The US, debt and industrial production growth
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Just as markets had largely anticipated, the US House approved a Senate bill to fund the US government through January 15th and suspend the debt ceiling through February 7th with vote going 285–144. President Obama said that he would sign the bill into law as soon as it reached the White House and re-open the US government with immediate effect thereafter.
Despite statements by the organizations such as the IMF about the potential cataclysmic impact of a US default, markets proved to be remarkably resilient, and US consumer confidence dipped far less than in previous comparable periods, whilst the US dollar’s trade weighted index (TWI) traded largely sideways, with traditional “safe havens” such as the Swiss franc and the yen failed to gain.
This suggests that markets and consumers had become relatively immune to the threat of US political-sourced calamity, although by failing to exert pressure this did take the heat off the politicians. There’s also the reality that market participants have now become very focused on economic recovery and growth and have wanted not to miss out on ‘good news’. Yet there are grounds for caution.
The fact that markets didn’t succumb means that the ‘risk-on’ rally from the deal could be relatively short lived, with attention turning to the economic cycle and the likelihood that tapering may now commence in the first quarter of next year, and meanwhile the short-term reprieve from the debt ceiling crisis threatens to leave markets unsettled until a proper resolution is reached.
As for what’s going on in the global economy, the US government shutdown has made the task of tracking global growth momentum even more difficult than usual. We can expect that the debt ceiling uncertainties will have adversely affected both consumers and producers, albeit less than in previous similar episodes, but apart from optimism on the US economy, sentiment towards China and Euroland has been improving. Yet markets were generally disappointed by China’s September trade data, with exports off 0.3%yoy (well short of expectations of a 5.5% increase) and while most focused on the yoy increase in imports, in real mom seasonally adjusted (sa) terms, they also fell – by 4.1%. The trade data have been volatile, in part due to over-reporting earlier in the year and then a fix implemented over Q2 but it’s notable that exports to HK declined 3.6% mom sa suggesting that underlying dynamics are soggy and the data support the idea that the rebound in China’s activity since June has been primarily driven by domestic policy, with little boost from the external sector. Thus in large part the rebound was due to relaxation in credit, with reliance on infrastructure and credit expansion as macro management tools. The recent surge in total social financing does seem to be easing back, but with the peak in the new orders component of the PMI in September, it look as if the rebound in China may have run its course, and the next phase will depend on policy to be announced at the November plenum. The authorities will likely seek to maintain a floor for growth, but comments from President Xi at last week’s APEC summit suggest that the floor could fall next year, increasing the likelihood that growth may have already peaked in this cycle. This means we’ll need to focus on the macro data releases on 18th October. If GDP growth is announced to be in line with market expectations at 7.8%yoy, this implies c.10% saar, well above the target growth rate and suggesting that policy stimulus may be withdrawn. In line with this outcome, it’s possible that industrial production (IP) disappoints after the recent surge.
Turning to Europe, after the dip in July, markets were somewhat reassured by the rebound in European IP growth in August, with a gain of 1% mom sa. But looking through the volatility, after production had decoupled from surveys earlier in the year, the two now seem to be more correlated and with September’s dip in the new orders PMI, it looks as if we should anticipate that the peak in European IP growth may be approaching.
Our conclusion must be that robust global growth is not assured – and it’d be wise to stick to quality growth rather than relying on a strong cyclical boom, particularly given that de-leveraging of the overly-indebted is very far from over.
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla
