“Changes are happening in economic situations and downward pressure is increasing”, a statement from the Politburo meeting chaired by Xi Jinping on Wednesday reads. What’s needed, the committee reckons, are “timely steps” to stave off the worsening economic slowdown.
On Wednesday, markets received a slew of economic data to support the notion that the era of “synchronous global growth” is over. China’s official PMI data missed across the board, with the factory gauge barely hanging on in expansion territory and the new export orders sub-index plunging to the lowest level since the dark days of early 2016. Here’s the breakdown:
“In our view, lower PMI readings, especially in new orders, are the tell-tale signs of weaker industrial demand”, BofAML writes on Wednesday, on the way to noting that “trade-related sub-indices falling further below 50 indicates sentiment deterioration among purchase managers amid the escalation of trade tensions between the US and China.”
Barclays paints a similarly dour picture with regard to the trade sub-indices. “The continued contraction in trade-related PMI indices, which began in June, suggested a more significant impact of tariffs to show up in Q4 18-Q1 19, given a lag of several months from new orders to export shipments, and a gradual dissipation of the front-loading effect that likely masked the negative drag from initial tariffs in Q3”, the bank says, adding that if you ask them, external headwinds are likely to increase.
Remember, export growth held up well in September, when a mad dash to get out ahead of the tariffs helped China post a record surplus with the U.S., much to the chagrin of Donald Trump.
“In view of the recent US restrictions on exports to a Chinese chipmaker (Fujian Jinhua Integrated Circuit Co.), and our low expectations for a meaningful breakthrough at a planned meeting between President Trump and President Xi during the G20 summit at end-November (given the Chinese government still appears to be without a clear plan on how to address the US demands), we expect the USD267bn tariffs could be initiated in December and implemented by Q1 19”, Barclays projects.
As a reminder, late in the U.S. session on Monday, reports indicated that if there’s no breakthrough on trade following a meeting between Trump and Xi at the G-20, the U.S. will publish a new list of products subject to tariffs in early December. That means the actual imposition of the duties (after a two-month public comment period) would coincide with China’s Lunar New Year holiday. At that point, Trump would be taxing everything China ships to America.
Notably, China’s services sector looks to be cracking under pressure as well. The non-manufacturing PMI fell to 53.9 in October from 54.9 in September. That, according to Goldman, is down to “slower property transactions” and the stock market selloff, which continues to worsen.
“NBS quoted that October PMI reading for the securities industry was the lowest this year, if we do not account for the Chinese New Year months”, Goldman observes. The bank says they “continue to expect an accommodative policy stance to support overall growth.” Specifically, Goldman is looking for another RRR cut before year-end.
Meanwhile, South Korea showed a pretty egregious slide in industrial output for September overnight, and while I won’t trouble you with the details, suffice to say the 8.4% YoY decline was the worst in nearly a decade. There were other signs of economic deceleration on Wednesday as well, including a decline in Japan’s factory output and a lower-than-expected read on Taiwan’s Q3 GDP (+2.2% YoY versus expectations of +2.5%).
Circling back, all of this would appear to support the notion that 2017’s “synchronous global growth narrative” is no more. You’re reminded that “synchronous global growth” was one of the two pillars of the “Goldilocks” meme that underpinned the low vol. regime. The other pillar was “well-anchored inflation.”
Analysts have long warned that the trade war has the potential to undercut both of those pillars. Now you’re starting to see those warnings play out.
When the U.S. economy finally decelerates as the stimulus wears off, there will be nobody to take up the slack. This was always the worry.