Economic Outlook – 10 November 2019


  • The ISM non-manufacturing index, a measure of the breadth of activity in the US service sector, beat expectations last week by climbing to 54.7 from a three-year low of 52.6 last month. The multiyear low of the non-man survey was especially concerning last month because it came just two days after its manufacturing counterpart fell to 47.8, indicating outright contraction at the fastest rate since 2009. The improvement of the surveys (the manufacturing survey rose to 48.3) was a welcome sign of stabilization, particularly given that the forward-looking new orders component rose in both surveys. To be clear, the manufacturing survey still indicates contracting activity, but the greater worry continues to be manufacturing weakness spilling over into the much larger service sector.
  • Business fixed investment, which drives productivity growth in the long run, has fallen the past two quarters. The latest data released this week showed productivity declined 0.3% annualized in Q2, the weakest pace since 2015. Tariffs have played a large role in the slower pace of capital formation, imports of industrial supplies and capital goods are down 14.8% and 6.0%, respectively, over the past year. The slowdown in productivity growth along with steady compensation growth lifted unit labor cost growth to the highest pace in five years, perhaps not surprising given the gap between job openings and unemployment.
  • Job openings continued to edge lower in September, reinforcing the notion that appetite among US employers for labor, while elevated, has waned a bit recently. The September data also affirmed that the pullback in job openings so far has limited geographic breadth, with recent pressures concentrated in the Midwest.
  • Progress toward a phase-one trade agreement between the US and China was reported last week, with comments by Chinese officials that some existing tariffs may be rolled back by each side as part of the agreement, though the US has yet to confirm that assertion. While details have yet to finalized, there is talk that an agreement could be signed by US President Donald Trump and Chinese President Xi Jinping on the sidelines of a NATO summit in London to take place December 3 and 4. Also on the trade front, signs are growing that the US Department of Commerce will refrain from placing tariffs on European automobiles next week. A decision on whether European auto imports pose a threat to US national security is due by 14 November.
  • The Dow Jones Industrial Average joined the S&P 500 and Nasdaq Composite Indexes in record territory, as optimism grew about a “phase one” trade deal between the US and China. A sharp increase in longer-term bond yields and the continued release of third-quarter corporate earnings reports also drove markets. The dispersion of the returns among stocks in the S&P 500 is at historically high levels, suggesting that individual company fundamentals, rather than cash flows into and out of stocks in aggregate, are playing the primary role in the market’s moves. On a sector basis, financials outperformed as rising long-term interest rates favored banks’ lending margins. Increasing bond yields weighed heavily on real estate and utilities shares, however, as their typically above-average dividends became less appealing in comparison.
  • Recession worries also receded notably in the bond market. The yield on the benchmark 10-year Treasury note surged for the second week in a row, bringing it to its highest level since the end of July. Hopes for a trade deal and technical factors appeared to be behind the surge in yields.
  • CPI core for October is due out Wednesday. The last couple of months, CPI core has surprised on the upside, but this is not expected to be the beginning of a new trend given the low inflation expectations. CPI is expected to rise 0.2% month-on-month in October, which translates to an unchanged inflation rate at 2.4%.
  • On Friday, retail sales for October are due for release. The past couple of months, retail sales have come in weaker, reflecting lower but still decent consumption growth. In light of the weakness in the manufacturing sector, the focus is on private consumption growth to understand if it can keep up the pace. While a negative surprise is long overdue given the volatility of the time series, fundamentals still look strong.


  • The UK composite PMI improved slightly to 50.0 in October, from 49.3 in September, as all sector PMIs improved somewhat. Within the services sector, actual business and employment improved from September to October, while new orders continued to slide according to the PMI survey. However, despite the improvement, numbers are still indicating that employment growth is easing and that output is levelling out. Last week, the manufacturing survey showed that new orders and production had improved, yet numbers were still stuck in negative territory, implying orders and production were still falling, only less than in September. Despite some improvement in the construction PMI in October, sentiment is still firmly in negative territory.
  • While the Bank of England made no change to monetary policy at its meeting on Thursday, two members of its Monetary Policy Committee unexpectedly voted for a 25-basis-point cut in the bank’s base lending rate, citing downside risks to the committee’s projections. Growth has slowed materially, the MPC said, amid negative business investment and moderating consumer spending. The Bank said it assumes the investment will turn positive in 2020 once uncertainty over Brexit has decreased. If that doesn’t happen, rates may need to be lowered, it said.
  • British house prices rose at their slowest annual pace in six-and-a-half years in October when they inched up by 0.9%, mortgage lender Halifax said, the latest sign of how Brexit uncertainty is weighing on the housing market. Compared with September, prices fell by 0.1%, Halifax noted. Russell Galley, managing director at Halifax, said consumers were “erring on the side of caution” although low interest rates and wage growth were underpinning the market.
  • On Monday, the monthly GDP estimate for September is due. Given the weak PMIs, growth seems to remain sluggish but there might have been a positive contribution from stockpiling ahead of the previous 31 October Brexit deadline.
  • On Tuesday, the jobs report for September is due out, which will be interesting, as the last couple of reports have shown decreasing employment.
  • On Wednesday CPI inflation for October is due and retail sales for October are out on Thursday.


  • The International Monetary Fund (IMF) announced that the eurozone is likely to grow less than expected in 2019 and that the recession in the manufacturing sector could spill into the services sector. The IMF forecast that the eurozone would grow by 1.2%, down from its April estimate of 1.3%. That comes after a 1.96% expansion in 2018. The IMF largely attributed the slowdown to slow growth in Germany, the eurozone’s largest economy, and stagnation in Italy, the region’s third-largest economy. The IMF also revised lower its growth forecast for Germany to 0.5%. To alleviate the slowing, the IMF has called on eurozone governments to respond with fiscal measures.
  • In Germany, exports rose a higher-than-expected 1.5% in September after adjusting for seasonal and calendar effects, according to the Federal Statistics Office. Factory orders moved 1.3% higher compared with the previous month, after falling for two months.
  • Equity markets in Europe were mostly higher, buoyed by a rally on Wall Street, optimism about a US – China trade deal, and generally solid corporate earnings reports. The pan-European STOXX Europe 600 Index rose for the fifth week in a row, gaining about 1.4%. The exporter-heavy German DAX rose about 2.0% too.
  • On Wednesday, US President Trump will most likely announce whether or not he will impose additional tariffs on cars imported from the EU. Additional tariffs would be the last nail in the coffin for the already weak euro area manufacturing (and car) sector, just as signs of a stabilisation are becoming more abundant.
  • Also on Wednesday the September industrial production figures are due. The question is whether the stabilisation in the latest manufacturing PMIs shows up in the production figures.
  • The November ZEW indicator is due out on Tuesday and the first Q3 GDP print on Thursday. German PMIs took a further plunge in Q3 pointing to the second consecutive quarter with negative growth (and so-called ‘technical recession’). It now seems like the service sector cannot compensate for the weakness of the ongoing industrial recession.


  • China’s currency is strengthening ahead of an expected interim trade agreement amid speculation that as part of the partial deal the US will remove its designation of China as a currency manipulator in exchange for China keeping currency weakness in check. The yuan has returned to above 7 per US dollar in recent sessions after falling to nearly 7.18 earlier this year.
  • Chinese stocks advanced for the week, as hopes rose for a comprehensive US – China trade agreement following news that both sides agreed to roll back tariffs on each other’s goods as part of a so-called phase one trade deal. For the week, the benchmark Shanghai Composite Index edged up 0.2%, and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, rose 0.5%. Both indexes fell Friday, however, as Beijing and Washington sent mixed messages about the likelihood of an imminent breakthrough and reports surfaced of fierce internal opposition within the White House to any tariff rollback
  • CPI and PPI inflation print will be published on Sunday, which will likely show a further rise in CPI inflation to 3.4% in October from 3.0% in September due to the rising pork prices related to the African swine fever crisis. PPI inflation is expected to stay in deflationary territory around the current level of -1.3% for the rest of the year before moving into positive territory in early 2020.

Sources: T. Rowe Price, Reuters, MFS Investment Management, Handelsbanken Capital Market, Danske Bank, TD Economics, Wells Fargo.