For quite a while, the big (if wholly self-evident) worry for markets was that the global factory slump would spill over into the services sector and then, into the labor market.
On Wednesday, there were some signs that’s beginning to happen. “Still solid growth in the service sector means that the German economy is just about keeping its head above water for now, but even here there are signs of increased worries among companies as optimism hit a three-and-a-half year low”, Phil Smith, Principal Economist at IHS Markit said, while documenting the worst read on German manufacturing in seven years.
“[Today’s data] clearly continues to point to lingering weakness in the German manufacturing sector on the back of the trade war concerns, China slowdown and auto sector woes”, SocGen wrote. “At this level, the composite PMI is consistent with GDP growth in 3Q of 0.2% qoq”.
Read more: ‘From Bad To Worse’: Yields Plunge To Record Lows As German Manufacturing Falls Off A Cliff
Nomura’s Charlie McElligott weighs in on this in a quick blast Wednesday morning, noting that while rolling out an easing package tomorrow (i.e., before September) is “a lot to deliver on short notice” for the ECB, “at this point though, the manufacturing slowdown in the EZ is so real that it risks dragging Services with it, which could trigger an actual recession”.
That, in turn, means the market will “see through any ECB disappointment as purely ‘delaying the inevitable’ and continue pricing-in an aggressive easing package”, McElligott writes.
As noted first thing Wednesday morning, the sour data across the pond sent core yields plunging. “Not surprisingly will all of this resumption of ‘Global Growth Scare’, yesterday’s bearish trade in global DM Bonds is but a distant memory and reverses”, Charlie goes on to note, adding that this “has implications across the Equities complex, as yet another attempted ‘Cyclicals over Defensives’/’Value over Momentum & Growth’ reversal trade seen yesterday will again be snuffed-out’ in today’s US Stocks session, as Duration-sensitives are likely to again outperform on said Bond rally”.
Meanwhile, any weakness that continues to come through in the euro on heightened easing expectations and a similar setup down under (where Westpac’s Bill Evans once again deep-sixed the Aussie with a dovish RBA call) will help bolster the dollar.
(BBG)
That’s not the best news in the world for Donald Trump, who is getting really – really – tired of the resilient greenback.
the threat to equities is a real recession. the current thinking is that this is a slowdown similar to winter 2015/2016 and that the economies will rebound with a little help from central banks. the problem is there might not be much upside even if this does come to pass since we are already approaching a forward P/E of 18 on SP500. if the economy really does head south.. look out below. but i don’t think the recession will happen. i think we bottomed in Q2, but we will still be in the 1.0% to 2.5% growth rate for the foreseeable future. so constantly susceptible to growth scares and near recessions.
I have to disagree with this post. If the trend in growth is down, even if recession is avoided, equities will be affected due to lower earnings growth or outright earnings declines.
This is a central bank liquidity driven equities market that seems impervious to traditional valuation metrics… the bulls will find good news in the bad news….
Yeah ,, and that is the hardest part to understand for some of us……as simple as it seems..
It seems to me that Germany is a rather special case. The Germans have only one product worth mentioning: cars. Thats fine as long as Chinese and American buyers line up to buy them. Right now, that is not the case. Blame it on the diesel cheating, Chinese going electric, Americans buying cheaper domestic and Asian SUVs and trucks – whatever. It doesnt matter outside of Germany (IMHO).