CMC Markets | Sep 16, 2019 08:45
China has been cooling for a number of years. From time to time the Chinese government embarks on initiatives to stimulate economic growth, and all that does is slow down the rate of the economic cooling. Recently, the deliberate devaluation of the yuan was a reaction to the US trade war, as the softer currency to a certain extent is offsetting the US imposed tariffs. The People’s Bank of China recently announced plans to cut the reserve requirement ratio by 50 basis points in September, October and November, and this is all aimed at trying to keep the economy growing at roughly 6.5% per year. Fixed asset investment and retail sales have been in a strong down trend for years, and the last industrial production report fell to a level not seen since the credit crisis. The weakening of the yuan should be good for domestic exports, but local retail sales might feel the pinch as imports are likely to cost more, and the middle income earners might become a little squeezed.
2. Brexit - 17/9
The saga continues, and sterling rallied as traders believed the prospect of a no-deal brexit appears to have declined. John Bercow, the Speaker on the House of Commons said he would use ‘creativity’ to ensure Prime Minister Johnson doesn’t swerve legislation that was introduced to avoid a no-deal situation. A report was doing the rounds the DUP were open to the possibility of some trade checks in the Irish Sea, but DUP politicians like Sammy Wilson denied such claims. At the start of the month the High Court declared the decision to suspend parliament as lawful, and that was appealed, and the Supreme Court will announce its decision on 17 September.
Fedex posted respectable fourth-quarter figures in June. Adjusted EPS was $5.01, which topped the consensus of $4.85. Revenue for the period increased by 2.89% to $17.81 billion and dealers were expecting $17.79 billion. The group cautioned the trade spat between the US and China is likely to impact its performance next year. In late August, the stock fell to a level not seen since June 2016, and that move coincided with the ratcheting up of trade tensions between the US and China. As of early September, China started imposing new tariffs on US imports, and vice versa. Trade talks are due to take place next month, but the situation is still going to hang over the group. Fedex is seen as a gauge for US consumer demand, as the company is in the parcel delivery business. The latest set of US retail sales numbers showed 0.7% growth, which is robust so consumers are clearly content to spend money, and that should help Fedex.
4. UK CPI (August) - 18/9
The political headline out of the UK recently have been daunting, but there have been some positive economic updates from the country. The unemployment rate is at its joint lowest level since the 1970’s and wages are growing at a fast rate too. UK citizens are in jobs and they are earning solid wages.
The latest UK inflation report jumped to 2.1%, while economists are expecting it to fall to 1.9%, and keep in mind the Bank of England’s inflation target is 2%. The core CPI rate edged up to 1.9%, and that reading is often a better gauge of underlying demand. The last retail sales report was respectable, and it showed that people are still be willing to spend money despite the political turmoil. The retail sector have been offering generous discounts to attract buyers, and there is an argument to be made that demand is robust on account of those discounts. The recent sell-off in the pound is likely to push up headline inflation in the months to come, but the UK economy has overcome high inflation in recent years.
5. Eurozone final CPI (August) - 18/9
Economists are expecting the final reading of the eurozone’s CPI to be 1%, unchanged from the flash report. The core reading is often deemed to be a better gauge of underlying demand, and that report is expected to be 0.9%, also unchanged from the flash update.
At the recent ECB update, the central bank lowered its CPI outlook 2019, 2020, and 2021. The central bank also lowered the deposit rate to -0.5% from -0.4% and a stimulus package of €20 billion per month will start in November. Demand in the currency bloc is low, and it is predicted to get weaker, hence the loosening of monetary policy from the ECB. The final reading of German, French and Spanish CPI was 1%, 1.3% and 0.4% respectively, and when some of the largest countries in the region have subdued demand levels, it doesn’t bode well for the region.
Kingfisher (LON:KGF) has been struggling in recent years as its operations in France, Russia and Romania have underperformed, while the B&Q business, and the Screwfix operation continue to perform well. Last month, the stock fell to its lowest level in over three years. In Mach, it was reported that Veronique Lauary, will be stepping down as CEO. The group reaffirmed its commitment to achieve savings of £500 million by the year 2021. In June it was reported that, Thierry Garnier, the CEO of Carrefour (PA:CARR) China, will become CEO of the group in autumn. No doubt My Garnier will have ideas of his known on how to run the group, and traders will be wondering will he continue with the cost saving scheme. Kingfisher has announced plans to close stores recently. 15 stores in the UK are to be shut, and 19 sites in Germany are to be closed. The group had a mixed performance in the first-quarter.
The UK & Ireland, and Poland saw total sales increase by 5% and 7.4% respectively, while the French operation saw sales fall by 3.4%. The group maintained its outlook for the year. There has been an economic cooling all across Europe in the past year or two, and the uncertainty surrounding Brexit is a factor, as well as global trade tensions. The UK housing market is slowing down, and in some regions of the country, prices are falling. The UK construction PMI reading shows the sector is incurring negative growth. Seeing as the group in involved in home improvements, and it acts a wholesaler to the construction industry, the outlook for the industry isn’t great.
7. Federal Reserve meeting - 18/9
At the start of the year there was talk of four interest rate hikes, but that was met with fear the US were going to hike rates at too fast a pace, and send the economy into recession, and the US central bank cooled their language. The cooling of China, and the US-China trade spat, has taken its toll on the global economy, and the Fed cut rates in June. There is continued talk about lower rates from the Fed, and the aggressive move lower in US government bond yields suggests that traders are expecting the Fed to cut rates.
There have been some mixed reports out of the US recently. The ISM manufacturing reading dropped to its lowest level since early 2016. The core PCE reading, held steady at 1.6%, which suggests that demand is standing still. The unemployment rate is 3.7%, close to a 50 year low, and yearly earnings are growing at 3.2% - which is much higher than the inflation rate, so an interest rate cut isn’t a done deal. Jerome Powell, the Fed chief, has come under intense pressure from President Trump recently, and the central banker didn’t give much away at the Jackson Hole symposium, and the Fed might hold fire as a way of asserting their independence.
The fashion house revealed solid first-quarter figures in May. Full-price sales jumped by 4.5%, which easily topped the 3.2% forecast. The retailer said the unusually warm weather over Easter helped the high street division.
Despite the warm weather, the high street unit still saw sales drop by 3.6% in the first-quarter, while online sales jumped in excess of 11% - this has been a common theme across the retail sector. Boohoo are an online only fashion house, and recently their share price hit a record high –and Next will need to ramp up its e-commerce division is it want to compete with the likes of Boohoo. Last year, the group posted a small decrease in profit, and it was the third decline in annual profit in a row. Simon Wolfson, the CEO of the group, said the company is prepared for a no-deal Brexit, and adding to that, he believes the reduction in tariffs on goods coming from non-EU countries, should more than offset the tariffs on imports from EU members.
9. Bank of England meeting - 19/9
The Bank of England are tipped to keep interest rates on hold, and the stimulus package is also expected to remain unchanged. The UK central bank is likely to sit on its hands while the Brexit situation unolds. The UK was due to leave the EU in March, and an extension was granted, and even though it avoided a no-deal Brexit, it left many in the business community in limbo. It is possible there might be another extension, and it is clear the lack of clarity is hurting the business community.
The construction PMI reading showed the sector is in contraction, and manufacturing is suffering too. It is worth pointing out the services sector is holding up alright, and the industry accounts for approximately 75% of the UK economy. It’s no secret the BoE are fearful about a no-deal Brexit, and should they play out, the central bank would is likely to keep its options open in relation to interest rate adjustments, and or a government bond buying scheme, and while the UK stays in the EU, the BoE are unlikely to act.
The Canadian economy is in great shape for a Western economy. The latest jobs repot underlines the strength of the country. The unemployment rate held steady at 5.7%, and the employment change showed that over 80,000 jobs were added. The Bank of Canada (BoC) kept interest rates on hold at the beginning of the month, which was expected, but what stood out, was the absence of dovish language.
In recent months, the Reserve Bank of New Zealand and the Reserve Bank of Australia cut interest rates. Some traders thought the BoC might move in a similar direction given the Canadian economy is also heavily exposed to the commodity sector. The latest reading of Canada’s inflation and retail sales were 2% and 0.0% respectively and they both pointed to mixed levels of demand.
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