Economic Outlook – 13 October 2019


  • The optimism among small businesses took another leg down in September, with fewer businesses reporting that they expected sales and the economy to improve. At 101.8, the NFIB small business index is not quite as low as it was at the start of the year following the stock market’s sharp selloff and the longest government shutdown on record. However, optimism has clearly faded, with the index down from 108.8 in August 2018. The trade war has not been limited to large multi-national corporations; 30.0% of small businesses reported tariffs are having a negative effect on their business. At the same time, “mumblings about a coming recession” were more frequent among respondents, according to the report. With the outlook dimming, hiring plans fell to more than a two-year low in September.
  • Declining job openings echoes the waning optimism among small businesses. Job openings fell for a third straight month and are down 7.5% since January. The pullback is nearly on par with the 2015 – 2016 mid-cycle slowdown, when a drop in job openings presaged a moderation in hiring. However, at the nadir of that period, in October 2016, the global outlook was beginning to firm and both ISM indices had already turned around. With no end to the trade war in sight and global growth still floundering, a turnaround seems at least some ways off.
  • Jobless claims fell by 10K last week, keeping the four-week average around 210,000 to 215,000. Yet separations are only part of the net hiring equation. Before laying off existing workers, businesses tend to stop bringing on new workers, so openings and hiring plans can provide earlier signs of stress in the labor market.
  • Reluctance by firms to bring on new workers points to a moderation in income and consumer spending growth. Consumers received a bit of a reprieve on that front in September, however, with the CPI unchanged. Overall prices are up a moderate 1.7% year-on-year, thanks to a drop in energy prices. Core inflation also eased up from a torrid pace this summer, as prices rose 0.1% in September, compared to 0.3% in each of the prior three months. Nevertheless, core CPI is still up 2.4% over the past year.
  • Chair Powell expressed concerns in his speech acknowledging that the US economy has slowed. He also reaffirmed that while the 50 basis points reduction in the fed funds rate so far is providing support, the FOMC committee will continue to assess incoming data signals on a meeting-by-meeting basis. The next meeting will take place at the end of October, and markets are expecting another quarter-point rate cut. Powell’s speech did not dispel those expectations, with the chairman reiterating that “policy is not on a preset course”.
  • Reports on progress in US – China trade negotiations sent stocks higher for the week. Within the S&P 500, hopes for a trade deal boosted the export-sensitive technology, industrials, and materials sectors. Utilities lagged as rising interest bond yields made their relatively high dividends less attractive in comparison. Pacific Gas & Electric (PG&E) shares fell sharply, as the California utility cut power to hundreds of thousands of customers to prevent a recurrence of the wildfires sparked by power lines last fall.
  • Good news for equity markets was bad news for bond prices, as the yield on the benchmark 10-year Treasury note jumped by roughly 23 basis points (0.23% points) over the week. The broad municipal market held up better than Treasuries by a wide margin. The streak of consecutive weekly flows into muni bond funds advanced to 40 weeks, according to Investment Company Institute data.
  • In terms of data release, retail sales in September due out on Wednesday will be important. Some hawks argue that the Fed does not need to ease much (or at all), as private consumption growth remains solid, so a weak print here may persuade them to support another cut. Retail sales have risen for six months in a row and since retail sales is a very volatile indicator it would not be a big surprise to get a negative print soon.


  • After what was described as a constructive meeting, British Prime Minister Boris Johnson and Irish Taoiseach Leo Varadkar said the two leaders see a path to a Brexit agreement and continue to believe a deal is in everyone’s interest. They agreed to reflect further on their discussion and to engage intensively. Time is of the essence as a European Union summit to address the United Kingdom’s exit from the EU is scheduled for late next week. Under UK law, Johnson is required to seek a Brexit extension by 19 October if an agreement is not reached by the end of the summit on 18 October. Talks have moved to Brussels, where Brexit Secretary Steve Barclay met today with the EU’s chief negotiator, Michel Barnier, and the two sides agreed to intensify negotiations. Sterling and gilt yields are rising on renewed optimism regarding a deal.
  • Prolonged political uncertainty in Britain is forcing finance directors to cut costs and hold off hiring to help companies prepare for an unpredictable year ahead, according to a survey by Deloitte. The audit of 91 chief financial officers of some of Britain’s largest companies showed that a renewed focus on cost control will be a strong priority for six in 10 of respondents over the next year, the highest level for 10 years. According to seven in 10 of the CFOs, hiring will reduce in the next 12 months, while almost half will focus on trying to increase cash flow.
  • Bank of England (BoE) Deputy Governor Dave Ramsden said he did not share the views of some of his colleagues who have suggested the British central bank might cut interest rates if the Brexit crisis drags on beyond the current 31 October deadline. In an interview with The Telegraph newspaper, Ramsden said Britain’s economy had been so damaged by uncertainty about Brexit (chiefly via a steady fall in investment by companies) that it could hamper the BoE’s ability to help it.
  • The labour market report for August is due out on Tuesday, CPI inflation in September on Wednesday and retail sales in September on Thursday. There is also plenty of Bank of England speeches, which may provide more insight into whether the central bank is on the brink of cutting rates in line with other major central banks.


  • In a letter leaked to the Financial Times, members of the European Central Bank’s monetary policy committee (MPC) made up of technocrats from the ECB and central banks, advised against the resumption of bond purchases announced several weeks ago. While the MPC’s view is not binding, ECB President Mario Draghi has ignored its advice only a few times during his eight-year term, which draws to a close at the end of this month. The presidents of five European central banks, including those of Germany, France and the Netherlands (countries that represent more than half of eurozone GDP) have said they opposed the resumption of quantitative easing. The FT reports the leak was inspired by the officials’ desire to put pressure on incoming ECB President Christine Lagarde to change course.
  • In August, German exports fell 1.8%, more than expected, as slowing global growth, trade tensions, and Brexit continued to take a toll on Europe’s largest economy. Other data released during the week showed German industrial production fell more than expected in August as a result of weaker domestic demand. The German magazine Der Spiegel reported that the German government will cut its 2020 growth forecast to 1.1% from 1.5%, which it projected in April. It added that the government expected the economy to grow 0.5% this year, thus narrowly avoiding a recession.
  • Equity markets in Europe rallied amid fresh signs of progress on US – China trade talks and Brexit negotiations. The pan-European STOXX Europe 600 Index gained 2.7%, while the exporter-heavy German DAX was up 4.2%.
  • On Tuesday the first sentiment indicators for October is out when the ZEW prints are due out for both the euro area and Germany. It will be interesting to see whether the rebound in expectations and the fall in current situation continues.


  • Investors anticipate concessions on the part of US and Chinese trade negotiators that could forestall the implementation of two rounds of US tariff hikes scheduled to take effect on 15 October and 15 December. Potential areas of agreement include increased Chinese purchases of US agricultural products, a pact on currency management and looser restrictions on US technology firms’ sales to China’s Huawei. The leader of the Chinese delegation, Vice Premier Liu He, is scheduled to meet with US President Donald Trump at the White House today. Despite elevated hopes for an interim agreement, major differences stand in the way of a comprehensive deal such as US opposition to subsidies to favored Chinese industries.
  • Chinese stocks surged following numerous reports of tentative progress in high-level trade talks that concluded Friday in Washington. For the week, the benchmark Shanghai Composite Index gained 2.4%, and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, climbed 2.5%. Both gauges rose to their highest levels of the week on Friday, a day after President Trump told reporters that US and Chinese officials “had a very, very good negotiation.”
  • China will release its GDP data for Q3. A headline with lowest growth since the 1990s is likely because the economy probably grew 6.1% year-on-year in Q3 down from 6.3% year-on-year in Q2. The trade war has caused headwinds but structurally growth is also on a declining path over the next decade.
  • China also releases data on exports, industrial production and retail sales. The key figures are expected to point to some stabilisation in growth following the decline over most of the year. Recently Chinese PMI and a few other indicators have pointed to stabilisation and even improvement. CPI inflation is set to rise further from 2.8% year-on-year to 2.9% year-on-year as pork prices continue to rise due to African swine fever. PPI is likely to move a bit further into deflation from -0.8% year-on-year in August to -1.2% year-on-year in September.

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