Introduction

Weakening in confidence, whether at the consumer or business level, has been limited so far this year yet may be an emerging and very unwelcome trend, one that could pull forward global rate cuts. Whether for confidence readings or readings on manufacturing, multi-year lows are the increasing trend across economies. But not all the news is bad. The week's data on cross-border trade have some bright spots as do some of the latest inflation reports which at least aren't sinking further. What is the sense of urgency right now for central banks to cut rates? Still only moderate would be a fair answer.

The Economy

Monetary policy

The Reserve Bank of New Zealand left its policy rate, the overnight cash rate, unchanged as expected at a record low 1.50 percent. This rate was cut by 25 basis points at the RBNZ's previous meeting in May. The accompanying statement noted that global economic growth has weakened and that downside risks related to global trade have intensified. These factors, officials argued, are having a material impact on the New Zealand economy, particularly the outlook for business investment and imported inflation. Yet the bank also noted that low interest rates and higher government spending should provide support to domestic activity. Although officials concluded that no further cut in rates was required, the case for a rate cut was discussed and officials agreed that more support from monetary policy was likely to be necessary.

Confidence

"Escalation in trade and tariff tensions" is cited as a factor behind June's unexpected and very abrupt 10-point dip in the US consumer confidence index to 121.5. The jobs-hard-to-get reading in this report is closely tracked by forecasters as an early indication for the monthly employment report. This question improved very sharply in May to give a false signal for what proved to be a weak employment report. Now this question, surging 4.6 percentage points to 16.4 percent, is signaling significant weakness for June's employment report. Other readings on jobs are likewise unfavorable with fewer saying jobs are abundant and more seeing weakness for the jobs market six months out. Income prospects, reflecting the weaker jobs outlook, are also down and may also reflect a breakdown in the outlook for the stock market. Long out in front, bulls now trail bears 31.4 percent to 33.3 percent in the Conference Board's data, this despite June's strong market rally.

The rival US consumer sentiment index produced by the University of Michigan also softened, ending June at 98.2 and down from May's recent peak at 100.0 and roughly intrend with where it has held for most of the past year, in fact exactly where it was in June 2018. The expectations component, likely reflecting less confidence in future income, slumped sharply to offset improvement in current conditions. And expectations for inflation point to a tangible break lower for prices, down 2 tenths for the year-ahead outlook to 2.7 percent and down 3 tenths for the 5-year outlook to 2.3 percent. Both of these levels mark deep lows. For the Federal Reserve, the steady showing for sentiment will support their confidence in consumer spending but the weakness for inflation expectations, the primary importance of which is routinely underscored by Jerome Powell, raises the chances however incrementally for a rate cut at next month's policy meeting.

Turning to Germany business sentiment, the latest Ifo survey points to broad deterioration. The overall climate indicator dropped 0.5 points in June to 97.4, its third decline in as many months and its weakest reading in 5 years. The headline fall is attributable to another downgrading in the expectations component which is now at a 4-month trough in the second worst result in 7 years. By contrast and consistent with other reports, current conditions edged higher for their first increase since March. At a sector level, morale in manufacturing extended its downtrend to 10 months and there were fresh declines in both services and construction. The Ifo results paint much the same picture of German business as the prior week's flash June PMI report. Services remain relatively buoyant, but manufacturing continues to weaken and shows few signs of any near-term turnaround.

Consumer confidence in Germany likewise continued to deteriorate according to the latest survey from GfK. At 10.1, June edged 0.1 point lower and is now 0.7 points short of its recent February peak. July is seen declining a further 0.3 points to 9.8 points, on the soft side of the market consensus and, if accurate, would equal its weakest reading in 3 years. The dip in June, like in the US, was tied to a 12.2 point drop in income expectations to 45.5. This left the sub-index down 11.9 points from a year ago for the lowest reading in more than 2 years. The fall here reflected mounting fears about prospective job losses. By contrast, economic expectations improved slightly though remain far off levels of last year as concerns about global trade, Brexit and the slowdown in the German economy all continue to weigh. The GfK results, like those in the US, are not particularly weak but still provide fresh warning signs about the outlook for household consumption.

Morale in France's manufacturing sector unexpectedly deteriorated this month. At 102, INSEE's business climate indicator was 2 points short of its May reading to equal its lowest result since June 2016. The headline decline masks a significant improvement in recent output and reflects instead a marked worsening in forward-looking components. Contraction in new orders deepened and within this, exports slumped to their weakest mark in 5 years. Elsewhere the picture was more optimistic as sentiment was unchanged in both retail trade and construction and slightly higher in services where it also equaled a 15-month high. As a result, economy-wide confidence was steady at May's 106, its third month at this level and still comfortably above its 100 long-run average. The results suggest that the French economy is continuing to expand at a moderate pace but still shows no sign of acceleration due to the current, and prospective, weakness of manufacturing.

Manufacturing

It's manufacturing that's under the microscope right now in US as indicated by Federal Reserve chief Jerome Powell who is watching to see if the slowdown in global trade and global growth is beginning to drag the sector lower. The latest US durable goods report was weak at the headline level, down a monthly 1.3 percent in May, yet there was improvement in some of the details. Excluding transportation equipment, specifically a drop in motor vehicle orders and a second straight drop in civilian aircraft orders, durable goods orders rose 0.3 percent to just edge past Econoday's consensus range. Core capital goods orders (nondefense ex-aircraft) came in on the high end of expectations at a respectable 0.4 percent gain. Yet hidden strength is not the overwhelming theme of this report as a 0.5 percent drop in unfilled orders followed a 0.2 percent decline in April. The effects of the Boeing 737 Max grounding are still unfolding and may be appearing in unfilled orders for civilian aircraft which have fallen 0.9 percent and 0.5 percent in May and April respectively. Another negative in the report, and one that will weigh on second-quarter GDP, is a second sharp fall in shipments of core capital goods, down 0.5 percent and 0.4 percent which points to contraction for the equipment component of nonresidential fixed investment. For the Fed, this report is mixed. The bounce higher in core capital goods orders is a plus though weakness in aircraft, and the risk that 737 effects are now appearing, is a major negative. US manufacturing is limping along at a modest pace.

Also mixed was the May industrial production out of Japan. Preliminary data showed that industrial production advanced 2.3 percent on the month after advancing 0.6 percent in April. In year-on-year terms, as tracked in the graph, production fell 1.8 percent in May versus April's 1.1 percent decline. Stronger headline industrial production reflected increases in the output of motor vehicles, production machinery and electrical machinery. This was partly offset by declines for transport machinery and other manufacturing. May's monthly gain was weaker than official forecasts which were calling for a 5.6 percent jump and also contrasts with PMI survey data which indicated that conditions in Japan's manufacturing sector moderated in the month. Officials expect industrial output to fall 1.2 percent in June and then rise 0.3 percent in July.

Mixed to weak is the indication from Singapore where manufacturing output fell 2.4 percent on the year in May after increasing 0.1 percent in April. On the month, output fell 0.7 percent after rising 2.1 percent in April. The drop in May's headline growth was mainly driven by the electronics industry, which accounts for around 27 percent of total manufacturing production. Electronics output fell 10.8 percent on the year after a decline of 0.6 percent previously, while year-on-year growth also weakened for chemicals. On the plus side, biomedical output, around 20 percent of total manufacturing production, increased 8.8 percent on the year in May, up from 8.2 percent in April, with year-on-year growth also improving for output in the precision engineering, transport engineering and general manufacturing industries. Singapore trade data for May released earlier in the month showed weaker growth in both exports and imports, broadly in line with recent Chinese data also showing subdued trade flows in Asia.

Cross-border trade

The latest trade data out of Hong Kong underscore the slowing in regional trade. Hong Kong's merchandise trade deficit narrowed slightly from HK$35.1 billion in April to HK$34.7 billion in May but exports dropped 2.4 percent on the year after falling 2.6 percent in April. And imports, in an indication of general trade contraction, fell 4.3 percent after April's 5.5 percent drop. External demand from major markets was again weak, with exports to mainland China down 4.1 percent on the year and those to the US down 15.0 percent. Hong Kong officials again cited escalated trade tensions between the US and China as a factor weighing on exports and noted the near-term outlook would depend heavily on whether these tensions are resolved.

In contrast to Hong Kong, the latest New Zealand trade data mostly show strength. The nation's merchandise trade surplus narrowed from NZ$383 million in April to NZ$264 million in May, with year-on-year import growth steady and export growth strong. Exports rose 8.5 percent on the year in May slowing, however, from an increase of 10.8 percent in April. Exports of dairy products recorded another month of stronger growth, offset by a relatively small increase in meat exports, while another month of strong demand from the US, China and other major Asian trading partners was offset by a small year-on-year decline in exports to Australia. Imports of petroleum and related products rose 48 percent on the year in May after recording a decline in April, but this increase was largely offset by a sharp drop in imports of vehicles, parts and accessories, down nearly 20 percent on the year.

The latest data out of the US also hint at improvement in trade flows. The US deficit in cross-border goods trade did come in at a much deeper-than-expected $74.6 billion masking, however, a strong 3.0 percent rise in monthly exports to $140.2 billion. But imports outmatched the rise with a 3.7 percent increase to $214.7 billion. Exports of foods, feeds & beverages were a major plus for May, up 6.1 percent to $11.9 billion though year-on-year contraction is still substantial at minus 9.1 percent. Capital goods exports were also strong, up 3.5 percent with this yearly contraction at 3.8 percent. Vehicle exports rose 4.7 percent and show a 1.5 percent yearly gain. Imports of foods fell 0.5 percent in May to $12.8 billion with all other import categories, however, showing sharp increases especially vehicles at a 7.5 percent monthly gain for a yearly increase of 10.9 percent. Consumer goods imports rose 2.7 percent to $55.5 billion in the month but were down 2.4 percent on the year. Though the rise in imports will be a negative for second-quarter GDP, the year-on-year improvement for both imports and exports is a special plus. These readings had been dipping into the negative column this year.

Inflation

Not only was there a bit of good news on trade in the week, there was also limited good news on inflation. Eurozone inflation flat lined in June, at 1.2 percent for the provisional reading and unchanged from May. Yet, more importantly, core prices picked up a little steam with the narrowest gauge, which excludes energy, food, alcohol and tobacco, climbing three ticks to 1.1 percent, slightly higher than expectations but still broadly in line with the 2018 average. Omitting just energy and unprocessed food the rate was 0.2 percentage points firmer at 1.2 percent, also in line with its average. Inflation in non-energy industrial goods dipped from 0.3 percent to just 0.2 percent but in services jumped 0.6 percentage points to 1.6 percent, a contrasting pattern that continues to build. Food, alcohol and tobacco edged up from 1.5 percent to 1.6 percent but energy dropped from 3.8 percent to 1.6 percent. Despite the higher core rates, the European Central Bank isn't likely to be too excited with June's update. Underlying inflation has been within a lowly 0.8 percent to 1.3 percent range for more than two years now and the upper end of the corridor was only hit courtesy of Easter distortions. The bottom line is that inflation remains too low and, on current trends, a still looser stance for monetary policy would seem to be just a matter of time.

Though looser policy also seems to be in the works for the Fed, the latest US price data are showing a little more pressure than expected. The core PCE price index rose 0.2 percent for a second straight month with the year-on-year rate steady at 1.6 percent, both soft but slightly better than expected. Overall prices also rose 0.2 percent on the month with this yearly rate down 1 tenth to 1.5 percent which is still 1 tenth better than Econoday's consensus. The modest but respectable showing for core prices contrast with the emerging weakness in inflation expectations and will help cool the heat on the Fed to cut rates at their July meeting.

Markets: Gold climbing but not on inflation worries

Falling currency values are often cited as a reason to buy gold. Gold has been climbing sharply, up roughly $100 over the past month and now over $1,400. This raises the question whether the rise is in anticipation of an extending cycle of global rate cuts, a trend that in theory could trigger a bout of future inflation and with that erode the purchasing power of traditional currencies. But the rise in gold also reflects an increasing lack of attractive investment alternatives, a lack of safe yield-bearing investments. Global sovereign yields are not that rich looking to say the least, at roughly 0.80 percent for 10-year Gilts, at minus 0.15 percent for 10-year JGBS, and at minus 0.30 percent for 10-year bunds. The 10-year US Treasury at 2.00 percent looks like the best game in town right now but this yield has been falling fast, down 25 basis points over the last month. The lower this yield goes the more the opportunity cost to own gold, which doesn't pay a yield, declines. This is also a likely factor behind the sudden jump in the value of bitcoin which also, of course, doesn't pay a yield. Stuffing money in your mattress doesn't pay a yield either but for those who shy away from the risks of gold or bitcoins, this may also be an increasingly important option. Low yields not only limit the options for monetary policy, low yields also limit investment choices.

The bottom line

Falling confidence in the economy, which in part is the result of falling forecasts from central banks, can have a self-fulfilling effect. Yet economic data have a way of ebbing and flowing. Though trends are generally pointing lower, we can expect ups and downs along the way. If data do improve, as we saw glimpses of in the latest week, central bankers will feel less compelled to restore confidence in which case the beginning of new Fed or ECB stimulus efforts could well be pushed back.

**Jeremy Hawkins and Brian Jackson contributed to this article

Week of July 1 to July 5

What is expected to be another up-and-down run for economic data, the week starts and ends with two major market movers: China's CFLP manufacturing index the first thing on Monday which isn't expected to show much improvement and the US employment report on Friday where sharp improvement is the strong consensus. After a round of manufacturing PMIs through Monday morning, from India to Germany, the ISM manufacturing report will cap the day off. This is a very closely watched report, especially by policy makers, and further slowing, in contrast to what's expected for Friday's employment report, is the call. Tuesday starts with the second-quarter Tankan out of Japan followed by a monetary announcement from the rate-cutting Reserve Bank of Australia. Trade data from Australia, Canada and the US also fill Tuesday's calendar and will offer updates on the pace of cross-border activity. ISM non-manufacturing will be Wednesday's highlight in a US report, one in which rates of growth have been solid, that can have outsized impact on US markets. Eurozone and Japanese consumer spending data will be posted on Thursday and on Friday, ahead of US employment, German manufacturing orders and the Canadian labour force survey.

China: CFLP Manufacturing PMI (Sun 21:00 EDT; Mon 01:00 GMT; Mon 09:00 CST)

Consensus Forecast: 49.6

The CFLP manufacturing PMI fell a much sharper-than-expected 7 tenths in May to 49.4 and only limited bounce back is the expectation. Forecasters see June coming in at 49.6.

German Unemployment Rate for June (Mon 03:55 EDT; Mon 07:55 GMT; Mon 09:55 CEST)

Consensus Forecast: 5.0%

Germany's unemployment rate is expected to hold steady in June vs May's unexpected 1 tenth rise to 5.0 percent. Confirming weakness in May was a second straight rise in vacancies.

German Manufacturing PMI, Final for June (Mon 03:55 EDT; Mon 07:55 GMT; Mon 09:55 CEST)

Consensus Forecast: 45.4

The manufacturing PMI for Germany has been sending prominent signals of global trade weakness. The final index for June is expected to hold at the flash reading of 45.4.

Eurozone Unemployment Rate for May (Mon 05:00 EDT; Mon 09:00 GMT; Mon 11:00 CEST)

Consensus Forecast: 7.6%

The unemployment rate in the Eurozone is expected to hold steady at April's 7.6 percent which, for a second month in a row, was 1 tenth below expectations.

US: ISM Manufacturing Index for June (Mon 10:00 EDT; Mon 14:00 GMT)

Consensus Forecast: 51.2

Consensus Range: 50.0 to 53.0

At a consensus 51.2, modest and slowing growth is the call for the ISM manufacturing index in June which in May came in below expectations for a second month in a row at 52.1 and a 3-year low.

Japanese Tankan for the Second Quarter (Mon 19:50 EDT; Mon 23:50 GMT; Tue 08:50 JST)

Large Manufacturers, Consensus: 10

Large Non-Manufacturers, Consensus: 20

Capex Change, Consensus: 9.3%

The Tankan survey in the first quarter showed significant deterioration in manufacturing but steady conditions in non-manufacturing. The second-quarter consensus for large manufacturers is 10 versus 12 in the first quarter with non-manufacturers at 20 vs 21. Capex is expected to increase 9.3 percent vs 1.2 percent.

Reserve Bank of Australia Announcement (Tue 00:30 EDT; Tue 04:30 GMT; Tue 14:30 AET)

Consensus Forecast: No consensus

There is no consensus for the Reserve Bank of Australia's announcement. The last meeting in June produced an as-expected 25 basis point cut to 1.25 percent. RBA officials have been warning of uncertainty over household consumption.

German Retail Sales for May (Tue 02:00 EDT; Tue 06:00 GMT; Tue 08:00 CEST)

Consensus Forecast, Month-to-Month: 0.7%

Both March and especially April were weak months for German retailers. A bounce back is seen for May with the consensus at a monthly 0.7 percent increase vs a 2.0 percent drop in April.

UK: PMI Construction for June (Tue 04:30 EDT; Tue 08:30 GMT; Tue 09:30 BST)

Consensus Forecast: 49.4

Pulled down by Brexit uncertainty, the construction PMI, at 48.6 in May, posted a third sub-50 reading in the last four months. For June the consensus is 49.4.

US International Trade Balance for May (Wed 08:30 EDT; Wed 12:30 GMT)

Consensus Forecast: -$53.2 billion

Consensus Range: -$54.4 to -$49.5 billion

Sharply wider is the call for May's international trade deficit, at consensus $53.2 billion vs $50.8 billion in April. Advance data for the goods portion of May's report showed a deeper-than-expected deficit of $74.6 billion.

Canadian Merchandise Trade for May (Wed 08:30 EDT; Wed 12:30 GMT)

Consensus Forecast: C$1.6 billion

A C$1.6 billion deficit is expected for Canadian merchandise trade in May vs a smaller-than-expected C$1.0 billion deficit in April that showed a 1.3 percent monthly rise in exports and a 1.4 percent decline in imports.

US: ISM Non-Manufacturing Index for June (Wed 10:00 EDT; Wed 14:00 GMT)

Consensus Forecast: 55.9

Consensus Range: 54.2 to 57.0

Forecasters see slowing to a consensus 55.9 versus May's stronger-than-expected 56.9 for ISM's non-manufacturing survey. Both new orders and business activity were strong in the May report.

Eurozone Retail Sales for May (Thu 05:00 EDT; Thu 09:00 GMT; Thu 11:00 CEST)

Consensus Forecast, Month-to-Month: 0.4%

Eurozone household spending opened the second quarter with a 0.4 percent decline in April retail sales but a 0.4 percent rebound is expected for May.

Japanese Household Spending for May (Thu 19:30 EDT; Thu 23:30 GMT; Fri 08:30 JST)

Consensus Forecast, Year-over-Year: 1.4%

Japanese household spending is expected to rise 1.4 percent year-over-year in May versus a lower-than-expected 1.3 percent April increase that was pulled down by weakness in spending on housing.

German Manufacturers' Orders for May (Fri 02:00 EDT; Fri 06:00 GMT; Fri 08:00 CEST)

Consensus Forecast, Month-to-Month: 0.2%

Consensus Forecast, Year-over-Year: -6.3%

German manufacturer's orders beat expectations in April with a 0.3 percent gain while March was revised higher to a 0.8 percent increase, both of which follow, however, a significant slump in January and February. For May, forecasters see orders rising only 0.2 percent for yearly contraction of 6.3 percent vs April contraction of 5.0 percent.

Canadian Labour Force Survey for June (Fri 08:30 EDT; Fri 12:30 GMT)

Consensus Forecast: 5,000

A 27,000 rise in May employment was modest but still better than expected with forecasters calling for a 5,000 rise in June. The unemployment fell 3 tenths in May to 5.4 percent and a record low with 5.5 percent expected for May.

US Nonfarm Payrolls for June (Fri 08:30 EDT; Fri 12:30 GMT)

Consensus Forecast: 165,000

Consensus Range: 135,000 to 205,000

Unemployment Rate

Consensus Forecast: 3.6%

Consensus Range: 3.5% to 3.8%

Private Payrolls 

Consensus Forecast: 150,000

Consensus Range: 130,000 to 178,000

Manufacturing Payrolls 

Consensus Forecast: 1,000

Consensus Range: -2,000 to 2,000

Participation Rate

Consensus Forecast: 62.8%

Consensus Range: 62.7% to 63.0%

Average Hourly Earnings

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.3%

Average Hourly Earnings

Consensus Forecast, Year-on-Year Change: 3.2%

Consensus Range: 3.1% to 3.2%

Average Workweek

Consensus Forecast: 34.5 hours

Consensus Range: 34.4 to 34.5 hours

Solid is the expectation for June, at a consensus 165,000 vs May's unexpectedly weak 75,000 gain. The unemployment rate is seen holding steady at 3.6 percent with average hourly earnings, which were very soft in the May report, warming back up to an increase of 0.3 percent. The year-on-year rate for earnings is expected to move 1 tenth higher to 3.2 percent. Private payrolls are seen rising 150,000 but with manufacturing payrolls expected to increase only 1,000. The workweek is seen rising incrementally to 34.5 hours with the labor participation rate steady at 62.8 percent.