which would deepen the slowdown already under way. This nascent spill over into the services sector puts the so far resilient consumer, currently underpinning the economic expansion, at risk because services is where a larger part of the workforce sits. Labour markets have been a pillar strength alongside the current global slowdown, but leading indicators have been deteriorating and now coupled with evidence the services sector may be slowing this pillar could be set to crumble which would accelerate the end of cycle dynamics currently in play. If the ongoing industrial recession continues to seep into the services sector more hawkish members of the FOMC will be forced to capitulate before year end.
Gold miners were among the top performers today in Asia after gold jumped the most in almost 3 weeks off the back of the weak PMI data. After a few weeks of consolidation, gold will continue to climb in coming months whilst expectations for global growth are continually recalibrated downwards, uncertainty is elevated and geopolitical frictions remain. The backup in yields that we have seen since the start of this month will also likely prove to be a buying opportunity. This as the synchronised global slowdown continues, US/China tensions are merely on ice and central banks continue their spate of policy easing. As growth continues to slow neutral rates will also decline which will force central banks hand on continued and more aggressive monetary easing.
The August jobs report on top of September’s dovish minutes sealed the deal for the RBA to cut the official cash rate again in October from the current record low of 1.00% to 0.75% as we have previously thought. But traders will be listening to RBA Governor Lowe’s speech tonight for clues on where the RBA is at in relation to next week’s policy decision. Market bets of a rate cut next week have stepped up following the pickup in unemployment and underemployment last week which is a serious impediment to spurring wage gains. This pick up in labour market slack along with deteriorating business conditions and the minutes of the September meeting which were decidedly dovish should have sealed the deal for an October cut particularly given it is clear the government will look to maintain the budget surplus as a priority leaving the heavy lifting to the RBA. A rate cut next week, and further monetary easing will continue to keep downwards pressure on the AUD, along with mounting global growth concerns and a strong US dollar. Given the probability of a cut at next week’s meeting is sitting at around 75% any dovish comments from Lowe tonight should see a pickup in market pricing which means there is room for the aussie dollar to trade lower.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.