Economic Outlook – 21 October 2018


  • US retail sales fell short of expectations and rose 0.1% in September, primarily due to slower sales at gas stations and bars and restaurants, which dipped 0.8% and 1.8%, respectively. However, control group sales, which feed into GDP and exclude volatile categories like auto, gas and building materials, came in better than expected, increasing a solid 0.5% during the month.
  • Industrial production rose 0.3% in September as mining and durable goods orders advanced. Higher oil prices continue to support mining production, while manufacturing activity was bolstered by upticks in motor vehicles and machinery. A robust 8.0% rise in production of business equipment over the past three months bodes well for equipment spending being supportive of real GDP growth in Q3.
  • The Leading Economic Index (LEI) climbed 0.5% higher in September, further evidence that economic growth will remain solid in the final quarter of the year.
  • The underlying strength of the labor market was apparent in the August JOLTS report, which showed a record number of job openings. The rate of workers quitting their jobs also hit the highest point since 2001, which signals that workers have a high degree of confidence in the labor market.
  • The subject of a strengthening labor market was also discussed in the minutes for the most recent September FOMC meeting released last week. The minutes revealed that participants generally anticipate further increases in the federal funds rate if such broadly positive conditions persist. This reaffirms the view that the Fed will cap the year with a rate hike in December, followed by three additional hikes in 2019.
  • Existing homes sales fell short of expectations and dropped 3.4% in September. Housing starts also came in slightly below consensus and declined 5.3% during that same period. Much of that decline occurred in the volatile multifamily segment, while new single-family units were essentially flat. Hurricane Florence may have had an undue influence as the South saw starts drop 13.7% during the month. The NAHB Housing Market Index edged higher, reflecting strong builder confidence surrounding current demand for new homes.
  • The federal government ran a USD 779 billion deficit during 2018, a number just slightly ahead of what was expected given the recent budget deal and tax reform. Tax collections rose just 0.4%, while spending increased 3.2%.
  • In a television interview last week, President Trump called the US Federal Reserve the biggest threat to his presidency because it is raising interest rates too fast despite still-low inflation. Trump has blamed the recent uptick in market volatility on the central bank, saying that while the Fed is independent and he is not blaming Fed chairman Jerome Powell, he is disappointed with his decisions.
  • The Office of the United States Trade Representative informed Congress this week that it will begin trade talks with the EU, the UK and Japan. Under Trade Promotion Authority, Congress grants the executive branch the ability to negotiate trade agreements without interference, though Congress must receive 90 days notice before talks are initiated. The talks are aimed at addressing both tariff and non-tariff barriers and achieving fairer, more balanced trade, according to the USTR. Should the US secure updated trade agreements with these allies, it is expected that they will unite in opposition to China’s trade practices.
  • For the first time in a decade, the US regained the top spot in the World Economic Forum’s index of most competitive economies. Rounding out the top 5 countries in the rankings were Singapore, Germany, Switzerland and Japan. The WEF highlighted the vibrant entrepreneurial culture, competitive labor market and nimble financial system of the United States.
  • The major US stock indexes produced mixed results for the week amid continued volatility as a solid rally on Tuesday was offset by Thursday’s sell-off. Corporate earnings reports were generally positive and helped support stock gains, but global economic and political worries seemed to weigh on the market. Small-cap stocks under-performed the large-cap indexes. Companies representing about 14% of the S&P 500’s market cap reported earnings during the week. Results from Morgan Stanley and Goldman Sachs in the financials sector surpassed analysts’ estimates and helped drive Tuesday’s 2.15% gain in the S&P 500. Technology and related stocks remained under pressure after large sell-offs earlier in the month. Video streaming service Netflix, which was recently moved to the new communication services sector, rallied after announcing better-than-expected subscriber growth but gave back some of the gains.
  • The yield on the benchmark 10-year Treasury note increased to about 3.2% by the end of last week but remained below the seven-year high reached earlier in the month. The banking sector outperformed in the investment-grade corporate bond market, primarily due to a lack of new deals following solid earnings reports. New issuance volumes were subdued, and investors seemed to be focusing on quality bonds while limiting risk exposure. High yield corporate bonds also saw limited supply and generally supportive technical conditions amid inflows to the sector. Energy bonds were resilient despite the price of Brent crude oil falling below USD $80 per barrel for the first time in several weeks due to rising US inventories. Solid demand provided support in the municipal bond market.
  • On Friday, the first estimate of GDP growth in Q3 will be released. Atlanta Fed’s GDPNow says it was 3.9% quarter-on-quarter AR, while the NY Fed Nowcast indicator says it was just 2.2% quarter-on-quarter AR. It will likely be probably slightly higher than 3.0% quarter-on-quarter AR, which is relatively strong, at least in this expansion.
  • As the estimate for PCE core is a rise of 0.1% month-on-month in September, it is likely core PCE rose 1.5% quarter-on-quarter AR but watch out for revisions. The figure will probably not change anything for the Fed, which is on autopilot until it reaches 3.0% in June next year after hikes in both December and March.


  • A free-spending summer by British consumers came to an abrupt end last month with the biggest fall in sales in six months, raising questions about one of the main drivers of the economy ahead of Brexit, official figures showed. Retail sales volumes in September dropped by 0.8% from August (a sharper fall than economists had expected in a Reuters poll) hit by the largest decline in food purchases since October 2015, the Office for National Statistics said.
  • After surprising to the upside in August, UK consumer price inflation was weaker than expected in September. CPI inflation fell to 2.4% in September, from 2.7% in August, and core inflation fell to 1.9%, from 2.1% in August. Consensus expectations were for 2.6% and 2.0% respectively. The downward correction in CPI inflation in September left the rate in line with the Bank of England’s estimate. In August, inflation was pulled higher by some rather volatile components, such as transport, cultural services and clothing. In September, those factors pulled the inflation rate down again. The largest downward contribution in September came from food and non-alcoholic beverages. Producer price inflation increased slightly from August to September with PPI input inflation up to 10.3%, from 9.4% in August (revised from 8.7%). PPI output inflation increased to 3.1% in September, from 2.9% in August.
  • So little progress was made at last week’s summit between EU-27 leaders and the UK prime minister Theresa May that a meeting to advance the negotiations scheduled for November was postponed until December. Additionally, the British prime minister floated the idea of extending to the end of 2021 the transition period following the UK’s formal exit from the European Union on 29 March 2019. This was met with howls of indignation from Brexit supporters in May’s own Conservative Party, citing the lack of new ideas justifying the delay.
  • In the UK there are no market movers this week.


  • Europe’s markets generated mixed performance last week. Buoyed by a strong start to earnings season, corporate earnings reports were less uniformly positive later in the week. Stocks came under some selling pressure as Italy’s standoff with the EU intensified. Other developments, such as the increasing likelihood of a “hard” Brexit and a Spanish supreme court decision requiring banks to pay mortgage tax, also weighed on the markets. Nevertheless, the pan-European STOXX Europe 600 Index posted a modest gain for the week.
  • Spreads between Italian and benchmark German bonds reached their widest levels in five years this week after the EU warned that Italy’s proposed 2019 budget does not conform with rules laid out in the EU’s Stability and Growth Pact, calling the budget’s deviation from the rules “unprecedented.” Brussels gave leaders in Rome until noon on Monday to explain the discrepancies. European Central Bank president Mario Draghi also weighed in on the importance of member states respecting budget rules, saying they are in the interest of all.
  • Spanish banks fell after news that the country’s supreme court ruled that banks, not clients, must pay certain fees on mortgages, reversing a decision from earlier this year. These charges are currently being passed onto clients, costing upward of 1.0% of the mortgage loan. The initial flurry of headlines was overwhelmingly negative, suggesting that banks would need to reimburse clients for fees paid on all outstanding mortgage loans, resulting in a potential total cost to the banking sector of €18 to €20 billion. While the ruling does not specify whether this is the case, most analysts agree that Spanish law allows for past taxes paid to be claimed for the past four years, which suggests that the reimbursement of taxes paid would cover only those funded since 2014. By some estimates, lenders may be forced to retroactively pay between €1.3 and €4.5 billion in refunds.
  • On Wednesday, the euro area flash PMIs for October are due. In September, manufacturing numbers continued this year’s declining trend and fell to 53.2, while services rose slightly to 54.7. Services PMI is expected to extend the pickup and rise to 54.9; in contrast, there is a downside risk for manufacturing PMI, with a possible to 53.0 due to the deteriorating new orders component in the latest reading.
  • On Thursday, the ECB Governing Council (GC) meeting will be held, which is expected to be a meeting with little action. Since the last meeting, incoming data has not warranted a change in policies, not least the wording on ending its APP. Therefore, the word ‘anticipate’ is likely to remain.


  • China’s economy downshifted slightly in the third quarter, according to government figures. Growth slowed to a 6.5% annual pace last quarter, compared with a 6.7% rate in Q2. However, private sector growth estimates suggest the slowdown has been much more severe, with the economy expanding at only a 4.0% pace. Further government stimulus efforts are expected in reaction to the economic deceleration, calling into question whether deleveraging will be ongoing. With Chinese equities under heavy pressure this week, authorities tried on Friday to reassure markets, prompting a steadier market tone ahead of the weekend.
  • China’s top financial officials spoke out in a rare show of coordinated intervention after the country’s stock market benchmark touched a four-year low, as the escalating trade tensions with the US and evidence of slowing domestic growth unnerved investors. The Shanghai Composite Index ended at its lowest level since November 2014 on Thursday, while the CSI 300 Index (a gauge of large-cap stocks) closed at its lowest level since March 2016. Though the Shanghai Composite surged 2.6% Friday, reportedly on state buying, the benchmark still fell for the week. The yuan touched its weakest level in almost two years last Thursday, renewing speculation that the currency would soon break the psychologically key threshold of 7 yuan per US dollar.
  • In China there are no market movers this week.


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