5th February 2019

Rathbones: Great timing

US nonfarm payrolls smashed expectations once again, posting 304,000 new jobs in January instead of the 165,000 forecast. December's number was revised down from exceptionally high to very high. The ISM manufacturing survey rose to 56.6, higher than expected, showing that US producers are busy and confident. Consumer sentiment was soggier, however, dropping to the weakest level of Donald Trump’s presidency. It was likely dragged down by the record 35-day government shutdown, yet it held up significantly better than economists had expected.

All pretty rosy then! Great timing too – right after the US Federal Reserve (Fed) had effectively U-turned on its plans to tighten monetary policy. A few months ago the central bank had set out its stall for steady interest rate hikes and a wind down of the unprecedented pile of bonds and mortgages it still holds. The Fed said the economy looked strong enough for the Fed to continue its work. Then investors panicked, stocks fell and the Fed backtracked swiftly – Fed Chair Jay Powell outlined an almost capitulatory stance last week that even opened up the potential for a cut to interest rates in the coming year. So the question is, was Mr Powell’s technocratic mea culpa based on economic data that the bank believes will cool in coming months, or was the lurch to accommodative policy simply to assuage stock investors? And which explanation is more worrying?

The American reporting season is about halfway done, with earnings growth ticking along at about 12%, according to FactSet. Executives are cagey about the future though: roughly 30 S&P 500 companies have reduced their expectations for 2019 profits. Just nine have boosted their forecasts and the rest (about 190 firms) have stayed mum.

Source: FE Analytics, data sterling total return to 1 February

Factory town

Nissan has pulled the plug on one of the SUV production lines it had planned for its Sunderland factory. It’s easy to make the quip that Sunderland workers – who overwhelmingly voted for Brexit – are getting what they voted for: turkeys plumping for Christmas and all that.

But that’s unfair; it’s not as simple as that. A good deal of the reason for icing the project is a large fall in European demand for diesel vehicles, something that has nothing to do with trade wrangles, political union or policy certainty. Nissan has invested significant sums in the state-of-the-art factory over the past couple of years and is still going ahead with the larger of the two SUV projects it had announced in 2016 after the referendum. Sizeable developments are planned for Sunderland’s auto industry in the coming years, funded by the UK government, including an advanced manufacturing park near the Nissan plant.

There are several risks, however. First, the Sunderland expansion was given the green light after Prime Minister Theresa May gave personal assurances to Nissan then-company boss Carlos Ghosn that Brexit wouldn’t affect the UK’s largest automotive employer. Of course, Mr Ghosn now languishes in a Japanese prison cell because of criminal charges about his remuneration package and he has resigned from the company. Will his successor continue with Mr Ghosn’s UK strategy? Nissan always qualified its UK plans by saying it wouldn’t pull the trigger on any new investments without knowing what the UK-EU trading relationship will be. Also, the new SUV programme won’t go live till later this year at the earliest, i.e. after Brexit. Political delays could lead to investment delays.

Meanwhile, both sides of the Channel are hurting at the moment. Italy slipped into recession last year, according to growth numbers released last week. Its GDP shrank 0.1% and 0.2% in the final two quarters of 2018. This was partly because the implementation of new car-making standards crimped production, but – more worryingly – the main cause appears to be sluggish spending and investment by Italian households and businesses. A raft of economic measures show Germany is slowing too. Retail sales there were extraordinarily bad in January – down 2.1% on a year earlier. Still, economists are hoping that the nation’s households can pick up the slack by spending more. They could certainly afford to – unemployment is low, wages are decent and people there are known for their sound finances (their banks, ironically, are a different story). Can the frugal Germans learn to shop till they drop?

Investments, Investment Commentary, US