The world is adjusting to the reality of Brexit. The good news is that world equity markets have stabilized, and in some cases, have rallied. That does not mean, however, that the potential fallout has been contained. Global government bond yields have dropped, the sterling continued to plumb new depths and UK consumer confidence experienced the largest decline in 21 years. And the possibility of additional EU political contamination continues.
Over the last 2 weeks, Markit Economics released their latest manufacturing and service PMI numbers for China. Manufacturing continues to contract, with the PMI falling from 49.2 to 48.6. A drop in new work and production was responsible for the decline. More importantly, employment reached a 32-month low. Service activity, however, increased; the PMI rose from 51.2 to 52.7, largely as a result of increased new orders.
On Monday, Australia maintained interest rates at 1.75%. Their statement contained the following assessment of the Australian economy:
In Australia, recent data suggest overall growth is continuing, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators have been more mixed of late, but are consistent with a modest pace of expansion in employment in the near term.
The latest Australian GDP report showed annual growth of 3.1%, while the unemployment rate has been 5.7% for the last 3 months. The most recent retail sales release reported a 3.3% Y/Y growth rate. Business investment has declined sharply, largely due to a number of very large natural resource projects being completed, with no new projects being developed. However, other areas of the economy have more than made up for the slowdown in business investments.
Japanese news was negative. While the manufacturing PMI rose, it's still at a negative 48.1 - below the 50 level that delineates expansion and contraction. The rising yen, which is negatively impacting export orders, caused the drop. The service sector isn't much better, with the headline PMI dropping from 50.4 to 49.4, indicating the service sector, like manufacturing, is contracting. Weak export orders, largely caused by the strong yen, were the primary reason for the decline.
This week's EU economic releases were positive. Markit's manufacturing PMI increased from 51.5 to 52.8, a 6-month high. While France's PMI showed contraction, Germany's number was the highest in 2¼ years. Both domestic and export orders contributed to the increase, while employment rose for a 22nd consecutive month. The services number declined, but was a still expansionary 52.8. This was, however, the slowest reading in 1½ years. The other positive news came from the retail sector, where sales rose .4%, continuing their impressive growth trend:
On Monday, Canada released the Business Outlook Survey, which, on balance, showed Canadian business to be slightly optimistic about the next 12 months. But there's a wide divergence in the answers, depending on the respondent: oil & gas firms are still bearish, while services are moderately bullish. The overall outlook, however, is still fragile: respondents were just as likely to say sales weren't going to get any worse as they were that sales would increase slightly. On Friday, Statistics Canada released their latest unemployment report, which showed a .1% decrease in the unemployment rate to 6.8%:
UK news was mixed. While production and manufacturing each decreased .5% M/M, they respectively rose 1.4% and 1.7% Y/Y. The other manufacturing news - Markit's PMI - was positive: it rose from 50.1 to 52.1, largely due to a weak pound increasing export orders. Markit's service index declined from 53.5 to 52.3. The report's internals reveal deterioration: it contained the weakest outlook since 2012 and the weakest new orders level in 3½ years. Construction turned very bearish. The index experienced the sharpest decline since 2009, falling from 51.2 to 46. Residential and commercial sentiment collapsed into contractionary territory.
Overall, this week's releases continued their respective pre-Brexit trends: Japan is in trouble, Australia is strong, Canada is healing the UK is slowing and the EU is growing. But starting in the next few weeks, we'll begin to see economic numbers and reports that include post-Brexit information. The markets should be worried about this development.