Economic Outlook – 17 November 2019


  • Reverberations of slowing global growth and trade uncertainty have been most acutely felt in the factory sector, given newly imposed tariffs on a wide array of producer inputs and globally integrated supply chains. The weakness was on full display in October, as manufacturing production slipped 0.6%, the second straight monthly decline. Adding to their woes, manufacturers have been hit by a string of domestic issues, which have weighed on production even further, such as the continued sidelining of the Boeing 737 MAX. In addition to this, the United Auto Worker strike at GM, which was not resolved until late in the month, also put a sizeable dent in production. What’s more, the mining component of industrial production fell 0.7%, likely a result of a continued pullback in capital investment in the energy sector. Following last year’s decline in oil prices, energy producers have become much more financially disciplined, a fact which is increasingly apparent in a steadily declining rig count.

  • There was a 0.3% rebound in retail sales during October. Sales strengthened for autos, gas stations and non-store retailers, while clothing, sporting goods, building materials and furniture sales declined for the month. More important, control group sales, which are used as an input into the personal consumption expenditures component of GDP, also rose 0.3% during the month. The rise in the control group sales points to the consumer again offsetting the weakness in business spending. That noted, consumer spending appears to be cooling down a bit.

  • Although manufacturing weakened, there have been some improve­ment in small business confidence. The NFIB small busi­ness optimism index increased in October, with businesses signaling they will move forward with capital outlays in the months to come. This is a good sign for sputtering invest­ment, which has contracted in the last two quarters as eco­nomic policy uncertainty spiked.
  • The CPI advanced 0.4% during October, the strongest gain in eight months, but the jump was owed to a 3.7% surge in gas prices. Core CPI, which strips out the volatile energy and food inputs from the headline index, grew a more modest 0.2%. Additionally, the core measure is up 2.2% on a three-month annualized basis, which marks a substantial downshift from the 3.4% annualized pace registered just a few months back. With overall measures of core inflation coming in on the soft side, the Fed will likely remain in “wait and see” mode with regard to monetary policy.
  • In testimony on Capitol Hill last week, US Federal Reserve Chair Jerome Powell indicated that monetary policy is likely to remain appropriate as long as US economic data continue to support the Fed’s outlook, though he noted that policy is not on a preset course. Powell repeated warnings that the federal budget is on an unsustainable path. Also last week, Fed Vice Chair Richard Clarida said there was little evidence that rising wages are putting excessive upward pressure on price inflation, noting inflation expectations are at the low end of the Fed’s acceptable range
  • Relatively tame inflation pressures during the month are notable, given October is the first month with the effects of new 15% tariffs on roughly $111 billion of imports from China that went into effect in September. Consumer apparel and household furnishing prices, which were subject to the newly imposed tariffs, actually declined during the month.
  • While markets are optimistic that the US and China will reach a phase one trade agreement by the end of the year, familiar stumbling blocks continue to hamper negotiations. China remains wary of US demands that it make very large agricultural purchases while the US continues to resist the rollback of existing tariffs. US President Donald Trump said last week that a significant phase one deal could happen soon but that the US would only accept an agreement if it is good for US workers. Late in the week, White House economic adviser Larry Kudlow expressed optimism regarding a deal, saying talks were making very good progress. Separately, Trump is expected to postpone for another six months a decision on levying tariffs on imported autos on national security grounds.
  • The major indexes ended mostly higher as investors continued to await firm details on the progress of US – China trade negotiations. The large-cap Dow Jones Industrial Average and S&P 500 Index managed to establish record highs, as did the technology-heavy Nasdaq Composite Index. The small-cap benchmarks lagged and ended roughly flat. Within the S&P 500 Index, health care shares outperformed thanks in part to a late rally in insurer shares following the White House’s announcement of new rules requiring disclosure of rates negotiated with hospitals. Energy stocks trailed, weighed down by a decline in Exxon Mobil. High-valuation growth shares generally outperformed slower-growing value stocks.
  • The good news retail sales data seemed to spark a small rise in bond yields on Friday, but the yield on the benchmark 10-year Treasury note decreased over the week as a whole, over the week on concerns that the “phase one” U.S.-China trade deal may be stalled.
  • Preliminary Markit PMIs for November are released on Friday. The October PMIs sent a signal of modest GDP growth. Markit PMI orders-inventory balance suggests stronger PMI manufacturing in November, while the global PMIs appear overall improved but still below the 50 threshold, implying a broadly unchanged risk but with upside potential.
  • Wednesday brings FOMC meeting minutes. At the October meeting, Fed cut its target range by 25bp to 1.50-1.75% as expected, but it seems as if the Fed now wants to stay on hold to monitor how things play out. As there is a clear division in the committee, it will be interesting to see if the minutes will provide any information on the different stances within the Fed.


  • European Central Bank Vice President Luis de Guindos said last week that the bank has not exhausted its policy options, noting that while eurozone inflation expectations have continued to decline and are falling markedly, they have not become de-anchored. However, Bank of France Governor François Villeroy de Galhau, a member of the ECB’s governing council, said that rates are unlikely to go down much from present levels although they are also unlikely to rise unless governments with room for fiscal expansion, such as Germany, increase government spending.
  • The latest German data showed the economy avoided recession, growing 0.1% in the third quarter. Germany’s manufacturing sector has been hurt by the US – China trade dispute, Brexit uncertainty, and a disruption in its auto industry. Thus far, the manufacturing recession has not spilled into the services sector. The European Union Statistics office also reported that the eurozone economy grew at a modest 0.2% from the previous quarter and 1.2% on the year. 
  • Equity markets in Europe were mostly higher, buoyed by hopes for a US – China trade deal and continued strength in US stocks. The pan-European STOXX Europe 600 Index gained 0.2%, and the exporter-heavy German DAX rose 0.08%,
  • The November PMI figures from Germany and the euro area are out on Friday. Last month, both the German and the euro area PMIs stabilised around the previous levels and this month’s print will show whether this was an actual trough or whether further slowdown lies ahead. In support of the trough view, the November ZEW indicator strengthened the signal for PMI stabilisation, showing both the euro area and Germany edging further away from recession territory.
  • On Thursday, minutes from the October ECB meeting are due out. The meeting was rather uneventful and thus the minutes are likely to contain few new insights for markets. However, it will be interesting to check the Governing Council’s thinking on the QE ISIN limits and any views on whether these self-imposed rules could be bent. Furthermore, the minutes will also reveal whether the frictions in the Government Council after the September meeting still linger.


  • CPI inflation fell further in October, to 1.5% year-on-year from 1.7% in September. The outcome was slightly weaker than the market consensus of 1.6%, but in line with the Bank of England’s (BoE) expectation. Core CPI inflation was steady at 1.7% year-on-year in October. Cost pressures, as measured by the producer price indices, fell further in October. The PPI input inflation fell to -5.1% year-on-year in October from a downwardly revised -3.0% in September. The PPI output inflation fell to 0.8% year-on-year in October from 1.2% in September.
  • The UK avoided recession, but the economy grew at its slowest annual rate in about a decade, pressured by Brexit uncertainty. The economy grew 1.0% in the quarter. Moody’s lowered its outlook for the UK economy to negative from stable, citing political and social divisions that have impeded the UK’s ability to make policy decisions. As the December 12 general election nears, the number of people employed fell the most in more than four years in the third quarter. Even so, the labor market remains tight, with the unemployment rate near a record low of 3.8%.
  • British consumers, whose spending has helped the economy through the Brexit crisis, cut back on their shopping in October, according to official data that adds to signs the economy is losing momentum. An unexpected fall in sales in October pushed retail growth over the last three months to its weakest since April 2018, the Office for National Statistics said on Thursday. The downbeat news follows official figures earlier last week that showed the economy as a whole grew at its weakest annual rate since 2010 in the third quarter of this year, while the number of people in work dropped sharply.
  • IHS Markit has announced it will start publishing flash estimates of UK PMIs next week. The flash estimates for November are due out Friday.


  • All three main activity indicators disappointed in October. Industrial production growth fell from 5.8% year-on-year to 4.7%, thereby almost fully reversing the unexpected rebound in September. Similarly, retail sales growth fell from 7.8% year-on-year to 7.2%, which fully reversed the September rebound. Thus, manufacturing PMI from Markit is now the only indicator still signaling stabilisation, which looks increasingly unreliable. Fixed investments also disappointed, with growth in ordinary year-on-year falling from 4.8% to 3.7%. Both the slowdown in industrial production and fixed investments was driven by the private sector, whereas state-owned enterprises held up satisfactorily.
  • Chinese stocks recorded a weekly loss as a trio of weaker-than-expected indicators underscored the US – China trade war’s impact on the economy as talks over a partial “phase one” trade deal dragged on with no firm commitment on either side to end the dispute. The benchmark Shanghai Composite Index lost 2.5%, its largest weekly decline since September, and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, fell 2.4%.
  • There are no market movers in China this week.

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