ECB considers additional stimulus

At the close of the ECB meeting on June 6th, the central bank kept rates unchanged and pushed the date for any potential rate increase to the second half of 2020 rather than the end of 2019. During the ECB press conference, Mario Draghi explained that this six-month delay was to address prolonged global uncertainty (rising protectionism, a potentially hard Brexit) rather than any weakening in the eurozone economy.

The ECB only marginally adjusted its economic projections compared with March. The bank now expects slightly stronger 2019 eurozone growth (+0.1 percentage point to +1.2%), but scaled back forecasts slightly for 2020 (-0.2 percentage points to +1.4%) and 2021 (-0.1 percentage point to +1.4%). The bank also lowered its forecast for 2019 underlying inflation (-0.1 percentage point to +1.1%), while keeping its 2020 and 2021 forecasts unchanged (+1.4% and +1.6% respectively).

In addition to postponing any rise in interest rates, Mario Draghi also emphasised that the central bank was ready to act and deploy all available instruments should downward risk materialise. During his speech at the central bank forum in Sintra on June 18th, the ECB chief even went a step further by indicating that supportive action would be needed ‘in the absence of improvement’ and clarifying that this could come in the form of rate cuts or a fresh round of asset purchasing.

June’s PMI surveys, while encouraging, failed to deliver any real signs of improvement. The eurozone Composite PMI rose 0.3 points to 52.1 according to the flash estimate, in line with growth of about 1%.

The manufacturing PMI stayed low, only moving from 47.7 to 47.8, whereas the Services PMI rose from 52.9 to 53.4, reflecting the ongoing divergence between the sectors.

Data available for the start of the second quarter are also proving quite disappointing. April’s industrial output fell 0.5%, retail sales slipped 0.4% and the trade surplus also shrank due to a 2.5% fall in exports. In contrast, eurozone car sales continued to rise, moving 2.8% higher in May, after April’s 4.8% increase. Car sales are now back at the average levels seen in the first half of 2018, prior to the disruption caused by introducing new anti-pollution standards.

Headline inflation slowed in May from +1.7% to +1.2% year-on-year. Underlying inflation, which excludes food and energy, fell from +1.3% to +0.8%. Both April and May’s readings were distorted by calendar effects.

The opinion expressed above is dated 25 June 2019, and is liable to change.

Fed opens the door to preventive rate cuts

The Federal Reserve followed in the ECB’s dovish footsteps at its meeting on June 19th, without actually lowering rates. The US central bank removed the reference to patience, which was introduced in January, from its latest statement. Reiterating Fed chair Powell’s comments in Chicago at the start of the month, the central bank signalled it will be closely monitoring the incoming information and will act as appropriate.

The FOMC has also downwardly revised its interest rate forecasts. Although the 17 members’ median forecasts remain unchanged for 2019, eight members are now expecting at least one rate cut compared with zero in March 2019. The median forecast for 2020 is now for a 25 bps cut versus a rise previously.

Although the Fed has opened the door to rate cuts, its assessment of the US economy remains optimistic overall albeit less so than at its previous meeting at the start of May. The FOMC members did not downwardly revise their growth forecasts from March. They still expect 2019 growth of 2.1% and even increased their 2020 growth forecast slightly from +1.9% to +2.0%.

The shift in the Fed’s stance appears to address rising risks for growth, and especially trade tensions, rather than a worsening economic situation. Any preventive action by the Fed in terms of interest rates would mark a first in such circumstances. In the past, only significant financial pressures and material economic deterioration have prompted the Fed to cut rates preventively, neither of which is the case currently.

May’s sharp slowdown in job creations from 224,000 to 75,000 could be a leading indicator of a weakening labour market, but jobs data are notoriously volatile and other indicators, such as weekly jobless claims, are not signalling any weakening. Household consumption is robust and on an upward trend and the property market is not showing any signs of turnaround. Economic weakness is primarily affecting the manufacturing sector.

Underlying inflation has been slowing over recent months to settle at +1.6% year-on-year in January, but the slowdown is concentrated on certain segments. The Fed’s Dallas index, which excludes the most extreme price changes, seems to be indicating that inflation is gaining pace.

The opinion expressed above is dated 25 June 2019, and is liable to change.

Authorities increase economic stimulus

Following two extremely volatile months, China’s industrial production slowed to +5.0% year-on-year in May compared with +5.4% year-on-year in April, a record low since 2002. Although a lower number of working days in this period exaggerated the year-on-year comparison, the deteriorating picture does echo falls in the manufacturing PMI over the past two months. The average of the official PMI and the Caixin PMI dipped back below 50 in May to 49.8.

Investment also slowed from +5.7% year-on-year in April to +4.4% year-on-year in May. Weak property and infrastructure-related investment was a major contributory factor to the slowdown, whereas manufacturing investment spending actually rose slightly after six months of steep falls.

Retail sales jumped to +8.6% year-on-year in May from +7.2% year-on-year in April. Again, the lower number of working days affected the data as workers had more time off for discretionary spending. Meanwhile, the China Association of Automobile Manufacturers (CAAM) reported a 17.4% year-on-year fall in car sales in May, in line with the steady pattern seen since the start of the year.

Chinese exports rebounded in May, rising +1.1% year-on-year, due in particular to a jump in exports to the US. However, the improvement may merely reflect Chinese corporate fears of additional customs duties, prompting them to front-load exports ahead of any future backlash.

Following escalating tensions in May, the latest news on the US–China trade front appears to be more positive.

Both Chinese and US Presidents confirmed their intentions to meet during the G20 Osaka Summit meeting on 28–29 June. Statements from both sides of the negotiating table are now more constructive, leaving hope for real progress.

Faced with worsening economic conditions and uncertain trade talks, China’s authorities decided to announce fresh economic stimulus, demonstrating a commitment to cushioning the growth slowdown. They eased the regulations that govern local municipalities seeking to engage in large infrastructure projects and announced fresh support for the auto sector.

The opinion expressed above is dated 25 June 2019, and is liable to change.

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