New vigour or flash in the pan?

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shares figures with trend graph

I have said here before that I am expecting the IT cycle globally to improve and to lead a modest improvement in the global industrial cycle. Recent Taiwanese data on export orders is supportive of this view. These orders rose 8.3% yoy in August, after falling 3.4% in July. The August number was the first positive number since January 2015. Taiwan’s Ministry for Economic Affairs reported strong increases in demand for handheld devices and computers.

The US Federal Reserve kept rates unchanged as expected, but clearly kept open the possibility of a rate hike in December. Han de Jong Han de Jong Chief Economist

The geographical breakdown shows strong increases in demand from China, the US, Germany and the UK. At least part of the improvement in export orders for Taiwan is due to new versions of leading smart phones. But the strengthening of the IT cycle is broader than that, as, for example, evidenced by the continuing rise of the SOX index, the index of stocks of semiconductor companies. The next few months must show whether the improvement of the IT cycle can be sustained or if recent stronger numbers are a flash in the pan.

Taiwan export orders The fact that demand from China is strengthening is particularly important and fits in with other recent Chinese data. The Chinese policymakers have tried to prop up economic activity by taking targeted measures. That seems to be paying off. The Conference Board’s leading indicators index has steadily improved since early this year and rose strongly in August. This trend is confirmed by the recently published data for the Chinese MNI Business Indicator. In addition, house prices are rising.

Increasingly divided, but FOMC decision seen as easing

The US Federal Reserve kept rates unchanged as expected, but clearly kept open the possibility of a rate hike in December. It has been our view for some time that they will, indeed, hike in December. For that to happen, the economic data must become a little more consistent. I would like to highlight two elements of the FOMC’s decision and communication. First, the FOMC is very divided. Three voting members disagreed that rates should remain unchanged. All three dissenters were presidents of regional Feds and preferred an immediate hike. It is unusual to have three dissenters and it shows a growing difference in view between the Washington-based governors and regional presidents. In addition, the so-called dot plot of projections for the appropriate policy path by individual FOMC members is showing a wide range between the highest and the lowest, even for dates that are relatively near. This division within the FOMC makes policy less predictable and shows that Janet Yellen, who chairs the FOMC, has a phenomenal challenge in finding consensus. Her appearance at the press conference following last Wednesday’s meeting was not particularly convincing in our view, but that is surely a reflection of the divergence of views among the members.

A second important observation is that the median projection by FOMC members for the appropriate policy rate was lowered further. The median for the end of this year now stands at 0.6%, against 0.9% in June and 1.4% in December last year. The median for the end of 2017 now stands at 1.1%, against 1.6% in June and 2.4% in December last year. The expected level for the longer run rate has fallen from 3.5% in December to 2.9% now. Looking at how markets, in particular the equity market, responded to the FOMC’s decision and communication, this was seen as an effective easing of policy.

Mixed data

US and European data was mixed in recent days. The confidence index of US home builders (the NAHB index) rose strongly in September, reaching its highest level since 2005. This indicates strong demand for housing. However, August housing starts and building permits weakened in August. Jobless claims amounted to 252,000 in the most recent week, suggesting a continued robust development of the labour market. On the weaker side, the comprehensive Chicago Fed National Activity Index fell more sharply than expected in August, though this series is volatile.

Eurozone data was also mixed. Construction output is gaining momentum, growing 3.1% yoy in July, the best since early 2014 if one excludes weather-induced strong numbers earlier this year. The preliminary Markit PMI for the manufacturing sector was better than expected, bouncing after two months of decline. However, the services-sector PMI weakened, pulling the composite index down somewhat. Some divergence is occurring between Germany and France. While manufacturing confidence strengthened in both countries in September, German services-sector companies became significantly less optimistic, while optimism among their French colleagues reached its highest level since October last year. While the correlation between these two series is not high, this divergence is unlikely to last long.

PMI service sector


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