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Macro Watch: PMIs to confirm cautious optimism, but coronavirus fears cloud outlook

Your guide to this week's big economic events 

Key points

  • Will China’s Purchasing Managers’ Index (PMI) data reveal any early economic effects of the coronavirus?
  • US unemployment growth should slow in January
  • The Reserve Bank of Australia (RBA) is likely to cut rates

PMIs to confirm slightly brighter picture, but coronavirus fears cloud outlook

The flash January PMIs for the US, UK, eurozone and Japan showed broad-based improvements, building on recent modest advances. The final readings (manufacturing and services PMIs will be released on Monday and Wednesday respectively) should confirm the slightly brighter picture but all eyes will be on China’s PMI data which may provide an insight into the early impact of the coronavirus outbreak – a potentially major new risk to the economic outlook that has already rattled financial markets. Similarly, Chinese trade data for January (which will be released on Friday) will be closely scrutinised. It is hard to assess the impact of the coronavirus outbreak on the global economy as it is still early days, but we can look to history as a guide. In 2003, the Sars epidemic hit China. It caused volatility in Chinese economic activity:  temporary weakness in the first half of 2003 was followed by a sharp rebound. In addition, there were negative international spill-overs owing to trade/travel disruptions and, more importantly, sentiment effects and a tightening of financial conditions. According to a 2004 academic study, the estimated global economic cost of the Sars outbreak was close to $40bn (or 0.1% of GDP). Today, conditions in China and the global economy are quite different: global economic growth is sluggish, while China’s growth is on a structural downward trajectory and its relevance in the global economy has increased. Therefore, we can expect the coronavirus to adversely affect global growth through channels such as trade/supply chains, sentiment and financial conditions. That said, there are some mitigating factors, as the current crisis is being much better managed than the Sars outbreak in 2003 (in terms of communication and speed of response). In general, there are more relevant risks to the global economic outlook including protectionism and climate change. However, the evolution of the coronavirus must be closely monitored.

Figure 1. China in the global economy

Source: World Bank, IMF, as of January 2020.

US jobs growth cools, but don’t worry – yet

In the US, the monthly payroll report is likely to show slower employment growth. According to consensus forecasts, the US economy is expected to add 145,000 new jobs in January, compared to 155,000 the previous month. In addition, comprehensive annual revisions (including benchmark revisions1) are likely to result in a less bullish backward-looking picture of the labour market. Indeed, the preliminary benchmark revisions showed that the March 2019 level of payroll employment will be revised down by about 500,000 or 0.3%. This means that in the 12 months to March 2019 average monthly employment growth will be revised down to about 170,000, down from a previously reported figure of 210,000. That said, job growth should remain above the level required to absorb the number of people entering the labour force – about 100,000 a month. As such, the unemployment rate should remain low. In addition, initial jobless claims have stabilised at low levels, pointing to a similar development in the u-rate in the next months. Consensus expectations suggest that the unemployment rate will be unchanged in January at 3.5%, a multi-decade low. Meanwhile, wage inflation should be little changed at about 3%, well contained from a historical perspective and likely reflecting the impact of structural factors on price pressures and wages. Other US releases to pay attention to next week include the ISM surveys, car sales and weekly claims. The manufacturing ISM index is expected to edge up to 48.5 in January from 47.2 in the previous month. The manufacturing sector is still in the doldrums, but the outlook has improved thanks to the US-China trade truce and a gradual improvement in external demand.

Figure 2. Jobless claims suggest u-rate is about to bottom out

Source: US Department of Labour, BLS, as of January 2020.

Central banks: the impact of climate change on monetary policy

The RBA is expected to cut interest rates by 25bps to 0.5% amid weakening demand and subdued price pressures. However, idiosyncratic factors, such as the bushfires that raged across the country recently, are likely to act as an additional drag. Indeed, this demonstrates the effect climate change can have on the economy and monetary policy – a topic explored in a recent research study by the Bank for International Settlements (see ‘The green swan’). Other monetary policy meetings are also taking place in Thailand, Poland, Brazil, India, the Philippines, Czech Republic and Russia this week. Overall, a dovish tone is likely to prevail as there are still downside risks to the economic outlook as we discussed earlier.  It is too close to call whether the Brazilian central bank will cut rates, while the remaining banks are expected to stand pat. A minority of observers are calling for rate cuts in Thailand and the Philippines.

Figure 3. The number of extreme weather events has risen dramatically

Source: “The green swan – Central banking and financial stability in the age of climate change”, BIS paper, January 2020. Chart based on MunichRe data (2018).

Other events we're watching 

  • US Presidential elections: the Iowa caucases, which take place on Monday, are shaping up to be the most competitive ever. Former Vice President Joe Biden, Senator Bernie Sanders, former South Bend, Indiana, Mayor Pete Buttigieg and Senator Elizabeth Warren are all clustered within about eight percentage points of each other, according to the average of the state’s polls.
  • Donald Trump will deliver his State of the Union address on Tuesday. It may be contentious as it will take place against the backdrop of the ongoing Senate impeachment procedure. As the presidential election campaign lurches into gear, Trump’s address is likely to have a strong campaigning flavour.
  • Spluttering Germany: manufacturing sector, factory orders, industrial production and trade data will be published later this week.
  • Inflation in emerging markets: Turkey, Mexico and Brazil will publish consumer price inflation for January. In recent months, inflation has been boosted by strong oil prices. In the short-term, there are other sources of upward price pressures. In Mexico and Brazil, these price pressures are likely to be temporary (notably, tax increases in Mexico), while they may persist in Turkey (owing to a recovery in domestic demand and a weak lira).

What we're reading right now

ESG and engagement in fixed-income markets, Britain’s future after Brexit, and inequality and economic growth are among some of the interesting reads you may have missed.

Why fixed-income investors should factor sustainability into investment decisions

Members of our fixed income team tackle the key questions that our clients and prospective investors ask about ESG and engagement in fixed-income markets.

Britain after Brexit

The Economist explores Britain’s future following its departure from the European Union on 31 January.

Inequality and economic growth 

A Project Syndicate column explains why economic policymakers can no longer afford to view inequality as an issue separate from boosting employment and incomes.

Please note...

This is our final edition of Macro Watch and so, we would like to take this opportunity to thank you for your readership over the past two years. We are excited to announce that we will be launching a new monthly newsletter in February. Authored by the Investment Office, it will explore how a key macro theme interacts with investment themes identified by our various investment teams. Until then, feel free to explore our extensive range of newsletters and research on our Insights page.

  1. 1A benchmark revision is an annual exercise conducted by the Bureau of Labour Statistics which reconciles the sample-based employment count as of March to more comprehensive information from state unemployment insurance tax records.

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