Economic Outlook – 10 September 2017

US

• Jobless claims jumped to 298K from 236K in the prior week. The Labor Department reported an unadjusted increase of roughly 52K claims in Texas. It is reasonable to expect claims will continue to rise in coming weeks due to the recent calamities affecting the South of the US.
• The US trade deficit remained largely unchanged in July, and net exports are on track to contribute positively to economic activity for the third consecutive quarter. At the same time, the ISM non-manufacturing index followed its manufacturing counterpart and rebounded in August. The renewed vigour in both ISM metrics points to economic growth gaining momentum, with an upbeat tone in the Beige Book echoing a similar narrative.
• Shipments of US core capital goods orders increased 1.2% in July, lifting the 3-month annualised growth rate to 5.4%. This is consistent with the consensus forecast for gradual firming in equipment investment in the third quarter. In a positive sign for future spending prospects, core capital goods orders also increased in July, growing 1.0%, which puts the 3-month annualised rate for that series at 5.1%. After having been a drag on growth in 2015 and 2016 when low oil and commodity prices acted as a damper on spending plans, equipment outlays have been gradually firming and added to top-line growth for three-straight quarters.
• Activity in the service sector handily outpaced activity in the factory sector. Both measures are in expansion territory today and the service-sector measure improved to 55.3 from 53.9 previously. In a bit of role-reversal, the past few months have been characterised by activity in the manufacturing sector outpacing that of the service sector. ISM non-manufacturing tends to be a useful proxy of future core retail sales growth.
• A number of speeches from Fed officials took place throughout the week. The most significant were those of voting members Brainard and Dudley. Brainard’s speech, which suggested treading carefully over low inflation, was decisively dovish. Meanwhile, Dudley retained a more hawkish tone, but did acknowledge his ‘surprise’ to the shortfall in inflation and suggested that ‘structural’ factors may be at play. The diverging views point to some uncertainty as to the near term path of interest rates. The October departure of Vice Chair Fischer, at a time when the Fed Board already has three vacancies, is likely to add to that uncertainty.
• The US Federal Reserve’s seven-member Board of Governors is now down to just three members, with Vice Chair Stanley Fischer this week tendering his resignation, effective in mid-October. Fischer, 73, whose long career includes stints at the International Monetary Fund, the World Bank and the Bank of Israel before he joined the Fed, is leaving roughly a year before his term is set to expire. Meanwhile, nominee Randal Quarles awaits final confirmation. And theWall Street Journal reported this week that US President Donald Trump is unlikely to appoint Gary Cohn, his chief economic advisor, to replace Janet Yellen when her term expires in February. Cohn’s sharp criticism of Trump’s reaction to the recent violence in Charlottesville, Virginia, in an interview with the Financial Times, has diminished his chances of being nominated to the top job at the Fed, the Journal.
• With the government close to hitting the debt ceiling and the end of the fiscal year approaching without a budget in place, President Trump struck a deal with congressional Democrats to extend the debt ceiling and fund the government for three months while providing Harvey relief funds for Texas and Louisiana. This is the first time Trump has reached across the political aisle to strike a deal. Republican leaders pushed for a longer-term package to avoid having to repeatedly vote to raise the debt ceiling, an unpopular move with the party’s base of supporters, before next year’s mid-term elections.
• On September 14, the CPI Core inflation reading is due. The headline CPI inflation is expected to pick up to 1.9% year-on-year in August, with prices up 0.4% month-on-month. Energy prices will be a significant boost this month following Hurricane Harvey, which shuttered about a quarter of the nation’s refinery output. Gasoline prices will likely be up nearly 6% month-on-month, with an even stronger increase in September. That would leave headline inflation on track to breach 2% year-on-year by October. In the core, a return to a 0.2% month-on-month print (the first in six months) is probable though unfavourable base effects leave the year-on-year rate lower at 1.6%. August gains should largely be driven by a rebound in hotel prices, which plunged in the prior two months.
• US retail sales for August will be release on September 15. A fall of 0.1% is expected for August, led by a drop in motor vehicle sales. Light weight auto and truck sales disappointed at a 16.0m annual rate last month, in part due to the aftermath of Hurricane Harvey that hit Houston; the second largest auto market in the US. The August sales figure came in lower than analyst expectations, pointing to weaker Q3 real PCE closer to a mid to low 2% pace. Offsetting the August drop in auto sales are gasoline station receipts, reflecting a significant jump in gasoline prices. This should leave ex-auto sales up 0.5% and drive the pickup and offset a likely persistent drag from past categories of weakness, namely vehicle prices and wireless services.

China

• In China, BOC surprised by delivering a 25bps rate hike to 1.0%, its second this year, and left the door open for more hikes.
• August round of data for Chinese industrial production and retail sales is on next Thursday. Industrial production disappointed last month showing a decline from 7.6% to 6.4%. However, too much emphasis should not be put on the numbers as they haven’t seemed to give a credible picture of the economy in the past couple of years. The Chinese economy rebounded in the summer as witnessed by higher PMI manufacturing and the recent surge in metal prices (China consumes 50.0% of global metals). In the industrial production data, most attention should be paid to electricity generation and steel output as these are better gauges of activity than the overall number.
• Retail sales have increased steadily over the past two to three years in an interval of 10.0% to 11.0% year-on-year. The August data will show a continuation of this. Credit (total social finance) and money data is also up for release next week. A continuation of the more subdued development in credit growth is likely, pointing to weaker investment growth ahead and a moderate slowdown of the economy.

UK

• UK industrial production was up 0.4% in July, after 0.5% in June. The July reading was in line with the consensus expectation. Total production was pulled up by a better-than-expected outturn for manufacturing production, up 0.5% in July after flatlining in June. The consensus expectation for July was +0.3%. Manufacturing provided the largest contribution, increasing by 0.5%. The rise of 0.5% was the first significant monthly rise in this sector since December 2016 and follows flat growth in June 2017.
• According to the ONS, transport equipment provided the largest contribution to growth in manufacturing. Within this sub-sector, motor vehicles, trailers and semi-trailers had the strongest growth since March 2009. Evidence suggests the production of new models contributed to growth this month. On the other hand, mining and quarrying, which fell 1.2%, hampered industrial production.
• The drop in mining and quarrying was mainly due to oil and gas extraction, and the fall was largely a correction after a higher-than-usual increase in June. Manufacturing sentiment, as measured by the PMI, the CBI and the EC surveys, indicates that momentum in the sector has picked up over summer.
• The main event this week is the Bank of England meeting on Thursday where BoE is expected to keep the Bank Rate unchanged at 0.25% with an unchanged vote count of 7 to 2. It is one of the small meetings without an updated Inflation Report and a press conference so the interesting elements are any changes to the policy stance in the minutes. The BoE is not expected to change its tone significantly, as the economy has developed more or less in line with the expectations set out in the latest Inflation Report of 3 August but the BoE may address the weaker GBP. The bank will likely remain on hold throughout the Brexit negotiations, which is also what markets have priced in.
• CPI data for August will be released on Tuesday. The estimate for CPI is a rise of 0.5% month-on-month (rounded up), which should be enough to push CPI inflation up from 2.6% to 2.8% year-on-year.

EU

• The ECB did not make changes to monetary policy or forward guidance, as was widely expected. Hence, focus was on the press conference, news stemming from the QE tapering discussion, possible comments about the stronger EUR and the updated ECB staff projections. Regarding QE tapering, the ECB reiterated that a decision will be made at the October policy meeting.
• On the stronger EUR, ECB President Draghi separately said that recent EUR volatility is a source of uncertainty and requires monitoring. That was also reflected in the staff projections, as inflation forecasts for 2017 and 2018 were lowered a notch due to the exchange rate movements. On the other hand, GDP growth was revised up this year, to 2.2%, while forecasts for 2018 and 2019 were left unchanged. Overall, the ECB judged the outlook for growth and inflation to be broadly unchanged.
• Another piece of good news was that Draghi, for the first time in many meetings, omitted the phrase that economic growth prospects continue to be dampened by a sluggish pace of implementing structural reforms. All the comments were fairly in line with expectations. Draghi struck a balance between uncertainty from the stronger EUR/robust growth and tightening plans drawing closer.
• Spanish prime minister Mariano Rajoy vowed this week to “stop at nothing” to derail a planned independence referendum in the region of Catalonia. On Thursday, Spain’s Constitutional Court suspended the referendum law passed late Wednesday in Catalonia’s parliament, though Catalan officials vow to press on with the vote regardless. Polls show only a slight majority of Catalans support independence from Spain.

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