Economic Outlook – 23 December 2018


  • The relative lack of concern on the part of US Federal Reserve Chairman Jerome Powell surrounding the recent downdraft in risk asset markets during his post rate-hike conference on Wednesday sent markets tumbling to fresh 2018 lows. While noting the Fed is no longer on a preset course of quarterly rates hikes, he did little to assuage investor fears that the Fed could be in the process of making a policy error by tightening monetary policy too much despite scant evidence of inflation pressures building in the economy. Markets were particularly spooked by Powell’s insistence that the Fed’s balance sheet reduction policy remains on autopilot and will not be adjusted in reaction to changes in the economic outlook. However, Federal Reserve Bank of New York president John Williams soothed markets a bit on Friday morning, saying that the Fed is listening to markets and is always ready to reassess its views. 
  • The FOMC seems to be attempting to move away from a pre-determined policy path. It sees balanced risks to the economic and inflation outlook, and reaffirmed its data-dependent approach in the policy statement. The FOMC also dialed back its assessment for future tightening while recognizing some moderation in growth by reducing its GDP growth forecast.
  • US personal income and spending data showed consumer spending continuing to rise at a steady rate. A sturdy consumer backdrop points to solid growth in Q4 consumption, and despite increasing interest rates November’s release showed some newfound strength in durable goods spending. Steady gains in the hard data helped keep the University of Michigan’s measure of consumer sentiment elevated in December. This is despite worries of extended drops in financial markets and softness in the housing sector. Durable goods orders rose in November, but core orders have slowed recently. Core orders reaffirm the view that the pace of equipment spending is likely to slow in 2019 due to slower global growth and trade tensions starting to weigh on US activity.
  • The US housing sector has been a laggard of late, but fresh November data suggests some modest improvement. Housing starts jumped a better-than-expected 3.2%, although this was concentrated in the multifamily segment. Single-family starts fell for the third consecutive month. The 5% rebound in building permits over the month was also led by multifamily permits. Existing home sales rose 1.9%, which was better than the consensus estimate of a 0.4% drop.
  • The last look at Q3 US gross domestic product was revised lower, to 3.4% from an earlier 3.5% reading. With the market much more focused on Q4 GDP, the data were taken in stride. GDP is expected to slow further in the current quarter, with growth estimates clustered between 2.4% and 2.9%.
  • The shutdown of several US government departments did happen. The House has passed a stopgap-funding bill that includes in excess of USD 5 billion in border security funds, but that bill is seen as having little chance of passing the Senate, where 60 votes are needed in order to avoid a filibuster. The latest drama from Washington has contributed to recent market volatility, a shift from earlier in the Trump presidency, when markets largely ignored day-to-day political infighting.
  • US stocks suffered another week of steep losses, pushing all the major benchmarks to their lowest levels in well over a year. The technology-heavy Nasdaq Composite Index fared worst and joined the small-cap Russell 2000 Index in bear market territory, down more than 20.0% from its recent highs, on Thursday. The S&P MidCap 400 Index also moved into a bear market on Friday morning. The pullback was especially dramatic in the energy sector as oil prices plunged to the lowest levels in over a year. By the end of the week, domestic crude prices were down by over a third from their mid-October peak. Other commodity producers held up much better, however, and materials stocks were among the best performers in the S&P 500 Index.
  • Equity volatility and policy uncertainty sent the yield on the benchmark 10-year Treasury note to its lowest level since late May. After pressure from cash outflows in prior weeks, the municipal market benefited from the rally in Treasuries. With no meaningful new issuance coming to market for the rest of the year, buyers continued to search for opportunities in the secondary market.
  • There are no market movers in the US next week.


  • As widely expected, the Monetary Policy Committee (MPC) of the Bank of England decided to keep its policy rate unchanged at 0.75%. The QE programme was also unchanged. The decisions were unanimous. The BoE has so far assumed a smooth and orderly Brexit, which is also why it has expected GDP growth to hold up around 1.7% over the coming two years. The BoE focused mostly on downside risks. The MPC noted that the near-term outlook for global growth had softened and that downside risks to growth had increased. In addition, the MPC underlined that Brexit uncertainties had intensified considerably and that these uncertainties were weighing on UK financial markets. Consequently, the outlook for the UK economy had softened, it said. The BoE said that judging the appropriate stance of monetary policy required separating shorter-term volatility caused by Brexit uncertainty from more persistent factors affecting inflation and the economy, which could only be done once greater clarity emerged around the nature of Brexit. Regarding future monetary policy, the BoE noted that in November it had expected an ongoing tightening of monetary policy over the forecast horizon, but that this expectation was based upon an assumption of a smooth and orderly Brexit. Now, it simply said that the broader economic outlook will depend on the form of Brexit and whether the transition to the new state is abrupt or smooth. The MPC therefore judged that the monetary policy response to Brexit will not be automatic and could be in either direction.
  • Britain’s economy relied on its financially stretched households to power growth in the three months to September as businesses, worried about Brexit, cut investment for the longest period since the global financial crisis. The figures also showed the country’s balance of payments shortfall was its widest in two years. The Office for National Statistics (ONS) confirmed a preliminary estimate that Britain’s economy (the world’s fifth-biggest) grew by 0.6% in the third quarter from the previous three months.
  • British consumers are their gloomiest in more than five years, business sentiment is its weakest since the 2016 Brexit referendum and car output has tumbled this year, according to three surveys that paint an ominous picture for 2019. Brexit worries weighed on consumer and business morale, according to the surveys, while car production is falling at its fastest rate since Britain was last in recession in 2009.
  • After weeks of wrangling, the EU has approved Italy’s proposed 2019 budget. The blueprint projects a deficit fractionally larger than 2.0% of GDP (down from earlier proposals which included deficits as high as 2.4%) and is based on a 1.0% GDP growth assumption, compared to the earlier proposal which assumed a more ambitious 1.5% growth rate.
  • There are no market movers in the UK next week.


  • The European Union outlined a series of measures that could come into force should the UK leave the EU without a transition agreement on 29 March. Among the more important precautions are temporary measures to maintain continuity in financial markets by assuring that EU and UK investors can continue to use central counter parties to clear derivatives contracts for up to a year. Other important areas addressed are transport and residency rights for UK citizens residing in the EU. With no consensus on the way forward toward a deal with the EU, odds of the Brexit question being put back before the voters, either in the form of a second referendum or a general election, are rising.
  • In Germany, the Ifo Institute’s business climate index fell to its lowest level in two years in November, marking the fourth-consecutive monthly decline for the index amid growing concerns about an economic slowdown. In France, surveys showed consumer spending fell in November, while quarterly economic growth missed expectations. Confidence among manufactures dropped in December, according to the French Institute of Statistics and Economic Studies.
  • The pan-European STOXX Europe 600 Index hit a two-year low amid widespread risk-off selling. The German DAX index declined over 2.0% and fell further into bear market territory, down about 22.0% from its 52-week high
  • There are no market movers in the EU area next week.


  • China’s top politicians have concluded their Central Economic Work Conference and have announced that further stimuli are in the pipeline. Details are not yet available, but it has been announced that more significant tax and fee cuts than the ones already implemented will follow in 2019. In general, fiscal policy should according to the statement be more forceful and efficient. Also monetary policy will be loosened as the term ‘neutral’ has been removed from the description of the monetary policy stance.
  • Markets in mainland China slumped for the week as a new policy aimed at supporting small businesses and a temporary thaw in the US vs. China trade battle failed to lift investor sentiment battered by the US stock market sell-off. For the week, the Shanghai Composite Index lost 3.0%. The large-cap CSI 300 Index, China’s blue chip benchmark, fell for the sixth straight day and ended the week down 4.3%, recording its lowest close since March 2016.
  • China’s central bank announced Wednesday the creation of a new monetary tool intended to boost credit for small and private companies. The targeted medium-term lending facility permits domestic banks to borrow from the central bank more cheaply to extend loans to smaller companies. The new policy tool follows other efforts by the central bank to stimulate growth, which had been slowing prior to the onset of the trade rift with the U.S. The central bank has cut reserve requirement ratios (the level of cash that banks must hold as reserves) four times this year.
  • In China, official PMI manufacturing for December is due on 31 December. It dropped to 50.0 in November and could very well fall below the 50 level this month.

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