Daily Market Update: Deluge of weak data raises questions over strength of US economy
China posted its third successive week of stock market declines last week.
The Shanghai Composite index fell by over 9% last week and officially entered bear market territory for the second time in seven months. The latter is defined as a fall of 20% from its recent high. European stocks have also recorded their worst ever start to the year with the Euro Stoxx 600 index also entering bear market territory last week. Friday saw the narrower Euro Stoxx 50 index fall 2.4%. European equities have resumed their declines in early trading this morning. Looking to the week ahead it is a significant week for Chinese economic data with retail sales, industrial production and Q4 GDP due later this week.
Oil spent much of last week trading at $30 a barrel, an astonishingly steep fall considering that it averaged $110 between 2011-14. The good news is that consumers and big users of energy will see their costs fall, but this isn’t the growth-boosting tax cut that many hoped it would be. A large part of the reason oil is so cheap is that demand growth hasn’t met expectations, with the slowdown in China and its near neighbours the main culprit. Therefore implying that global growth more generally will disappoint. Brent crude briefly dipped below $28pb this morning. This follows the news over the weekend that economic sanctions imposed on Iran have been lifted. Another new supplier will be added to the current oil glut.
Friday’s incoming US economic data releases were largely disappointing and have raised concerns about the strength of the US economy. Retail sales were the main source of disappointment on Friday and suggest that weakness within the manufacturing is now spreading to services. Consumer spending accounts for two-thirds of US GDP and analysts have been receiving mixed signals on consumer confidence. On the one hand, 2015 was a record year for US car manufacturers as consumers splashed out on a new set of wheels - the most tangible indicator of consumer confidence. Friday’s University of Michigan’s survey of consumer sentiment hit a 7-month high in January.
Plunging oil prices and a strengthening labour market ought to have had US retailers, outside of new car salesmen, rubbing their hands too. Not so. While US retail sales were 2.2% higher in December than a year earlier they fell relative to the previous month. This brought the curtain down on the worst year for US retailers since 2009. Gasoline sales were down 15% y/y in December with new car sales up over 6% y/y. Stripping these two components out sales were flat last month. The retail sales control group, which inputs into US GDP was expected to post a 0.3% m/m gain in December. Instead it posted a decline of the same amount. This marked the biggest fall since last February. Against this backdrop it is perhaps not surprising that Wal-Mart, the world’s largest retailer, has just unveiled a store closure programme. Retailer and consumer confidence appears to be diverging.
Alongside Friday’s weaker than expected retail sales figures, the latest industrial production data continues to disappoint. Last month US industrial production fell by 0.4% m/m, twice the amount expected. Furthermore, the decline in November was larger than previously stated. Output dropped due to cutbacks in utilities and mining. Meanwhile a separate survey revealed that business inventories posted their biggest drop in 4 years in December. The increasingly pessimistic outlook for US manufacturing was topped with the Empire manufacturing survey for New York State. The January survey plunged to its lowest reading since March 2009.
Economists are starting to lower their economic growth estimates for Q4 with JP Morgan slashing its estimate of Q4 GDP growth from 1.0% on an annualised basis to just 0.1%. This compares with a growth rate of 2% in Q3. Policy analysts are scaling back their expectations of a second Fed rate hike in March. The probability of a rise in March is just 34%. Looking to the week ahead, there is more manufacturing data in the shape of the Philly Fed survey on Thursday and the Markit manufacturing PMI on Friday. These are expected to signal a further deterioration in US manufacturing activity. Markets are closed in the US today as it is Martin Luther King Day.
Last week saw a disappointing batch of UK economic data and a dovish set of MPC Minutes. These, coupled with mounting political risks linked to Brexit have weighed on sterling sentiment. Indeed, a poll out over the weekend puts the ‘Out camp’ (UK to leave the EU) six percentage points ahead of those wanting the UK to remain within the EU. On Friday EUR/GBP almost hit 77p and is back trading at 76.2p as I write. Meanwhile GBP/USD is trading at $1.43 having briefly dipped below $1.4250 a short time ago. EUR/USD is broadly unchanged over the week at $1.09. The key UK releases of the week are CPI tomorrow, labour market data on Wednesday and retail sales on Friday.
In the Eurozone the final estimate of CPI and the German ZEW survey are the key releases tomorrow with the flash PMIs due on Friday. Thursday’s ECB policy announcement is expected to keep the policy settings on hold. However, with inflation expectations falling watch out for Mario Draghi talking up more stimulus in the not too distant future at the press conference. This should see the single currency give up some of its recent gains.