China Trade Data Adds to Fears ...
The world economy had a rough week, according to Bloomberg headlines today. "China and US deal blow to world markets" according to the Times. Is there any hope for the future?
US markets fell by 2% in the week as the Dow, S&P and Nasdaq shared the impact of disappointing jobs data. South East Asian markets fell. China trade data in February suggested a radical slowdown in trade with the USA. Lower imports contributed to fears of a slow down on the Chinese mainland.
Chinese stocks were down 5% in the week. You have to be quick in the markets. Last week China was the darling of growth. Up weighting within the MSCI index did produce a short surge in prices as tracker funds bought into China's superstars. Profit taking and fears for the short term provided a basis for a reassessment. As always the short term bears had some fun. Fundamental traders will stick with value in the East.
It was left to Mario Draghi to be the cheerleader for the West; Think José Mourinho running the United Supporters Club. The ECB downgraded forecasts for growth in the EU area. Rate rises are off the table for the central bank until 2020 at best. Further QE is not expected. The bank announced a further round of short term funding for the banking system. TLTRO 3 is coming. It sounds like a LEGO Movie series. It actually represents "Targeted Longer Term Refinancing Operations" a means of providing discounted funds into the banking system.
The ECB is worried about growth prospects in the world economy generally and in the EU area specifically. World trade appears to be slowing, growth is allegedly slowing in the US and China. Trump's trade war with China is creating problems within the US and China. Brexit uncertainty is damaging investment and trade prospects for the UK and Europe.
Central banks are accommodating slowdown. Further rate hikes are off the table in Europe, the UK and U.S.A. China is cutting domestic rates to stimulate demand. Monetary policy and fiscal policy do not suggest any real slow down in the economy any time soon. Political folly is to blame for the uncertainty. Brexit is a shambles as is The President's trade policy. The wounds are self inflicted but for how long can the self abuse continue ...
US Jobs Data Disappoints ...
Another Tough week for the President of the United States.
Last week, Janet Yellen former chair of the Fed explained that Trump has little grasp of economic policy. This week Paul Krugman, American Economist and columnist at the New York Times explained the President has little grasp of international trade. No real surprise there!
The President had promised to reduce the trade deficit. In 2018, the trade deficit ballooned to $891 billion. The highest level in US history. Despite the introduction of tariffs, to reduce the level of imports, the trade deficit with China and the rest of the world increased. Dollar strength and relative rates of growth in the US versus the rest of the world explain the deficit expansion. Trump's $1.5 trillion tax cut fueled domestic demand and the propensity to import.
Markets were relatively unmoved on the news. The twin deficit dilemma will return to haunt markets in the medium term. Growth in the US was 2.9% last year. This year, growth is expected to slow to 2.5%, it could well be higher as we have explained. (Growth in Q4 was 3.1% year on year).
The real shock came with the jobs data for February. The number of jobs created in the economy slumped to just 20,000 compared to the 200,000 expected. 30,000 jobs were lost in the construction sector. The good news, earnings increased by 3.4% as participation rates continue to increase. The unemployment rate fell to 3.8% in the month.
So what can we make of the February jobs data. Not much is the real answer. Payroll growth was over 300,000 in January and 227,000 in December. Over the three months job gains were 186,000. Construction jobs were up by over 50,000 in January. Can we really believe there were 30,000 layoffs in the following month?
Monthly data in isolation is often too noisy. A break in trend should be treated with suspicion. The world economy may appear to have had a rough week. The fundamentals remain in place. The world economy will grow by 3.5% this year, underpinning the continued expansion in world trade. Trump's economic credentials are discredited. A reduction in tariffs is called for in a resolution of the trade war with the East.
Lambs to the Slaughter ...
Good news, Greggs announced it has stockpiled ingredients for the vegan sausage roll ahead of a no deal Brexit. The share price was still down in the week. Fickle markets have no heroes.
Not so good, no deal Brexit threatens a cull of ten million lambs, the revelation in the Times this week. Tariffs would rise on trade with the EU, closing the vital export market for UK farmers. The proposal to eliminate tariffs on food imports would compound the problem for domestic agriculture.
UK officials have told farmers almost half of the lambs reared each year may have to be slaughtered, burnt and buried on farms in the event of a no deal. British lamb may fall foul of EU hygiene rules. They may face a 45% surcharge if the full tariff is implemented. It is an horrendous scenario with now less than three weeks to deadline.
BMW added to the traumas in the car industry this week. The future of the Mini will not in Cowley lie, in the event of no deal. Honda, Nissan and now Toyota have made the position clear. What use is a gateway to the Europe when the ports are closed to trade. It may have come a surprise to Dominic Raab, Brexit Secretary, the importance of trade between Dover and Calais. Just as it was a shock to Northern Ireland minister that Nationalists don't vote for Unionists in the province.
How great the shock will be if Liam Fox determines to slash tariffs on food and manufactured goods in the event of a no deal Brexit. The impact on many industries would be devastating. No time to adjust to the flood of product into the UK. Brexit "Après ça le deluge", will be the reality for farmers and manufacturers alike. It is time to call for an international trade crimes commission. Who would you most like to see doing the perp walk? We already have a great list for that early morning wake up call ...
That's all for this week, have a great week-end. We will be back with more news and updates next week!
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for FREE weekly updates on the UK and World Economy.
The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.