Weighing The Week Ahead: Will Slowing Chinese Growth Spark A Global Recession?

We have a big economic calendar with some reporting still catching up from the government shutdown. Inflation data, small business and consumer confidence, and retail sales lead the list. In addition to the U.S. economic data, there is increasing concern about China. Pundits are wondering: Will weakening Chinese growth drag the world into a recession?

Last Week Recap

In last week’s installment of WTWA I suggested renewed attention to what was “baked into” current market prices. While the topic attracted frequent mention, the daily market declines and political news attracted more attention.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. This week I am featuring Investing.com. In addition to several choices of index, they include versions for both cash and futures. The interactive charts are very flexible and highlight key news events.

Stocks lost 2.2% in the week and the trading range increased to 3.5%. You can see volatility comparisons in our Quant Corner.

Of special interest is the pre-market trading on Friday. For this we need to see the futures chart. The horizontal red line represents Thursday’s close. Futures fell to the 2736 range, apparently in reaction to China news. After the employment report release the decline was another 8 or 9 handles – 30 to 40 bps. The Friday close was actually higher than prices when the employment news was announced. I have a more complete discussion of the weak employment report below, but we should take note of the market impact of the news.

Noteworthy

Puzzles often illustrate the critical thinking required of investors. Try out the two in this short video. Learning two spot these two tricks will inoculate you against much of the misleading noise about the economy and markets.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too.

When relevant, I include expectations (E) and the prior reading (P).

New Deal Democrat’s high frequency indicators are an important part of our regular research. He is observing improvement as the effects of the government shutdown fade. Only the short-term indicators remain negative, but he is still watchful. NDD gets credit both for sticking to his indicators and for noting the likely shutdown effects.

The Good

  • Mortgage delinquencies are lower. Black Knight (via Calculated Risk) reports January’s rate as 3.75%, down from 4.31% a year ago.
  • The ISM Non-Manufacturing Index registered 59.7, a healthy increase from January’s 56.7 and beating expectations of 57.2. ISM spokesman Anthony Nieves states’ “The past relationship between the NMI® and the overall economy indicates that the NMI® for February (59.7 percent) corresponds to a 3.9-percent increase in real gross domestic product (GDP) on an annualized basis.” The ISM data page provides excellent context, including comments from respondents. Bespoke charts both services and the combination with manufacturing.

  • Bloomberg’s consumer comfort index made a new recent high (Daily Shot).

  • New home sales for December were 621K (SAAR) beating expectations of 572K. November’s report however was revised lower from 657K to 599K. Calculated Risk notes the revisions as well as the reporting delay, advising that we continue a close watch on inventory.
  • Housing starts for January were 1230K (SAAR) beating expectations of 1180K and December’s 1037K (downwardly revised from 1078K). (Calculated Risk).

  • Building permits significantly beat expectations – 1345K versus 1280K and December’s 1326K.
  • ADP’s report on private employment showed a solid gain of 183K for February, beating expectations of 175K, but lower than January’s 300K (upwardly revised from 213K). Amazingly, some of those on my “reliably bearish commentary” Twitter list (publicly available – just follow me via @dashofinsight) scoured the report to discover a decline of .02% in one subgroup, businesses with fewer than twenty workers. This was touted as an early “canary” warning of recession. Here is ADP’s own summary.

The Bad

  • Construction spending for December declined by 0.6%, worse than the expected drop of 0.3% and much worse than November’s gain of 0.8%.
  • Rail traffic is now in contraction reports Steven Hansen (GEI). He writes as follows:

    We review this data set to understand the economy. The intuitive sectors (total carloads removing coal, grain and petroleum) contracted 4.8 % year-over-year for this week. We primarily use rolling averages to analyze the intuitive data due to weekly volatility – and the 4 week rolling year-over-year average for the intuitive sectors improved from -3.2 % to -2.9 %.

    When rail contracts, it suggests a slowing of the economy.

  • US-China trade talks “hit a bump” reports the WSJ.

    A week ago, the sides appeared to be closing in on a draft accord. But Chinese leaders were taken aback by President Trump’s failed meeting in Vietnam with North Korean leader Kim Jong Un, the people said.

    Mr. Trump’s decision to break off those talks and walk away sparked concern that China’s President Xi Jinping could be pressured with take-it-or-leave-it demands at a potential summit at Mr. Trump’s Mar-a-Lago estate in Florida late this month, these people said.

    As a result, China wants a summit to be more of a signing ceremony than a final negotiating session that could break down, the people familiar with the leadership’s thinking said.

  • The trade imbalance for December was -$59.8 billion worse than expectations of -$57.8 B. It was much worse than November’s deficit of -$50.3 B.
  • The employment report was weak, showing a net gain of only 20,000 jobs. The report contrasted sharply with January’s strong report, causing most economists to conclude that it was noise rather than signal. Investing.com sources noted the effects of weather and the inconsistency with other data for the period. This was the most common conclusion among economists (TIME), and the market seemed to shrug off the report. (See introductory week review above). Business cycle expert Dr. Robert Dieli, in his excellent monthly report on employment, smooths via a six-month moving average of change from the prior year.
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