Real Time Economics: Factory Weakness Keeps Central Banks in Play


This post is by Brian Blackstone from Real Time Economics


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Good morning. Brian Blackstone here to take you through the latest on Europe’s factory slowdown, the most recent central-bank decisions and U.S. corporate-profit repatriation. Send us your questions, comments and suggestions by replying to this email.

Dark Clouds

Factory output has weakened in a number of key economies, a worrying sign for the global economy that strengthens the case for fresh stimulus from central banks, Paul Hannon writes. Europe has suffered the sharpest turnaround, and there is little relief in sight, according to a June survey of purchasing managers conducted by data firm IHS Markit. The purchasing managers index for manufacturing rose to 47.8 from 47.7 in May, but a reading below 50.0 points still points to a decline in activity. Readings for the three months the second quarter point to the sharpest fall in activity in six years. A similar survey of Japanese manufacturers also published Friday found that activity was at its weakest in three years, while a decline in new orders suggested a significant pickup is unlikely over coming months.

  • Now the good news: Services, which make up the bulk of economic activity, still look OK. In the eurozone, the PMI for the services sector rose to 53.4, hitting a seven-month high as low unemployment rates helped support spending.
  • Sweet spot: It’s tough to interpret economic data amid hopes for central-bank easing by the Federal Reserve, European Central Bank and others. Indicators need to be strong enough to ease recession fears, but not so strong that they derail rate-cut expectations. Judging by the rise in European equities early Friday, the PMI data appear to have hit that sweet spot.
  • See you in September. The PMI data “will not be enough to deflect the ECB from its new plan to ease policy within the coming months. We expect it to cut its deposit rate by 10 [basis points] in September,” said Capital Economics economist Andrew Kenningham.

 

WHAT TO WATCH TODAY

IHS Markit’s U.S. flash manufacturing index for June is expected to tick down to 50.2 from 50.5 at the end of May. The services index is expected to hold steady at 50.9. (9:45 a.m. ET)

U.S. existing-home sales for May are expected to rise to an annual pace of 5.25 million from 5.19 million a month earlier. (10 a.m. ET)

The Baker-Hughes rig count is out at 1 p.m. ET.

Fed governor Lael Brainard and the Cleveland Fed’s Loretta Mester speak at a “Fed Listens” event in Cincinnati at 12 p.m. ET, and the San Francisco Fed’s Mary Daly host a podcast on community economics at 3 p.m. ET.

TOP STORIES

The Outsiders

Events this week cemented the status of the Fed and ECB as the world’s dominant central banks, as their easing signals sent global equities soaring and bond yields plunging. But there are a lot of others out there, too, and decisions this week offer a window into what a global easing cycle will look like. Central banks in Japan, Taiwan, Indonesia and the Philippines took a wait-and-see approach, holding rates steady Thursday. Not everyone is a dove these days. The Bank of England held rates steady but said it expects to slowly raise them in the next two to three years if Brexit goes smoothly. Norway’s central bank raised interest rates Thursday and signaled another rise is likely this year. Bottom line: The global economy may be weakening but it isn’t sending an all-clear sign yet for rate cuts across regions. Brian Blackstone

Home Sweet Home

U.S. companies brought home more foreign profits in the first year after the tax-law overhaul than the government previously estimated. Firms repatriated $776.51 billion in profits made overseas in 2018, the Commerce Department said Thursday. The agency revised up an estimate made in March by more than $111 billion, Eric Morath and Theo Francis report. Newly released first-quarter data for 2019 also showed the pace of repatriations slowed to a seasonally adjusted $100.25 billion. That was the smallest quarterly amount since the tax-law changes went into effect but still well ahead of the quarterly average in 2017.

‘Systemically Important’

Add the Bank of England to the growing list of regulators and politicians that want to take a look at Facebook’s plans for a digital currency called Libra. In prepared remarks for an annual address to bankers, BOE Governor Mark Carney said Libra has the potential to be a critical part of the global financial system given the social-media giant’s reach, and as such will need to be scrutinized by regulators and central banks, Jason Douglas reports. “The Bank of England approaches Libra with an open mind but not an open door,” Mr. Carney said, calling Libra “systemically important” if it achieves its ambitions.

No News Is No News

European leaders failed to strike a deal on key European Union posts at a summit last night, leaving presidencies of the European Commission and, more importantly for investors, the European Central Bank in limbo. The logjam seems rooted in the European Commission job, which will set the tone for the horse-trading involved in picking the successor of Mario Draghi, whose nonrenewable, eight-year term ends in October. EU leaders will have another crack at it at a meeting on June 30. “While markets are obviously focused on the choice of Draghi’s successor, that is not the priority for the EU’s political leadership, for whom it is just one piece of a larger puzzle,” said JPMorgan economist Greg Fuzesi. Brian Blackstone

BIG NUMBER

2013

The last time business activity in the purchasing managers index for eurozone countries, excluding German and France, was as weak as it was in June, according to IHS Markit.

WHAT ELSE WE’RE READING

Inflation expectations can have both inflationary and deflationary biases, according to a Bank for International Settlements paper, and the dispersion is particularly large across Europe. Germany and France has biases in both directions, the paper said, while Spain has a deflationary bias and Italy an inflationary one. “These results indicate that the ECB faces an ongoing challenge in convincing households of their objectives,” the authors wrote.

One reason for subdued underlying inflation in Europe is moderate gain in rent prices, according to a European Central Bank paper that noted a disconnect between home and rental prices. The reason: low price pressures more broadly and limited turnover in rental contracts. “Should these factors persist, rent inflation will likely continue to make a relatively moderate contribution to services and underlying inflation,” the authors wrote.

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