Introduction

Facing a sudden rush of improving economic data – including consumer spending as we shall see – the Federal Reserve will nevertheless be able to point to contraction underway in global trade as justification for what appears to be an approaching rate cut at the coming week's FOMC. Goods are the primary source of trade between countries and trouble here is being felt first by the producers of goods, that is manufacturers. Slowing trade has been sending manufacturing PMIs falling across the world, including those for both Germany and Japan and also the US. But first we start with monetary policy and the European Central Bank which, now like the Fed, is set to re-introduce stimulus at their very next meeting.

The Economy

Monetary policy

In a significant shift, the ECB took the first steps toward a full-blown ease by modifying its forward guidance on interest rates. Previously the bank said it would hold its refi rate at zero at least through the first half of 2020. Now this has been amended to include the possibility of lower rates. For now, the bank kept its benchmark refi policy rate unchanged at zero. There were no modifications to reinvestment policy which entails full reinvestment of principal inflows from maturing securities purchased under the asset purchase programme, but the bank did bolster expectations for future easing by tasking Eurosystem committees with examining policy options that would bolster the chances of meeting price stability goals. These will include ways to reinforce forward guidance on policy rates, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases. In other words, both lower borrowing costs and a fresh round of quantitative easing appear to be on the table. It is clear that the central bank is now much less convinced that the Eurozone economy will rebound in the second half of the year as it previously expected and risks are tilted to the downside. Falling inflation expectations are also a worry. Build up to the ECB's next policy meeting on September 12, when new economic forecasts will be available, should be interesting.

GDP

The build up to the coming week's Fed meeting has definitely been interesting as a rush of strong data has reduced the chances for a 50 basis point cut versus a 25 point cut. Definitive economic data have clearly been improving in the US and are not pointing to urgency for a rate cut of any size. And if there's one strength that is most important for the US it's personal consumption expenditures which along with government spending held up second-quarter GDP to a 2.1 percent annual rate that beat Econoday's consensus by 2 tenths. Beating Econoday's consensus by 4 tenths was inflation-adjusted consumer spending which came in at a very hot 4.3 percent pace. This is directly tied to the strength of the labor market. Government purchases, here tied to heavy government spending on both the state and especially the federal levels, grew at a 5.0 percent pace.

As tracked by the tall red column on the left of the graph, consumer spending contributed 2.85 percentage points to second quarter growth while government purchases contributed 0.85 points. Yet all other major components pulled down GDP which is what FOMC policy makers, particularly the doves, may well underscore at their meeting. But inventories are tricky to nail down. Growth here slowed in the quarter and pulled GDP down by 0.86 points – but the lower rate of inventory build may be a blessing in disguise should domestic demand remain strong and businesses then in turn accelerate their builds which would add to jobs and production.

Less tricky negatives include nonresidential fixed investment which ended a long run of strength with a minus 0.6 percent quarterly pace that pulled GDP down but not that much, at minus 0.08 points. Business structures, where data are often volatile, were the weakness here with equipment a small positive and intellectual property a strong positive. And residential investment was once again a major disappointment in the report, falling for the sixth quarter in a row and this time at a 1.5 percent pace to pull GDP down by 0.06 points. Net exports, reflecting a deepening trade deficit, were also a negative and made a 0.65 point negative contribution, though this component could turn around in the ongoing quarter should imports slow. Price data were another upbeat aspect of the report, rising solidly to 2.4 percent for both the overall index and the core.

Manufacturing versus Services

In contrast to the strength of GDP, many anecdotal reports have been sending alarms including from the US which we'll get to in a minute. First let's look at one of the most alarming of any anecdotal indication and that's Germany's manufacturing PMI. At 43.1, the flash manufacturing PMI for July was nearly 2 full points short of final June and at its lowest level in seven years. Production was especially weak again while new orders, pulled down by weak foreign demand for autos, posted their steepest drop in three months. Backlogs also fell. For services where the PMI held steady at 55.4, they have yet to be pulled down by manufacturing. But growth in new orders for services did slow and backlog orders were down. And with manufacturing in trouble, business optimism in services is at its worst level since December 2014. July's disappointing results suggest that a probably subdued second quarter for GDP growth (data to be posted in mid-August) was followed by an equally sluggish start to the third quarter.

Trouble for manufacturing in Germany unfortunately was no surprise unlike, however, what may be emerging trouble for French manufacturing. France's flash for July fell 1.9 points to a dead even 50.0 which indicates no growth in composite activity relative to June. This missed expectations by a sizable 1.6 points. Like Germany, manufacturing orders fell in the French sample with backlogs subdued and not boosting demand for labor as employment contracted for the first time this year. Services, at 52.2, also lost momentum. July's results suggest that French GDP had a subdued start to the third quarter as growth appears to be stabilizing but at a relatively pedestrian rate.

Weakness in the Japanese PMI samples, like those for China which will be updated next week, has been long established. The flash estimate for the July's manufacturing PMI came in at 49.6, up but only slightly from 49.3 for June. Respondents again cited weak Chinese demand as a significant factor weighing on activity and sentiment. If confirmed by final data early next month, this survey will have indicated contraction in the Japanese manufacturing sector for five of the last six months. New orders as well as new export orders were down again in the flash though employment did improve. Confidence in the outlook weakened which isn't a surprise given that respondents have been reporting contraction in selling prices. Markit Economics, which produces this series, is adding a service sector flash for Japan, which in its first reading came in at 52.3 for a 4 tenths gain from final June.

Gradual deceleration to a standstill is the story of PMI manufacturing's sample for the US where July's flash, like that for France and nearly so for Japan, came in at 50.0 to indicate no change. This is the worst showing for this sample in 10 years and will no doubt be cited at next week's FOMC as an indication of weakness in manufacturing, a sector that tops the list of the Fed's concerns. Production in manufacturing is lower this month and also at a 10-year low with employment ending six years of continual growth. Inventories of inputs are also down this month. Weakness in auto manufacturing and heightened global uncertainties were cited by the sample. In contrast, like the other reports, services are still growing, at 52.2 for a 5 tenths gain from June. New orders here are up with respondents citing strength in consumer spending in what perhaps hints at extending gains for US retail sales. Yet employment in the sample slowed noticeably which the report says is in line with a slump in overall optimism.

International trade

Slowing in cross-border demand, reflected directly in the weakness for manufacturing, is really the ultimate justification for the global trend lower in central bank policy rates. In the latest week we have two updates on trade, one large and one small but both pointing to the same thing. US exports of goods fell very sharply in June with imports also down, posting year-on-year rates as tracked in the graph of minus 3.7 percent for exports with imports barely in the plus column at 0.2 percent. These are at or near the worst showings in three years. Capital goods are the US's strongest exports and these were sharply lower in June as were exports of consumer goods and autos. Exports of foods improved in the month though year-on-year this rate is in the deepest hole of any export category, at minus 5.5 percent. On the import side, contraction was deepest in industrial supplies which points to the effects of lower oil prices. But imports of consumer goods and also vehicles were also down which hints at more fundamental weakness in US demand for foreign goods.

A very similar picture, especially the slump on the right side of the graph, comes from Hong Kong's goods trade where exports in June dropped 9.0 percent on the year after falling 2.4 percent in May. Imports declined 7.5 percent after falling 4.3 percent. External demand from major markets was again weak, with exports to mainland China down 10.6 percent on the year and those to the US down 6.6 percent. Hong Kong officials again cited ongoing US-China trade tensions as a factor weighing on exports and noted that the near-term outlook would depend heavily on whether these tensions are resolved.

Yet another economy getting hit by trade is Singapore's which, earlier in the month, posted sharp year-on-year contraction in exports and imports and in the latest week a sharp contraction in manufacturing as well. Singapore's manufacturing production fell 6.9 percent on the year in June after falling 2.0 percent in May, declines in line with similar results for Singapore's exports. Note that the accompanying graph also looks uncomfortably similar to the prior two graphs on trade. June production in Singapore was largely pulled down by electronics, down 18.8 percent on the year. Growth in biomedical production slowed as did growth for chemicals and transport engineering industries. On the plus side, growth firmed for precision engineering.

Markets: Where to put your money in a recession

One reason not to cut the funds overnight rate by 50 basis points is the risk that it could trigger a scare in the financial markets: that the Fed fears significant not minor troubles for the economy and/or that the Fed's independence, in the face of President Trump's sustained calls to cut rates, is all dried up. And the deeper the Fed cuts rates, the more the pattern would match up with the prior two recessions. That is, the coming cut is not an incremental nuance along a rising path for the economy but a desperate attempt to avoid the worst. Short-term rates move nearly in lockstep with the funds rate but much less so for long-term rates including the 10-year Treasury yield which is a benchmark for the US economy. If the pattern of the prior two rate-cut sequences holds true (in 2001 and 2008) then demand for the safety of Treasuries, despite their declining yields, may well go up as money shifts out of stocks and corporate bonds. Currencies are another option for the investor yet with nearly all global central banks cutting rates or about to cut rates, a competitive round of rate cuts (akin to a competitive round of currency devaluation) could act to keep currency differentials more stable than volatile.

The bottom line

Weakness in trade is resulting in weakness in manufacturing. And though services have been holding up better, continued strength here is not guaranteed and may well be in doubt. Can national economies thrive when trade slows? This may be a question best suited for historians but for global central bankers, they're not taking any chances.

**Jeremy Hawkins and Brian Jackson contributed to this article

Week of July 29 to August 2

Policy announcements from the Bank of Japan followed by the Federal Reserve and then the Bank of England will merely be highlights in an unusually eventful week for the economic calendar. The most potentially market-moving of the economic data will be core PCE inflation out of the US on Tuesday where an unexpected strong increase could further cloud the debate at the FOMC which on Wednesday is widely expected to cut rates by 25 basis points. The CFLP manufacturing PMI will be posted on Wednesday and the Caixan PMI on Thursday both offering the first looks at July conditions in China and both, like similar reports in other countries, struggling at the 50 breakeven line. Final manufacturing PMIs for July will be posted for a host of countries on Thursday including Germany which has been struggling at the 45-point line. Japan will post its own run of data, these results will be for June and will include industrial production. The most market-moving of all economic reports will be on Friday with the US employment report where another month of very solid growth is the expectation.

Bank of Japan Announcement (Any time Monday local time)

Change, Consensus: 0 bp

Level, Consensus: -0.1%

No change is expected for the Bank of Japan's announcement with the short-term policy rate for excess reserves remaining at minus 0.1 percent and the target level for the long-term 10-year yield at around zero percent. At its last announcement in June, the BoJ repeated that it intends to keep in place strong stimulus measures.

Japanese Industrial Production for June (Mon 19:50 EDT; Mon 23:50 GMT: Mon 08:50 JST)

Consensus Forecast: -1.0%

Industrial production far surpassed expectations with a 2.3 percent surge in May, a month boosted by motor vehicles and machinery. A 1.0 percent downward correction is the expectation for June.

Japanese Unemployment Rate for June (Mon 19:30 EDT; Mon 23:30 GMT; Tue 08:30 JST)

Consensus Forecast: 2.4%

The unemployment rate in Japan is expected to hold steady at 2.4 percent in June. Japan's participation rate increased to 62.2 percent in May.

French GDP Second-Quarter Flash (Tue 01:30 EDT; Tue 05:30 GMT; Tue 07:30 CEST)

Consensus Forecast: 0.3%

Looking back, first-quarter real GDP in France expanded 0.3 percent versus a 0.4 percent gain in the fourth quarter reflecting modest to moderate gains for household consumption and capital expenditures. A 0.3 percent rise is expected for the second quarter.

Germany: GfK Consumer Climate for August (Tue 02:00 EDT; Tue 06:00 GMT; Tue 08:00 CEST)

Consensus Forecast: 9.7

A dip to 9.7 is the call for August's Gfk survey which in July came in on the soft side of expectations at 9.8. Income expectations fell in the last report on concerns over job losses and despite a slight improvement in economic expectations and a rise in buying plans.

Eurozone: EC Economic Sentiment for July (Tue 05:00 EDT; Tue 09:00 GMT; Tue 11:00 CEST)

Consensus Forecast, Economic Sentiment: 102.9

At 103.3, the European Commission's economic sentiment index missed expectations in June with goods producing industries and households falling deeper into negative ground. Readings on inflation expectations, of special note to the ECB, were also soft in June. For July, the consensus is for further headline erosion to a headline to 102.9.

German Preliminary CPI for July (Tue 08:00 EDT; Tue 12:00 GMT; Tue 14:00 CEST)

Consensus Forecast, Month-to-Month: 0.3%

Strength in service prices offset weakness in goods prices to lift June's CPI by a 0.3 percent monthly gain for a 1.6 percent yearly rate. For the July's preliminary CPI, a percent 0.3 increase is also the monthly consensus.

US Personal Income for June (Tue 08:30 EDT, Tue 12:30 GMT)

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

Consensus Range: 0.3% to 0.5%

Consumer Spending

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

Consensus Range: 0.2% to 0.4%

Core PCE Price Index, Month-to-Month Change

Consensus Forecast: 0.2%

Consensus Range: 0.2% to 0.3%

Core PCE Price Index, Year-on-Year Change

Consensus Forecast: 1.7%

Consensus Range: 1.6% to 1.8%

Consumer spending was solid in May (up 0.4 percent) and even more solid in April (up 0.6 percent) though forecasters see slowing in June where Econoday's consensus is a gain of 0.3 percent. Personal income is expected to also rise 0.3 percent following a strong 0.5 percent headline gain in May that did not include, however, much strength for wages & salaries. Core prices were soft in May but did edge past expectations which for June are subdued once again, at a monthly gain of 0.2 percent with year-on-year expectations, however, at 1.7 percent in what would be a 1 tenth increase.

US Consumer Confidence Index for July (Tue 10:00 EDT; Tue 14:00 GMT)

Consensus Forecast: 125.0

Consensus Range: 122.0 to 127.0

The consumer confidence index fell sharply and unexpectedly in June reflecting deterioration in job assessments and also income prospects. Inflation expectations surged in the June report. For July, forecasters are looking for a 3.5-point correction higher in confidence to 125.0.

China: CFLP Manufacturing PMI for July (Tue 21:00 EDT; Wed 01:00 GMT; Wed 09:00 CST)

Consensus Forecast: 49.5

The CFLP manufacturing PMI in June, at 49.4, was unable to recover any of May's 7 tenths decline. Forecasters see June coming in at 49.5.

German Retail Sales for June (Wed 02:00 EDT; Wed 06:00 GMT; Wed 08:00 CEST)

Consensus Forecast, Month-to-Month: 0.5%

March, April and May were all weak months for German retailers. A bounce back is seen for June with the consensus at a monthly 0.5 percent increase versus a 0.6 percent decline in May.

Eurozone Unemployment Rate for June (Wed 05:00 EDT; Wed 09:00 GMT; Wed 11:00 CEST)

Consensus Forecast: 7.5%

The unemployment rate in June the Eurozone is expected to hold steady at May's 7.5 percent which, for a third month in a row, was 1 tenth below expectations. The 7.5 percent rate was the lowest in 11 years.

US: ADP, Private Payrolls for July

Consensus Forecast: 155,000

Consensus Range: 135,000 to 170,000

Econoday's consensus for ADP's private payroll estimate in July is 155,000 which would compare with 102,000 for ADP's estimate in June and against 191,000 in the government's data for June.

US Employment Cost Index for Second Quarter (Wed 08:30 EDT; Wed 12:30 GMT)

Consensus Forecast, Quarter-to-Quarter Change: 0.7%

Consensus Range: 0.4% to 0.8%

Steady pressure is expected for the employment cost index with Econoday's second-quarter consensus at a 0.7 percent rise. The first-quarter rate was also at 0.7 percent though the year-on-year paced eased slightly to 2.8 percent.

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

Consensus Forecast, Month-to-Month: 0.1%

GDP for May is expected to rise fall a monthly 0.1 percent vs a 0.3 percent rise in April. The slightly stronger-than-expected gain in April put the annualized pace at roughly 2 percent at the start of the second quarter and ahead of the Bank of Canada's projected 1.3 percent rate for the quarter.

Federal Funds Target for July 30-31 Meeting (Wed 14:00 EDT; Wed 18:00 GMT)

Consensus Forecast, Midpoint: 2.125%

A 25-basis-point rate cut is the unanimous call among Econoday's panel for July's policy meeting. Federal Reserve policy makers have been signaling that chances for a shift to accommodation have risen, the result of weakening in business investment, weakening in manufacturing and also global trade. But strength in a recent run of other economic data, from June employment to second-quarter consumer spending, has kept down expectations from a 50 basis point cut.

China: Caixin Manufacturing PMI for July (Wed 21:45 EDT; Thu 01:45 GMT; Thu 09:45 CST)

Consensus Forecast: 49.5

The Caixin PMI decreased in line with the official CFLP index, coming in June at 49.4 for an 8 tenths decline. Respondents cited China-US trade tensions as the central factor for the deterioration in activity and sentiment. Little change at 49.5 is the call for July.

Bank of England Announcement (Thu 07:00 EDT; Thu 11:00 GMT; Thu 12:00 BST)

Consensus: Bank Rate: 0.75%

Consensus: asset purchase level: £435 billion

No change is once again the expectation for Bank of England monetary policy which, despite a standing bias toward tightening, is locked in place by not only the Brexit dilemma but also by general slowing in the global economy. Bank Rate is expected to stay at 0.75 percent and the QE ceiling at £435 billion.

US: ISM Manufacturing Index for July (Thu 10:00 EDT; Thu 14:00 GMT)

Consensus Forecast: 51.9

Consensus Range: 50.5 to 54.0

Stalling growth has been this year's consistent signal from the ISM manufacturing index which in June came in at 51.7 and a 3-year low. Most indications in June's report, including for new orders, were flat. For July, Econoday's consensus is 51.9.

US Construction Spending for June (Thu 10:00 EDT; Thu 14:00 GMT)

Consensus Forecast, Month-to-Month Change: 0.4% 

Consensus Range: -0.5% to 1.0%

Construction spending fell a sharp 0.8 percent with all major categories, especially residential, showing visible weakness in May. For June, Econoday's consensus is calling for a 0.4 percent increase.

US Nonfarm Payrolls for July

Consensus Forecast: 156,000

Consensus Range: 150,000 to 170,000

Unemployment Rate

Consensus Forecast: 3.6%

Consensus Range: 3.6% to 3.7%

Private Payrolls 

Consensus Forecast: 154,000

Consensus Range: 139,000 to 165,000

Manufacturing Payrolls 

Consensus Forecast: 6,000

Consensus Range: -5,000 to 10,000

Average Hourly Earnings

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.2% to 0.3%

Average Workweek

Consensus Forecast: 34.4 hours

Consensus Range: 34.4 to 34.5 hours

Solid but less heated is the expectation for July nonfarm payrolls, at a consensus 156,000 versus a 224,000 jump in June that beat high-end forecasts. The unemployment rate is seen edging lower to 3.6 percent with average hourly earnings remaining subdued at an increase of only 0.2 percent. Private payrolls are seen rising 154,000 with manufacturing payrolls, which were a highlight of the June report, expected to increase 6,000. The workweek is seen steady at 34.4 hours.

US International Trade Balance for June (Fri 08:30 EDT; Fri 12:30 GMT)

Consensus Forecast: -$54.7 billion

Consensus Range: -$55.1 to -$52.8 billion

Narrowing is the call for June's international trade deficit, at consensus $54.7 billion vs $55.5 billion in May. Advance data for the goods portion of June's report showed a deficit of $74.2 billion for a $0.4 billion monthly increase from May's goods deficit of $74.6 billion.

Canadian Merchandise Trade for June (Fri 08:30 EDT; Fri 12:30 GMT)

Consensus Forecast: -C$0.4 billion

A C$0.4 billion deficit is expected for Canadian merchandise trade in June versus a better-than-expected C$0.8 billion surplus in May that was the largest surplus in two years. Canada's trade surplus with the US rose to C$5.9 billion for an 11-year best.

US Factory Orders for June (Fri 10:00 EDT; Fri 14:00 GMT)

Consensus Forecast, Month-to-Month Change: 0.7%

Consensus Range: 0.4% to 2.2%

The advance headline of the durables side of the June factory orders report rose 2.0 percent, with ex-transportation orders increasing 1.2 percent while core capital goods orders surged 1.9 percent. Forecasters see factory orders in June, which will include initial data on non-durable goods, rising 0.7 percent.