From Germany To Down Under, Global Slowdown Narrative Finds Validation

There was some fresh fodder for the “global slowdown” narrative on Wednesday, and while RBA chatter and German factory orders don’t make for the most riveting reading, in the current environment, both are worth a mention.

The recession story has been gathering adherents in Germany for months. Recent data to support the dire narrative included the worst annual slump in industrial production in a decade (in November). That print (out in early January) came hot on the heels of lackluster factory orders data, which tipped an 11.6% drop in orders from the rest of the eurozone. The writing, we suggested, “is on the wall.”

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Fast forward four weeks and the latest read shows factory orders fell for a second month in December, dropping 1.6% against expectations for a 0.3% gain.



The YoY drop was the largest since 2012.



This comes days after data showed a sharp decline in new orders caused the manufacturing PMI to fall into contraction territory in January.



Clearly, the odds of Germany having fallen into a “technical” recession are rising and when it comes to the eurozone more generally, do note that this has a self-feeding feel to it. Italy, you’re reminded, has already fallen into a recession and in “explaining” things, Premier Conte in part scapegoated Germany.

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All in all, the clouds continue to gather across the pond, and if it’s “evidence” the ECB is looking for when it comes to moving ahead with a new round of TLTROs, there’s no shortage of it these days.

Meanwhile, RBA Governor Lowe decided to go ahead and blindside folks with a dovish pivot on Wednesday, where that means shifting the outlook on the rate path to neutral. Here’s what he said while commenting in a Q&A session following a speech in Sydney:

Through much of last year, it looked more likely to me that the next move in interest rates would be up than down. I think things today are much more evenly balanced. Whether they’re exactly evenly balanced, I’m not sure, our crystal ball isn’t clear enough.

But they seem broadly evenly balanced and it’s still entirely plausible the next move will be up —- the labor market’s strong, and if peoples’ income starts rising, inflation will rise and it will be appropriate to raise interest rates.

But it’s also possible that income growth doesn’t pick up, the labor market deteriorates, the housing market weighs on spending in our biggest capital cities, and business confidence declines and they don’t want to invest, so that’s possible as well. How you assign the probabilities exactly is difficult, but it’s broadly equal.

So that’s a pretty explicit nod to the notion that RBA policy is now neutral and while I suppose that won’t be a shock to folks who follow the local economy closely (e.g, see the RBA’s Tuesday reference to “domestic uncertainty remains around the outlook for household spending and the effect of falling housing prices in some cities”), it seems pretty notable considering it comes just a day after the policy statement.

The Aussie was clearly blindsided, diving as Lowe’s comments crossed.



This puts the RBA in sync with other major central banks in terms of not only acknowledging downside risks but also shifting to a neutral stance in the face of what certainly appears to be a more challenging macro backdrop.

One assumes there’s actually no real “threat” (if that’s the right word) of a cut from the RBA and the Aussie would of course benefit in the event China does manage to reinvigorate the global reflation narrative by unclogging the monetary policy transmission channel so that easing can finally work its way through to the real economy. That would presumably benefit commodities with knock-on effects for the Aussie, etc. etc.

But in terms of the broader narrative (i.e., panning back out from “Down Under” to the 30,000-foot macro view), the point is that Lowe has now joined in when it comes to central banks explicitly dropping the tightening bias amid growing signs of economic weakness.

The question, as ever, is whether policymakers can convince markets to interpret the messaging not as a sign that they (central banks) believe the ship has already sailed on a downturn, but rather as evidence that they’re ahead of the proverbial game, vigilant and well-equipped to avert a global recession.


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