Economic Outlook – 11 August 2019


  • Markets opened on Monday to news that China’s onshore USD/CNY exchange rate traded beyond the symbolic 7.00 per dollar for the first time in more than 10 years. This occurred in the wake of President Trump tweeting on August 1 that, “…the US will start, on September 1, putting a small additional Tariff of 10.0% on the remaining 300 Billion Dollars of goods and products coming from China into our Country.” The S&P 500 index plunged 87 bps on Monday (marking the largest daily drop this year) and the yield on the 10-year Treasury fell to its lowest rate in three years on Tuesday as investors flocked to safer assets.
  • If implemented, this new round in the trade-spat leaves consumers directly in the crossfire. Previous bouts of tariffs, like those on the steel and aluminum, have mostly been aimed further up the production pipeline. But this new round impacts finished goods like consumer electronics, toys and clothing. Whereas tariffed inputs were previously only part of a finished goods’ final cost, with the full value of many finished goods now subject to tariffs, there is less scope for businesses to absorb the additional cost.
  • The US Federal Reserve announced last week that it will develop a faster payment system for banks that will allow instant round-the-clock payments starting in 2023 or 2024. The service will compete with the bank-owned Clearing House Payments Company. According to the Fed, a second payments provider will lower costs, improve efficiency and reduce the vulnerability of the financial system.
  • Former Fed chairs Greenspan, Bernanke and Yellen wrote a Wall Street Journal op-ed last week saying that they are united in the conviction that the Fed must be permitted to act independently and in the best interests of the country. Policymakers need to be free of short-term political pressure and should be allowed to do their jobs without the threat of removal or demotion for political reasons, they said. The former officials also said that policy based on political needs tends to lead to higher inflation and slower growth in the long run.
  • The Labor Department reported that core producer prices (which exclude food and energy) had declined 0.1% July, marking the first decline since 2017. Along with the rising trade tensions, the report seemed to give further room for the Federal Reserve to continue cutting interest rates, and futures markets ended the week pricing in a roughly 88% likelihood of at least two more quarter-point rate cuts by the end of the year, according to CME Group data.
  • In one of the few data releases of last week, the July ISM non-manufacturing index suggested that the recent economic soft patch is not just limited to US factories. Though the services sector expanded, it did so at the slowest pace in nearly three years. The index eased for the second month in a row to 53.7 in July from 55.1 in June, coming in below expectations. The sub-index tracking business activity dropped sharply to 53.1 from 58.2 in June. New orders also decreased in July. With trade tensions rising and U.S. business activity cooling, the renewed uncertainty will undoubtedly factor into the Fed’s discussions as they attempt to engineer a soft landing for the US economy in these turbulent times.
  • US stocks ended modestly lower after a week of trade-driven volatility. The major indexes suffered their worst day of the year on Monday, while the Cboe Volatility Index (VIX) hit its highest level since late 2018. The benchmarks recovered their losses in subsequent trading sessions but remained volatile through the end of the week. Energy shares were among the worst performers in the S&P 500 Index, weighed on by a midweek plunge in domestic oil prices following a surprise rise in US inventories. Longer-term interest rates fell back to their lowest level in three years, favoring real estate shares, and the larger consumer discretionary sector was helped by a rise in Booking Holdings (operator of Priceline and other travel sites) after an earnings and revenue beat.
  • The yield on the benchmark 10-year US Treasury note continued its slide, with most of the drop coming in response to China’s devaluation Monday. Investment-grade corporate bond spreads (an inverse measure of the asset class’s appeal relative to Treasuries) widened as trade tensions dampened investor sentiment. Spreads across most sectors narrowed as the week progressed, but the energy and automotive segments continued to experience weakness. In credit-specific news, semiconductor manufacturer Broadcom rallied after the company confirmed that it will purchase Symantec’s enterprise security business.
  • In terms of data release, the CPI core is due out Tuesday and it is expected to rise +0.2% month-on-month in July which translates into an unchanged annual inflation rate at 2.1% year-on-year.


  • UK GDP fell 0.2% in Q2 versus expectations of zero growth, missing the estimates of the market and the Bank of England (BoE) for zero growth. The year-on-year growth rate fell to 1.2% from 1.8% in Q1. GDP growth had temporarily been buoyed to 0.5% in Q1 thanks to some catch-up from past weakness. In addition, Brexit fears had led to hoarding and front-loading of production ahead of the original Brexit date of March 29. In Q2, output growth was burdened by falling output in both the industrial and construction sectors, while growth in the services sector eased markedly. According to the ONS, industrial production output fell by 1.4% in Q2, the largest decline since 2012, driven by a 2.3% fall in manufacturing output. Services output growth slowed to 0.1%, the weakest quarterly figure in three years. Construction output fell by 1.3% in Q2. On the demand side, private consumption and falling imports added to GDP growth, while exports, investments and inventories burdened.
  • Chancellor Sajid Javid said he would delay a long-planned review of public spending due this year to allow officials to focus on preparing for Brexit on October 31. Javid said he would postpone the full three-year spending review until 2020, and instead set out spending limits next month for just the 2020/2021 financial year, which would continue to respect his predecessor Philip Hammond’s fiscal rules. No date was set for the annual budget due later in the autumn, when Javid will face pressure to fund tax cuts promised by Boris Johnson in his campaign last month to succeed Theresa May as prime minister and Conservative Party leader.
  • Mortgage lenders’ claims for home repossession in England and Wales rose to the highest since late 2014 during the three months to June, according to official data that add to concern about households’ finances. Britain’s Ministry of Justice recorded 6179 claims in county courts for repossession, a 39.0% rise compared with a year ago and the biggest annual increase since the financial crisis.
  • The political focus remains on Brexit and how it will develop over the autumn. Right now, the Brexiteers and remainers are discussing whether or not Parliament is able to block a “no deal” Brexit from happening automatically.
  • In the UK, the labour market report for June is due out on Tuesday and CPI inflation in July is due out Wednesday.


  • Data released on Wednesday showed that German industrial output decreased 1.5% in June, a decline that was much larger than consensus estimates. The disappointing industrial production number ratcheted up fears that escalating trade conflicts would drive Germany’s export-driven economy into recession. In response, German government bond yields moved even further into negative territory. All maturities of the country’s government debt (even the longest term, 30-year bonds) now trade with negative yields.
  • After months of speculation, Italian Deputy Prime Minister Matteo Salvini has set in motion the dissolution of the country’s unusual left-right coalition government after 15 months. Salvini’s party, the League, holds a wide lead in opinion polls and is expected to be in a position to form the next government with support from smaller right-of-center parties. Italian bond spreads widened Friday on concerns that a League-led government would be likely to butt heads with the EU over budget deficits.
  • European stock markets finished the week lower amid elevated volatility. Stocks generally followed the trading patterns of global markets, dropping steeply on Monday on the news that China allowed the yuan to fall sharply against the US dollar before recovering some losses later in the week. However, European trading volumes were lackluster on positive days, possibly indicating a lack of investor enthusiasm for taking risk. The pan-European STOXX Europe 600 Index and the exporter-heavy German DAX all posted substantial losses.
  • In the euro area, the focus turns to the German Zew (Tuesday) and the GDP figures, most notably in Germany (Wednesday). The Zew is expected to continue to point to a gloomy outlook in the uncertain global environment. On Wednesday, the euro area GDP growth figure is expected to remain unchanged, but with the first release of the drivers it will be clearer if investments are still holding up amid the global uncertainty. Furthermore, the ailing German economy will publish its first Q2 GDP estimate.


  • China allowed its currency, the yuan, to weaken past seven to the dollar on Monday for the first time since the global financial crisis. The action was seen as a countermeasure meant to offset some of the drag on China’s economy caused by a fresh round of US tariffs. It sparked heavy selling in global equity markets early in the week, though efforts to moderate the currency’s fall helped stabilize markets later in the week. While a weakening currency makes Chinese goods more affordable overseas, rapid currency devaluations can spark capital outflows, further destabilizing markets. The US Department of the Treasury countered the currency move by branding China a currency manipulator, which sets off a year-long process of negotiations involving the International Monetary Fund. Furthermore, China officially halted purchases of US agricultural products while US president Donald Trump said the US will not be doing business with China’s Huawei without a trade deal.
  • Stocks in China posted their steepest weekly drop in three months, as traders appeared to brace themselves for a lengthy US – China economic battle. For the week, the benchmark Shanghai Composite Index shed 3.2% and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, fell 3.0%. Chinese technology shares were among the week’s biggest losers after Bloomberg reported late Thursday that the White House was delaying a decision about granting licenses to US companies that applied to resume sales to Huawei Technologies, the Chinese telecom company that the US has blacklisted due to espionage risk. That report came a day after the Trump administration announced a ban on federal purchases of equipment from five Chinese companies, including Huawei, over fears that the companies could reveal US trade secrets to Beijing.
  • The past week’s deterioration in US – China relations increases the risk of an escalatory spiral that could lead to a scenario of 25.0% across-the-board tariffs. President Trump appears to be gambling that putting added tariff pressure on China (combined with the country’s already slowing economy) will get Chinese negotiators to soften their stance. But Beijing’s negotiating position appears to have hardened, and Chinese officials will likely look for the US to make the first move to de-escalate tensions. In any event, the reliance on pressure tactics, a potential misreading of each side’s strengths and weaknesses, and other miscalculations could push both countries into a full-blown trade war if not carefully managed.
  • On the data front, industrial production, retail sales and fixed asset investments will be released on the same day. The data is still expected to paint a soft picture of the Chinese economy, but not a hard landing. Retail sales growth moved sharply higher but it is expected to fall back to around 8.0% in July. New home prices will probably show a still robust pace of increase as they are underpinned by low inventories of houses.

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