Introduction

Industrial production data rolled out en masse during the week and the inescapable trend is weakening across the major economies, clearly evident in emerging or deepening rates of year-on-year contraction. Behind the breakdown are general declines in the import and export of manufactured goods, the result of global trade tensions and tariff actions and which may be triggering a slumping in prices whether at the producer level or the consumer level or, and this is the risk right now for monetary policy, at the expectations level as well. We'll start first at the European line of the global industrial breakdown, and that's Germany.

The economy

Industrial production

Industrial production did show some life in August but not enough to lift year-on-year contraction which came in unchanged at minus 4.0 percent. Yet on the month, German production did rise unexpectedly by 0.3 percent which, nevertheless, is a moderate rate of monthly growth that failed to fully offset July's 0.4 percent drop. That said, the underlying performance was a little stronger than appearances suggest as output was pulled lower by two volatile components, construction and energy which contracted 1.5 percent and 1.7 percent respectively. And though consumer goods had another poor month at minus 1.0 percent, there were respectable advances for both intermediates, at 1.0 percent, and capital goods at 1.1 percent. Though stronger than expected, August's report doesn't really impact a still ominously weak trend. Average industrial production in July/August was still 0.9 percent below its mean level in the second quarter when it decreased 1.8 percent versus the first quarter. Possible revisions aside, September will need an improbably sharp monthly rise of at least 2.7 percent to prevent the sector from sliding into third-quarter recession. And as manufacturers' orders are warning, prospects for the fourth quarter look far from bright.

The outlook for German manufacturing deteriorated again in August. Following a sizeable 2.1 percent monthly slump in July, manufacturers' orders fell 0.6 percent for their third decline in the last four reports. Annual growth, as tracked in the accompanying graph, dropped from minus 4.7 percent to minus 6.6 percent. August's weakness was wholly attributable to the domestic market where orders shrank a monthly 2.6 percent, their sixth contraction so far in 2019. In a contrasting positive, overseas demand expanded 0.9 percent, with the rest of the Eurozone up 1.5 percent and elsewhere gaining 0.4 percent. Within overall orders, intermediates saw a monthly 1.1 percent advance but capital goods decreased 1.6 percent and consumer goods were off 0.9 percent. The disappointingly soft August data put average orders in July/August 1.3 percent below their mean level in the second quarter. When it comes to orders, September will need a monthly jump of at least 4.4 percent just to hold the third quarter flat. Prospects for the fourth quarter look grim and German manufacturing seems set to end the year in recession.

France had been holding up better than Germany but goods production (ex-construction) unexpectedly fell in August. A 0.9 percent monthly decline put annual output growth at minus 1.4 percent. The setback was driven by manufacturing, down a monthly 0.8 percent, which was undermined by machinery and equipment goods (minus 2.2 percent) and the other manufactured goods category (minus 1.0 percent). Partial offsets were provided by transport equipment, which rose 0.5 percent, and the volatile coke and refined petroleum products subsector, up 1.5 percent. Elsewhere there was a small gain in construction of 0.3 percent, but mining and quarrying, energy, water supply and waste management contracted by 1.4 percent. August's disappointment leaves French industrial production at its lowest level so far in 2019. It also puts average output in July/August 1.0 percent below its mean level in the second quarter when it expanded just 0.2 percent on the quarter. This means that September will need to see a very steep 3.5 percent monthly surge if goods production is not to subtract from third-quarter GDP.

But let's not be too grim. France aside, Germany's production did rise a monthly 0.3 percent in August as it did in Italy where, however, the gain made only a small dent in July's 0.8 percent drop as tracked in the graph. Neverthless, this was the first monthly increase since May though not enough to pull annual workday adjusted growth closer to the water line, at minus 1.8 percent and an 8-month low. August's monthly advance reflected a 0.3 percent rise in consumer goods and a 0.4 percent gain in capital goods, partially offset by a 0.5 percent decrease in intermediates and a 0.9 percent drop in energy. Intermediates have now posted three consecutive monthly contractions. Despite August's advance, the trend in goods production remains soft with average output in July/August 0.5 percent below its mean level in the second quarter. Italy's data, taken together with the French and German reports, point to a very small increase in Eurozone industrial production that is unlikely to have been large enough to prevent the continent's sector from having fallen into recession last quarter.

Industrial production in the UK, where Brexit effects of course are at play, has also been in contraction and goods production well undershot market expectations in August. A 0.6 percent monthly fall more than reversed a 0.1 percent rise in July and put annual output growth, as seen in the graph, at minus 1.8 percent. This marks a 0.7 percentage point drop from July and a new 2019 low. The key manufacturing sector performed in much the same vein with a 0.7 percent monthly decline that left production 1.7 percent below its level a year ago. The monthly change was heavily impacted by weakness in pharmaceuticals (minus 4.7 percent) which alone subtracted about 0.3 percentage points. However, a number of other subsectors also posted losses, notably computer, electronic and optical equipment (1.8 percent), electrical equipment (2.5 percent) and coke and petroleum (5.7 percent). Elsewhere, overall production was hit by a 1.0 percent slide in mining and quarrying and a 0.7 percent drop in electricity and gas but supported by a 0.3 percent gain in water supply. Though soft, the August report does put average industrial production in July/August 0.2 percent above its second quarter mean. As such, there is still a chance that the sector avoided recession last quarter although it is likely to have been a very close call.

Now let's turn to a couple of industrial production reports out of Asia where, unfortunately, the accompanying graphs resemble those in Europe. Indian industrial production was down a year-on-year 1.1 percent in August, sharply lower from growth of 4.3 percent in July and far below expectations. This marks the first year-on-year fall in industrial production since June 2017 and was mainly driven by manufacturing output, which like other industrial production reports accounts for the vast bulk of the total index and which fell 1.2 on the year after July's 4.2 percent advance. At their most recent policy meeting earlier this month, officials at the Reserve Bank of India lowered their GDP forecasts in response to recent data. Officials forecast GDP growth at 6.1 percent in the 2019-20 fiscal year ending March, well down from their previous forecast of 6.9 percent, with their forecast for the June quarter of the 2020-21 fiscal year also lowered. Given the current level of inflation, which at 3.2 percent is well below the RBI's 4 percent midpoint target, and their assessment of the outlook, officials decided to cut rates for the fifth time in a row at that meeting and the latest industrial production data will likely reinforce their bias for more rate cuts to come.

Machinery is at the heart of business investment and, for the manufacturing sector, is especially at risk when businesses lower their outlooks and with that their capital spending plans as well. Core machinery orders in Japan (private orders excluding volatile items) fell 2.4 percent on the month in August after dropping 6.6 percent in July. On a year-on-year basis, August orders were down 14.5 percent. This series, which can be volatile and which excludes orders for ships and those from electric power companies, is considered a proxy for capital expenditures. Although monthly growth did improve in August, both major categories fell on the month, broadly in line with other data showing subdued activity across the Japanese economy in recent months. Manufacturing orders fell a monthly 1.0 percent after increasing 5.4 percent previously, while non-manufacturing orders fell 8.0 percent after dropping 15.6 percent previously. Officials expect core machinery orders to fall by 6.1 percent on the quarter in the three months to September.

Producer prices

Weakness in manufacturing is not surprisingly leading to weakness in prices of raw materials and intermediate goods and other production inputs. Producer prices in the US showed deterioration in data for September as did September data out of Japan where the index fell 1.1 percent on the year, weakening further from a decline of 0.9 percent in August. Headline PPI inflation in Japan has now fallen for six consecutive months, has been in negative territory for four consecutive months, and is now at its lowest level since late 2016. The fall in headline PPI inflation in September was broad-based across most major categories. Petroleum and coal prices declined 11.9 percent on the year in September after falling 9.9 percent in August, while the year-on-year change in utilities fell from 1.8 percent to 0.3 percent. Price changes were also slightly weaker for food and beverages, chemicals, and transportation equipment. The latest data will likely reinforce concerns among officials at the Bank of Japan that there may be a loss of "momentum" toward meeting their inflation target, a condition they have advised would prompt further policy easing. September consumer price data out of Japanese are scheduled for release next week.

Inflation expectations

The US posted September consumer price data in the latest week and the results were, yes, soft, headlined by a marginal 0.1 percent monthly rise in ex-food ex-gas core inflation. But that wasn't as much as of an unwanted surprise perhaps – especially for Federal Reserve policy makers – as another breakdown in consumer inflation expectations as measured by the University of Michigan. In data for October, year-ahead inflation expectations, as tracked in the red line, are down 3 tenths this month and back at the multi-year lows seen earlier this year at 2.5 percent. The results do not point to continued improvement for core PCE prices which in the latest available data for August and tracked in the blue line, had been showing improvement at a 1.8 percent gain. It's the core PCE index that is the central gauge for Fed policy and a turn lower in pending data for September and October should come as no great surprise, especially given declines not only in inflation expectations but also producer prices not to mention the wage downturn posted in the proir week for average hourly earnings which fell to an unexpected 2.9 percent for the lowest rate since July last year.

MARKETS: Risk-on back on, impeachment impact nil

Apart from inflation expectations, the consumer sentiment report showed a sizable 3.8 point jump in its headline index to a 96.0 level that easily exceeded Econoday's consensus range. The jump in the index is a positive indication for continued strength in consumer spending during October and also offers evidence that the impeachment inquiry of President Trump is not having a significant impact on the consumers' mind, at least so far. In fact, the text of the University of Michigan's report noted that the ongoing GM strike, which does look to further slow US manufacturing, was mentioned by respondents nearly twice as much as the impeachment. What has been affecting consumer confidence as well as the financial markets is the up-and-down trade talks between the US and China which, in the latest week, helped the stock market substantially on reports of compromise from both sides. And opposing sides may also be compromising in the Brexit countdown amid reports that an Irish border agreement between Europe and the UK may finally be possible. Yet there's always the risk that a Brexit agreement would not pass the UK parliament, as there is the risk of course that US and China talks could break down again. And aside from special factors, underlying economics are not pointing to accelerating rates of growth right now, to say the least, not with growth in global manufacturing coming to a stand still at the same time that doubts are emerging over the potential effectiveness of global monetary policy, policy that may have become sapped by years of rate cuts and quantitative easing.

The bottom line

Slumps underway in goods production and goods orders are a reflection of the slump underway in global trade. Inflation hasn't always been responsive this cycle to changes in fundamentals, but the softness seen in Japanese producer price data or US inflation expectations are consistent with slumping demand. When it comes to inflation targeting, the central focus among central bankers is often inflation expectations which, given the latest signal from the US together with wide signals of weakness in global demand, may be shifting the general global policy outlook to more rate cuts, not fewer, in the months ahead.

**Jeremy Hawkins and Brian Jackson contributed to this article

Week of October 14 to October 18

Chinese data will be back in force in the coming week starting with the latest on international trade as well as consumer and producer prices on Tuesday. This run will be followed on Friday by Chinese fixed asset investment, industrial production, not to mention GDP. All of these reports are key and, on net, are expected to extend mostly slowing rates of growth, a result that would further pressure central banks for additional stimulus. US data will be highlighted by retail sales on Wednesday followed on Thursday with industrial production, also reports that are not expected to show additional strength. Industrial production for the Eurozone as a whole, data to be posted Monday, are likely to reflect the weakness already reported out of Germany, France and Italy. The week's other Eurozone data will include October's ZEW survey from Germany and labour market data out of the UK, both on Tuesday. Aside from the CPI and PPI reports out of China early in the week, other price data will include the latest out of Canada at midweek with Japan to follow Friday.

Eurozone Industrial Production for August (Mon 05:00 EDT; Mon 09:00 GMT; Mon 11:00 CEST)

Consensus Forecast, Month-to-Month: 0.3%

Consensus Forecast, Year-over-Year: -2.5%

Eurozone industrial production has been on a sharp decline since late last year. The monthly consensus for August is a 0.3 percent increase with the yearly consensus, however, at minus 2.5 percent.

Chinese Merchandise Trade Balance for September (Monday CST: Release Time Not Set)

Consensus Forecast: $34.00 billion

Exports, Year-on-Year

Consensus Forecast: -3.0%

Imports, Year-on-Year

Consensus Forecast: -5.0%

The September consensus for the merchandise trade balance is a surplus of US$34.00 billion following a $34.83 billion surplus in August. Imports in September are seen falling a year-on-year 5.0 percent in US dollar terms following August's 5.6 percent drop while exports are expected to decrease 3.0 percent versus August's 1.0 percent decline. Both imports and exports for China have been flattening.

Chinese CPI for September (Mon 21:30 EDT; Tue 01:30 GMT; Tue 09:30 CEST)

Consensus Forecast, Year-over-Year: 2.9%

Disruptions in pork supply have been driving Chinese consumer prices higher. The year-on-year consensus forecast for September is plus 2.9 percent, up slightly from August's 2.8 percent.

Chinese PPI for September (Mon 21:30 EDT; Tue 01:30 GMT; Tue 09:30 CEST)

Year-over-Year, Consensus Forecast: -1.2%

Producer prices fell a yearly 0.8 percent in August for the weakest showing in three years. For September, forecasters are calling for a 1.2 percent decline.

UK Labour Market Report for September (Tue 04:30 EDT; Tue 08:30 EDT; Tue 09:30 BST)

Consensus Forecast, Claimant Count: 27,700

Consensus Forecast, ILO Unemployment Rate: 3.8%

Consensus Forecast, Average Weekly Earnings Y/Y: 3.9%

The ILO unemployment rate is expected to hold unchanged in September at a 45-year low of 3.8 percent. Claimant count joblessness is seen rising 27,700 versus a 28,200 rise in August. The call for average hourly earnings including bonuses, which rose sharply and unexpectedly in both July and August, is 3.9 percent year-on-year which would compare with 4.0 percent in August.

Germany: ZEW Survey for October (Tue 05:00 EDT; Tue 09:00 GMT; Tue 11:00 CEST)

Consensus Forecast, Business Expectations: -29.4

Consensus Forecast, Current Conditions: -25.3

Business expectations improved in September but still remained depressed at minus 22.5 with October's consensus looking for weakening to minus 29.4. Current conditions are also not expected to improve with this consensus at minus 25.3 compared with September's minus 19.9.

UK CPI for September (Wed 04:30 EDT; Wed 08:30 GMT; Wed 09:30 BST)

Consensus Forecast, Month-to-Month: 0.2%

Consensus Forecast, Year-over-Year: 1.8%

The CPI softened below the Bank of England's 2 percent target in August, down 4 tenths on the yearly rate to only 1.7 percent. Expectations for September are looking for a 1.8 percent yearly rate with the monthly showing expected at a 0.2 percent increase.

Canadian CPI for September (Wed 08:30 EDT; Wed 12:30 GMT)

Consensus Forecast, Month-to-Month: -0.1%

Consensus Forecast, Year-over-Year: 1.9%

Headline consumer prices were flat in August, down 0.1 percent on the month that pulled the year-on-year rate down by 1 tenth to 1.9 percent and below the Bank of Canada's 2 percent target. For September the consensus is more of the same, a 0.1 percent monthly decline for a plus 1.9 percent yearly rate.

US Retail Sales for September, Month-to-Month (Wed 08:30 EDT; Wed 12:30 GMT)

Consensus Forecast: 0.3%

Consensus Range: 0.1% to 0.5%

Retail Sales Ex-Autos

Consensus Forecast: 0.2%

Consensus Range: 0.0% to 0.5%

Retail Sales Ex-Autos & Gas

Consensus Forecast: 0.3%

Consensus Range: 0.1% to 0.3%

Retail Sales Control Group (Ex-Food Services, Ex-Autos, Ex-Gas, Ex-Building Materials)

Consensus Forecast: 0.3%

Consensus Range: 0.0% to 0.4%

After posting a mostly soft August despite strength for auto sales, marginal slowing is the forecast for September retail sales where the consensus is looking for a 0.3 percent headline increase that would compare with a 0.4 percent increase in August. Unit vehicle sales rose in September which may hold down ex-auto sales which are expected to rise 0.2 percent in the coming report, yet this would be up from no change in August. Ex-autos ex-gasoline sales are expected to rise 0.3 percent in September with 0.3 percent also the call for the control group.

UK Retail Sales for September (Thu 04:30 EDT; Thu 08:30 GMT; Thu 09:30 BST)

Consensus Forecast, Month-to-Month: 0.2%

Retail sales in the UK fell an as-expected 0.2 percent in August and are expected to increase 0.2 percent in September. Annual sales growth in August was 2.7 percent, down from 3.4 percent in July.

US Industrial Production for September (Thu 09:15 EDT; Thu 13:15 GMT)

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

Consensus Range: -0.7% to 0.3%        

Manufacturing Production

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

Consensus Range: -0.4% to 0.2%

Capacity Utilization Rate

Consensus Forecast: 77.8%

Consensus Range: 77.2% to 78.0%

Driven by strong gains across components, industrial production easily beat expectations in August with a 0.6 percent increase. Manufacturing production also posted a strong gain, of 0.5 percent and the third gain in four months. Yet the strength is not expected to extend to September where the headline consensus is a decrease of 0.2 percent with manufacturing seen down 0.3 percent. Capacity utilization also rose sharply in August and a 1 tenth decrease to 77.8 percent is the call for September.

Japanese Consumer Price Index for September (Thu 19:30 EDT; Thu 23:30 GMT; Fri 08:30 JST)

Consensus Forecast Ex-Food, Year-on-Year: 0.3%

Minimal pressure is the consensus for ex-food consumer prices, at a year-on-year plus 0.3 percent pace in September following a lower-than-expected 0.5 percent pace in August that was well below the Bank of Japan's 2 percent target.

Chinese Fixed Asset Investment for September (Thu 22:00 EDT; Fri 02:00 GMT; Fri 10:00 CST)

Consensus Forecast, Year-to-date: 5.4%

Held down by general slowing including for manufacturing and mining, fixed asset investment rose 5.5 percent year-to-date in August which just missed expectations. Forecasters see September fixed asset investment rising a year-to-date  5.4 percent.

Chinese Third-Quarter GDP (Thu 22:00 EDT; Fri 02:00 GMT; Fri 10:00 CST)

Consensus Forecast, Year-on-Year: 6.1%

Two tenths of slowing was the unexpected result for second-quarter GDP, which came in at 6.2 percent with expectations for third-quarter GDP at further slowing to 6.1 percent.

Chinese Industrial Production for September (Thu 22:00 EDT; Fri 02:00 GMT; Fri 10:00 CST)

Consensus Forecast: 5.0%

Slowing has been visible and broad based and was much sharper than expected in August, at a year-on-year 4.4 percent and a seven-year low. Forecasters see September industrial production in China reviving to a 5.0 year-on-year pace.

Chinese Retail Sales for September (Fri 06:00 EDT; Fri 10:00 GMT; Fri 18:00 CST)

Consensus Forecast, Year-over-Year: 7.8%

Weakness for autos, tied to the introduction of new emission standards, held back August retail sales where the year-on-year rate fell 1 tenth to what was much lower-than-expected annual growth of 7.5 percent. For September, forecasters expect retail sales rebounding to 7.8 percent.