International Economic Week In Review For December 10-14

by: Hale Stewart

China is slowing.

Despite ECB's "glass half full" description of the EU economy, the underlying trends are weakening.

Global markets remain weak.

China is now the second largest economy in the world. Unfortunately, it's slowing. Retail sales grew 8.1% Y/Y. But the multi-year trend continues lower:

Industrial production is slow and weakening:

According to the NY Times, other statistics are weaker [emphasis added]:

But beneath the surface, a sharp slowdown is building. Foreign investment plunged last month. Auto sales over the past three months have fallen by record percentages. Floor space completed, one gauge of the housing market's health, has slumped this year. Sentiment among Chinese purchasing managers has soured.

The Chinese government has initiated stimulus spending in the form of tax cuts, increased infrastructure spending, and increased money supply. However, none of these measures provide an instantaneous result.

Brazil maintained rates at 6.5%. In its policy announcement, the Copom offered the following assessment of risks for the Brazilian economy [emphasis added]:

The Committee emphasizes that risks around its baseline scenario remain in both directions, but with larger weight on the last two risks. On the one hand, (i) the high level of economic slack may lead to a lower-than-expected prospective inflation trajectory. On the other hand, (ii) frustration of expectations regarding the continuation of reforms and necessary adjustments in the Brazilian economy may affect risk premia and increase the path for inflation over the relevant horizon for the conduct of monetary policy. This risk intensifies in case (iii) the global outlook for emerging economies deteriorates. The Committee judges that risk (i) has increased, whereas risk (i) has moderated.

The economy has recovered somewhat from the recession of 2014-2016. The annual GDP growth rate has been in the lower 1% range during the last five quarters. But unemployment is 11.7% - a high rate of "under-utilization." Inflation is slightly above 4%:

The ECB kept rates at 0-.25% while also formally ending its asset protection program. Here is how it characterized the EU economy in its policy announcement:

Euro area real GDP increased by 0.2%, quarter on quarter, in the third quarter of 2018, following growth of 0.4% in the previous two quarters. The latest data and survey results have been weaker than expected, reflecting a diminishing contribution from external demand and some country and sector-specific factors. While some of these factors are likely to unwind, this may suggest some slower growth momentum ahead. At the same time, domestic demand, also backed by our accommodative monetary policy stance, continues to underpin the economic expansion in the euro area. The strength of the labour market, as reflected in ongoing employment gains and rising wages, still supports private consumption. Moreover, business investment is benefiting from domestic demand, favourable financing conditions and improving balance sheets. Residential investment remains robust. In addition, the expansion in global activity is still expected to continue, supporting euro area exports, although at a slower pace.

Despite ECB's "everything is going to plan" phraseology, there are legitimate reasons to be concerned. While GDP growth is positive, it's slowing; retail sales - also still positive on a Y/Y basis - are moving sideways; and German growth was negative in the third quarter. Friday's Markit PMI release summed up the growing malaise [emphasis added]:

New business inflows almost stalled, job creation slipped to a two-year low and business optimism deteriorated. An undercurrent of slowing economic growth was exacerbated by protests in France and on-going weak demand for autos.

There's a lot of bearishness baked into the wording of that brief paragraph.

Let's turn to the performance table of the major international ETFs: There is actually some modestly good news in the above table: China was up modestly; the broader Asian section advanced as well; Russia's 2.3% drop is at the other end of the spectrum; and Latin America was down as well.

Here is the relative performance of the ETFs relative to SPY (from

Brazil, Latin America, and Russia are outperforming. However, all the other global markets are improving. Improving, however, does not mean rallying; it simply means they're doing better than SPY on a relative basis.

Here are the two 2-month charts

Asia and China have an upward bias, Europe and the UK are moving lower thanks to Brexit, Latin America has a slightly lower bias as well, and all other sectors are moving sideways.

Finally, let's look at the 6-month charts:

Brazil is the only index that is near a 52-week high. The vast majority are consolidating losses after the fall sell-off.

Remember that international markets first sold-off in the spring in reaction to the then escalating global trade wars. They have since sold-off in sympathy with the US's fall drop and a general slowdown in the underlying economic data. There is little reason to argue for a rally at this point.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.