Weak world demand, trade take a toll on US factories


US business expectations for the year ahead reached the lowest level in data back to July 2012
Chief Investment Office23 Aug 2019
Photo credit: AFP Photo


US

Bigger cracks are forming across America’s manufacturing foundation as lacklustre global demand and persistent trade tensions led to the first contraction in US factory activity since September 2009.

The IHS Markit manufacturing Purchasing Managers’ Index slipped to 49.9 from a final July reading of 50.4, according to a preliminary August report Thursday (22 August) that trailed all estimates in Bloomberg’s survey. 50 is the dividing lines between expansion and contraction. The reading for the US follow others from Europe and Japan that showed shrinking factory activity.

The US data underscore the challenge of a bifurcated economy faced by Federal Reserve Chairman Jerome Powell and his colleagues – a battered manufacturing sector, beset by global fragility and trade tensions, and an invigorated American consumer powered by still-robust employment and incomes. The IHS Markit’s gauge of manufacturing has declined five points since this year’s peak in January, according to the report which also showed the largest contraction in a decade for domestic orders and bookings from abroad.

The figures surface ahead of Powell’s opening remarks Friday at the central bank’s annual Jackson Hole symposium. Comments from other Fed officials indicate the difficult task Powell has in delivering financial markets a consistent message about changing monetary policy. US stocks fell after Fed officials cast doubt on further interest rate cuts and as traders assessed mixed economic data. Treasuries fluctuated.

A week ago, the Commerce Department reported that retail sales rose by the most in four months. The fifth-straight advance indicates Americans, buoyed by plentiful jobs and wage gains, remain comfortable spending. A separate release Thursday showed applications for jobless benefits at a four-week low. Earnings from companies such as Walmart Inc and Target Corporation have also signalled consumers’ strength.

At the same time, a factory gauge from George’s district showed the worst contraction in activity since March 2016. Furthermore, Fed officials must keep in mind the risk that the retrenchment in manufacturing will spill over into the broader economy. The IHS Markit gauge of business at US service providers fell to 50.9 from 53 in July and matched the lowest since February 2016.

US business expectations for the year ahead reached the lowest level in data back to July 2012, the IHS Markit data showed. Sluggish global demand is causing service firms to cut prices at the same time input costs weaken. A measure of prices charged contracted by the most since records began in October 2009.  

Meanwhile, US stocks were mixed as a slide in technology companies offset a rally in bank shares. Treasuries dropped as Federal Reserve officials cast doubt on further interest rate cuts. The S&P 500 Index closed little changed, while the Dow Jones Industrial Average outperformed as The Boeing Company surged. Bloomberg News.

The Dow Jones Industrial Average jumped 0.19% to 26,252.24, while the Nasdaq Composite Index lost 0.36% to 7,991.39, and the S&P 500 Index fell 0.05% to 2,922.95.

 

EUROPE

Activity in the Euro Area’s private sector unexpectedly picked up, though a meaningful rebound remains out of sight.

IHS Markit’s composite Purchasing Managers’ Index rose to 51.8 in August, indicating a slightly stronger expansion than in July. While manufacturing returned to growth in France, the outlook for Germany remained bleak, with orders falling the most in more than six years.

The Euro Area’s persistent sluggishness is damping optimism, and companies are preparing for the slump to last, according to the report. Industry in particular has faced a number of headwinds in the past year, including mounting global trade tensions and slowing demand from China.

After the 19-nation economy expanded 0.2% in the second quarter, growth could slow further in the current period, according to the report. Germany, the region’s largest economy, faces the risk of falling into a recession should output contract again in the three months through September.

European Central Bank policymakers are three weeks away from their next meeting and are widely expected to respond to the bleak economic prospects with the first interest rate cut in more than three years. – Bloomberg News.

The Stoxx Europe 600 Index traded 0.40% lower to 374.29 on Thursday (22 August).

 

JAPAN

Insurance company, Aflac Inc, said sales through Japan Post Holdings Co Ltd could drop by half this year as both companies investigate reports of improper selling of policies.

Aflac shares slumped 5.6% Wednesday (21 August) after Mainichi Shimbun reported that Japan Post mishandled about 104,000 policies. Aflac said in a regulatory filing Thursday that it continues to offer cancer coverage through Japan Post and has seen a “material” decline in sales, which are running at about 25% of normal daily volume. Aflac was down 0.2% to USD48.88 in New York on Thursday.

The insurer has been working to explain the situation to investors given the importance of the Japanese market to its results. Total operations in Japan, which include sales through Japan Post, accounted for 68% of the company’s revenue in the six months ended 30 June. Aflac said Wednesday that it is conducting a “rigorous, voluntary” review of sales through Japan Post, and added Thursday that it is not anticipating any change to the firms’ alliance or to Japan Post’s investment in Aflac’s stock. – Bloomberg News.

The Nikkei 225 Index decreased 0.03% to 20,621.91 early-Friday (23 August) morning. It gained 0.05% to 20,628.01 the previous session.


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