Economic Outlook – 22 September 2019


  • An unusually divided Federal Open Market Committee cut its target rate a quarter point to between 1.75% and 2.0% and left the door open to additional cuts. Two members of the committee dissented, arguing rates should be left unchanged. One member voted for a deeper, half-point cut. US Federal Reserve Chairman Jerome Powell offered little clear guidance on future policy moves, though the committee’s statement retained language used to signal openness to additional cuts. Perhaps most notably, Powell dismissed the notion that the Fed might deploy negative interest rates if rates fell to the effective lower bound.
  • On net, the dot plot and Powell’s press conference were received as slightly less dovish than expected. Seven of the 17 dots expected one more cut this year, indicating several committee members, but not a majority, favor further easing. The consensus expectations is still for a 25 bps cut in the fourth quarter and one more in the first quarter of 2020, but it is recognized that these are not set in stone, particularly as the range of views at the FOMC widens and consensus becomes harder to maintain.
  • The US housing market, perhaps the most interest rate-sensitive sector of the economy, takes on greater importance as an indicator of the efficacy of monetary policy in shielding the domestic economy from weakness overseas and in manufacturing. Total housing starts jumped 12.3% to a 1.36 million-unit pace, the highest since June 2007, while existing home sales rose again in August, marking the first back-to-back increase since 2017. The roughly 130 bps decline in mortgage rates has boosted sales and firmed prices, and lower short-term rates are helping homebuilders. Despite this, builders seem to remain cautious, wary of trade policy uncertainty and stock market volatility leading to a sudden pullback in demand. Still, the stronger sales pace and improving builder confidence should feed through to stronger construction later this year. After dragging on overall GDP growth for six straight quarters, residential investment is finally poised to boost growth in the third quarter and through next year.
  • Industrial production rebounded 0.6% in August, with a strong 0.5% gain in manufacturing output. Compared to a year ago, manufacturing production is still down, but August’s report suggests the situation is at least not worsening.
  • Last week started with a bang, as a spike in overnight money market rates drove the Fed to undertake its first overnight repo operations since 2008. A  number of factors combined to create stress in the US money market (such as quarterly corporate tax date and the settlement of several large Treasury auctions at midweek) and pushed overnight interest rates well above the Fed’s target range, prompting the central bank to add billions of dollars in liquidity to the system on Tuesday, Wednesday and Thursday.
  • The GM strike halted production at more than 30 US plants. There are few signs of a deal, and the strike is likely to subtract around 0.1% off real GDP growth in Q3. The impact on fourth quarter growth will depend on how long it lasts and on how quickly GM ramps up activity after the strike. A four-week strike would see a very limited bounce back in activity in the fourth quarter, but would push the rebound in growth more into the first quarter of 2020.
  • The 14 September attack on major oil facilities in Saudi Arabia knocked out about 5.0% of global oil production and triggered a gain of about 13% in the price of West Texas Intermediate crude, the US benchmark, on Monday. The spike was the largest one-day percentage gain since 2016. Oil prices remained volatile throughout the week as Saudi Arabia adjusted its estimates for when it expects the production and processing facilities to come back online. Although oil prices moderated midweek, they still finished the week up approximately 6.0%.
  • Equities finished last week modestly lower after a spike in oil price volatility caused by the attack on Saudi Arabian oil facilities and a widely expected interest rate cut from the Federal Reserve. Large-cap stocks outperformed small-caps. Higher-valuation growth companies held up slightly better than value stocks. Companies in the value-oriented transportation industry, which experienced steep losses as a result of the jump in oil prices, weighed on returns for the value category.  
  • US Treasury yields decreased as the jump in geopolitical risk in the Middle East seemed to convince some investors to move into safe-haven assets like Treasuries. Overnight lending rates were unusually volatile as a result of technical factors relating to the amount of bank reserves available for lending in the money markets. This caused the fed funds rate to briefly break through the upper end of its target range before the Fed stepped in to inject more reserves into the system via overnight repurchase operations.
  • On Friday, PCE data for August are due out. PCE core is expected to rise +0.2% month-on-month in August, implying an unchanged PCE core inflation rate at 1.8% year-on-year.
  • Housing market data will be released on Wednesday and Thursday. The housing market has been a concern among economists for some time; however, in the last couple of months, numbers have come in stronger due to rate cuts, among other things. Construction is a very cyclical and interest rate-sensitive sector and a downturn in the housing market could have a severe impact on both construction companies and consumers (home owners).


  • European Commission President Jean-Claude Juncker said that a Brexit deal is possible by 31 October and that if alternative arrangements are agreed to, the Irish backstop (which would tie the United Kingdom to European Union indefinitely while keeping the border between the Republic of Ireland and North Ireland open) would not be needed. Juncker said he didn’t know if the odds of a deal being reached were more than 50-50. A no-deal Brexit would have catastrophic consequences, he said, adding that he was doing everything he could to get a deal.
  • The Monetary Policy Committee (MPC) of the Bank of England (BoE) decided to leave the policy rate unchanged at 0.75%. The asset purchase programme was also left unchanged. The decisions were unanimous. The BoE, as expected, pointed to Brexit uncertainty remaining elevated, which together with slowing global growth and a weaker outlook had led to a slowing of underlying growth in the domestic economy. While private consumption growth still remained resilient, growth in investment and exports were weaker. The MPC pointed to a still tight labour market, and strong pay growth, but also said that employment growth appeared to be softening. The BoE now expects GDP growth of 0.2% in Q3, which is 0.1% lower than in the August report.
  • British retail sales unexpectedly fell in August after shoppers bought less online than the month before, when an annual promotion by Amazon appeared to have encouraged them to splash out, official figures showed. The figures gave little obvious sign that either the possibility of a no-deal Brexit on 31 October or a fall in sterling over the summer had dealt a visible blow to consumer spending, which has solidly supported British growth in recent years. Monthly retail sales volumes dipped by 0.2%, the Office for National Statistics said, compared with an average forecast for a flat reading in a Reuters poll of economists and the first fall in three months.
  • There are no market movers in the UK this week.


  • The Eurozone Flash Composite PMI was 50.4 in September compared to 51.9 in August, while Manufacturing PMI was 45.6 compared to 47 and Services PMI was 52 compared to 53.5, all below expectations. The Eurozone economy shows signs of stalling as demand for goods and services fell at the fastest rate in over six years. A deep manufacturing recession plagues the region and does not seem to be bottoming out. Output fell at the sharpest pace since 2012 and was accompanied by a slower service sector expansion, raising the spectre of cross-sector spillovers. Jobs growth and price pressures remained muted and sentiment about the outlook was among the lowest for seven years.
  • Easing concerns about US – China trade tensions and a no-deal Brexit combined with added monetary stimulus to give a boost to expectations about the German economy, the eurozone’s largest. The ZEW survey of financial market experts showed sentiment in Germany rose in September. However, it also found that the mood about current economic conditions is at its lowest level in nine years. The ZEW institute warned that the outlook for Germany remained negative due to trade disputes and Brexit uncertainty. 
  • Stock markets in Europe were largely range-bound this week, even as trade negotiations between the US and China resumed after two months and hopes for a Brexit deal rose. The pan-European STOXX Europe 600 Index gained 0.4%, while the exporter-heavy German DAX declined slightly. 
  • In the euro area, on Tuesday, German Ifo prints for September are out. Both the expectations and current situation component have been on a falling trend for the last year, but stabilization is expected this month in line with the uptick in the ZEW expectations last week.


  • The trade war continues to take its toll on China’s economy as stimulus falls short of avoiding a further growth slowdown. All three activity indicators fell in September against expectations of small rebounds. Industrial production growth fell from 4.8% year-on-year in August to 4.4% in September, the lowest on record except for a few new-year distorted months in the early 2000s. Hence, not even front-loading of exports (and thus production) ahead of the US import tariffs hike taking effect on 1 September could prevent growth from slowing. Growth of fixed investments also slowed as infrastructure investments did in fact jump, but not enough to counter the weakness in the industrial sector that holds down this sectors’ investments. Growth of retail sales also slowed.
  • Negotiators from the United States and China meet face to face last week for the first time in two months, in Washington, to lay the groundwork for a high-level meeting in October. Markets continue to anticipate an interim deal, with perhaps the US freezing or rolling back some tariffs and offering some relief on the US’s ban on technology sales to China’s Huawei in exchange for China resuming purchases of US agricultural and energy products.
  • Chinese stocks retreated last week as a batch of closely watched indicators underscored the continued toll of the US trade war on the country’s economy. The benchmark Shanghai Composite Index shed 0.8% and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, fell 0.9%.
  • Last Friday, the People’s Bank of China (PBOC) trimmed the loan prime rate (LPR), a one-year benchmark lending rate for banks, for the second month in a row, marking policymakers’ latest effort to support the economy. However, the central bank left the LPR longer than five years on hold, reflecting policymakers’ reluctance to flood the banking system with too much liquidity. Despite the unresolved US – China trade battle, overseas investor interest in Chinese domestic stocks remained solid: Friday marked the 16th straight session of foreign fund net flows into Chinese yuan-denominated A shares via the Stock Connect program linking Hong Kong’s stock market with those in the mainland.
  • There are no key market movers out of China this week.

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