Economic Outlook – 15 September 2019


  • CPI inflation is beginning to heat up more materially. Core prices rose 0.3% for the third straight month, pushing the three-month annualised inflation rate to a 13-year high. The year-on-year rate hit 2.4%, which suggests PCE inflation (which tends to run about 0.3% below CPI inflation) may finally be at the Fed’s target. A few quirks boosted the number, including surging used auto and airfare prices. The rise in goods prices is more important. Core goods had generally been in outright deflation since 2013, but prices are now rising almost 1.0% over the past year, clearly illustrating the pass-through of tariff costs to the consumer, even before a much broader tranche of goods is subject to higher import taxes.
  • The NFIB small business confidence survey fell modestly to 103.1, off its cycle high of 108.8 one year ago, but it is still consistent with solid economic growth. Small business owners increasingly see a divergence between conditions today and what they expect in the future, reported sales and earnings remain strong, but hiring and capital spending plans have come down.
  • The Federal Open Market Committee (FOMC) meets this week and will likely deliver a 25-basis point cut. The FOMC is likely to look through the tariff-related increase in consumer prices, but with an unemployment rate at 3.7% there is little at present to motivate a full-blown cutting cycle. The meeting will come with updated economic projections. Perhaps even more than its near-term forecasts, analysts are looking for the migration in the Fed’s long-term projections for the fed funds rate and the unemployment rate, which may validate at least some of the decline experienced this year in bond yields and provide a sense of where policy may land in the coming months and quarters.
  • The Commerce Department reported that retail sales had risen a healthy 0.4% in August, although a rise in volatile auto sales deserved the credit. The University of Michigan’s preliminary gauge of September consumer sentiment rose more than expected, helping calm worries over a steep drop in August’s final reading. Core (excluding food and energy) consumer price inflation, reported Wednesday, rose 2.4% on a year-over-year basis, a bit more than anticipated and the most since mid-2018.
  • US stocks recorded a third consecutive week of solid gains as investors responded to a series of hopeful policy turns. The gains lifted the large-cap benchmarks within 1.0% of their all-time highs, but the small-cap Russell 2000 Index outperformed by a large margin, rising 5.0%. In another sign of a rotation in market leadership, slower-growing value stocks handily outperformed higher-valued growth shares. The shift into value and small-cap stocks helped narrow a yawning performance gap for the year-to-date period. As of August 31, the small-cap Russell 2000 Value Index was up 7.3% on a total return (including dividends) basis, while the large-cap Russell 1000 Growth Index was ahead 23.3%.
  • The positive data and trade signals sent the yield on the benchmark 10-year note to its highest level in over a month. Investment-grade corporate bond market was primarily focused on issuance, with the week’s total exceeding expectations, although most new deals were met with decent demand. US dollar-denominated bonds from European banks performed particularly well after the European Central Bank (ECB) announced its new stimulus measures.
  • Wednesday brings the FOMC meeting and rate decision. As repeated at the last FOMC meeting, the Fed ‘will act as appropriate to sustain the expansion’ and the Fed is expected to deliver on its promise.


  • After months of little or no progress in Brexit negotiations, signs of flexibility emerged on both sides, with the possibility that to keep open its border with Ireland, Northern Ireland will be treated somewhat differently than the rest of the United Kingdom. One proposal would give the Northern Ireland Assembly a say in alignment with European Union rules. Previously, the Democratic Unionist Party, a key faction in the ruling Conservative coalition, had objected to any separate treatment for Northern Ireland. With Parliament suspended, any agreement would need to be rushed through the legislature before the 31 October deadline. A general election would likely take place shortly thereafter.
  • The UK labour market remains resilient, but weakness may be starting to show. Numbers today showed that the unemployment rate in the UK had ticked down again to 3.8% in the three months to July after having temporarily risen to 3.9% in the three months to June. The consensus for July was 3.7%. However, the fall in the unemployment rate came as employment growth weakened, but growth in the labour force weakened more. Also, the labour market indicators in the PMI surveys suggest employment growth across UK businesses could be weakening ahead. Total wage growth in the UK increased to 4.0% year-on-year in the three months to July from 3.8% the month before, but regular pay (excluding bonus payments) fell to 3.8% from 3.9% the previous month. The Bank of England Agent’s survey indicates that wage growth in the UK could have passed its peak.
  • The pound rose to its highest level against the US dollar since July as Parliament passed a law that forces the UK government to seek from the European Union a Brexit extension and avoid a no-deal Brexit on 31 October. Prime Minister Boris Johnson is scheduled to meet European Commission President Jean-Claude Juncker on 16 October to discuss potential changes to a Brexit deal. The pound also gained some strength after data showed the UK economy grew faster than expected in July.
  • Brexit uncertainty is likely to press down on house prices and the volume of property sales over the next three months, a closely watched industry survey showed. The Royal Institution of Chartered Surveyors said its headline price balance for August rose to -4 from -9 in July, bucking economists’ average expectation in a Reuters poll for a further decline to -11. But RICS members’ outlook for the next three months (during which period Britain is scheduled to leave the European Union) grew darker. Sales volumes expectations for the next three months dropped to -23 from -4, while short-term expectations for prices declined to -24 from -13.
  • Bank of England is not expected to change its monetary policy at its meeting on Thursday. The Bank of England is caught in the middle of a combination of a tight labour market, higher wage growth, high Brexit uncertainty, trade war uncertainty and slower global growth.


  • In its September meeting, the ECB’s Governing Council voted to lower its key rate: the interest rate on the deposit facility will be -0.5%, whereas the rates on the main refinancing operations and the marginal lending facility will remain at 0.00% and 0.25% respectively. The bank further reinforced its forward guidance and now expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2.0% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
  • The German Ifo Institute cut its forecast for German growth this year to 0.5% from 0.6% and lowered its estimate for next year to 1.2% from 1.7%. The institute warned that a sharp slowdown in manufacturing could spread to the services sector and cause an increase in unemployment.
  • European markets rose as the European Central Bank announced a fresh wave of monetary stimulus aimed at supporting the eurozone economy and fears of a no-deal Brexit subsided. The pan-European STOXX Europe 600 Index rose about 1.3%, while the exporter-heavy German DAX gained 2.4%.
  • The focus this week is on Tuesday’s ZEW sentiment index from both Germany and the euro area. Last month, investors’ expectations of the economy plunged to a level similar to the beginning of 2008. However, the assessment of the current situation in the euro area is not in a free fall anymore and this month’s Sentix indicator actually showed a rebound for the euro area.


  • Amid mounting speculation that the United States and China will reach an interim trade deal that leaves thornier issues unresolved until a later date, US President Donald Trump said his administration would consider an interim deal, though he prefers a comprehensive agreement. Each side took steps last week to ease tensions ahead of ministerial talks in Washington next week followed by high-level talks in early October. China suspended tariffs for a year on certain imports from the US, including agricultural products such as soybeans and pork, cancer drugs and other products. For its part, the US postponed a tariff hike scheduled for 1 October until mid-October to avoid clashing with the 70th anniversary of the founding of the People’s Republic of China. There was widespread media speculation that a limited, interim trade agreement (with the US freezing or rolling back certain tariffs and China resuming agricultural and energy purchases) will occur in the coming weeks but that major points of disagreement over such issues as Chinese government subsidies for state owned enterprises will be left unresolved.
  • Chinese stocks advanced in a holiday-shortened week, as China and the US took incremental steps toward defusing their trade war and expectations grew that Beijing would roll out more stimulus measures to boost the economy. For the week ended Thursday, the benchmark Shanghai Composite Index rose 1.1%, to its highest level in 10 weeks, and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, added 0.6%. Stock markets on the mainland were closed Friday for the Mid-Autumn Festival.
  • The batch of industrial production, retail sales and fixed asset investments will be released this week in China, which are always released on the same day. A rebound in industrial production after a quite weak print last month is expected, while growth is under pressure, there is no sign of a hard landing. Retail sales is expected to hover around 8% as it has done since November last year. On Friday, the new benchmark lending rate (Loan Prime Rate) is expected to decline slightly from the current level of 4.85%.

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