US
The Federal Reserve received positive reports on the US economy in September. Reports in the Beige Book were described using particularly upbeat language with increasing accounts of labor market tightening and wage pressure. Economic indicators released last week continued to support the case for a December rate hike.
Multi-family housing starts plummeted in September, dragging total starts down 9% to a 1.05 million annual rate. Single-family construction picked up, however, rising 8.1% to an annual pace of 783,000. Healthy buyer traffic, solid job growth and house price appreciation should boost construction in the coming months, as inventory remains exceptionally tight. Higher-than-expected building permit activity in September supports this notion. According to the NAHB/Wells Fargo housing market index, home builders appear encouraged by market fundamentals.
The first estimate of Q3 GDP growth is due on Friday. The estimate for GDP growth was around 2.0% quarter-on-quarter in Q3, which is not strong taking into account the disappointing growth rates in the three previous quarters and is much lower than previously expected.
The consensus for private consumption growth slowed markedly in Q3 (compared with the strong Q2 growth above 4% quarter-on-quarter despite strong car sales, as retail sales have been weak. Private consumption growth does not seem to have stopped but Q2 was a very strong quarter and Q3 seem weaker than Q2. The drag from private investments is expected to fade on a combination of business investments stabilising and a positive growth contribution from inventories, which have been a negative contributor to GDP for the past five quarters. It is likely net exports contributed slightly positively to Q3 GDP growth.
UK
Unemployment rate was 4.90% in the three months through August, hovering around its decade low rate since May. Companies added 106k employees to payrolls in the same period, which was much lower than the 174k increase in July.
Despite the low unemployment rate, rapid price growth dampened real wage gains, potentially undermining household spending with Brexit fallout. In addition, retail sales growth was also showing signs of slowdown. Driven by Sterling’s depreciation, consumer prices surged at its quickest pace since November 2014. Growing price pressure was also reflected in PPI and RPI.
The first estimate of GDP growth in Q3 will be released on Thursday. Economic data in Q3 have been much better than feared and expected. GDP growth is expected in the range 0.25% to 0.50% quarter-on-quarter, with 0.40% being a point estimate (2.20% year-to-year), driven mainly by services. This is slower than before the EU vote but still a solid growth rate from a global perspective. As the economy has been resilient to Brexit uncertainty so far and as growth has been higher than projected by the Bank of England in its August Inflation Report, the BoE is no longer expected to provide additional stimuli to the economy at the November meeting.
There is a risk that business confidence and hence growth may take a hit, as it seems UK may be heading for a ‘hard Brexit’, with limited access to the European single market after Prime Minister Theresa May’s comments in connection with the Conservative Party congress.
EU
ECB maintained its policy stance as widely expected. Main refinancing rate, deposit rate and lending rates were held at 0.00%, -0.40% and 0.25% respectively. Asset purchase target also stayed put at € 80 billion per month. President Mario Draghi signalled that bond tapering may occur before the QE program stops, indicating that an extension to the maturity of the stimulus program is on the table.
The main data release in the euro area next week is the PMI figures for October, due on Monday. The economic survey data has been resilient to the UK’s vote to leave the EU and, although it seems more likely that a “hard” Brexit will occur, a stronger manufacturing PMI in October is expected . The order-inventory balance, which is usually a good leading indicator for the manufacturing index, was very strong in September, pointing to a large jump in the manufacturing figure. The services PMI on the other hand has trended down in 2016 but a recent stabilisation in the future business expectations index suggests it will remain around the current level.
Thursday brings the money supply and loan growth figures for September. Growth in lending to non-financial corporations turned positive at the end of last year and has recently reached the highest rate since 2011. The October bank lending survey showed continued increasing demand for loans, particularly from households, while enterprises’ demand for loans is increasing at a slower pace.
China
GDP growth in China was unchanged at 6.7% year-on-year in Q3 according to the official figures and has thus been stable for three consecutive quarters. The outcome was in line with consensus expectations whereas an uptick to 6.8% year-on-year had been expected.
The monthly activity indicators showed a mixed but slightly positive picture. Industrial production growth slowed to a disappointing 6.1% year-on-year in September from 6.3% in August, likely dragged down by the ongoing process of reducing overcapacity in the heavy industries and weak external demand continuing.
Retail sales and fixed investment growth improved as expected. The latter was driven by a rebound in growth of property construction investments related to the once again booming real estate market in many bigger cities. Investment by industrial companies rebounded, hinting that the process of scrapping of overcapacity might have come closer to an end.
Sources: Danske Bank, Haendelsbank, Wells Fargo, HansLeong.