Economic Outlook – 19 August 2018


  • US Consumer Prices matched expectations and edged up 0.2% in July. The monthly gain kept the headline index at a 2.9% increase on a year basis, the fastest pace in six years. Energy prices were a drag on the headline figure and dropped 0.5% for the month, mostly the result of lower gas prices. Excluding food and energy prices, the core index also rose 0.2% during the month. Before rounding however, core prices came in on the high side of expectations and grew 0.24%, pushing prices 2.4% higher compared with last year. Much of the monthly increase in core prices was owed to a 0.3% gain in services, notably in housing, which also rose 0.3%.
  • US retailers reported a 0.5% monthly sales increase in July, led by surging spending at food service and drinking places. The year-over-year pace of sales at restaurants and bars has sharply accelerated, and the three-month average annualised pace is the highest on record dating back to 1992. The strength in retail sales extended beyond this sector, as clothing sales, non-store retailers and even department stores posted strong starts to the third quarter. After a weak Q1 in which real personal consumption rose at just a 0.5% annualised pace, consumer spending bounced back to a robust 4% pace in Q2.
  • US industrial production expanded a scant 0.1% in July, which missed the mark of the 0.3% increase expected by markets. The miss can largely be traced to a 0.5% decline in the volatile utilities component, however, and an upward revision to June more than made up for the shortfall. Mining output dipped, the first monthly drop in more than a year, but the manufacturing sector showed no sign of slowing down as factory output rose 0.3% in July and 3.% over the year. While the outlook for the industrial sector remains hazy amid trade war concerns, the near-term trend in industrial production remains solidly upward, with production over the past year notching the biggest one-year gain since early 2011.
  • Total housing starts increased to a 1.168-million unit pace, rising 0.9% in July. While new units started in July came in below expectations for the second straight month, starts are still running 6.2% ahead of last year on a year-to-date basis. Despite the number of starts falling short of expectations, builder confidence remains high. That builders continue to express such a high degree of confidence in current market conditions supports the stance that housing starts will be stronger in coming months.
  • Data on capital flows garnered some attention this week amid emerging market fears centred on Turkey. Holdings of US Treasuries fell significantly in Turkey and Russia through the first half of the year. This multi-year low in June potentially signals that these countries had fewer foreign exchange reserves on hand to grapple with the softness in their currencies that has occurred over the past few weeks. For the U.S. Treasury market as a whole, however, Russia and Turkey are relatively small players compared to other foreign holders such as China, which holds more than $1 trillion in US Treasuries.
  • Most of the major indexes closed higher for the week, as large declines on Wednesday were offset by a rally on Thursday. The technology-heavy Nasdaq Composite Index lagged and recorded a modest loss. Consumer staples shares led gains in the S&P 500 Index for the week, but real estate and utilities shares also outperformed. Energy stocks retreated with oil prices and performed worst, hurt by a rise in US inventories. The outperformance of the typically defensive consumer staples, real estate, and utilities sectors helped value stocks outperform growth stocks for the week; growth stocks remained far ahead for the year to date, however.
  • The favourable economic signals failed to spark an increase in longer-term Treasury yields, due in part to a countervailing “safe haven” bid that resulted from concerns about the unstable global economic situation. The strong economic data did lead to a firmer tone in the investment-grade corporate bond market, however. After a slow start to the week, an active primary calendar caused month-to-date issuance to exceed the total volume expected for all of August.
  • On Wednesday, the FOMC minutes from the meeting earlier in August will be made available. As the Fed seems to be on track to deliver two more hikes this year, the focus is on any discussions on how long to continue shrinking the balance sheet and the future monetary framework.
  • On Thursday, the Markit PMIs are due out, which will provide more information about the current growth momentum.


  • Italy’s FTSE MIB Index fell dramatically, posting a weekly decline of about 3.6%. Early in the week, the plunge in Turkey’s currency continued to weigh on Italian bank shares. The country’s ongoing budget issues and fragile banking system were likely concerns for investors. Late in the week, a brief fall of about 10% in the Turkish lira pushed Italian bank shares even lower. The FTSE MIB Index was closed on Wednesday 15 August, to mark the Assumption of Mary feast day.
  • Key European indexes ended the week lower amid concerns about the health of Italian banks, Turkey’s currency crisis, and uncertainty about global trade policies. Mixed corporate earnings results also weighed on some sectors. The German DAX 30, which is highly reactive to global trade uncertainty, fell nearly 2% for the week. The pan-European STOXX 600 Index ended the week with a loss of about 1.5%. Midweek, the index posted its biggest one-day decline since late June, as uncertainty about Turkey apparently worried investors. Some of Europe’s biggest lenders to Turkey include Italian bank UniCredit, Spanish bank BBVA, and French bank BNP Paribas. Spain’s IBEX 35 and France’s CAC 40 ended the week lower, as banks and industrial shares under-performed.
  • The key data release is the PMI figures due for release on Thursday. After reaching an all-time high of 60.6 in December 2017, manufacturing PMI fell for six consecutive months to 54.9 in June 2018. The July figure reported a small increase to 55.1 and manufacturing PMI is expected to stabilise around this level for now. This is supported by the rebound in August ZEW economic expectations and the trade deal between the EU and US in July has also diminished the immediate threat of tariff measures.


  • UK CPI inflation increased to 2.5% year-on-year in July from 2.4% in June. This was in line with the market consensus, while the Bank of England (BoE) had expected 2.6%. Core inflation was unchanged at 1.9%, as expected by the market. Headline inflation was buoyed by a rise in energy price inflation to 9.3% in July from 8.7% in June. Cost pressure seems to have picked up again from the end of Q1, but is still considerably lower than at its peak in January last year. In July, producer price inflation (PPI input) increased to 10.9% year-on-year, up from 10.3% in June. PPI output inflation, however, eased a bit to 3.1% in July from 3.3% in June.
  • UK labour market numbers came in slightly mixed. The unemployment rate in the three months to June fell to 4% from 4.2% in May. This was lower than both the Bank of England’s (BoE) expectation (4.1%) and the market consensus (4.2%). However, employment growth in June was weaker than expected, at +42k vs. 93k expected. So, the reason for the marked fall in unemployment in June was a sizeable drop of some 23k in the labour force. The more timely jobless claims increased by 6.2k in July after increasing 9k in June (revised from 7.8k). Total pay growth (average weekly earnings) eased to 2.4% in the three months to June from 2.5% in May. This was below the market consensus for an unchanged reading.
  • In the UK, there are no market movers this week.


  • All three main monthly Chinese activity indicators were weak in July and weaker than expected by consensus. Retail sales growth fell from 9% year-on-year in June to 8.8% in July. Industrial production growth was steady at 6% in July, but that follows a marked decline in June. Finally, growth of fixed assets investments slowed to 3% in ordinary year-on-year terms, the lowest on record. Thus, the past deleveraging efforts and trade tensions are still impacting negatively.
  • The tide of economic policies has changed recently with clear signals from China’s authorities that both fiscal and monetary policies are being loosened rather than tightened now. However, there are no signs yet of the stimuli kicking in. Investments in infrastructure projects should be among the first indicators to point upwards again, but growth slowed to below zero in July. Meanwhile, property investment growth, a little surprisingly, increased again in July even though the authorities still seem to be in tightening mode with respect to the property market.
  • The Chinese yuan declined for the tenth-straight week, extending its record-long losing streak, but news that the US and China will rekindle trade talks lifted expectations that selling pressure on the currency would ease. After hitting a 20-month low midweek, the offshore yuan (which is traded by international investors outside the mainland) rallied Thursday after China said that it would send a delegation led by its vice minister of commerce to meet with US Treasury Undersecretary David Malpass later this month. The upcoming talks mark the first face-to-face meeting for US and Chinese officials in over two months and offer the possibility of a breakthrough in the current trade dispute.
  • In China, there are no market movers this week.


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