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Disappointing Data, Subdued Markets

| September 06, 2016
MPCA Weekly Market Update

Global equities rose slightly last week, although trading activity in domestic equity markets has been even more subdued than usual this summer. August saw the fourth-narrowest trading range since 1928, according to the Wall Street Journal. The low volatility this past month stands in sharp contrast to a year ago, when China’s surprise currency devaluation roiled the markets.

Two reports stood out last week, confirmed by more weak news this morning. First, on the jobs front, the United States created 151,000 jobs in August, fewer than the consensus estimate of 180,000. Data for July were revised up to 275,000 from 255,000, while June numbers were revised downward by a similar amount. The unemployment rate held steady at 4.9%.  The closely-watched U6 unemployment, a broader measure, also held steady at 9.7%.

Additionally, global manufacturing was sluggish in August — with one striking exception.  UK manufacturing rebounded strongly, reversing a dip in July data in the wake of the Brexit vote. The UK Manufacturing Purchasing Managers' Index jumped 5 points to 53.3, the largest monthly gain in the index’s 25 year history. The United States, in contrast, saw an unexpected contraction in the manufacturing sector last month, with the US PMI falling to 49.4 from 52.6, the lowest since January. China’s official and Caixin manufacturing PMIs converged near 50, while Eurozone manufacturing growth eased to 51.7 in August from 52.0. PMI readings below 50 indicate contraction, while those above 50 indicate expansion.

Markets began this week with more downbeat news. After last week’s unexpected plunge in manufacturing activity, the much bigger services sector showed a similarly unexpected and massive slowdown in August growth, raising fresh concerns about the state of the economy. The ISM non-manufacturing survey fell to 51.4, the lowest level since February 2010. The services sector, which represents about 70 percent of the U.S. economy, consists of a much broader subsector of the economy than the manufacturing report, and as such raises significant concerns when it signals weakness.

Fed funds futures immediately and sharply reduced the odds of a September rate hike. They had been around 35% for September, but fell closer to 25% after the ISM non-manufacturing (services) report, according to Jefferies. July's ISM was 55.5 and economists had expected a reading of 55, compared to the 51.4 result. Again, a reading below 50 is a sign of contraction.

Not to pile on, but the drumbeat of weakness came from all corners last week. Hanjin Shipping, the Korean cargo transport behemoth and the seventh-largest firm of its type in the world, filed for court receivership (bankruptcy) this week, sending jitters through the global supply chain. Importers are scrambling to find shippers ahead of the critical holiday season at year-end.

Meanwhile, credit rating agency Moody’s reports that China’s banking sector is becoming more interconnected as banks increasingly rely more on wholesale funding than on client deposits. The reader may be forgiven for wondering why that matters. As the 2008 financial crisis illustrates, wholesale funding can dry up very quickly in times of stress, with systemic consequences.

The week would not be complete without yet another example of EU bureaucratic shenanigans and maddening legislative overreach. The European Commission ruled that the Irish government granted illegal state aid to Apple in the form of artificially low tax rates and has ordered the US tech giant to pay Ireland €13 billion ($14.5 billion) in back taxes. This in spite of the fact that the ruling violates the EU’s own treaties, which reserve tax policy for national governments, and therefore violates Ireland’s national sovereignty. The ruling was so egregiously bad that even the former EU “competition commissioner” came out against it.

The Irish government itself has made it clear that Apple owes no such thing. Perhaps the Brits knew what they were doing in voting to escape such capricious and arbitrary meddling from Brussels after all.