Markets were pleased on Thursday with news that the US and China are set to hold principal-level trade talks in early October following ministerial-level meetings in Washington which will ostensibly set the stage for “progress” between Bob Lighthizer and Liu He next month.
It’s a step in the right direction, but we crossed the Rubicon long ago when it comes to the trade war doing lasting damage to the global economy. Germany is on the front lines, and the lackluster data didn’t abate on Thursday.
Factory orders fell 2.7% MoM in July, much worse than consensus, which was looking for a 1.4% drop. Workday adjusted factory orders were down 5.6% YoY against estimates for a -4.2% print. The MoM number was below the most pessimistic estimate from 30 economists surveyed.
The breakdown was disconcerting. Capital goods orders fell 3% MoM, consumer goods orders dropped 2.4% and basic goods orders declined 2.2%. “In light of ongoing international trade conflicts and modest business expectations in manufacturing, no fundamental improvement in momentum is in sight for the coming months”, the country’s economy ministry remarked.
Separately (or not, depending on how you want to look at things), Markit’s construction PMI for Germany printed 46.3 for August, a five-year nadir and down markedly from 49.5 in July. That doesn’t make for a particularly encouraging visual:
“Signs of a rebound in the construction sector following the slowdown in the second quarter haven’t yet materialized. Instead, trends have turned increasingly negative, with new orders and expectations sinking deeper into contraction territory amid reports of growing concerns among clients about an economic slowdown and a lack of tender opportunities from the public sector”, Phil Smith, Principal Economist at IHS Markit, said Thursday, adding that “home building showed renewed weakness in August and joined the commercial and civil engineering categories in contraction, resulting in a decrease in total industry activity that surpasses anything we’ve seen since June 2014”.
There’s not much to like there, and one person who’s keen on emphasizing that is former Lehman trader Mark Cudmore (now Managing Editor of Bloomberg’s Markets Live blog).
“So [the] US and China have agreed to the idea of talks next month? Whoop-de-doo.”, he derisively chides, before reminding everyone that there is still no path to removing any of the tariffs.
Does one more round of (likely futile) negotiations do anything to relieve the global factory malaise or in any way ameliorate the fact that major economies like Germany appear poised to slide into recession? “Color me skeptical”, Cudmore says, on the way to noting that although “bear markets are hard to trade, and market peaks are hard to time, this equities bounce is running on nothing but hope and a prayer”.
But hopes and prayers are powerful things, Mark!
Cudmore goes on to highlight all of the German data mentioned (and visualized) above. To wit:
I guess we don’t care that its manufacturing PMI has been in contraction all year, factory orders have been negative y/y in each of the past 14 months and that the construction PMI just sank to a new low of 46.3. Correction: I care. Fundamentals will still matter. This data is rubbish. When such a key country is getting economically killed, there will be wider repercussions.
Fair warning, we suppose. Or maybe Mark’s just in a bad mood on Thursday. Of course, with that kind of data out of the world’s fourth-largest economy, can you really blame him?