Tug of War Continues
Australian Market Strategist, Saxo
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.