Economic Outlook – 1 October 2017


  • Housing data kicked off the week in what was a relatively light data week in the United States. New home sales fell 3.4% to a 560,000-unit annualised pace in August. The Houston metro area accounts for about 5.0% of new home sales, providing an indication of the magnitude of hurricane-related disruptions. Inventory of new homes for sale at the end of the period spiked in August, largely in the South. Most of the increase was in homes not yet started or under construction, which is consistent with earlier reported data on completions, which fell sharply.
  • The inventory of both completed new and existing homes for sale remains near historic lows. The lean inventory has weighed on home sales in the United States. Pending home sales fell a larger-than-expected 2.6% in August, the fifth drop in the past six months and a sign that existing home sales will likely continue to slide during the next few months. Amid this lean inventory environment, home price growth has been firm. The S&P CoreLogic Case-Shiller National Home Price Index rose again in July and is up 5.9% over the year, continuing the steady price gains of 5-6.0% seen over the past few year.
  • September consumer confidence was also affected by hurricane effects, but only modestly so. Consumer confidence fell 0.6 points in September from August’s downwardly revised reading. The decline was concentrated in the present situation component, however, as expectations for the future were stronger in the month. The Conference Board noted that “confidence in Texas and Florida decreased considerably,” as those two states were most severely impacted by the hurricane.
  • Durable goods orders were the notable bright spot this week. Durable goods orders rose 1.7% in August, aided in part by a bounce back in the notoriously volatile aircraft orders component. New orders for non-defence capital goods excluding aircraft, the preferred measure of business investment plans, rose a strong 0.9% in August, bringing the three-month average annualised pace of growth to a healthy 6.4%. The regional purchasing managers’ indices released thus far this month have all also improved, with new orders expanding at a faster clip according to the New York, Philadelphia, Richmond and Dallas Fed manufacturing surveys.
  • According to estimates released this week by the Bureau of Economic Analysis, The US economy grew at an annual rate of 3.1%, a slight upward revision from last month’s 3.0% reading. Despite the uptick in growth, corporate profits advanced at an annual rate of just 0.1% in Q2, a sign that the broad economy is performing worse than large multinational firms, which have recorded two straight quarters of double-digit profit growth. Economic data for the next few quarters are likely to be noisy given the disparate economic impacts of hurricanes Harvey, Irma and Maria.
  • Fed Chair Yellen hawkish comment that shrugged off current soft inflationary pressure reinforced expectations for another rate hike this year. Markets implied probability of a December hike increased to 67.0% post-Yellen speech. She also expressed that the Fed still expects price pressures to shift towards the 2.0% target, fueled by a tightening labour market. Echoing Yellen’s stance are Fed President Williams, Dudley, and Rosengren. Both Rosengren and Williams expect rate to increase in a gradual manner. Relatively speaking, Fed President Kaplan, Evans, and Bullard sounded more cautious. Evans mentioned there needs to be “clear signs of building wage and price pressures before taking the next step” in policy, so that markets do not “misread” the Fed as having “lack of concern over inflation outlook”. Meanwhile, Fed Bullard said the Fed should hold on to rates given that inflation remains below the Fed 2.0% target and that growth is trending around the low 2.0% ranges.
  • Still seeking his first major legislative accomplishment, US president Donald Trump this week unveiled a reform plan designed to simplify the cumbersome US tax code. Under the proposal, today’s seven tax brackets would shrink to three (with the potential for an additional bracket for high-earners) and the corporate tax rate would be cut from 35.0% to 20.0%. The plan would nearly double the standard deduction for most households and retain mortgage interest and charitable deductions while eliminating deductions for state and local taxes. The plan would end the estate tax and the alternative minimum tax. As with his efforts to repeal and replace Obamacare, Trump has left many of the details of the plan in the hands of congressional leadership. Markets have greeted the proposal positively, pushing equities, bond yields and the dollar higher in anticipation of a faster pace of economic growth.
  • The most important data release will be the labour market report for September, due to be released on Friday. Markets usually pay a lot of attention to the report and react negatively to weak data but this is not likely to be case this time. The numbers from this release are likely to be more affected by Hurricanes Harvey and Irma and will not reflect underlying labour market strength. Looking at initial jobless claims, they have risen significantly since the hurricanes but any impact on US economic data will be short-lived. Also, the Fed clearly stated at its recent meeting that it will look through weak economic data in the short term as it is due to the hurricanes.
  • On Monday ISM manufacturing and ISM non-manufacturing, respectively, for September will be released. Given that both Empire, Philly and Richmond regional PMIs increased strongly in September there is also room for ISM manufacturing to increase to around 60 despite PMI manufacturing was stable at a much lower level in September, although the hurricane may also affect ISM in the short-run as well. This big gap between PMI manufacturing and ISM manufacturing is still puzzling and the truth is likely somewhere in the middle but note markets tend to focus more on ISM.


  • In other policy development, ECB President Mario Draghi expressed more confident that inflation will eventually head towards the central bank’s target with the support of continuous accommodative monetary policy.
  • German chancellor Angela Merkel will be forced to cobble together a three-party coalition after her Christian Democratic Union fared worse than expected in Sunday’s election. The right wing populist Alternative for Germany party won 12.6% of the vote, becoming the third-largest party in the Bundestag. Another small party receiving a substantial number of votes was the Free Democratic Party (FDP), which garnered 10.7%. The FDP will likely pry the finance ministry away from Merkel’s CDU in return for its support in parliament. Wolfgang Schaeuble stepped down after eight years as finance minister this week to take up the post of president of the parliament, paving the way for a new finance minister. The FDP is thought to be even less inclined to bring about closer European integration than past Merkel governments.
  • In the euro area, the first release of interest is the unemployment rate due for release on Monday. The unemployment rate continues to decline and close in on the NAIRU and a further decline to 9.0% in August is expected as employment PMIs have remained high. There has been a pickup in wage growth since H2 2016, but despite the seemingly tight labour market, a slack can be observed due to a lack of productivity growth, low inflation expectations and a still high share of involuntary part timers.
  • On Wednesday, the euro area retail sales figures for August are out. In July, retail sales decreased 0.3% month-on-month, which is the largest decline since March 2016 and driven primarily by a decline in the sales of auto fuel. The consensus is for rising retail sales in August of 0.4% month-on-month, supported by the falling oil price throughout August and continued high consumer optimism.


  • In the UK, focus is on the UK Conservative Party Conference in Manchester on 1 to 4 October. The Conservative Party (not only backbenchers but also Cabinet members) remains hugely divided on Brexit and PM Theresa May’s position has been clearly weakened since the general election in June, although it is difficult to see a leadership contest in the short run due to the ongoing Brexit negotiations (which are difficult enough as they are) and no obvious successor. PM Theresa May is expected to deliver a speech on Brexit in connection with the conference, where she is expected to repeat that the UK is leaving the single market and the customs union.
  • Next week, September PMIs will be released, which will give more information about Q3 GDP growth. So far, it seems like growth in Q3 has continued around the same pace of a quarter percentage per quarter as in H1 2017, perhaps slightly higher.
  • UK PMI manufacturing is due on Monday and it is likely to have risen to the 58.0 level, in line with the level of the equivalent index for the euro area, as the UK has a tendency to follow the euro area index (although the UK index is more volatile).


Sources: Wells Fargo, MFS Investment Management, Danske Bank, HongLeong Bank