Economic Outlook – 11 December 2022


The November release of the ISM services index kicked off the week with a surprisingly strong reading on the U.S. economy. The index rose 2.1 points to 56.5 despite consensus expectations for a roughly one-point decline. The outturn was higher than any of the 60 forecast estimates submitted to Bloomberg. The better-than-expected gain was due almost entirely to a 9.0-point increase in the business activity index. This component is now at its highest reading in almost a year, signaling economic growth in the service sector remained widespread through November. The new orders component fell slightly but remained in solid territory at 56.0   The ISM services prices paid component declined last month, but a reading of 70.0 suggests price pressures still remain elevated. In contrast, the prices paid component in the ISM manufacturing index has fallen to 43.0, the lowest reading since May 2020. This is the largest gap on record for the two price indices and speaks to the different inflation dynamics for service-providers and manufacturers   Producer price index (PPI) data for November was reflective of this divergence between goods and services inflation. The PPI for final demand increased by 0.3% in November. Beneath the headline, prices for final demand services rose 0.4%, while final demand goods prices inched up just 0.1% in the month. Even as a reprieve in goods prices can be witnessed, the slow descent in the larger services sector speaks to the fact that it will take time for inflation to return to target and that the Fed still has work to do in its fight against inflation   Continuing jobless claims increased to 1.67M through the week ending November 26. On an absolute basis, the level of claims is still quite low. For context, continuing claims averaged 1.70M in 2019 in what was a tight labor market   Trade data showed that goods exports declined in October, with a notable weakness in industrial supplies and materials (includes petroleum products), providing more evidence of dwindling demand from overseas. This contributed to a widening in the trade deficit to $78.2 billion. Imports also improved marginally supported by an increase in domestic demand for foreign goods, partially offset by weaker services imports from abroad   Consumer demand has proven a bit more resilient recently, and it looks to have been supported by consumer credit, which continued to expand in October despite higher interest rates. Consumer credit outstanding increased by $27.0 billion on the month (7.1% annualized), driven by nonrevolving credit, which gained $17.0 billion   According to FactSet Research, during the months of October and November, analysts lowered EPS estimates for S&P 500 companies for the fourth quarter by a larger margin than average. The Q4 bottom-up EPS estimate, which is an aggregation of the median EPS estimates for Q4 for all the companies in the index, decreased by 5.6% to $54.58 from $57.79 from September 30 to November 30   Stocks gave back much of the previous two weeks’ gains, as some surprisingly strong economic data dampened hopes that the Federal Reserve might soon be able to curb its program of raising interest rates to cool inflation. The S&P 500 Index recorded its worst return in five weeks, while the small-cap Russell 2000 Index endured its worst week since late September. Thechnical factors may have played a role in the declines, with the S&P 500 unable to stay above its 200-day moving average following the recent rally   Markets gave back some of the big gains made late last week after comments from Fed Chair Jerome Powell were taken as dovish. The catalyst for the bulk of the retracement? An article in the Wall Street Journal on Monday pushing back against last week’s rise in asset prices, which said officials could continue lifting rates to higher levels than the market currently expects due to elevated wage pressures, Nick Timiraos reported. The article also noted that Powell has told associates that he hasn’t changed his view that the bigger mistake the Fed could make would be to do too little to control inflation rather than too much   With only a few weeks left in the year, investors are cautiously awaiting two of the most important remaining US macro data points: the US consumer price index reading for November (released Tuesday) and the conclusion of the December FOMC (occurring Wednesday). After peaking at 9.1% year over year in June, CPI has edged lower four out of the past five months, and economists expect a further decline to 7.3% from the 7.7% level in October. Core inflation is expected to fall to 6.1% in November from October’s 6.3%. Markets expect the Fed to raise rates next week by 0.5%, to between 4.25% and 4.50%, and eagerly await its so-called dot plot, which illustrates policymakers’ rate expectations along with their economic projections. On Thursday, the European Central Bank and the Bank of England meet; both are expected to hike rates by a half-point   The expectation for inflation in November is a deceleration to a 0.2% MoM gain, translating to a 7.2% YoY pace. Food prices, at the grocery store and at restaurants, likely continued to rise at a strong monthly pace. However, a decline in energy prices and used car prices look to have dampened the overall gain in price level   On Thursday, retails sales it out. Total retail sales, and even when excluding autos, expanded 1.3% MoM in October, showing that consumers still have some spending endurance despite their historically low saving rate and still-elevated inflation. Retail sales is expected to gain a 0.8% in October. Regardless of rising prices, consumers are continuing to spend more and more. While a positive note for demand across most sectors, this consumer resilience continues to give firms flexibility in price increases in passing costs on to consumers, heightening some upside risk to inflation      


Business activity in the UK services sector contracted again in November as new orders fell, a survey of purchasing managers showed. The S&P Global/CIPS UK Services PMI Business Activity Index held steady at 48.8 in November, remaining at levels that correspond with a contraction   House prices dropped for a third consecutive month in November and at the fastest pace since the financial crash in 2008, mortgage lender Halifax said. Average house prices declined 2.3% sequentially, after dropping 0.4% in September as mortgage rates surged. Meanwhile, the Royal Institution of Chartered Surveyors said that its house price net balance—measuring the difference between the percentage of surveyors seeing rises and falls in house prices—fell to -25 in November, the lowest level since May 2020   Rating agency Fitch maintained United Kingdom’s sovereign debt rating at “AA-” on Friday, citing Prime Minister Rishi Sunak’s macroeconomic policy framework, deep capital markets and the sterling’s international reserve currency status. The agency affirmed its outlook for the country at “negative”, due to high public and external debt, as well as rising energy prices. Despite concerns about a potential recession, investors have pinned hopes that the new government leadership will re-instill confidence in the country’s fiscal health   Britain set out a raft of measures on Friday to bolster the City of London’s role as a global financial centre, under strain since Brexit ushered in new competition from Amsterdam, Paris and Frankfurt. The planned reforms also include a review of rules put in place following the financial crisis over a decade ago to make bankers accountable for their decisions and easing capital requirements for smaller lenders, after much lobbying by banks. Finance Minister Jeremy Hunt said it would be wrong to describe the 30 measures as a “Big Bang” – a reference to deregulating the stock market in the 1980s – that will unravel tougher rules introduced after the global financial crisis   British finance minister Jeremy Hunt said the financial services reforms he announced on Friday would not lead to a repeat of the regulatory errors that contributed to the 2008 global financial crisis. “It is perfectly sensible to make pragmatic changes such as the ones that we’re announcing today,” he said at an event hosted by the Financial Times. “But we’re doing so very, very carefully to make sure that the UK is a competitive, exciting place to be and to invest, but also that we don’t lose the guard rails that we put in place after 2008.”    


Revised data showed that the eurozone economy expanded 0.3% sequentially in the third quarter—up from a first estimate of 0.2%—boosted by increases in household spending and business investment.   S&P Global’s composite Purchasing Managers’ Index (PMI), which measures business activity in the services and manufacturing sectors, ticked up to 47.8 in November from the 47.3 reading registered in October. Despite the improvement, the composite PMI remained below 50, marking the fifth consecutive month in which the forward-looking indicator has been in contractionary territory.   Eurozone retail sales in October posted their biggest monthly drop this year, while German industrial production weakened that month, albeit less than expected   The central bank governor of Ireland, Gabriel Makhlouf, and the governor of the Bank of France, François Villeroy de Galhau, added their voices to growing support among European Central Bank (ECB) policymakers for a half-percentage-point rate increase this month, which would take the deposit rate to 2%   Shares in Europe fell on renewed fears of a recession as central banks tighten monetary policy in an effort to quell inflation. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.94% lower. Major indexes also declined. Italy’s FTSE MIB Index lost 1.40%, Germany’s DAX Index dropped 1.09%, France’s CAC 40 Index slid 0.96%    


Weak trade data tempered optimism about reopening. China’s exports fell a bigger-than-forecast 8.7% in November from a year earlier, marking the steepest monthly drop in exports since February 2020. Weaker global demand resulting from rising prices and interest rates worldwide and pandemic-related disruptions in China weighed on exports. Although China has relaxed its COVID restrictions, economists believe that persistent virus outbreaks will weigh on manufacturing activity in the coming months   China’s producer price index contracted in November and inflation fell to 1.6%, in line with expectations. Core inflation, which excludes food and energy prices, was unchanged at 0.6%. The tame inflation data raised expectations that China’s central bank would loosen monetary policy, including a possible interest rate cut, even as other major central banks are expected to keep hiking rates into next year   Chinese stock markets rose as Beijing’s rapid easing of coronavirus pandemic restrictions bolstered investor sentiment despite an expected surge in infections in the coming months. The Shanghai Composite Index added 1.6% and the blue-chip CSI 300 Index gained 3.3% in its biggest weekly gain since early November, according to Bloomberg    

Sources: T. Rowe Price, MFS Investments, Wells Fargo, TD Economics, Reuters, M. Cassar Derjavets