Even though record highs in major US indices are peppered with warning signs from weakening economic data, many investors are still risking their money for further gains.
With strong jobs numbers out last Friday, they may now be unsure if the Federal Reserve would cut interest rates, which would be a move in tandem with rate cuts elsewhere.
Against some growth in the US, weak manufacturing data is emerging from Germany and China.
That should leave investors in greater doubt as to whether an “insurance cut” by the Fed can halt the downslide in global manufacturing as lower borrowing costs may not work to arrest the trade war fears of the business community.
Slowing economic and wage growth is worrying. No doubt, US non-farm payroll employment that covers goods, construction and manufacturing companies, rose by 224,000 in June compared with just 75,000 in May.
US unemployment which is still low, inched up to 3.7% from 3.6% and wage growth remained disappointing as average earnings rose by 0.2% in June against expectations for 0.3%.
The global manufacturing purchasing managers’ index (PMI), produced by JP Morgan and IHS Markit, showed a continuous decline to 49.4 in June.
That was the lowest for over six-and-a-half years and recorded back-to-back sub 50.0 readings for the first time since the second half of 2012, said JP Morgan. China, Japan, Germany, Britain, Taiwan, South Korea, Italy and Russia were among economies experiencing this downturn in manufacturing.
With new export business declining for the tenth straight month, large industrial economies experiencing declines in exports include the eurozone, China and Japan.
The global cake is shrinking, with 60% of the world’s national PMIs coming at below 50, which means they are experiencing various degrees of contraction.
Investors hoping for monetary and fiscal measures to work, in the wake of such a slowdown, should be aware that slowing wage growth and hence lower demand, may undermine the effectiveness of monetary easing in driving the real economy.
Fiscal measures such as government spending and taxation, must come in strongly, something that the weaker emerging markets can ill afford.
In the midst of policy limitations, global risks in trade and geopolitical issues remain loud, with the potential to heighten the pace of slowdown or even recession.
“The risk of net capital outflows remains very high especially in countries facing twin current account and budget deficits, or those that have failed to address their policy challenges,’’ said AmBank Research head Anthony Dass.
Clouding the US macroeconomic outlook are the lagged impact of previous US rate hikes, slower capital spending and lingering trade tensions.
Reflecting deep uncertainties among those who have run to safe haven bonds, yields of 10-year US Treasuries have fallen below 2% (bond yields move inversely to prices).
Multiple inversions of the US yield curves where long-term yields are lower than those in the short-term, signal a possible downturn in the next one year or so, said Nor Zahidi Alias, associate director of economic research, Malaysian Rating Corp.
The reprieve from the US-China trade truce, that is boosting stocks, may be short-lived as frothy and rich valuations of stocks coupled with fading effects of the US tax stimulus remain a downside risk to the US economy.
“A severe enough shock such as elevated trade tensions and global debt crisis could usher in a global recession, even if central banks respond rapidly,’’ said Socio Economic Research Centre executive director Lee Heng Guie.
Rate cuts alone cannot prevent a recession, which is a process, not a singular event.
The US new orders index came in at a borderline 50% for June against 52.7% in May, said the Institute of Supply Management.
“If the next set of data for new orders comes in at below 50, the Fed may just cut rates as expected, and set into motion the typical trajectory heading into a recession.
“This is quite likely the last hurrah (in stocks),’’ said Interpacific Research’s head Pong Teng Siew.
“There is nothing that pumping in more liquidity can’t achieve.’’
Ahead of the earnings season that kicks off this week, 77% of the 113 companies that have issued earnings per share guidance warned their numbers would be worse than expected, said FactSet.
With US$5 trillion already in equities, and the S&P up 19% in the first half, market forecasters say a lot of gains have been booked in, and it will be hard to sustain that kind of momentum.
In the short term, there could be some strength in US and European equities but one must diversify into other asset classes, said Areca Capital CEO Danny Wong.
Columnist Yap Leng Kuen notes the warning that ‘ignoring the weakening data comes with peril.’