Economic Outlook – 20 August 2017

US

• US retail sales rose 0.6% to kick off the third quarter, topping expectations for a 0.3% gain. The strength in retail sales was broad based, with motor vehicle and parts dealers’ sales increasing 1.2% and building material and garden equipment and supplies dealers’ sales increasing 1.2% after registering a 1.1% gain in June. Even department stores sales, a sector that has been negatively affected by the eruption of online sales, posted a strong 1.0% increase for the month.
• Despite a robust reading on home-builder confidence on Tuesday, US housing starts data released the next day for July were a disappointment. Starts declined 4.8% in July and have fallen in five of the past seven months. However, much of the weakness has been in the multifamily component, which should not be surprising given slowing fundamentals. Year-to-date, single-family starts are up 11.0% compared to the first seven months of last year. However, single-family starts still have not risen nearly as much as builder confidence has, reflecting the greater difficulty builders are having obtaining lots and labor relative to past cycles.
• US industrial production growth in July was underwhelming. Manufacturing output, which comprises three quarters of total industrial output, fell 0.1% on the month. The automobile sector was a key driver of the miss, with monthly output declining 3.6%. Seasonal factors can sometimes wreak havoc on the July figures in this sector due to summer shutdowns at auto plants, but the fourth decline in five months suggests a genuine downward trend in production rather than just seasonal noise. Through the monthly volatility, manufacturing production as a whole is up 1.3% on a year-over-year basis, consistent with the consensus for modest but steady growth in the sector more broadly.
• FOMC minutes took centre stage, as always, even though there were little surprises. Policy makers voted unanimously to keep rates unchanged at the July meeting and reiterated concerns over low inflation, which further dented expectations for further rate, hike this year. There was also little to suggest a derail in the Fed tapering plans, with an announcement expected at the upcoming September FOMC meeting. Policy makers were divided on announcing balance sheet reduction plan at the July meeting.
• After several high-profile defections of corporate CEOs from two business advisory councils, President Trump this week dissolved the councils. Friction between the business leaders and the president came to a head in the wake of a Trump press conference on Tuesday in which the president blamed both sides for violence at a rally in Charlottesville, Virginia last weekend rather than single out racist hate groups.
• President Trump signed an order this week directing the Office of the United States Trade Representative to conduct an investigation into China’s trade practices with regard to intellectual property theft and the forced transfer of technology in order to be granted access to Chinese markets. If China is found to be in violation, Trump can skirt the World Trade Organisation and order tariffs under the Trade Act of 1974. Meanwhile, NAFTA negotiations are set to begin this week between the United States, Canada and Mexico. US Trade Representative Robert Lighthizer said the US is not looking for mere tweaks in the existing treaty, but substantial changes that assure balance and reciprocity.
• The Markit PMIs for both manufacturing and service are due for release. In July, manufacturing PMI took a large jump to 53.3, up from 52.0 in June, ending a five month streak of declines. The August figure is expected to remain around the 53.3 level. Service PMIs have shown a rising trend over the past four months, climbing from 52.8 in March to 54.7 in July. The August figure is expected to continue upwards to 55.0.
• The key event next week is the annual Jackson Hole Symposium, with speeches by central bank governors, academics and financial market participants. This year’s title is ‘Fostering a Dynamic Global Economy’. The programme is not public yet but ECB President Mario Draghi will be among the speakers. With regard to Fed signals, no surprise are expected. This week’s minutes from the latest FOMC meeting confirmed that the Fed would make an announcement on balance sheet reduction relatively soon. Any signals at Jackson Hole are likely to mirror comments earlier this week by Vice-President Bill Dudley (voting, dove), who is at the centre of decision making by the Board. He said, “I would be in favour of another rate hike this year” if the economy holds up. On the balance sheet reduction, he said, “In the last FOMC statement, we said that we expected this to happen relatively soon. So, I expect it to happen relatively soon”. The signals are generally in line with the view that the Fed will make an announcement on the balance sheet reduction in September and make another rate hike in December.

UK

• UK labour market numbers were largely in line with the Bank of England’s (BoE) expectation. The unemployment rate for the three months to June fell to 4.4%, from 4.5% in May. The consensus expectation was for the unemployment rate to stay unchanged, at 4.5%. Average weekly earnings, both total pay and regular pay (excluding bonuses), increased by 2.1% year-on-year in June. That was up from 1.9% (revised from 1.8%) in May for total pay and up from 2.0% for regular pay. The BoE had expected total pay growth to fall slightly, to 1.7%, while it expected regular pay growth to increase to 2.2%. The consensus expectation was for wage growth rates to remain unchanged from May. According to the ONS, employment grew by 125k in the three months to June, while the labour force increased by 68k, reducing the number of unemployed by 57k compared with the previous three-month period. Hence, the unemployment rate fell to 4.4%. The employment rate in June (people aged from 16 to 64 who were in work) was 75.1%, which is the highest since comparable records began in 1971. The unemployment rate of 4.4% is in line with the BoE’s estimate for the equilibrium rate of unemployment.
• After being criticised by European Union negotiators for months, the British government published several position papers this week, laying out detailed viewpoints on border issues between Northern Ireland and the Republic of Ireland as well as on the need for a transitional customs union following Brexit. British negotiators are trying to meet the EU demand that sufficient progress be made on a series of issues, including the Irish border, the rights of EU citizens living in the United Kingdom and the financial settlement, before negotiations on future relations between the UK and EU are taken up.
• The second GDP estimate for Q2, due for release on Thursday. The first estimate showed sluggish quarterly growth of 0.3%, driven primarily by the service sector, while construction and manufacturing dragged. However, there is speculation that the second estimate will revise the figure upwards.

China

• China data turned out softer in July, reflecting some payback from June’s solid numbers that affirmed that growth is poised to take on a more moderate path in the second half of 2017. Retail sales grew at a slower pace of 10.4% year-on-year in July, while industrial production growth was much softer at 6.4% compared to 7.6% in June. Meanwhile, growth of investment in fixed assets slowed to 8.3% in the January to July period compared to the same period a year before, pulling back from 8.6% growth recorded between January and June.
• There are no key movers in China next week.

EU

• Eurozone Q2 GDP sustained a 0.6% quarter-on-quarter growth and staged a surprised pick-up to 2.2% year-on-year, thanks to continued growth in Germany, and a pick-up in Spain benefitting from an improving labour market and exports. While growth outlook is improving, below target inflation will continue to constrain ECB on any policy moves in the near term. ECB minutes revealed that policy makers were cautious, expressing concern over an overshooting EUR that could derail growth and inflation. There was however no further insights on QE tapering plans from the minutes, other than the “post-summer” remark given by President Draghi after the previous ECB meeting.
• The main release is the German ZEW expectation due for release on Tuesday. In May, the ZEW expectation reached 20.6, the highest level since August 2015, but it has since slid down to 17.5 in July. While the IFO expectations continue upwards, the latest German services and manufacturing PMI have shown declines in both current activity and leading indicators. Together with the appreciating euro, further downward pressure on the ZEW is likely.
• On Wednesday, the PMI figures are due for release. After a 10-month streak of rising manufacturing PMI in the euro area, we saw a decline from 57.4 in June, to 56.6 in July. There were declines in both activity and the leading order-inventory indicator. The appreciating euro is also likely to become a headwind to export orders, so manufacturing PMI is likely to fall to 56.2. The services PMI remained at 55.4 between June and July but has also started to show some exhaustion since April. While services PMI is likely to show a small decline to 55.2, PMIs remain at very strong levels, still pointing towards solid growth in Q3.
• On Wednesday, euro area consumer confidence is due. In July, consumer confidence saw a small fall to -1.7, from -1.3 in June, which was its highest level since 2001. Despite the unemployment rate continue to decline, consumer confidence is expected to remain roughly stable around the current high level at -1.8 in August.

Sources: Wells Fargo, MFS Investment Management, HongLeong Bank, Handelsbanken