Economic Outlook – 16 September 2018


  • US retail sales data came in a bit light, rising just 0.1%, but data for the prior month were revised higher and the core measure of retail sales remains up at a brisk 7.8% pace over the past 3 months. Keep an eye on clothing and department store sales, which tumbled 1.7% and 1.0%, respectively in August. Back-to-school sales have historically been a good predictor of holiday season sales and the weakness here is somewhat surprising. These categories are notoriously volatile, however, and calendar effects can cause wide month-to-month swings. Much of the most recent drop appears to have been due to discounting. Apparel prices tumbled 1.6% in August, their largest monthly drop since January 1949.
  • US industrial production rose 0.4% in August, which was slightly better than expected. A rebound in motor vehicle assemblies and utilities output accounted for most of the increase. Motor vehicle output jumped 4.0% in August following a 1.4% drop the prior month. Excluding motor vehicles and was unchanged in August, following a 0.5% rise the prior month. Utility output jumped 1.2% in August, with electric utilities logging all the increase, reflecting warmer temperatures and increased use of air conditioning.
  • The US headline PPI fell 0.1% in August after remaining unchanged in July. The year-on-year change in the final demand series fell on both an overall and core basis, slipping to 2.8% and 2.3% respectively. While it is hard to draw too many conclusions from the PPI data, it appears that inflationary pressures are cresting or possibly even backtracking a bit, likely due to some slowing in global economic conditions. Price increases have also eased at the intermediate level and the old method of measuring the PPI, which is more closely tied to industrial demand, shows both headline and core inflation pressures easing.
  • The overall CPI moved to 2.7% from 2.9% % a month earlier and core sliding back to 2.2% year-on-year from 2.4% in July. The smaller rise in the core CPI was largely due to the previously mentioned plunge in apparel prices. Given the lack of recent precedence for such a plunge, this looks more structural than cyclical and its moderating impact on the headline and core CPI data is unlikely to impact the Fed’s timetable for raising interest rates.
  • The National Federation of Independent Business (NFIB) Small Business Optimism index rose to a new all-time high in August. Business owners continue to express a great deal of optimism about the economy and their business, which adds a little upside risks to forecasts for business fixed investment and employment.
  • US officials have reached out to their Chinese counterparts ahead of the imposition of additional tariffs on $200 billion of imports from China on top of tariffs on $50 billion in goods already in place. High-level talks are expected to take place in Washington before the end of September, led by Secretary of the Treasury Steven Mnuchin and Chinese vice premier Liu He. The US is expected to refrain from imposing the latest round of duties in advance of the talks. While there are few hopes for a breakthrough, the fact that the two sides are talking is seen as a mild market positive.
  • US stocks finished the week with gains, as shifting signals on potential protectionist trade policies between the US and China seemed to drive investor sentiment. Large-cap stocks outpaced small-caps, with companies in the transportation segment – which is part of the industrials and business services sector and includes railroad operators, trucking companies, and airlines (notably outperforming the broad market). Oil prices were volatile with US benchmark crude oil rising above the $70-per-barrel mark midweek before falling back somewhat.
  • US Treasury yields increased despite the dovish statements and soft inflation data, with the yield on the 10-year Treasury note touching 3.0% intraday on Friday. Issuance of municipal bonds ticked upward during the week, although T. Rowe Price muni traders noted that market participants seemed generally unenthusiastic about the new deals. Yields on longer-maturity municipal debt increased to their highest levels since the beginning of the summer.
  • In the US, there are no market movers this week.


  • As widely expected, the Monetary Policy Committee (MPC) of the Bank of England (BoE) left monetary policy unchanged at its September meeting, after having hiked the policy rate in August. The decision in September was unanimous, also as we expected. According to the MPC, recent news in UK macroeconomic data had been limited, but the August projections appeared to be broadly on track. UK GDP grew by 0.4% in Q2 and by 0.6% in the three months to July. The UK labour market had continued to tighten, with the unemployment rate falling to 4.0% and the number of vacancies rising further. Regular pay growth had risen to around 3.0% on a year earlier. CPI inflation was 2.5% year-on-year in July. Regarding the global economy, the MPC noted that growth rates were still above trend, but recent developments were likely to have increased downside risks. Particularly the announcements of further protectionist measures by the United States and China, if implemented, could have a more negative impact on global growth than was anticipated at the time of the August Report.
  • House prices in London fell last month at the fastest pace since April but there were strong gains away from southern England, giving a broadly flat picture overall, the Royal Institution of Chartered Surveyors said on Thursday. The RICS said its monthly national house price balance edged down to +2 in August from July’s six-month high of +4, in line with average expectations in a Reuters poll of economists.
  • Focus is on Brexit, not least with the informal EU summit in Austria on Wednesday-Thursday, where the EU leaders are expected to discuss Brexit and probably soften Michel Barnier’s negotiation guidelines in order to make it easier to reach a withdrawal agreement in Q4. The UK Conservative Party remains divided on Brexit, as the hardliners still think PM Theresa May’s Chequers plan is too soft.
  • The most important data release in the UK this week is the CPI inflation August data due on Wednesday. After it surprised on the upside in July, headline inflation is expected to fall to 2.3% year-on-year from 2.5% year-on-year in July, in particular because the impact of the GBP depreciation is fading. CPI core inflation is likely to have fallen to 1.8% from 1.9%.


  • August activity data was a mixed bag, but the fixed investments data remain weak. Growth of fixed investments fell to 5.3% year-to-date from 5.5% in July against the consensus expectations of an increase. That corresponds to a modest increase in the ordinary growth rate from 3.0% year-on-year to 4.1%. It is primarily infrastructure investments that suffer with the growth rate remaining in negative territory in August. Thus, there are still no signs of the authorities’ stimuli kicking in yet, even though funding conditions for local governments have been eased markedly to promote infrastructure projects. Property construction investments growth also fell, which is consistent with that the authorities still seem to be in tightening mode with respect to the property market. The two other main activity indicators, retail sales and industrial production, both experienced very slight growth increases.
  • China’s main stock indexes fell for the week, as monthly indicators provided fresh evidence of slowing growth on the mainland. For the week, the benchmark Shanghai Composite Index declined 0.8%, its third-straight weekly loss, while the large-cap CSI 300 Index shed 1.1%. On Friday, China said that fixed-asset investment grew a weaker-than-forecast 5.3% in the year’s first eight months, its slowest pace since 1999, according to Bloomberg.
  • August industrial production rose in line with estimates, while retail sales came in stronger than expected. A Chinese government official said that US trade friction had little impact on August’s readings. Nevertheless, the data underscored the broad slowdown underway in China and the risks that more US tariffs could pose to growth.
  • In China, there are no market movers this week.


  • The European Central Bank confirmed its intention to phase out asset purchases by the end of the year and reiterated its plan not to raise interest rates for at least a year. At the same time, the ECB downgraded modestly its forecast for eurozone economic growth, to 2.0% this year from 2.1% and to 1.8% next year from 1.9%. ECB president Mario Draghi highlighted downside risks to the economic outlook from uncertainties relating to rising protectionism, vulnerabilities in emerging markets and financial market volatility.
  • Italy’s FTSE MIB Index rose more than 2.0%, even as Italy’s antiestablishment coalition members wavered between funding campaign promises and remaining within the guidelines of European Union budget constraints. Markets remained reactive to the statements of coalition leaders. The League party promised to lower the retirement age, which would be funded by a tax amnesty, while the leader of the Five Star Movement said the future of the coalition would be threatened if an election pledge for universal basic income was excluded from the budget. The government will submit its draft budget to the European Commission by the middle of October, and the commission will release its opinion on the plan by the end of November.
  • In the euro area, the final HICP figures from August are due on Monday. No revision is expected from the preliminary release, which saw headline inflation falling back to 2.05% and core inflation disappointing on the downside at 0.96%, driven by lower service and goods price inflation. Of particular interest are the drivers for the drop in core inflation and whether they are of a permanent or temporary nature. A gradual pickup is likely in underlying inflation pressures throughout 2018 and 2019.
  • On Friday, the euro area flash PMIs for September are due. After starting the year on a declining trend, PMIs is expected to stabilise around their current levels. Manufacturing PMI is likely to rise slightly to 54.7 from 54.6 and services PMI to increase to 54.6 from 54.4, as trade war fears continue to retreat as a headwind to business sentiment and the forward-looking new orders component also rebounded in the last survey.


Sources: Wells Fargo, T. Rowe Price, Reuters, Handelsbanken Capital Markets, MFS Investment Management.