Economic Outlook – 23 June 2019


  • The Fed kept rates unchanged last week but opened the door to easing later this year by noting the heightened uncertainty to the economic outlook and the persistent undershoot of inflation. Seven committee members expected the year-end Fed funds rate to be 50 bps lower, one expected it to be 25 bps lower and eight projected the Fed’s benchmark rate would remain unchanged. The Fed reinforced investor expectations for an interest rate cut later this year, powering strong gains for stocks and lifting the large-cap S&P 500 Index to record highs. After an early-week lull, Monday had the second-lowest daily trading volume of 2019; investors bid stocks higher after the Fed issued its post-policy meeting statement on Wednesday. The central bank’s policymakers removed the word “patient” from the statement’s reference to adjusting interest rates and said that they “will act as appropriate to sustain the expansion,” signalling a willingness to cut rates if needed.
  • Presidents Trump and Xi will meet in Japan as part of the G20 meeting, ostensibly to reach a deal. A sooner than expected resolution to trade hostilities would dispel much uncertainty and likely obviate the need for a return to monetary policy easing in an economy with a 3.6% unemployment rate and a stock market at an all-time high. An unexpected deterioration or improvement in the trade arena could dramatically move the needle (in either direction) for the Fed, leading us to think markets are a bit too convinced of the magnitude of future easing. Yet with trade, perhaps the most appropriate course of action is to expect the unexpected.
  • The housing market (one of the primary transmission mechanisms for monetary policy) continues to get a bit of a reprieve from drastically lower mortgage rates, but has not meaningfully re-accelerated. While existing home sales are still down 1.1% over the year, sales rose 2.5% in May and are trending in the right direction. Housing starts fell 0.9% in May, and remain 5.3% below their prior-year pace on a year-to-date basis. The NAHB builder confidence survey fell two points, likely on fears of a prolonged trade war driving materials prices higher.
  • Purchasing manager surveys plummeted this month, with the Empire manufacturing and Philly Fed indices dropping 26.4 (the largest drop on record) and 16.3, respectively.
  • President Trump ordered airstrikes against Iranian targets last Thursday in response to a series of provocative Iranian actions near the Strait of Hormuz in recent weeks. The US blames Iran for recent attacks on six ships in the region, and this week Iran shot down an unmanned military drone in what the US says was international airspace. Global oil prices rose this week in response to the escalating tensions, and a great deal of international aviation is being diverted to avoid Iranian airspace.
  • Geopolitical tensions in the Middle East continued to ratchet higher, driving large gains in crude oil prices as well as stocks in the energy sector. News that Iran shot down a US drone helped push the price of West Texas Intermediate crude, the US oil benchmark, up more than 5.0% on Thursday alone.
  • In the US, it is a rather quite week in terms of data release. The preliminary core capex orders for May are due out on Wednesday and the PCE core inflation print in May is due out Friday.


  • Britain will see the slowest growth in consumer spending in 2019 in six years, piling even more pressure on retailers, EY ITEM Club forecast on Monday. It said it expects spending to rise by 1.6% over last year, although that would be faster than an estimated 1.3% growth in the broader UK economy in 2019.  Consumer spending benefited from robust employment growth and a strong pick-up in real earnings growth in the second half of 2018 and early 2019 but the outlook was now weaker, the economic forecasting group said.
  • Britain posted a larger-than-expected budget deficit last month as government spending rose, a reminder that the next finance minister may have limited options to cushion any Brexit blow to the economy. The budget deficit widened to 5.115 billion pounds, the Office for National Statistics said last Friday, a 23.0% rise from May 2018 and above all forecasts in a Reuters poll of economists. For the first two months of the 2019/2020 financial year, the deficit was 18.0% larger than a year earlier at just under 12 billion pounds.
  • UK CPI inflation was 2.0% year-on-year in May, down from 2.1% in April. This was in line with the consensus expectation. Core CPI inflation, however, was slightly higher than the consensus (1.6%) at 1.7% year-on-year, but still down from 1.8% in April. By far the largest downward contribution to the easing 12-month rate came from transport, with the April prices influenced by Easter and the associated school holidays falling in the middle of the month. However, according to the ONS, cost pressures fell further with PPI input inflation down to 1.3% year-on-year from 4.5% in April. PPI output inflation fell to 1.8% year-on-year in May from 2.1% in April. When it comes to cost pressure ahead, the PMI surveys indicate it could remain rather subdued.
  • The two final Conservative candidates are Boris Johnson and Jeremy Hunt. It is now up to the party members to vote on which candidate they prefer. Based on opinion polls, Johnson is clearly favourite to win a landslide victory. While Johnson is more pro-Brexit and does not rule out a no-deal Brexit, he inherits the same problems PM Theresa May faced, as there still seems to be a small majority in the House of Commons against a no-deal Brexit if it comes down to the wire. The result of the leadership vote is announced on 22 July.
  • There are no market movers in the UK this week.


  • The euro fell about 1.0% against the US dollar on the week. Following ECB President Mario Draghi’s statement, the yield on 10-year German government bonds fell to a new all-time low of -0.315%, while the yield on the French 10-year bond hit 0%, its lowest level ever. Draghi’s words also sparked tweets from US President Trump, who accused him of talking down the euro and making it easier for Europe to compete with the US. 
  • HS Markit’s Flash Composite Purchasing Managers’ Index (PMI) rose to 52.1 in June from 51.8 in May but remained weak, reinforcing expectations for further monetary easing. French business activity strengthened more than expected in June to the fastest pace in seven months. In Germany, services and manufacturing activity rose slightly. IHS said that the data highlight a growing concern that the region is sliding closer to stagnation. It noted that growth remains very dependent on the service sector, which largely reflects the strength of domestic consumer demand and improving labor markets.
  • European stocks rose, buoyed by anticipation of more central bank stimulus measures. The pan-European STOXX Europe 600 Index, the exporter-heavy German DAX index, and Italy’s FTSE MIB Index all gained as Draghi signaled that the ECB could offer more stimulus measures as early as July if growth continued to stall. Draghi’s comments preceded the Fed’s assertion that it is ready to cut rates if the US economic outlook does not improve soon.
  • The flash HICP figures for June on Friday. In May, core and headline inflation disappointed markets and fell back to 0.8% and 1.2%, respectively. For the June print euro inflation is expected to continue its roller-coaster ride, as base effects remain in the driver’s seat and core inflation is expected to jump back to 1.3%.


  • Chinese stocks advanced for the week, as traders bet that a meeting between President Trump and his Chinese counterpart Xi Jinping at the upcoming Group of 20 meeting would lead both countries to resume trade talks that broke down last month. The benchmark Shanghai Composite Index gained 4.2% and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, added 4.9%. Both indexes recorded their largest weekly gains since the week ended April 5, according to Reuters
  • There are no market movers in China this week.

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