Economic Outlook – 11 September 2016


August’s pullback in the ISM non-manufacturing index marked the largest pullback since late 2008. While still in expansion territory, the services measure stands at 51.4 compared to a 55.5 reading in July. The details of the report were also disappointing with the business activity index falling 7.5 points, the forward-looking new orders component declining 8.9 points, and the employment component fell 0.7 points.

The trend in both ISM measures has been noticeably downward with the manufacturing index falling back into contraction territory in the August data reported last week. Taken together, these measures suggest some downside risks to economic growth in the months ahead.

Initial fillings for US unemployment insurance benefits remained very low for the week of September 3 at 259,000 (declining 4,000 from the prior week). The trend in initial jobless claims, represented by the four-week moving average, continues to grind lower. The four-week moving average now stands at 261,250, a 5.5% decline from the same point last year.

The continued downward trend in jobless claims continues to support the view of continued labor market gains in the second half of the year and, in turn, a continued robust pace of consumer spending.

US wholesale inventories were flat in July after a 0.3% increase in June. The pace of sales among wholesalers declined 0.4% in July. After five consecutive quarters of drag to GDP growth from the pace of inventory building, inventories seem likely to have a neutral effect on GDP growth in the third quarter.

On Thursday, US retail sales figures for August are due out. Decent growth is expected in core (control group) retail sales of 0.25% month-on-month but a decline in total retail sales of 0.3% month-on-month due to a large drop in vehicle sales and lower petrol prices in August; components that are excluded from the control group figures.

On Friday, the CPI inflation figures for August are due out. The estimate is a core inflation rate of 2.3% year-on-year. Throughout 2015, core inflation trended upwards but this year CPI core inflation has been more and less unchanged. Hence, there is currently no pressure on the Fed from a rising inflation trend.


Output in the retail, construction and manufacturing sectors have developed better than feared over the summer. After falling for two months, construction output was flat in July, while the expectation was for a further fall of 0.5%.

The trend in construction output going back to last fall is now rather flat. Sentiment in the construction sector has also improved considerably after plunging in June and is almost back at 50, suggesting a flatlining of production ahead, but certainly no collapse.

UK Manufacturing output has weakened over the summer, but the trend now looks more like a correction of the surprisingly strong production increase at the start of the year. Manufacturing sentiment also suggests output growth should pick up ahead. Retail sales have proven remarkably resilient to the Brexit vote, with sales surprising firmly on the upside in July and resuming the upward trend. This strong trend, however, seems less sustainable as consumer confidence remained in negative territory in August.

The most important event is the Bank of England meeting on Thursday. This is one of the small meetings without an Inflation Report and a press conference, so only the policy announcement and the minutes from the meeting will be released. No change in policy is expected; therefore, the BoE is likely to maintain the Bank Rate at 0.25%, the target for the stock of government bond purchases at GBP 435 billion and the target for the stock of corporate bond purchases at GBP 10 billion.


The ECB, as expected, did not announce changes to monetary policy, implying unchanged key interest rates, an unchanged QE programme size and unchanged QE duration to “March 2017 or beyond”. If anything, some speculated about an extension to the QE programme and the EUR strengthened following the policy announcement.

With regard to possible tweaks to the QE programme framework, no news was announced but Draghi said that the ECB has tasked the relevant committees to evaluate options that ensure the smooth implementation of purchases.

German ZEW expectations are due out on Tuesday. The ZEW expectations saw a rise in August having plunged in July following the Brexit vote and it is expected to continue rising in September. Financial sentiment is improving, supported by initial resilient economic figures following the UK’s referendum.

The employment numbers for the euro area are also due to be released on Tuesday. Quarterly employment growth has been stable at 0.3% for the past three quarters and in Q1 2016 total employment reached its highest level since 2008. Since 2015, employment growth has remained strong despite only modest GDP growth.


China’s exports fell 2.8% year-on-year to USD 190.59 billion in August (July: -4.4% year-on-year), marking its fifth straight month of contractions. While overseas sales extended its streak of declines, a closer look at the broader set of economic data displayed further signs of stabilisation in the world’s second largest economy.

Reiterating the case, imports surprisingly rose 1.5% year-on-year to USD 138.54 billion last month (July: -12.5% year-on-year), bolstering hopes that domestic consumption may replace exports as the new growth driver in the long-run.

Chinese Industrial production data is due on Tuesday, and growth is expected to have picked up to 6.3% year-on-year in August from 6.0% in July. Consensus expects 6.2%. The increase has been indicated by both manufacturing PMIs. The official one jumped in August, whereas Markit’s jumped in July and only fell back slightly in August.

Higher industrial production growth is consistent with the view that the part of the industrial sector that is not affected by the ongoing process of reducing overcapacity in the heavy industries is faring quite well. Fixed asset investments are also set to rebound in August. Some sectors are hardly investing in buildings, machinery and equipment at all, as overcapacity is reduced, but others still are.


Sources: Danske Bank, Haendelsbank, Wells Fargo, HongLeon Bank.

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