Economic Outlook – 15 October 2017


  • August JOLTS data show demand for labor was solid before the storms, suggesting the decline in September should reverse rather easily. Openings remained at their record highs, though that did little to entice workers to leave their current positions. The quit rate held in its 2.1% to 2.2% range that it has bounced between each month this year, leaving 2.2% as cycle high.
  • Many US small businesses are finding it difficult to find qualified workers, according to the September NFIB survey also released this week. Among respondents attempting to hire, 86.0% said there were few or no qualified applicants. The problem is most acute for manufacturers and construction firms. Overall small business optimism slipped in September, partially reflecting the impact from the storms. Optimism still remains near cycle high.
  • Producer prices in September pointed to firming inflation. Energy prices contributed to a sizeable 0.4% rise in producer prices on the month. The volatile trade component helped push services prices up 0.4%, and higher energy costs also helped boost prices for transportation on the month. Though construction costs experienced little changed in September, they will likely continue on the recent upward trend as rebuilding from the hurricanes get underway. Although not the Fed’s primary inflation gauge, the PPI has firmed over the year and is behaving in a way supportive of the Fed’s inflation objectives. Headline PPI is up 2.6% while core PPI, which excludes food and energy, is up 2.2%.
  • The storms pushed up consumer prices, particularly at the gas pump, as expected. Headline CPI rose 0.5% on the month, though core inflation rose 0.1%, which was below the consensus of 0.2%. The softer showing in the core did little to give the Fed clarity on the underlying inflation trend.
  • Retail sales received a large boost from storm-related purchases. Replacing cars and paying more at the pump pushed retail sales up 1.6% on the month. Control group sales were up a solid 0.4% which suggests the strong showing in September was not only because of hurricanes, as it excludes autos and gas as well as food services and building materials.
  • The latest in a string of disappointing inflation readings will surely add fuel to the ongoing inflation puzzle debate going on in the Federal Reserve as evidenced by the minutes from its September meeting released this week. Core measures of inflation, including the Fed’s preferred core PCE deflator metric, have held below the 2.0% target for much of the recovery from the Great Recession even though economic slack has largely diminished. Fed officials remain somewhat divided on the topic. Some Committee members favour maintaining a highly accommodative monetary policy environment until wages and inflation show a persistent move higher, while others attribute much of the weakness to more temporary forces that do not warrant a pause in interest rate normalisation. As an example, Fed Powell in his speech yesterday shared that monetary policy normalisation should continue to be gradual as long as the US economy evolves roughly as expected. Meanwhile, Fed Kashkari remarked that the Fed should pause until inflation creeps back up to the Fed’s 2.0% target.
  • With efforts to repeal and replace the Affordable Care Act stymied in Congress, US president Trump issued an executive order to reform the health care sector. The order allows employers to band together to form groups, potentially lowering the cost of coverage. It also allows insurers to offer coverage across state lines. In addition, the administration is expected to announce later today that it will halt payments to insurers to offset government subsidies for low-income purchasers. Insurance carriers have been raising premiums in recent months in anticipation that the payments would be halted.
  • Industrial production for September is due to be released on Tuesday. With the September print, there will be a full picture of industrial production in Q3. The first two months have been on the weak side and based on these, industrial production points to GDP growth in the region of 2.3% quarter-on-quarter AR in Q3. However, this is well in line with the consensus overall estimate of the current economic activity. The current large gap between ISM and PMI manufacturing makes it difficult to use these as guidelines for industrial production. However, PMI has been the best predictor over the past three months and currently indicates that the relatively muted growth in industrial production continued in September.
  • The Fed will release its Beige Book that will offer its latest assessment on the health of the US economy and it is expected to maintain its view that the US economy remains on a moderate and modest growth path. There will also be several speeches by FOMC members, including Fed Chair Janet Yellen, who is due to speak on Sunday.


  • The headline coming out of the labour market seems at first glance to be encouraging. The unemployment rate is sitting at a 40-year low at 4.3%, and has almost halved since its peak in 2011. The recovery has been driven by strong job creation, and this has continued of late, with fears that uncertainty might hold back hiring not materialising. Employment growth is currently running around a healthy 1.0% in year-on-year terms, with the majority of this representing full-time, private sector jobs. This has been outpacing the still-solid growth seen in labour supply. The labour force has been boosted by both a rise in the working age population and the participation rate to a record high. Interestingly, there has already been a slowdown in the growth rate of EU nationals employed in the UK since the referendum last year.
  • The UK CPI inflation print for September and the jobs report for August are the two most important releases ahead of the Bank of England meeting next month. The releases should not alter the BoE members’ views on the economy significantly and hence a 25bp Bank Rate hike next month is still expected. Markets have priced in a 60.0% probability of a rate hike.
  • European Commission president Jean-Claude Juncker said on Friday that the United Kingdom would need to pay its “divorce bill” before discussions can proceed on trade and future relations between the UK and the European Union. The EC leader said that negotiations have advanced more slowly than expected and that it is unlikely the European Council will agree when it meets next week that sufficient progress has taken place for negotiations on the future relationship to begin. Earlier in the week EU chief Brexit negotiator Michel Barnier said discussions on the financial settlement were deadlocked.
  • Retail sales for September are due on Thursday, which is an indicator that usually moves markets but in reality is a very weak indicator of actual consumption growth.


  • The European Central Bank appears to have floated several trial balloons in the press this week as it moves toward shifting its exceptionally easy stance toward monetary policy before the end of the year. One proposal reportedly being considered by the ECB is to cut in half the rate at which it buys European bonds, from €60 billion to €30 billion beginning in January, and keeping the program active for at least nine months. At the same time, ECB president Mario Draghi said in Washington that policy rates would not be raised until well past the end of quantitative easing. Markets appear to be focusing on the policy rate forecast more than the QE rumours, with 10-year German bund yields falling 4 basis points on Friday to 0.41%.
  • Eurozone labour markets continue to heal. At the aggregate level, the unemployment rate came in at 9.1% in July, having gradually fallen from a post-crisis high of 12.3% in the summer of 2013. Meanwhile, the other side of the coin (the overall employment level) also reflects this recovery, with the number of people employed having finally risen above the pre-crisis peak in Q1 this year.
  • However, aggregate figures in the Eurozone risk overstating the state of play in the individual labour markets. For Germany, the unemployment rate sits much lower than the aggregate at 3.6%; the result of a steady fall in unemployment following only a minor surge in 2008.
  • Germany is the exception rather than the rule; for many Eurozone countries, particularly in the periphery, unemployment rates are much higher. Indeed, Spain and Greece remain in recovery mode, with unemployment having peaked at 26.0% and 27.0% respectively at the height of the crisis, and still sitting well above the aggregate measure at a chronic 21.0% and 17.0%, according to the latest print.
  • The most interesting data release are the final HICP figures for September, due on Tuesday. Changes are not expected from the preliminary release with regard to headline and core inflation, which reported a decline to 1.1% year-on-year. However, it will be interesting to see which components caused the fall in service price inflation and whether they point towards any sustained upwards or downwards trend in core inflation, which will be important for ECB policy normalisation going forward.


  • The Chinese labour market has tightened noticeably over the past year, owing to an improved external environment and a pick-up in industrial sector demand. A few interesting trends emerge among the data. First, rebalancing and industrial upgrading is evident in the employment data, with electronics and environmental industries continuing to show gains in employment. Second, income growth has improved, largely due to direct government transfers and housing-related income. Third, the industrial rebound and supply-side policies have provided direct support to embattled western provinces, where much mining and heavy industry is based.
  • In China, the 19th Congress of the Communist Party begins on Wednesday 18 October. The top leadership (the Standing Committee of the Politburo) will experience a big reshuffle as five out of seven members are likely to be exchanged as they fall for the informal age limit. The Congress will also reveal how much President Xi Jinping will strengthen his power and is likely to give a signal of a deepened reform focus.
  • China third quarter GDP, due a day after the kickoff of the 19th Congress of the Communist Party, will certainly be closely watched. Even though the Chinese economy is expected to slowdown, the pace of moderation remains very muted, which would continue to be supportive of growth outlook not only regionally but also globally. Retail sales, industrial production, fixed asset investment, CPI, PPI will likely take a backseat with the GDP print taking centre stage.


Sources: Wells Fargo, MFS Investment Management, Danske Bank, HongLeong Bank, TD Economics, Standard Life Investment.

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