First the bullish perspective:
The biggest news for the bulls this past week was the Bureau labour of Statistics’ payrolls report, which was much better than expectations. This bullish report was also confirmed by ADP’s report, as well as further improvement in the past month in the 4-week average of initial jobless claims. Furthermore, Challenger and grey reported that mass firings remain very low. The job market has shown stabilisation. Meanwhile, on the housing front, the Case-Shiller index posted its 4th straight gain and its largest in nearly 3 years. Year over year growth rates for sub-indexes are near 0% after a steady climb from negative territory. Falling inventory will spur construction spending, making housing an increasing tailwind for domestic growth in the months to come. Anyone telling you that the economy is in a recession with these data points is high on something.
In the euro zone, monetary and political officials are beginning to outline the parameters of a team-up in an effort to stabilise financial markets. Promises by the ECB to buy near-term sovereign debt of periphery nations have resulted in falling yields across their yield curves. In addition, swap spreads, which measure systematic risk, are far from their highs from last year. Improving financial metrics signal that investors are increasingly receptive to the forthcoming solution in the euro zone. Alleviating confidence in the region is helping stabilise global growth.
China, the up and coming economic powerhouse, is showing signs of stabilisation. Despite endless bearish chatter of the length of the country’s manufacturing contraction, it pays to note that PMIs are still very close to the 50 mark demarcating expansion from contraction. China’s slowdown is nothing more than that. As officials begin implementing stimulus measures, economic growth is sure to reaccelerate. The situation there is under control.
At home, income dynamics are improving. Income growth is strengthening as per the Personal Consumption and Expenditures report, which showed wages and salaries rose 0.5% in June. Moreover, the Mortgage Bankers Association reports that re-financings rose to the highest in three years. Continued income growth is resulting in a resilient consumer. Chain store sales surprised to the upside, while vehicle sales rebounded. The Restaurant Performance Index showed that business in this consumer-sensitive sector remains in growth mode. A durable consumer will lead to improved sentiment of investors.
Citi’s economic surprise indicator has bottomed, marking a likely reacceleration of economic activity. This can be corroborated by an improving ECRI growth index, having increased from a low of near -4% two -1.3% today.
And now the bearish perspective:
Continued bluffs by Mario Draghi are harming the reputation of the ECB. Markets plunged midweek on no action from the central bank. It’s becoming increasingly clear that the Bundesbank will not allow the ECB to proceed, without severe repercussions (Germany drops out?). Efforts to buy time using these bluffs serve to weaken political will. In Germany, a survey was published in which a majority of the German citizenry now believes the Euro does more harm than good. Furthermore, the tomfoolery creates additional uncertainty, resulting in reduced consumer and business confidence (to the lowest since Sept. 2009). Geopolitics isn’t helping much either; Russia has sent 3 warships to Syria with army personnel. Iran/Israel keeps bubbling.
Vaporizing confidence is further strengthening what is an already scary negative feedback loop within the world’s largest economic bloc. PMIs throughout the region were very negative, Germany in particular. Weak PMIs in France, Spain, the UK (largest fall in three years), and Greece weren’t worth peeking at if you’re a bull banking on stabilisation. Unemployment in the region rose to a record 11.2% in June, while retail sales sunk for the 9th consecutive month. Continued weakness in the territory is likely to exacerbate an already faltering global recovery.
In Asia, Japan’s manufacturing PMI and industrial production fell, the latter falling for the 3rd consecutive month. In Taiwan, GDP surprised to the downside. South Korean had some awful data also. June industrial production fell, while manufacturing confidence fell to a three-year low. Furthermore, exports plunged almost 9% in July. JP Morgan’s global manufacturing PMI showed a greater pace of deterioration.
The U.S., with its economy also on the verge of recession, isn’t doing much to help as auto imports have plunged since the beginning of the year according to the latest vehicle sales report. Frailty in the manufacturing sector has become persistent with a slew of reports noting continued weakness. The ISM manufacturing index has contracted for two months in a row, with important leading indicators such as backlogs and new orders signaling more to come. Meanwhile, factory orders declined and core durable goods were revised lower. The Dallas Fed manufacturing report was lackluster as well, with general business activity plunging due to continued uncertainty in Washington. Weekly consumer spending metrics show continued weakness due to a increasing savings rate as a crisis of confidence engulfs the global economy. While the bulls may point to the jobs report as a sign that the economy is stabilizing, it’s unusual that the bulk of the gains came from the service sector in the same period that the ISM’s non-manufacturing report showed an employment sub-index in contraction territory. Furthermore, chatter from CEOs of consumer-based companies does not confirm these bullish numbers. In addition, is improved job growth sustainable when various leading indicators such as the conference Board’s employment trends, and the Monster Employment index both point to limited gains at best?