US
The US ISM non-manufacturing posted its highest reading this year of 57.2 in November. The measure of services business activity has been up and down throughout 2016, but has found an upward trend toward the second half of the year. The details of the recent survey were more encouraging, with the employment component jumping 5.1 points to 58.2 (approaching its record high of 60.2). The jump in November was largely due to a drop in the share of respondents planning to lower employment (the share that planned to hire held steady).
The October JOLTS data were released the flows of labor underlying the monthly jobs report and provided useful clues about labor supply and demand. Job openings and hires both dipped in October, consistent with the moderation in job growth. The quits rate remains stubbornly low. One interesting story in these data is the exceptionally low rate of layoffs. In a tight labor market and slow productivity growth environment, employers appear to be holding on tightly to existing workers.
Countering some of this optimism was US trade data for October, which revealed a broadly anticipated widening of the international trade deficit, a development that underscores the relatively weak external environment further exacerbated by a strong US dollar and rising political uncertainty. Both US dollar strength and political uncertainty will remain a dominant theme in 2017, likely acting as a drag on US GDP over the next year.
FOMC is expected to raise policy rates by 25 basis points next week, a year after lift-off. This anticipated action was first signaled in the September 21 statement with the phrase “the case for an increase in the federal funds rate has strengthened”, and the inclusion of a net risk assessment, “roughly balanced”, for the first time this year. It was re-signaled in the November 2 statement with the words “continued to strengthen” replacing “strengthened”, which implied a more compelling rate hike argument in the Fed’s mind compared to before. In the statement, apart from the wording around the rate “hike”, language alterations to the economic assessment and edits to the risk assessment (with “roughly balanced” transitioning to, simply, “balanced”) are to be closely monitored.
US retail sales data for November are due on Wednesday. The retail sales control group (which feeds into GDP) is expected to rise 0.4% month-on-month in November, so Q4 seems like another strong quarter for private consumption. With consumer confidence at a high level, private consumption is likely to continue to be the main growth engine in the US.
UK
In the UK, Sentiment in the service sector, as measured by the CIPS/Markit PMI survey, rose further in November to 55.2 from 54.5 in October and beat the consensus expectation of a small reversion to 54.0. The level of the PMI index in November is the highest in ten months and is in line with the long-run average of the series. The PMI development indicates that services sector growth has held up well in Q4 following a strong Q3.
Despite the dip in the manufacturing PMI in November, the better-than-expected development in both the services and construction PMIs pulled the composite PMI index to 55.2 in November, up from 54.5 in October. Based on past form, the PMI development is consistent with quarterly GDP growth holding up at around 0.5% in Q4. The CBI Growth Indicator also suggests that GDP growth should hold up well, 0.5% quarterly growth, in Q4.
Industrial production came in considerably weaker than expected in October, thereby starting Q4 on a weak footing. Manufacturing production fell by 0.9%, considerably below the consensus expectation of -0.2%. After recovering considerable lost ground in August and September, manufacturing production ended lower in October than in July. According to the ONS, the drop was concentrated to small firms across a range of sectors. Industrial production performed even worse with a monthly fall of 1.3%, the largest fall since September 2012.
The most important event is the Bank of England (BoE) meeting on Thursday. The BoE is expected to maintain its monetary policy unchanged in line with consensus and market pricing. Focus is on the minutes, as it is one of the small meetings without an updated Inflation Report and a press conference, but they should not to contain any big news, as economic data continue to be resilient to Brexit uncertainties.
EU
ECB extended its QE programme to December 2017 as expected but the move to trim asset purchases from €80b to €60b starting April 2017 came as a surprise. ECB is likely to stay accommodative as long as required to push inflation back up to its target, as it said the 1.7% inflation forecast for 2019 is “not really” close to its target. Meanwhile, RBA rhetoric remained neutral by and large but nevertheless opened up the door for a rate cut amid contraction in 3Q GDP.
The main release of interest is the German ZEW expectations on Tuesday. Since July, ZEW expectations have followed a rising tendency to 13.8 in November but the December figure may bring this tendency to a halt. The Sentix released this week saw an unexpected fall, which maybe reflected the uncertainty related to the Italian referendum. However, although the “no” vote in Italy on Sunday caused an initial fall in equities on Monday morning, they quickly recovered within the first few hours of the day.
Consensus expects unchanged growth in industrial production at 6.1% year-on-year in November. An uptick to 6.2% year-on-year is expected as indicated by the official manufacturing PMI, which increased to the highest level in more than two years in November, as well as growth in fixed investment to increase slightly (both year-on-year and year-to-date year-on-year). However, consensus expects unchanged growth at 8.3% year-to-date year-on-year. The expected uptick is primarily due to the ongoing boom in the property market, which boosts construction investment. Property construction activity, and thus overall fixed investment, are likely be dampened by the recent measures to cool down overheated property markets. However, the effect will unlikely be visible already in the November figures.
Sources: Haendelsbank, HansLeong, TD Economics, Danske Bank, Wells Fargo, BMO Capital Markets, Commerzbank.