Economic Outlook – 13 August 2017


  • CPI consensus had estimated prices increased at a 0.2% pace in July, for both the headline and core CPI. The print came in softer than forecasted for the fourth consecutive month, as both headline and core rose 0.1% in July. Both are up 1.7% year-on-year. The report did colour the inflation story in a few different lights. First, the continued misses suggest that the weakness in inflation is not as transitory as some had posited. The Fed is still likely to push forward with balance sheet reduction in September, but it does not yet have the “all clear” signal from the economic data for a December interest rate hike. Second, the details of the July CPI release were somewhat less disheartening than in June. Prices increased for apparel and recreation after falling in June, and food/beverage prices were up after June’s flat reading. Prices continued to decline for energy and transportation, but at a slower pace.
  • The June JOLTS report reinforced that demand for US labor is strong, as the number of job openings was at its highest level of the series at the end of the month. Fewer hires took place in June than in May, though much of that decline was in the Northeast, as hiring increased in most of the other regions of the country. There were also fewer separations from employment due to a smaller number of workers quitting their jobs in June. The quit rate has been oscillating between 2.1% and 2.2% every other month this year; 2.2% is the upper bound of the current cycle and 2.3% is the high point of the prior cycle. It will be interesting to watch in the coming months whether that rate breaks out in either direction. As an increase in the quit rate would support an increase in average hourly earnings, the fact that the quit rate has been “stuck” this year may help explain the disappointing wage growth.
  • Judging by the high number of open positions, the demand for workers is there and to fill them, either more people will be needed to quit their current jobs or to be enticed more workers to enter the labor force. The trend in productivity growth remains sluggish. The rate of non-farm output and hours worked increased slightly more than expected in the second quarter at a 0.9% annualised rate. The year over year growth of 1.2% remains below even the tepid trend of the current cycle. Until a breakthrough on the productivity front becomes visible, the economy is likely to expand at a 2.0% to 2.5% pace.
  • US president Donald Trump warned North Korea in no uncertain terms this week that its continued threats, if carried out, would be met with overwhelming force. North Korea, undeterred, announced it was planning to target the waters surrounding the US territory of Guam with four missiles and that a plan would be ready within a matter of days. Trump responded by noting US military plans are now “locked and loaded” should North Korea act unwisely. Earlier this week intelligence assessments became public revealing that North Korea has likely acquired the technological capability to miniaturise a nuclear warhead, making it deliverable by missile. North Korea recently tested a missile believed to have the range to reach parts of the United States. Tensions have risen further in the wake of additional United Nations sanctions against North Korea that were unanimously agreed upon by the UN Security Council. The sanctions aim to cut North Korean exports by one-third and ban exports of coal, iron ore and seafood.
  • US retail sales figures for July will be released on Tuesday. Retail sales are not expected to deviate significantly from its only moderately growing trend. Overall, consumption growth is likely to continue at a decent pace, which should be mirrored by positive retail sales growth.
  • On Wednesday, the FOMC meeting minutes are due for release. Focus will remain on the discussions on the timing of quantitative tightening. At the FOMC meeting in July, officials said QE tightening would begin “relatively soon”. Information deduced from the meeting minutes on what “relatively soon” means is therefore of special interest. It is a common expectation that the tightening will commence in September. Additionally, observers will also examine how concerned the Fed is about (the lack of) inflation.
  • The University of Michigan Consumer Confidence for August is due for release on Friday. In January, consumer confidence reached 98.5, its highest level in over a decade. Since January, it has declined to 93.4 in July, mainly driven by less optimistic expectations while the current situation indicator has continued to rise. In the wake of increasing tension and harder rhetoric between the US and North Korea, the consumer confidence figure is likely to be lower in August.


  • UK industrial production increased 0.5% in June after falling 0.1% in May. The consensus expectation for June was 0.1%. The increase in production was mainly due to a rise of 4.1% in mining and quarrying as a result of higher oil and gas production. Manufacturing production was flat, in line with the consensus expectation. The largest downward pressure came from transport equipment, which fell by 3.6%, although this was counterbalanced by an increase of 4.0% in other manufacturing and repair. For Q2 as a whole, manufacturing production was down 0.6%. Manufacturing sentiment, as measured by the PMI Manufacturing survey, was a little stronger than expected in July, indicating that growth in manufacturing output could accelerate in Q3. However, manufacturing sentiment has suggested a much better trend in UK manufacturing than the actual outturn over the past few months.
  • British negotiators appear to have floated a trial balloon in the press on the size of the divorce payment Theresa May’s government would be willing to pay to leave the European Union. The Sunday Telegraph reported that the United Kingdom would be willing to pay €40 billion, but only on condition that the payment come as part of a deal that included the future trade relationship with the EU. UK officials shot down the report as speculative, but it would appear to be a reasonable starting point for negotiations. EU officials have floated exit-charge figures of between €50 billion and €100 billion.
  • UK CPI inflation figures for July are due for release on Tuesday. The inflation figure will be scrutinised, as it will be a key factor in the Bank of England (BoE) decision of whether or not to hike rates before 2018.
  • On Wednesday, the labour market report for June is due for release. The unemployment rate (3M average) is expected to remain unchanged. However, should it fall further, it could pressure the BoE as the excess capacity becomes smaller. On the other hand, average weekly earnings growth (3M average) has decreased in recent months and remains low. The lack of wage growth highlights the lack of underlying pressure on inflation, diminishing the likelihood of a BoE hike for the remainder of 2017.
  • Retail sales figures for July are due on Thursday. Although the retail figure can be misleading of the overall condition of private consumption, markets tend to focus on the figure. However, it is likely retail sales in July will reflect only modest growth in private consumption, due to declining consumer confidence and negative real wage growth.


  • China data that turned out on the soft side was in focus too. Exports grew at a softer than expected pace of 7.2% year-on-year while imports growth also moderated more than expected to 11.0% year-on-year in July, raising concerns over slower demand from both the external and domestic fronts. Any faster than expected slowdown would complicate the government’s deleveraging plans to curb credit growth. Reports also showed inflationary pressure remained relatively subdued in China, suggesting lack of demand pull pressure despite improvement in global commodity prices.
  • On Monday, China is due to release industrial production figures for July. In the last couple of months, manufacturing PMI has shown strength, which indicates growth in industrial production in July. Additional support comes from the positive signal from rising oil and metal prices in recent months. On this basis, solid growth in industrial production is expected.
  • The M2 money supply figures for July will be released too. In the first half of 2017, M2 growth has signalled lower output growth. A modest slowdown in output growth during the second half of 2017 is expected and that the figure on M2 growth in July will reflect the slowdown.


  • The euro area industrial production figure for June, due for release on Monday. Against consensus, the German industrial production figure for June dropped 1.1% month-on-month on Monday. The drop was widespread, meaning both construction and all manufacturing sectors saw a decline in output. The euro area is expected to follow the German figure and report a monthly decline in June of 0.8%.
  • On Tuesday, the first estimate on German GDP growth for Q2 is released. Throughout Q2, German activity indicators have reached historical highs signalling strong growth in Q2. As observed last week, the euro area reported quarterly growth of 0.6%. Given activity indicators and euro area growth, German GDP figure of 0.6% quarterly growth in Q2 is expected.
  • On Thursday, the ECB minutes from the July meeting are set to be released. Focus will remain on discussions related to extension of the QE programme. At the meeting, the Governing Council was unanimous in setting no precise date for when to discuss changes to the QE programme and additionally, Draghi said the ECB had not tasked its staff to look into QE options after December. In light of this, it will be interesting to see how the discussion within the Governing Council has evolved around extending QE.


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

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