“US Factory Activity…”

website.jpg

US Factory Activity

US manufacturing activity slowed sharply to a two-year low in December as orders and hiring at factories plunged.  The Institute for Supply Management (ISM) survey published on Thursday, offered a downbeat assessment of the manufacturing sector with almost all components declining last month.  Although the labour market remains strong, concerns about the health of the economy are escalating.  ISM said its index of national factory activity tumbled 5.2 points to 54.1 last month, the lowest reading since November 2016.  This was the largest drop since October 2008, when the economy was suffering from recession.  A reading above 50 in ISM index indicates an expansion in manufacturing which accounts for about 12 percent of the US economy.  ISM said that demand had “softened” while consumption continued to strengthen, with production and employment still expanding, this was “at much lower levels compared to prior periods”.  Despite signs of slowing economic growth, the labour market appears strong.  The ADP National Employment Report on Thursday showed that private payrolls jumped 271,000 last month after increasing 157,000 in November.  A third report from the Labour Department showed initial claims for state unemployment benefits rose 10,000 to a seasonally adjusted 231,000 for the week ending 29 December.

US – Government Shutdown

Trump’s demand for $5 billion in funding for a wall along the US-Mexico border triggered the shutdown affecting a quarter of the federal government and 800,000 federal workers.  Funding for about a quarter of the federal government expired on 22 December, closing “non-essential”  operations at agencies such as the Department of Homeland Security, Energy and Commerce.  Many federal employees are working without pay.  The first twelve days of the shutdown moved quietly during the holiday season.  Thursday will mark the changing of power in the House, in which the Democrats won a majority of seats in November’s elections.  On Wednesday Nancy Pelosi was nominated as expected by fellow Democrats to be speaker of the US Representatives.  Investor’s concerns remained as a meeting between US congressional leaders and President Donald Trump on Wednesday saw no sign of an agreement to end a partial government shutdown.  On Thursday, Democrats did not waste any time and approved legislation backed by the new Speaker Nancy Pelosi that would end a 13 day partial government shutdown, ignoring Donald Trump’s demand for $5 billion for a border wall.  Thursday marked the first day of divided government in Washington since Trump took office in January 2017, as Democrats took control in the House from Republicans who remain in charge of the Senate.  The two-part Democratic package includes a bill to fund the Department of Homeland Security at current levels through 8th February, providing $1.3 billion for border fencing and $300 million for other border security items including technology and cameras.  The second part would fund other federal agencies that are now unfunded including the Departments of Agriculture, Interior, Transportation, Commerce and Justice through 30 September, the end of the current fiscal year.

US Companies Repatriate

US companies sent home over half a trillion dollars of cash they held overseas in 2018 to take advantage of tax changes.  Data however suggest the pace is slowing.  The repatriation followed the new regulations that allowed the US government to tax profits accumulated overseas, regardless of where the money was held.  Before the introduction of these rules, companies were allowed to defer US tax on worldwide profits unless they repatriated the money.  The change offered a powerful incentive to bring in the US, money that was held in jurisdictions such as Ireland and Switzerland either in cash or securities.

China And US Trade Talks

China and US will be holding vice-ministerial level trade talks in Beijing on the 7th and 8th January as the trade dispute is causing pain to economies and financial markets.   The trade war has been going on for the past year, disrupting the flow of hundreds of billions of dollars’ worth of goods and causing fear of an economic slowdown globally.  China and the US have a March deadline to end the trade war or Washington will proceed to impose a sharp hike in US tariffs on Chinese goods which was scheduled for 1 January.  Although Trump referred to the talks as progressing well, it is unclear if Beijing will give in to trade imbalances, market access and alleged Chinese abuses of intellectual property.  Data this week showed that the two largest economies are already experiencing a loss of momentum at the end of last year.

Asia’s PMI

  • China

China’s factory activity contracted for the first time in more than two years in December, highlighting the challenges that Beijing is facing as it seeks to end a trade war with Washington.  The increasing strain on factories signal a continued loss of momentum in China increasing the worries about softening global growth particularly if the trade war drags along.  New orders, which are an indicator of future activity continued to soften, reinforcing the views that business conditions in China will likely get worse.    Meanwhile, IHS market PMI fell to 49.7 from 50.2, its lowest reading since May 2017.  This confirms a trend seen in the official PMI on Monday, which showed a drop to 49.4 in December, the weakest since early 2016.  A reading below 50 signals contraction.

  • Taiwan

Taiwan’s Nikkei and IHS Markit manufacturing purchasing managers’ index fell to 47.7 in December from 48.4 in November, down from 56.6 a year earlier.  This is partly due to a fall in demand for machinery and electronic goods, information and communications equipment, slowing orders for new smartphones and the trade war.

  • Malaysia

Malaysia’s PMI fell to 46.8 from 48.2, which is the slowest reading since the series began.  New orders were at their weakest since May.  The readings show how the ongoing trade war between the US and China is effecting demand across Asia.

Apple Inc.

On Wednesday Apple Inc took the rare step of cutting its quarterly sales forecast to $84 billion for its fiscal first quarter ended 29 December.  This is the first time Apple had issued a warning on its revenue guidance ahead of releasing quarterly results since the iPhone was launched in 2007.   Chief Executive Tim Cook blamed slowing iPhone sales in China, as the economy has been dragged down by uncertainty around US-China trade relations. In November, the company said it would quit disclosing unit sales data for iPhones and other hardware items.  Many analysts were worried that a drop in iPhone sales was coming.   In a letter to investors Tim Cook said, “while we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China.” China is a key market for Apple sales and where it manufactures the bulk of iconic products it sells worldwide.  Cook told CNBC that Apple products have not been targeted by the Chinese government, however, some consumers may have elected not to buy an iPhone or other Apple devices due to the firm being an American brand.  Furthermore, Cook said “the much larger issue is the slowing of the (Chinese economy) and then the trade tension that has further pressured it.”  Apple shares dropped, dragging the company’s market value below $700 billion.

UK

Businesses in the UK’s dominant services sector reported the slowest sales growth in two years during the final three months of 2018.  This is a sign of a slowing economy ahead of the Brexit deadline said the British Chambers of Commerce on Thursday.  In the run-up to Christmas many retailers reported difficulties however Thursday’s findings point to a broader slowdown among businesses that rely on consumer spending.  Manufacturers also reported weaker sales growth and orders slowed across the board.

Gold And The Yen

Precious Gold hits over 6-month high amid growth fears and stock volatility.  Spot gold touched its highest since 15 June at $1,292.32 per ounce and was up 0.4 percent at $1,289.10.  Meanwhile, gold futures were up 0.6 percent at $1291.20.  When the stock markets are under pressure investors tend to increase their demand for gold as it is seen as a safe haven asset and likewise the Japanese yen is considered a preferred asset during economic volatility.  The Yen jumped almost 8 percent against the Australian dollar to its strongest since 2009 and surged 10 percent against the Turkish Lira.  Traders are trying to figure out what happened when orders flooded in to sell Australia’s dollar and Turkish lira against the yen.  Some have pointed out the risk aversion arising from the cutting of sales forecast of Apple Inc.  while others said Japanese retail investors were bailing out of loss-making positions.  The moves increased by algorithmic programs and thin liquidity with Japan on holiday.  The yen has strengthened against all major currencies over the past 12 months as concerns over global economic growth increased and stocks fell.

Market Wrap

Japan’s stock market is closed for public holidays.  The Nikkei index experienced its first annual loss for seven years in 2018 down around 15 percent after a strong performance in previous years. In the US government bond market which is a typical safe-haven, the yield on the 10 year benchmark which moves inversely to the bond’s price, sank to an 11 month low near 2.62 percent late in the day as Apple announced that sales would fall short of previous forecasts amid weaker demand for iPhones in China.    Throughout the first trading day of 2019 investors shifted into safe-haven investments like longer-dated Treasuries and German bunds after weak data out of China and Europe was reported overnight and as the partial shutdown of the US government persisted.   Other safe-haven investments also benefited in price from the flight to quality and the 10 year German government benchmark bond yield fell 7 basis points, at 0.17 percent.   On Thursday the US stocks added to losses after data showed factory activity slowed more than expected in December.    The Dow Jones Industrial Average fell 0.73 percent at the open to 23,176.39, the S&P 500 opened lower by 0.72 percent at 2491.92 while the NASDAQ dropped 1.22 percent at the opening.

Oil

On Wednesday oil prices rose about 2 percent supported by the slight recovery on Wall Street although concerns about weakening economic growth persisted as it could hurt demand for oil.  An economic slowdown and excess supply dragged down oil prices from multi-year highs reached in October 2018.  Crude futures ended 2018 down for the first year since 2015 with WTI slumping 25 percent and Brent tumbling 21 percent.  Figures on Wednesday showed that Russian production hit a post-Soviet record in 2018.  Other data showed US output reached a record in October and Iraq boosted oil exports in December.  Shale output surged in the United States and made it the world’s biggest oil producer, ahead of Saudi Arabia and Russia.  Oil production has been at near or record highs in the three countries.

 

 

Antonella Mercieca

Client Relationship Manager

Source:

Bloomberg, Reuters

Date:

January 4th, 2019


‘Disclaimer: The information provided on this website is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning investments or investment decisions, or tax or legal advice. Similarly, any views or options expressed on this website are not intended and should not be construed as being investment, tax or legal advice or recommendations. Investment advice should always be based on the circumstances of the person to whom it is directed, which circumstances have not been taken into consideration by the persons expressing the views or opinions appearing on this website. Timberland Finance has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website. You should always take professional investment advice in connection with, or independently research and verify, any information that you find or views or opinions which you read on our website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. Timberland Finance does not accept liability for losses suffered by persons as a result of information, views of opinions appearing on this website. This website is owned and operated by Timberland Invest Ltd.’

Subscribe To Our Newsletter

Be one step ahead with our latest news updates.

Timberland Finance,
CF Business Centre,
Gort Street,
St Julians STJ 9023
Malta