Economic Outlook – 19 November 2017


  • Three of the leading US inflation indicators, the consumer price index, the producer price index and the import price index, collectively showed a firming of price growth in October. Although the headline CPI decelerated slightly in October, the slowdown reflected a decline in energy prices as the supply disruptions surrounding Hurricanes Harvey and Irma abated. Excluding food and energy, inflation was noticeably stronger. Core services have been the primary source of inflation weakness this year, but services prices rose 0.3% in the month, while core goods prices also posted a rare increase. For the second consecutive month, the PPI for final demand beat expectations, rising 0.4% in October. Core producer prices, excluding energy, food and trade services, reached a fresh record high for this relatively new series. In addition, the import price index showed the strongest rate of non-fuel import price inflation in more than five years. On balance, inflation has not rebounded sharply from its recent slowdown, but neither has it continued to fall.
  • US Industrial production jumped 0.9% in October, led by a 1.3% surge in manufacturing output, which matched the largest monthly increase since 2010. The factory sector has been held back over the past few months as Hurricanes Harvey and Irma knocked some capacity offline that has only now begun to swing back in full force. The Federal Reserve, which produces the industrial production statistics, estimates that, excluding the effects of the hurricanes, output advanced just 0.3 % for the total index and 0.2% for manufacturing.
  • US Retail sales rose 0.2% in October, and September’s surge was revised higher to 1.9%. This was stronger than expected, as consensus had penciled in a flat month of sales as the boost from gas prices, building supplies and auto sales associated with the hurricanes eased from September. Control group sales, which exclude autos, food, gasoline and building materials, were less impacted by the hurricanes in September, and were up a stronger 0.3% in October. Over the past year, retail sales are up 4.6%, with continued strength in building supplies and non-store retailers.
  • US Housing starts rose 13.7% in October, halting a streak of three consecutive monthly declines and ending the week of data on a high note. The volatile multifamily component surged 36.8%, overstating some of the headline strength, but single-family starts posted a 5.3% increase as well. Year-to-date, single-family starts have risen 8.4%.
  • Yields on longer-term US securities have declined since last week. While a pullback in oil prices from their recent peak was partly to blame, much of the 5bps pare- back in the 10-year Treasury bond yield was related to increased investor demand for safe assets. There was also a sell-off in the junk bond market, widening the spread.
  • The US House of Representatives passed its version of the Republican tax bill by a vote of 227-205, with 13 Northeast Republicans, angered by the loss of tax deductibility of state and local taxes, voting no, along with all the Democrats. The Senate Finance Committee passed its version of the bill late Thursday, with the full Senate expected to vote after the Thanksgiving holiday. If the Senate passes its version, the differences in the two bills could be ironed out in a conference committee before a final vote. GOP leaders hope to complete the process by Christmas, though it could linger into early 2018 if the two versions of the bill cannot be reconciled quickly.
  • Wednesday brings FOMC minutes from the October/November meeting and core CAPEX orders for October. The last FOMC meeting revealed no new information and no new insights are expected from the minutes either. Looking at core CAPEX, it has been trending upwards since the spring in line with regional CAPEX plan surveys. These suggest core CAPEX orders growth of around 1.0% in October but the monthly changes are very volatile.
  • US Markit PMIs for November are due for release on Friday. The large gap between Markit and ISM manufacturing narrowed in October and this trend is likely to continue (driven by both variables). Hence, Markit PMI is expected to rise to 55.6.


  • The UK Office for National Statistics said its latest data showed that employment fell for the first time in nearly two years in the three months through September. Inflation-adjusted wages also fell for the seventh consecutive month in September. The British economy continued to show signs of slowing as uncertainty about the outcome of Brexit negotiations seemingly hurt both business and consumer sentiment.
  • UK prime minister Theresa May’s continued leadership of the Conservative Party was called into question last weekend as the Sunday Times reported that 40 members of her party have agreed to sign a letter of no confidence. Forty-eight signatures are needed to spark a leadership vote. May’s grip on power remains tenuous, but with no obvious replacement waiting in the wings she may be able to hang on to her post as the Brexit process unfolds.
  • The UK Chancellor, Philip Hammond, will deliver his second budget of the year on Wednesday, November 22. He will start his speech at around 12:30pm and continue for about an hour, followed by an all-day debate in Parliament. The Autumn Budget will be the second budget to be delivered this year, and will outline the government’s proposed tax changes and spending plans in response to forecasts from the Office for Budget Responsibility (OBR). During the 2016 Autumn Statement, the Chancellor announced that the annual Budget would now take place in the autumn, as opposed to spring. The Spring Statement will give an update and respond to the forecast from the OBR, but will be no major fiscal event. In March this year, the Budget Statement was more or less a non-event, and no big changes are expected this time either. Public sector borrowing was expected to fall over the next five years, and therefore continue to act as a drag on GDP growth.


  • European equities ended the week lower, pressured, in part, by disappointing corporate earnings and euro strengthening. Europe’s major indexes began the week in the red, briefly rose midweek on the back of some encouraging economic data, but then receded again by the end of the week. The euro’s strength, coupled with the continuation of the “sell the winners” narrative, contributed to the underperformance, particularly in Germany and Italy. A strengthening UK pound hurt the shares of the blue chip multinationals listed on the FTSE 100, which ended the week down. The STOXX Europe 600 Index and Germany’s commodities-heavy DAX 30 also ended lower.
  • Preliminary print showed Eurozone GDP sustained a 0.6% quarter-on-quarter increase in Q3, just a tad shy of the 0.7% quarter-on-quarter increase in Q2, and growth indeed accelerated to 2.5% on year-on-year terms, driven by hefty improvement in Germany (+2.3% vs +1.0%). ZEW survey also showed increased optimism while industrial production continued to expand albeit more moderately.
  • Europe’s economic recovery is robust and the fall in unemployment has been remarkable, European Central Bank president Mario Draghi said on Friday, but inflation is not at a point where it can be self-sustaining without stimulus.
  • Euro PMI figures are due for release on Thursday. Manufacturing PMI has been rising steadily throughout 2017 and reached 58.5 in October from 58.1 in September. It is now strikingly close to the 59.0 post-crisis peak reached in February 2011. Service PMIs also remain strong but after an increase in September to 55.8, Service PMI dropped to 55.0 in October. While survey expectations indicators point towards further increases with rising consumer confidence and high Ifo and ZEW expectations, only a moderate increase is expected as the euro appreciation in 2017 could have started to act as a drag on export orders.
  • The ECB minutes from the October meeting are also due for release on Thursday. At the October meeting, the ECB extended its QE programme for another nine months in 2018 but scaled down the monthly purchases to EUR 30 billion. In the minutes, focus will be on the Governing Council’s discussions regarding whether to put a definite end date to the QE programme, which might give insights regarding the likelihood of a possible tapering starting in Q4 18. In addition, it will be interesting to see how the governing council thinks about the economic development in its downscaling decision, as the inflation outlook still remains subdued.


  • Industrial production growth slowed a little more than expected in October as production related to construction and production in sectors affected by the ongoing crack down on pollution fell. Retail sales growth fell markedly despite that it was expected to have been buoyed by the mid-Autumn holidays where retail sales usually are strong, however, they fell in October this year compared to September last year. Investment growth also fell, driven by slowing property investment growth. Property sales also slowed further, underlining that the property boom is now finally fading as the many measures taken to dampen the property market are now kicking in.
  • There are no market movers in China this week.


Sources: MFS Investment Management, Danske Bank, T. Rowe Price, Wells Fargo, Standard Life Investments