Economic Outlook – 10 December 2017


  • US employers added 228,000 new jobs in November, which was better than expected. The print is particularly encouraging given that the distortions related to the storms this hurricane season have largely dissipated. Gains were widespread across major industries, with only information and federal government employment seeing declines. US unemployment held steady at 4.1% last month but is down from 4.6% a year ago. The labor force participation rate was also unchanged at 62.7%, which it is a positive sign in light of the ageing of the population weighing on overall participation.
  • Wage growth remained muted in November. Average hourly earnings rose 0.2%, which was short of expectations and followed downward revisions to September and October. The year-on-year rate rose to 2.5%, but has weakened since late last year. One offset to the tepid wage growth this month, however, was that workers were offered more hours at work. The average length of the workweek edged up to 34.5 hours, which, along with the net jobs added, suggest income derived from the labor market has strengthened at a 4.7% annualised rate the past three months.
  • The November ISM non-manufacturing index pointed to broad growth across industries. The index slipped 2.7 points, but remained squarely in expansion territory at 57.4 and of 18 industries, only one reported contracting over the month (Agriculture & Forestry). Most sub-indexes, including new orders, employment, and backlogs, pulled back in November, but remained at levels consistent with a decent pace of growth.
  • The ISM manufacturing index showed that factory activity has also remained strong in recent months. This week additional insight was added on the manufacturing sector in the factory orders report. The total value of orders edged down 0.1% in October, but this this came on the heels of a solid (and upwardly revised) 1.7% gain in September. The negative print for October stemmed largely from a drop in aircraft orders. Non-defence capital goods orders, excluding aircraft (a bellwether of private equipment spending) edged up and have risen at an impressive 16.4% three month average-annualised pace.
  • Even without tax cuts, the US economy appears likely to continue its winning streak. Growth in the fourth quarter is tracking close to 3.0%. With supportive financial conditions, economic growth in the range of 2.0% to 2.5% appears likely over the next year. Into this environment, Congress looks increasingly likely to pass a tax cut that will raise the deficit and add as much as $1 trillion to the national debt over the next decade.
  • The US House of Representatives and the Senate each passed a continuing resolution funding the US government for the next two weeks. Another legislative showdown is expected around 22 December, when the Democratic minority will seek to advance its spending and policy priorities in exchange for votes to fund the government till the end of the fiscal year in September. Republican leaders hope to complete tax reform legislation before having to turn to budget matters, a very ambitious timetable.
  • The most import event this week will be the FOMC meeting ending on Wednesday. This is one of the big meetings where projections are provided. There is a strong consensus expectation the Fed will raise the target range to 1.25% to 1.50%, which by itself should not have a great market impact. Additionally, the FOMC is expected to continue signalling three hikes both in 2018 and in 2019.
  • The CPI numbers for November are due on Wednesday. CPI core is expected to rise 0.2% month-on-month (1.7% year-on-year versus 1.8% year-on-year in October). It is likely headline inflation increased significantly more given the large increases in fuel prices, and an increase of 0.4% month-on-month in November could be in order (2.2% year-on-year versus 2.0% year-on-year in October).


  • After falling short of reaching a deal last weekend, the British government and the European Union managed to come to an agreement at the end of the week, just in time for next week’s EU summit. The pact includes a financial settlement, protects the rights of EU citizens residing in the United Kingdom and guarantees no hard border between the Irish Republic and Northern Ireland. EU demands on these critical issues having been satisfied, talks will now include future trade arrangements between the two sides.
  • This week, there will be the EU summit on Thursday and Friday (Brexit discussions scheduled for Friday), where the EU leaders have to decide whether there has been ‘sufficient progress’ in the first phase of Brexit negotiations (divorce bill, Irish border and citizens’ rights) to move to phase 2 (future relationship). This seems likely to be only a formal decision following the deal between the EU commission and the UK government struck last week. Still, it is too early for markets to reprice the Brexit risk premium significantly.
  • A Bank of England (BoE) meeting is due to take place on Thursday, right before the ECB meeting. After last month’s rate hike, the Bank of England is expected to stay on hold at this meeting and as it is one of the small meetings without updated projections and a press conference, focus is on the statement and minutes for any hints on the BoE’s intention of beginning a hiking cycle.


  • PMI manufacturing index in the Eurozone picked up steam to a 17.5 year high while that of the UK to a 4 year high. Reports also showed services activities generally gained better traction in November, bolstering expectations of extended growth into the final quarter of the year.
  • In the Eurozone, economic releases also turned in mixed. Sentix investor sentiments remained upbeat despite pulling back somewhat to 31.1 in December. Retail sales fell more than expected by 1.1% month-on-month in October offering signs of slower consumer demand. Year-on-year, sales decelerated sharply to a mere 0.4% year-on-year from the 4.0% increase a month ago. PPI moderated more than expected to 2.5% year-on-year in October, dampened by smaller gains across all categories except intermediate goods, led by energy.
  • The Eurogroup, the informal group of Eurozone-country finance ministers, elected Portuguese finance minister Mario Centeno to a two-and-a-half-year term as their new leader this week. He will replace Dutch finance minister Jeroen Dijsselbloem in January. The Eurogroup came into existence to help manage the banking crisis that nearly torpedoed the euro earlier in the decade.
  • EU PMI figures are due on Thursday. After an increase to 58.5 in October (up from 58.1 in September), manufacturing PMI jumped to 60.1 in November. The manufacturing output index thus surged past the post crisis peak of 59.0 reached in February 2011. Other survey indicators such as ZEW and German IFO expectations also continue to show rising optimism. However, the leading order-inventory balance has started to fall, manufacturing PMI I expected to decline to 59.5 in December.
  • The December ECB meeting will also be held on Thursday. The ECB is not expected to make any changes to its policy stance at the meeting following the QE extension at the October meeting. Focus will therefore be on the updated growth and inflation projections from the ECB. Throughout Q3 and beginning of Q4, activity indicators have remained strong, and the ECB is likely to revise its growth projections upwards in 2017 to 2019. It is also possible that the ECB will revise its inflation forecast up for 2018 due to higher oil prices, while the new 2020 forecast will probably show further pick-up in inflation towards the target, driven by ECB’s believe of increasing underlying inflation pressures in light of the strong economic momentum.


  • The International Monetary Fund warned this week that China’s debt-fuelled investment and export-driven economic model has reached its limits. The fund stress-tested 33 Chinese banks, and outside of the big four, found substantial weaknesses, with many banks deemed to be undercapitalised. The IMF called on China to de-emphasise high growth in gross domestic product, which incentivises local governments to extend too much credit and to protect failing companies. Ballooning debt adds financial risks and may weigh on economic growth in the future, the IMF concluded.
  • China CPI and PPI inflation for November are due next Saturday. CPI inflation is set to be broadly unchanged around 1.9% year-on-year, still far below the 3.0% target. However, a fairly big decline in PPI inflation is possible. This is due mostly to base effects, as PPI rose sharply in November 2016 (1.5% month-on-month). PPI is due to rise of 0.3% month-on-month this month, which would push down the annual PPI inflation rate to 5.8% from 6.9% in October. The global inflationary impact of China over the past two years is thus fading.


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