Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 15 April 2016 at 5:01 GMT

3 Numbers: Hopes for US industry boost from new orders

Blogger / MoreLiver's Daily
  • Euro area’s trade surplus hurt by the stronger euro and global weakness
  • US industrial production could be getting ready for at least a temporary rally
  • The manufacturing sector’s difficulties may keep the Fed’s hawks at bay for now
  • US consumer sentiment running high and is likely to have improved in April

By Juhani Huopainen

The overnight hard economic data from Asia (China’s industrial production, gross domestic production and fixed asset investments and Japan’s industrial production) will likely be the driving force in today’s trading. For industrial output see here.

Today’s economic data is quiet, with the US industrial production being the most important number. The focus is now on the International Monetary Fund’s and World Bank’s spring meetings this weekend – just in case the decision makers actually manage to come up with something.

The next week’s meeting (April 21) of the European Central Bank’s policy-setting governing council is also getting close. The Federal Reserve’s Charles Evans will be speaking at 1630 GMT. See here and here.

Euro area February Trade Balance (0900 GMT): The Eurozone’s trade surplus in January was EUR 6.2 billion, which was the lowest monthly reading since April 2012.

While the most recent reading was most probably anomalously low and a pick-up should be expected, the end of the euro’s weakening and the lower demand in key export markets are clearly hurting the balance of trade.

US March Industrial Production (1315 GMT) Industrial production is expected to have decreased by 0.1% – following a 0.5% fall in February. Capacity utilisation is expected to have continued falling, to 75.3% from 76.7% in February. The production index is now 1.6% lower than year ago.

The largest rise in the ISM manufacturing PMI is in new orders, which points to a welcome hike in production in the US. Photo; iStock

The longer-term charts suggest that what I have repeatedly warned about in the past has come true – high levels of capacity utilisation tend to be followed by decreasing capacity utilisation and decreasing production.

If what we have recently seen is the top of the cycle, there is plenty of room for both the capacity utilisation and production to fall. Perhaps the world’s economic problems and the strong US dollar are not going to go away any time soon.

There is one bright spot, though – the Institute for Supply Management’s manufacturing purchasing manager index rose in March back above the boom-bust 50 level, suggesting a slight pick-up in the production outlook. The largest increase in the PMI was seen in the new orders index, which rose to 58.3, a 16-month high. Coupled with softer USD, that is good news.

Note that the ISM’s PMI might very well be giving a false signal – it has happened in the past – and even if it proves right, the relief could turn out to be temporary.

With the labour and stockmarkets in a positive mood, the manufacturing sector’s difficulties might help to keep the Federal Reserve’s hawks at bay for now.

US April University Michigan Consumer Sentiment (1400 GMT):
Consumers are expected to have turned slightly more optimistic in April, as the preliminary sentiment index is seen to have risen to 92, from 91 in March.

Sentiment remains relatively directionless at the moment – at high, recovery-era levels and in an uptrend, and until oil prices or labour markets turn sour the positivity will continue.

Globally, I am worried about the high optimism of the consumers. Stockmarket and consumer sentiment extremes tend to coincide. With optimism high especially in Europe, less so in US, perhaps weakness in the financial markets is next, but timing it right is difficult.

Almost everybody believes the Fed will hit the “zero lower bound” in the next cyclical downturn. With quantitative easing already used-up to a large extent, it is no wonder that previous Fed chairman Ben Bernanke has been writing recently about negative interest rates and helicopter money. See Bernanké's views here: What tools does the Fed have left? Part 3: Helicopter money, Part 2: Targeting longer-term interest rate and Part 1: Negative interest rates.

-- Edited by Adam Courtenay

Juhani Huopainen
is a blogger and a macro analyst at More Liver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform.


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