Economic Outlook – 18 August 2019


  • The spread between the US two-year Treasury note and the 10-year note fell below zero for a time this week, setting of a recession warning bells. However, the inversion is not yet persistent, and in the past five such episodes the onset of recession averaged 22 months after inversion. Global bond yields continue to tumble, with US 10-year notes falling to their lowest level in three years and German, British and Japanese yields falling to record lows. The US 30-year bond yield fell below 2.0% for the first time on record.
  • The consensus is that Fed will continue its risk management approach and it is on course to cut rates another 25 basis points in September. The negative yield curve raises the probability that they take further action in the months ahead. The Fed is right to be wary of the risks from trade tensions, as evidence that tariffs are hitting the US economy continued to mount last week.
  • Initial Job Claims last week’s uptick to 220k is still not flagging much of anything, and the 4-week average is barely above cycle lows. Production/nonsupervisory work hours have drifted down in recent months. The six-month growth rate is now the weakest since 2009, but the year-over-year change is within this cycle’s range (albeit at the low end). Other indicators like the jobless rate are more lagging in nature. All in, the labour market is not flashing much at the moment.
  • Core capital goods orders have actually improved since the turn of the year through June, though year-over-year growth has faded to a skinny 1.5%. In the factory ISM, new orders have slowed significantly through July and are clinging to the 50 (neutral) level. Nonmanufacturing orders, while firmer at 54.1 in July, have also faded. This one bears watching, especially with trade tensions only heating up in August and business confidence likely suffering further
  • The lack of strength in housing is interesting especially given the plunge in mortgage rates (down about 120 bps since late-2018 for a 30-year). Sales have picked up somewhat, but remain more or less rangebound. Building permits encouragingly rose firmly in July after grinding lower for much of the past year. All told, we’re still seeing stagnation/saturation on the housing front, but not a rollover that would be indicative of recession.
  • The Commerce Department reported that retail sales, excluding autos, jumped 1.0% in July, the best showing in four months, helping build on optimism over healthy sales at Walmart. On Friday, however, the University Michigan reported that its preliminary reading on consumer sentiment fell more than expected and hit its lowest level since January. Weekly jobless claims also rose more than expected and hit their highest level since late June. Meanwhile, poor data out of China and Germany confirmed a substantial slowdown in global manufacturing, with rising trade barriers seemingly to blame. Investors also worried about political turmoil in Hong Kong and elections in Argentina
  • US stocks recorded a third week of losses as trade and growth worries unsettled investors. The bulk of the week’s declines came Wednesday, with the major benchmarks suffering one of their worst daily pullbacks to date in 2019. The smaller-cap benchmarks underperformed, and the S&P Midcap 400 Index briefly joined the small-cap Russell 2000 Index in correction territory, or down over 10.0% from the highs it reached in late August 2018. The Cboe Volatility Index (VIX) remained elevated but stayed somewhat below the eight-month peak it reached the previous week. With many investors on summer holidays, trading volumes were somewhat thin, which may have accentuated the market’s moves.
  • As investors rushed to the perceived safe haven of the Treasury market, the yield on the benchmark 10-year note fell as low as 1.48%, just above the record low it reached in the summer of 2016. Meanwhile, the yield on the 30-year bond fell below 2.0% for the first time.
  • On Thursday, the preliminary Markit PMIs for August and the leading index are due out. The Markit manufacturing PMI is expected to fall below the 50 threshold in line with the weakness seen in the manufacturing in the rest of the world but the service PMI is likely to hold up. Overall, it would signal US GDP growth is slowing.
  • On Wednesday, the FOMC minutes from the July meeting are due out. A lot has happened since the meeting so the minutes may seem hawkish in the current context. There are not scheduled any Fed speeches (it seems as if they may be on summer holiday) but the Jackson Hole conference (Thursday to Saturday) is interesting. The theme is ‘Challenges for Monetary Policy’ which suggests it will focus on the same things as in the FOMC review of the current monetary policy framework. The agenda has not been published yet.


  • British retail sales unexpectedly edged up in July, helped by the strongest growth in online spending in three years, as consumers continued to support the economy before the 31 October Brexit deadline. Monthly retail sales volumes rose 0.2% after a 0.9% surge in June, the Office for National Statistics said on Thursday, beating the average forecast for a 0.2% decline from a Reuters poll of economists. Compared with July 2018, sales were up 3.3%, slowing from 3.8% in June but at the top end of forecasts.
  • Britain’s labor market showed unexpected strength in the second quarter but economists said this could prove a high water mark, after figures last week showed the economy contracted as businesses braced for a potentially disruptive Brexit. Average weekly earnings rose by an annual 3.7% in the three months to June (the highest rate since June 2008 and up from 3.5% in May. Excluding volatile bonuses, annual pay growth reached 3.9%) also an 11-year high and beating economists’ average forecast in a Reuters poll.
  • Prime Minister Boris Johnson’s government has made billions of pounds of new spending commitments in its first three weeks in office, even before the potential costs of a disruptive, no-deal Brexit are taken into account. New Finance Minister Sajid Javid will give more details of the plans next month, before a full annual budget later in the year – assuming that a no-confidence vote and an election do not intervene before then.
  • In the UK there are no market movers this week.


  • Anticipation of an aggressive package of additional easing measures from the European Central Bank at its September meeting is helping fuel the global bond rally after a member of the bank’s governing council made a forceful case for additional accommodation in an interview with the Wall Street Journal. Lest anyone question the veracity of the Journal’s reporting, Finnish central banker Olli Rehn tweeted out a link to the article. Rehn said the ECB is preparing a strong package of measures and that it is important to overshoot expectations rather than undershoot. The starkest example of Rehn’s determination to signal a strong move was his assertion that the ECB has not ruled out purchasing equities as part of its quantitative easing program, a once-unthinkable prospect.
  • Eurostat reported that the eurozone economy barely grew in the second quarter of 2019, expanding just 0.2%, as economies across the bloc lost steam. The region’s largest economy, Germany, shrank by 0.1% in the second quarter, according to Destatis, the statistics agency. The gross domestic product flash estimates numbers, including year-on-year growth of 1.1% from the second quarter of 2019, were in line with economists’ forecasts. The report showed that Spain’s economy grew 0.5%, France’s expanded 0.2%, and Italy’s economic growth was flat for the same period. Other signs of slowing were seen in the 1.6% June downturn in eurozone industrial production.
  • Trade between countries of the eurozone fell in June at the fastest pace in more than six years as the China-US trade dispute begins to hit European exports. The value of intra-eurozone trade dropped 6.6% in June compared with the same month last year. Eurozone exports to the rest of the world fell 4.7%, and European exports to China contracted 3.4% for the same period.
  • Stock markets in Europe came under pressure throughout the week from fresh US – China trade tensions and growing signs of recession. The pan-European STOXX Europe 600 Index lost about 0.5% and the exporter-heavy German DAX index dropped about 1.3%.
  • In the euro area the most important data items this week are the PMI prints from Germany and the euro area on Thursday. In July, the already fragile euro area manufacturing sector continued to plunge to 46.5 (a 6.5 year low) while the service sector held broadly steady at 53.2. Weak external demand and geopolitical risks still haunt the manufacturing sector while domestic demand underpins the service sector, albeit companies have become more cautious about investment and also started to reassess staff levels.
  • The ECB minutes will be out on Thursday and deserve attention. The discussion of the new policy measures will be scrutinised, but not much flavour in terms of operational details will be revealed as ‘tasked committees’ are working on this.


  • The US – China trade skirmish continues to make news as market-supportive headlines keep getting pushed off the page by less upbeat ones. Markets were relieved midweek as the United States announced it was delaying the imposition of tariffs on several categories of imports from China until after the holiday season, but that news did not dissuade China from announcing that it intends to take necessary countermeasures to match the US tariffs. Face-to-face negotiations are expected to resume within two weeks, and China has asked the US to meet it halfway on trade issues. However, US President Donald Trump said that that a trade deal needs to be reached on “our terms,” though he said he believes the trade war will be fairly short, noting that US and Chinese negotiators had a very good conversation last week.
  • Air traffic out of Hong Kong was severely disrupted this week as protestors occupied the city’s international airport and clashed with police. The prolonged nature of the protests has resulted in Hong Kong’s government suggesting it will downgrade its forecast for gross domestic product to 0% to 1.0% this year from its earlier 2.0% to 3.0% forecast. The government also unveiled an economic support package worth $2.4 billion to offset some of the economic drag from the demonstrations. President Trump this week for the first time linked the protests in Hong Kong to the ongoing trade negotiations with China, saying the country must respond humanely to the protests if it wants to strike a trade deal. Trump’s remarks came amid signs that the Chinese government is gearing up to employ the Chinese People’s Armed Police to quell the protests, massing a force in Shenzhen, just across the border from Hong Kong. 
  • Chinese stocks posted a weekly gain after Beijing pledged to roll out measures to boost disposable incomes for the next two years to offset the slowing economy. For the week, the benchmark Shanghai Composite Index added 1.77%, and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, rose 2.11%. Most of the weekly advance occurred on Friday, after Beijing announced that it would roll out a plan to boost disposable income this year and in 2020 to spur private consumption, Reuters reported. The statement from the National Development and Reform Commission, China’s state planning agency, included few details, yet raised hopes that China’s government would step up efforts to stimulate domestic demand. A spate of solid earnings reports from some of China’s biggest companies also lifted sentiment.
  • All the main indicators of Chinese economic growth weakened more than expected by consensus in July. Industrial production growth fell to just 4.8 % year-on-year, the lowest on record except for a few New Year-distorted months back in the early 2000s. Retail sales growth fell from 9.8 % year-on-year in June to 7.6 %, a decline that can be only partly explained by the fading of the boost from rebates on older cars ahead of implementation of new emissions rules. Finally, fixed investment growth disappointed by falling from 6.3 % to 5.2 % in ordinary year-on-year terms. The overall picture is that the surprising growth uptick in June has been eliminated and that the direction continues to be downward. Looking at the sub-components of fixed investment reveals that the authorities’ preferred way of stimulating growth (infrastructure and property investments) both slowed in July. Only the industry’s fixed investment growth increased, but that is unlikely to last amid the ongoing trade war. This holds despite Trump’s decision to delay (not abolish) the imposition of import tariffs on some Chinese goods.
  • In China there are no market movers this week.

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