Technical Recessions in Germany and U.K. and More Impeachment Drama in the U.S.

October 3, 2019

Composite purchasing manager surveys that embody non-manufacturing as well as manufacturing activity released for several countries in Europe by and large underperformed expectations. Most alarming were the reports for Germany and the U.K., each of which recorded slight contractions of real GDP in the second quarter.

  • The German service sector PMI dropped 3.4 points in September to a 3-year low of 51.4, and combined with a very depressed 41.7 reading on the manufacturing PMI survey reported earlier, such depressed the German composite PMI score to an 83-year low of 48.5. That suggests that German GDP likely contracted further last quarter, meeting the unofficial technical criterion for recession of two straight drops of real GDP.
  • The same test has been met in the U.K. where a composite 48.8 PMI reading in September after 49.7 in August and 50.3 in July also suggests that real GDP likely continued to contract during the summer quarter. Uncertainty over Brexit and general trade tensions are the driving factors behind this economic weakness.

Other PMI reports today yielded the following:

  • As a whole, Euroland’s economic upswing seems to have been stalling as last quarter drew to a close. The composite PMI for the region fell 1.8 points to 50.1, lowest since June 2013. In addition to Germany’s sub-50 result, the composite PMIs of France and Italy of 50.8 and 50.6 were only slightly above the no change threshold.
  • Japan’s service and composite purchasing manager indices printed at 2-month lows of 52.8 and 51.5. Japan next faces the additional economic headwind of a sales tax hike to 10% from 8%, which likely shifted some economic growth from the fourth quarter into the third.
  • The private sector PMI readings of Singapore, South Africa, and Lebanon dropped respectively to and 85-month low of 48.3, a 2-month low of 49.2 and a 3-month low of 46.4 in September.
  • The Commonwealth Bank of Australia’s service-sector and composite PMI indices rose in September to a 3-month high of 52.4 and 2-month high of 52.0.
  • Russia’s composite PMI edged 0.1 point lower to a 2-month low of 51.4 despite a 1.5-point rise of the services PMI to a 6-month high.
  • Non-oil PMI readings last month from the Middle East dropped to a 112-month low in the case of the United Arab Emirates, but rose to a 3-month high in Saudi Arabia and a 2-month high (albeit slightly sub-50 level) in Egypt.

Investors have also been watching the U.S. impeachment drama with great trepidation. Share prices overnight fellĀ  2.2% in Australia, 2.0% in Japan and Singapore, and 1.4% in New Zealand. China’s market remains closed for the National Day holidays, and Germany was shut too for Unity Day

Ten-year sovereign debt yields are down all over, with drops of 3 basis points in Japan, 3-4 bps in key European countries, and 2 bps in the United States futures.

The price of West Texas Intermediate crude oil fell an additional 0.4%, but that of gold is unchanged.

The dollar rose 0.3% against the Swiss franc but fell 0.3% versus the kiwi. Movements versus the euro, yen, sterling and loonie have been very scant.

President Trump tweeted more complaints about Federal Reserve policy. Chicago Fed President Evans defended the central bank’s credibility by asserting that it retains a reasonable amount of independence from political interference, but he also expressed concern about the outlook for attaining the inflation target. Bank of Japan Board member Funo meanwhile said there’s no sign of a global recovery as global risks continue to intensify.

The National Bank of Romania left its monetary policy rate unchanged at 2.5%, the level since a 25-basis point hike in May 2018 to a 3-1/2 year high at the time.

In other data reported today, retail sales volume in the euro area rebounded 0.3% in August from a 0.5% drop in July, leaving the average July-August level 0.1% above the second-quarter mean. Sales had risen 0.5% between 1Q and 2Q and were 2.1% greater in August than a year earlier. Separately, euro area producer prices dropped 0.5% on month in August, and swung southward to the biggest 12-month rate of decline (0.8%) in 35 months.

Even in Turkey where CPI and PPI inflation peaked last year at 25.24% and 46.15%, respectively, September data reported today showed sharp decelerations to 7.54% and 2.45%, respectively.

Australia’s trade surplus, which hit a record monthly high of A$ 7.977 billion in June and then tallied A$7.253 billion in July, narrowed to A$ 5.926 billion in August as export commodity prices slid. That said, the year-to-August surplus of A$ 42.8 billion was still considerably higher than the year-earlier surplus of A$ 11.7 billion.

U.S. data on non-manufacturing purchasing managers conditions, factory orders, motor vehicle sales and jobless insurance claims will be reported today, and several Fed officials are scheduled to speak publicly.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


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