Economic Outlook – 20 October 2019


  • Personal consumption, which comprises roughly 70% of overall US GDP, has proved remarkably resilient under the cloud of trade uncertainty and the darkening economic picture overseas. However, retail sales fell in September for the first time in seven months. The 0.3% decline in headline sales was dragged down by a sharp drop in auto sales, but the flat reading for control group sales (versus consensus expectations of a 0.3% increase) is one of the first concrete signs of a crack in the consumer sector.
  • Leading indicators of consumer spending have been pointing to a slowdown (the Conference Board and University of Michigan surveys of consumer confidence have stalled and the pace of job growth has slowed) being borne out in the hard data. Still, PCE is on track for a solid 2.4% rise in Q3.
  • The manufacturing sector bore the brunt of the slowdown much sooner, and more deeply, and is showing minimal signs of picking up. Overall industrial and manufacturing production missed expectations in September, falling 0.4% and 0.5%, respectively. The GM strike was behind the 4.2% drop in autos and parts output, but even excluding autos, output was still down on the month and manufacturing has posted six monthly declines this year. GM and the UAW have reached a tentative agreement, but the nature of the approval process and the reporting calendar suggests manufacturing data will still see a major strike effect in October. That said, the biggest threat to the factory sector comes not from Detroit, but rather from overseas and from the political and policy maelstrom in Washington, D.C. Markets bounced on the “phase one” trade deal announced last Friday, but the details remain highly vague, and no major progress will be made until the Asia-Pacific Economic Cooperation (APEC) meeting in Chile in mid-November, if not even later.
  • Housing, consistently the laggard in this expansion, is now arguably the strongest sector. Residential investment is nearly certain to positively contribute to GDP growth in Q3 for the first time in six quarters. The headline drop in housing starts in September was entirely due to the wildly volatile apartment data (which is in fact topping out a bit) but single-family starts rose for the fourth consecutive month, and the NAHB survey, a measure of homebuilder confidence, jumped to a 20-month high.
  • The prospect of the economic malaise spreading from manufacturing to the consumer is a major driver of the 80% probability the market is pricing in for an October Fed rate cut. With the pre-FOMC meeting blackout period already started, the lack of a pushback on market expectations from Fed speakers gives us increasing confidence that the FOMC will cut the fed funds rate by 25 bps at its 29 October meeting.
  • The US and Turkey agreed to a five-day Turkish ceasefire on Thursday, only days after the country’s forces launched an offensive in northern Syria. However, fighting reportedly continued on Friday in the northeast Syrian border town of Ras al-Ain as Turkey continued to pound civilian areas and restrict medical aid in the middle of its fight with Kurdish forces. Earlier in the week, US President Donald Trump signed an executive order sanctioning Turkish officials, hiking tariffs up to 50% on Turkish steel and halting trade negotiations with the country, but has since cancelled those levies. The retaliatory measures followed the recent withdrawal of US troops from Syria’s northern border with Turkey, which enabled Turkish forces to launch an offensive against Kurdish forces in Syria.
  • Most of the major indexes recorded modest gains as investors welcomed some upside surprises in third-quarter earnings reports. The gains brought the large-cap S&P 500 Index within 0.65% of its record high on Thursday morning before falling back to end the week. The small-cap Russell 2000 Index outperformed, although it remained in correction territory, or down over 10% from its August 2018 peak. Health care shares outperformed within the S&P 500, helped by gains in UnitedHealth Group after the company reported better-than-expected revenues on Tuesday and raised profit guidance for the year. Technology shares underperformed, weighed down by a revenue miss from IBM.
  • Stocks recorded the bulk of their gains on Tuesday, which marked the unofficial start of earnings season on Wall Street (50 S&P 500 companies were expected to report third-quarter results during the week, according to Thomson Reuters. Earnings from JPMorgan Chase and Goldman Sachs surprised on the upside, and investors were encouraged by positive signals from UnitedHealth and Johnson & Johnson) although shares in the latter fell back sharply on Friday on news that the company was recalling baby powder containing trace amounts of asbestos. On Wednesday evening, Netflix reported a bigger-than-expected gain in international subscriptions, leading to a spike in the stock, which has a large weight in major indices, when trading opened Thursday. Despite the upside surprises, analysts polled by FactSet expect overall earnings for the S&P 500 to have declined slightly for the third consecutive quarter.
  • The yield on the benchmark 10-year Treasury note ended slightly lower for the week. The safe-haven bid for Treasuries led to volatility as news arrived about a revised Brexit agreement, sending the British pound sharply higher. Subsequent reports about the agreement and its waning likelihood of passage in the UK Parliament, coupled with the weak US retail sales data, caused intraday yields to fluctuate throughout the week.
  • On Thursday, preliminary Markit PMIs for October are released. The September PMIs sent a signal of modest GDP growth. The Empire manufacturing index and the Markit PMI orders-inventory balance suggest stronger PMI manufacturing in October, but the global slowdown points to a weaker print.


  • Negotiators from the United Kingdom and European Union drafted a Brexit deal in last-minute talks on Thursday, although British lawmakers asked for an extension. EU leaders reviewed the withdrawal agreement at their summit on Thursday and Friday. It is believed that the deal will include a provision whereby Northern Ireland will remain part of the UK’s customs territory and be the entry point into the EU’s single market (with no regulatory or customs checks at the border between the Republic of Ireland and Northern Ireland). However, the Northern Irish Democratic Unionist Party said it would not support the deal, which puts its passage in jeopardy.
  • British shoppers grew more cautious about their spending in the three months to September despite rising wages, official figures showed on Thursday, raising concerns about the health of the economy in the run-up to Brexit. Consumer spending has been the biggest driver of British economic growth since June 2016’s referendum to leave the European Union, but there have been increasing signs that this is starting to soften. Looking at the third quarter as a whole, which strips out monthly volatility, quarterly sales growth held steady at 0.6% while the annual pace of expansion dropped to 3.1% from 3.6% in the second quarter, the weakest since the late 2018.
  • British companies cut spending on marketing for the first time in seven years during the third quarter, as a rocky Brexit pushed businesses to keep a tight lid on costs, a survey showed. The IPA Bellwether, conducted by IHS Markit, and based on a questionnaire survey of around 300 UK-based companies, stuck to its forecast and said it remains cautious towards 2019. It expects a 1.1% annual increase in ad-spend over the year.
  • There are no market movers in the UK this week.


  • German Chancellor Angela Merkel’s government cut its 2020 growth forecast as Europe’s biggest economy expects the impact of weakening global demand, Brexit and lingering trade disputes to carry over into next year. Germany’s economic ministry expects the country’s gross domestic product to expand by 1.0% next year, compared with an earlier expectation of a 1.5% increase. While the outlook is an improvement from this year’s 0.5% GDP growth projection, the pace is a notably slower than in previous years.
  • Equity markets in Europe were mixed after the UK and the European Union struck a tentative deal, agreeing to new terms for the UK to exit the EU. Gains were muted amid concerns about UK Prime Minster Boris Johnson’s ability to convince Parliament to approve the deal. Similarly, news of a sharp contraction in the Chinese economy pressured stocks, setting off a fresh round of worries about slowing global growth. The pan-European STOXX Europe 600 Index was flat, the exporter-heavy German DAX was up 1.4%,.
  • PMI figures from the euro area and Germany. The current manufacturing recession is expected to drag into Q4 19, as trade war effects continue to work their way through the supply chain and since order-inventory dynamics are weighing on production.
  • Later on Thursday, the ECB will present the outcome of its monetary policy discussions. No policy changes are expected from the ECB at Draghi’s final meeting before leaving office on 31 October. The cacophony from governing council members will receive attention in the Q&A amid declining inflation expectations.


  • GDP growth slowed more than expected by consensus, from 6.2% year-on-year in Q2 to 6.0% in Q3, as slowing global demand and especially the trade war continued to hurt China’s economy. This brings GDP growth to the lower end of the official GDP growth target, which is between 6.0% and 6.5%. The Q3 outcome is still set to decline from last year’s 6.6% to 6.1% this year and 5.7% in 2020.
  • Stocks in China posted a weekly loss after the country’s third-quarter economic growth missed forecasts, underscoring the continued toll of the US trade battle and raising the recession risk for the global economy. For the week, the benchmark Shanghai Composite Index fell 1.2% and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, shed 1.1%. Both gauges recorded their biggest one-day drops on Friday, after China reported that its GDP rose 6.0% from July to September from a year earlier, missing the consensus 6.1% Bloomberg estimate.
  • China wants another round of talks before signing what President Trump called the first phase of a trade deal between the two nations. While details of the additional trade talks appear unclear, it is possible they could happen before the end of October. As part of the deal proposal reached last week, China will address intellectual property concerns raised by the United States and buy $40 billion to $50 billion worth of US agricultural products. In exchange, the US has agreed to suspend a tariff increase on at least $250 billion of Chinese goods, from 25% to 30%. A tariff hike implemented in September was not rolled back, and plans for another hike just before the Christmas holiday on 15 December remain in place. China requested that the tariffs end before it signs the deal. The country reported GDP growth of 6% in the third quarter, which represented its slowest expansion since 1992.
  • Chinese new home prices for September being the main indicator of interest. House price inflation has been running in an interval of 6% to 12% year-on-year for three years now and it is likely stay there for some time. The housing market is one of the pillars underpinning growth amid the headwinds from the trade war that China faces.

Sources: T. Rowe Price, Reuters, MFS Investment Management, Handelsbanken Capital Market, Danske Bank, Wells Fargo.