Headline Rollercoaster: The Economic Limbo Continues

June 6, 2016

Headline Rollercoaster: The Economic Limbo Continues

  • Europe and Japan continue with their easing policies as not much changes.
  • Chinese Purchasing Managers’ Index is positive but not far from stagnation.
  • US data flirts between a dead cat bounce and a stronger economic recovery.
  • Finding specific good investments should be the best answer to uncertain economic times ahead.

Introduction

Last week was an interesting one as it was filled with various economic news. It is important to summarize that news to see if it will move the needle as the market has moved only sideways since December 2014.

Global News

Mario Draghi, the president of the European Central Bank, announced on Thursday that the ECB will keep rates unchanged as it expects only moderated but stable economic growth, and there are still several sectors that need time to recover as turmoil in emerging markets and in some European countries disables stronger growth. As for EU inflation, expectations are that it should stay stable in 2016 and pick up in 2017 and 2018, but this is a story that we hear over and over again with just the timing being delayed. Inflation in the EU would be globally beneficial as it would push for higher interest rates in Europe and keep the balance between the currently rising dollar and weak Euro. Eventually it will rise but who knows when, and in the meantime US exports are already expensive and will be even more so if the FED raises interest rates.

Shinzo Abe, Japan’s prime minister delayed the announced rise in consumption tax from 2017 to 2019, despite repeatedly saying that only a shock of the scale of a Lehman Brothers collapse or an earthquake could delay the implementation of the increased tax. Such a move indicates that the Japanese economy is not strong enough to withstand any kind of tapering. So the story in Japan is practically the same as in Europe with continuing easing amid weak economic circumstances.

After some positive news from China at the beginning of the year and a hoped faster growth, the latest data from the Chinese Purchasing Managers’ Index (PMI) at 50.1 still indicates growth but a subdued one.

figure 1 china pmi index
Figure 1: Chinese Purchasing Managers’ Index. Source: Statista.

The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. An index value above 50 indicates a positive development in the industrial sector, whereas a value below 50 indicates a negative situation. The 50.1 mark is just above neutral and not the kind of news that could move global markets into bullish territory.

The Australian GDP gave a positive note to the week as the annual growth stepped up to 3.1% from an expected 2.9% mostly based on a larger than expected pickup in commodity prices.

News From The US

Unfortunately, news from the US starts on a darker tone as employers added only 38,000 jobs in May, which is the weakest performance since September 2010. As the rule of thumb is that an increase of 150,000 jobs indicates economic growth while any number below that indicates a weak job market and rough times for the economy, the news might make the FED delay interest rate increases, especially now that Europe and Japan are continuing with their easing policies.

The unemployment rate fell to 4.7% from 5% but mostly due to a decline in labor force participation as half a million Americans dropped out of the workforce. On the positive side, consumer spending advanced by 1% in April which is the fastest pace in the last 7 years. On a yearly basis, the inflation index climbed 1.1%. The US Purchasing Managers’ Index came in on an upbeat tone at 51.3, which indicates expanding activity, especially as it was at 50.8 in March 2016.

figure 2 pmi us
Figure 2: US Purchasing Managers’ Index. Source: Trading Economics.

The final interesting piece of news is the Nation’s international trade deficit that increased from $35.5 billion in March to $37.4 billion in April. Both exports and imports increased but imports increased at a faster pace.

Conclusion

The situation in the US is difficult to analyze as it paints a contradictory picture. Spending is increasing which is good for the economy, but it doesn’t spill into additional hiring which is the main factor for creating sustainable growth. The increase in spending can easily be attributed to a purchasing rush before inflation, and the expected increased interest rates kick in.

The global perspective isn’t better as Europe and Japan find it difficult to reach their targets and China is slowing down. It isn’t surprising that the market didn’t go anywhere in the last year and a half with such news.

As governments cannot reach set targets by using all the monetary policy mechanisms at their disposal, investors should be aware of investing in the market and opt for strategies that are not sensitive to economic activity. Also in the current ETF era, stock picking might come in handy as it enables one to find the best companies that can survive financial shocks or outperform in a longer term ‘economic limbo’.