The Four Horsemen of the Global Economy: U.S., China, Japan & Euro Zone

Chris Versace

Chris Versace is a financial columnist and equity analyst with more than 20 years of experience in the investment industry.

There have been a lot of questions raised about the direction and speed of the global economy. The Greece drama aside, those same questions, as they relate to the domestic economy, have taken center stage, largely because the answers will dictate when the Federal Reserve will hike interest rates. As I’ve been saying for some time, and as the Fed essentially confirmed last week in its latest Federal Open Market Committee (FOMC) policy statement, there is little reason to raise interest rates in the near term. Aside from the slowing industrial economy here at home (more on that in a few paragraphs), companies still have to contend with the strong dollar and all that entails.

At the same time, new evidence from Bankrate.com points to roughly 70 million Americans who have no emergency savings. That’s scary enough, but according to Harvard’s State of the Nation’s Housing 2015 report, one in five renter households making $45,000-$75,000 a year are considered “cost-burdened,” meaning they spend more than 30% of their income on rent. Add in higher food and healthcare costs, as well as the uptick we’ve seen in gas prices, and the would-be recovery we’ve been hearing about doesn’t sound like it’s made its way down to Main Street.

One of the ways that I keep tabs on the economy — not just the domestic economy, but the larger global economy — is by monitoring the flash PMI reports from Markit Economics. In other words, welcome, investing contestants, to that monthly game I call “What’s your vector? What’s your velocity?” That’s right, it’s once again time for the game that is sweeping the nation (maybe) and keeps Wall Street and economists alike on their toes. We have our usual lineup of contestants joining us this month. You know them as the four horsemen of the global economy: give it up for the United States, China, the euro zone and Japan! This month, we’ll start with our contestants traveling from east to west, and that means Japan is up first.

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Japan’s flash PMI reading fell to 49.9, a technical contraction given that the expansion-contraction line sits at 50. Digging into the report, output continued to slow — and, worse yet, new orders declined, as did backlogs of work. For those keeping track, June is looking like the third month of new order contraction this year, even though favorable exchange rates led to an uptick in new export orders. That’s not exactly bullish, but I’ll be looking at June’s monthly machine tool order data to see if May’s near-3% month-over-month increase was a fluke or not. To me, this says that certain machinery, mining and tooling companies will be in a holding pattern in the near term.

Turning to China’s June flash PMI readings, we have another contraction reading on our hand. Now the bulls will try to paint the preliminary June reading of 49.6 as a three-month high. Let’s remember that below 50 is a contraction. But there is reason to be optimistic that China’s manufacturing economy is on the cusp of finding its footing given the increase in new order activity, as well as backlogs of work. Separately, the latest China Beige Book suggests a recovery is underway, but, as I have pointed out, it’s more consumer-driven, as evidenced by the pickup in the retail and real estate sectors. The report found retailers’ revenue grew at a faster pace in the second quarter than manufacturers’ for the first time in 18 months. Earlier this week, I made a recommendation to PowerOptions Trader subscribers on how to profit from this — if you’re interested in learning more, click here.

As long as we are talking about weak initial reads for June, the U.S. economy comes to mind. During the last several months, more than a few indicators — industrial production, capacity utilization, truck tonnage, rail traffic and more — have been pointing to a slowing industrial economy, and Markit’s initial June PMI reading only adds to that picture. At 53.4, June is shaping up to be the weakest reading since October 2013. To me, some of the commentary from the report — “…there were reports that softer output growth reflected a degree of caution about the business outlook, as well as concerns about the impact of the strong dollar on competitiveness” — suggests we are not in for a pronounced pickup during the seasonally slow summer months.

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As Chris Williamson, chief economist at Markit, put it, “Manufacturers reported a disappointing end to the second quarter, with factory output growing at the slowest rate for a year-and-a-half.” To me that simply affirms the notion the Fed will hold off raising rates until late 2015. Remember, the summer months tend to be filled with vacations and summer shutdowns, which means September will be the next “must watch” month for economic data to gauge the underlying strength of the economy.

During the last several months, the euro zone has been the shining star of “What’s your vector? What’s your velocity?” Despite the potential for Greece to put a kibosh on things, the region continued to improve in June. According to Markit, the flash June PMI reading hit 54.1, a 49-month high, which placed the average PMI reading for 2Q 2015 to the highest level in four years. Outside of France and Germany, the June survey rounded off the best quarter in eight years, as measured by output growth, and the best job creation since the third quarter of 2007. I remain bullish on both iShares MSCI Italy Capped ETF (EWI) and iShares MSCI Spain Capped ETF (EWP). We’ll get more country-specific details when Markit publishes its final June PMI findings in early July.

Looking at the global economy and the four horsemen in sum, there is little reason to expect a breakout from second gear in the near term. This should give equities and higher-dividend-paying stocks in particular additional runway to move higher in the coming weeks and summer months.

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In case you missed it, I encourage you to read my e-letter column from last week about the implications of the recent FOMC announcement. I also invite you to comment in the space provided below my commentary.

Upcoming Appearances

  • Each Monday, I join Sonoma County’s Morning News with Melanie Morgan’s “Big Story” of the week to talk about the latest in the economy, stock market and more.
  • Each Friday, I join Mark Ray, the host of America’s Morning News, to talk about the latest on the economy, stock market and more. With the show broadcast in more than 170 markets, be sure to tune in.
  • I will be attending the San Francisco MoneyShow, July 16-18, at the Marriott Marquis. To register, click here. Mention priority code 038970.
  • I want to invite you on a cruise with Newt Gingrich, Mark Skousen and me, among others, Sept. 13-20. Spend seven fabulous days aboard the six-star luxury liner, the Crystal Symphony. We will travel from New York to Montreal with noted historical scholars, political pundits and renowned market experts who will share their insights and perspectives on the current environment in Washington and Wall Street. For further information, including how to sign up, visit www.PoliticsAndYourPortfolio.com.

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Stock markets across the globe bounced strongly over the past week. The Dow Jones was up 1.34%, the S&P 500 rose 1.33% and the NASDAQ jumped 2.07%. The MCSI Emerging Markets Index recovered a strong 3.16%. Big gainers in your Alpha Investor Letter portfolio included the Market Vectors Biotech ETF (BBH), jumping 4.94%; Allergan, Inc. (AGN) (formerly Actavis), up 4.80%; iShares Currency Hedged MSCI Germany (HEWG), rising 4.64%;

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