Economic Outlook – 2 July 2017

US

• The US economy expanded 1.4% in the first quarter of the year, which was a larger-than-expected upgrade in the final look at GDP this week. The improvement was largely on the personal consumption line, which actually rose 1.1% in Q1, much stronger than the 0.3% first estimated. Still somewhat soft relative to recent performance, the consumption portion of the US economy had a decent start to the year, and this could be a confirmation that Q2 GDP will get a solid boost from consumption.
• The Conference Board’s Survey of Consumer Confidence in June confirmed an upbeat assessment of the present economic situation. The measure has surged over the past six months, hitting a cycle high in March. Headline consumer confidence gave back some of that gain in subsequent months on diminishing strength in the expectations component. Consumers’ assessment of their current economic situation has continued its steady climb upward. Progress toward the policy objectives that had boosted expectations in the first months of the new administration has likely been slower than some anticipated.
• Personal income rose another 0.4% in May, besting expectations of 0.3%. Disposable income was up a strong 0.5%, and was even stronger in real terms as the lack of price pressures, particularly at the gas pump, left more money in consumers’ pocket in May. The PCE deflator declined 0.1% on the month, continuing a string of soft inflation prints. The PCE deflator, followed closely by the Fed, and the year-over-year increase of 1.4% in both headline and core PCE, is quite far from the FOMC target of 2.0%.
• Manufacturing activity has yet to ramp up significantly, as had been suggested by sentiment measures from the sector early in the year. To be sure, factories are faring far better than this time last year and continue to pull themselves out of the rout that had plagued the sector for nearly two years. Continued uncertainty surrounding trade, health care and tax reform appears to have diminished expectations in the business sector, which appear to be holding off investment spending, which weighs on demand from US factories.
• Comments from FED speakers suggest that further monetary policy tightening agenda remain on the table this year. Fed chair Janet Yellen reiterated that “it will be appropriate to raise interest rates very gradually” and the stockpile of bonds would be shrunk “gradually and predictably”. In addition, vice chair Stanley Fischer said there would be “notable uptick” in risk appetite but “has not lead to increase leverage across financial system”, suggesting that risks remained well balanced at this juncture.
• The most important data release this coming week will be the labour market report for June, due to be released on Friday. Progress in the labour market slowed somewhat in the first five months of 2017 compared to 2016, with an average monthly increase in non-farm payroll of 162,000 compared to 187,000 in 2016. Whether or not this is a permanent slowdown in job growth remains to be seen. However, there could be a decent number for June as the ADP employment figures showed stronger job creation in May than the non-farm payroll and there is a tendency for the numbers to correct for differences.
• On Monday, ISM manufacturing for June is due to be released. Manufacturing PMI suggests further decreases in ISM, which is also still very high. Thus, ISM manufacturing is expected to fall to 54.0 in June.
• The minutes from the FOMC meeting in June are due out on Wednesday. These deserve attention as they may shed some light on when the Fed is planning to start quantitative tightening.

China

• China’s industrial profit quickened to +16.7% year-on-year in May followed a 14.0% year-on-year increase in April. Profit increase to 626 billion yuan due to improving sales and better investment returns despite slower factory gate inflation, statement from the National Bureau of Statistics showed.
• PMI will be released next week and it is expected to remain largely unchanged after two months of significant falls. The general trend is down, however, so it is possible that there will be a further drop in June. Friday’s currency reserves data will presumably also show little change, as there has been no notable intervention in June.

UK

• On Wednesday service PMI for June is due out. Given the small decline in the confidence indicator for the service, there could be a small decline in the service PMI as well. A fall to 53.2 from 53.8 is possible.
• UK manufacturing production for May is due to be released on Friday. Manufacturing production been weak recently, which is a cause for concern given that there could be headwinds for the service sector due to the falling real wages.
• These headwinds are already beginning to make their way into the UK GDP growth, according to the NIESR GDP estimate, which is usually a good indicator of actual GDP growth. On Friday, the June numbers are due out and short of major surprises, GDP growth is likely to have remained weak in Q2.

EU

• The eurozone Economic Sentiment Indicator (ESI) jumped to a nearly 10-year high of 111.1 in June from 109.2 in May, with optimism on display in all sectors of the economy, according to a report by the European Commission. The ESI reached 111.8 in August 2007, just before the global financial crisis began to intensify.
• Mario Draghi signalled that the ECB is ready to pursue a somewhat less expansionary monetary policy. In his remarks he discussed in detail the reasons why inflation has fallen short of expectations although the economic recovery continues (e.g. external price shocks, labour market slack). A new element was his drawing the conclusion that these factors are only “temporary”, so that the ECB Council could “look through” them.
• EU unemployment rate for May will be released on Monday. The figure declined further to 9.3% in April, which is the lowest level since 2009. However, the actual unemployment rate is still above the estimate of its structural level (NAIRU) and wage growth in the euro area remains very subdued. This reflects a large amount of labour market slack, which the ECB has argued amounts to around 18% of the extended labour force. Hence, although the actual unemployment rate is set to continue to decline in coming months it is likely to take some time before wage growth picks up.
• On Wednesday, the euro area retail sales figures for May are due to be released. In monthly terms, retail sales have increased for four consecutive months, implying that the yearly growth rate remains at a fairly high level. This is consistent with the low unemployment rate and high consumer confidence in the euro area but in contrast with the decline in real wage growth, which turned negative in Q1 due to a sharp rise in inflation.

Sources: Wells Fargo, MFS Investment Management, Danske Bank, HongLeong Bank, Commerzbank