Economic Outlook – 24 December 2017


  • US housing market conditions were largely positive in October and November with forward-looking indicators suggesting upbeat conditions to continue. The NAHB/Wells Fargo survey of homebuilder sentiment in December revealed optimism not seen since 1999. The strong report exceeded expectations, as the overall gauge rose five points on the month to a reading of 74. Details of the survey were also upbeat, as current sales and prospective buyer traffic were at their highest point since the late 1990s. Homebuilders’ optimism for sales over the next six months is at its highest point of the current cycle. Homebuilders see continued income gains and low mortgage rates boosting demand, and also see policy changes in Washington as a plus to their industry.
  • Groundbreaking on single-family homes was running at its fastest seasonally adjusted pace of the current cycle in November. Some of the strength in the report was likely due to activity coming back to normal in the South after storm disruptions, but the year-to-date comparisons were also strong, which suggests underlying momentum is also gaining. The warmer-than-usual weather in November also helped make last month a busier-than-usual month for building. Indeed, not seasonally adjusted starts declined less than they usually do in November. Combined with the sky-high optimism among builders, it appears single-family construction has perked up in recent months and is slated to continue to drive total construction in 2018. Apartment construction has largely topped out. Still, existing limitations on building remain, such as lot shortages and a tight supply of construction labor in many cities.
  • US stocks recorded modest gains for the week, although most of the advance occurred in the first 15 minutes of trading on Monday. Trading volumes also moderated as the week wore on and investors began to leave town in advance of the Christmas holiday. The smaller-cap benchmarks performed better than their large-cap counterparts, slightly narrowing their considerable performance disadvantage for the year, although they remained a bit below the peaks they established in early December. Within the S&P 500, energy shares led the gains, helped by a rise in oil prices.
  • The GOP-sponsored tax bill, formerly known as the Tax Cuts and Jobs Act of 2017, was passed by both houses of Congress this week and will be signed into law on Friday. The law’s key provisions include a lower corporate tax rate 21%, down from 35% and lower rates on individuals, as well as a near doubling of the standard deduction. Congress also passed a stopgap-spending bill that will fund the government through 19 January. The passage of the bill set off a wave of announcements from the likes of AT&T, Wells Fargo and Comcast touting wage hikes, investments and employee bonuses.
  • The coming week brings no market movers. The week after New Year’s Eve, however, brings two interesting readings. On Wednesday, ISM manufacturing for December and FOMC minutes from the December FOMC meeting are due for release.


  • While secessionist parties in Spain’s Catalonia region did not garner a majority of the votes in elections held Thursday, they did secure a narrow majority of seats in the region’s parliament, winning 70 of 135. That is expected to undermine the business environment in the region because of ongoing uncertainty but is not expected to weigh heavily on Spain’s resurgent economy, nor is it expected to lead to another unilateral independence declaration in the near term. Elsewhere on the Iberian Peninsula, credit rating agency Fitch upgraded Portugal’s rating two notches to BBB, making it investment grade. The upgrade helped push yields on Portuguese bonds below those of Italy for the first time since 2010.
  • Early in the week, bullish sentiment swept through Europe amid progress on US tax reform, with some indexes rising more than 1.0% in anticipation of the reforms. Once the reform seemed assured, European stock gains stalled. Overall, trading volume was down on Europe’s main index by about 25.0% versus the week before.
  • In the euro area, the German inflation figures for December are due on Friday. After breaking above 2.0% in February 2017, German headline inflation decreased to 1.5% year-on-year in October. In November, it bounced back to 1.8%.
  • The euro area inflation figures for December are due for release on 5 January 2018. Headline inflation is expected to decline to 1.4% year-on-year in December due to weaker energy price inflation, while core inflation is expected to increase only slightly to 1.0% year-on-year in December as the strong economic momentum has yet to feed through to higher wages to push service price inflation higher.


  • The blue chip UK FTSE 100 hit a new high just before the week’s close, as the multinational heavy index rallied following US tax reform developments. A weaker pound also helped companies that repatriate foreign currency into sterling. Earlier in the week, UK stocks were lower following a report that consumer confidence had fallen to a four-year low.
  • The coming two weeks are quiet. The most important release is the PMI manufacturing for December due out on 2 January. As the equivalent euro area index has risen in December, another increase in the UK index (although it is more volatile) is possible. While growth in the service sector has slowed, manufacturing production growth has increased, supported by the global uptick in manufacturing.


  • A high-level economic planning conference in China ended with leaders signaling their commitment to containing financial risks and maintaining “prudent and neutral monetary policy,” which analysts interpreted as a sign that reducing debt was no longer a top priority for Beijing.
  • Following China’s Central Economic Work Conference (an annual meeting of top Communist Party members led by President Xi Jinping) officials stated their commitment to reducing industrial overcapacity, promoting high-quality development, advancing supply-side reforms, and other standard declarations. In a striking omission, officials refrained from mentioning China’s fast-growing debt burden; a topic that figured prominently in past years’ statements. Instead, officials pledged to “fight the battle of preventing and resolving major risks, with a focus on preventing and controlling financial risks,” the statement read.
  • Analysts interpreted the shift as a sign that China may be willing to increase its debt burden if it will help the economy and that financial de-risking had eclipsed corporate deleveraging as the government’s top priority. China’s rapidly growing debt in recent years has raised alarm for many analysts who see the country’s pace of debt growth as unsustainable over the long term. Both Standard & Poor’s and Moody’s downgraded their credit ratings for China in 2017, and many analysts have worried for years that unchecked credit growth in China could trigger a financial crisis with global repercussions.
  • The main release in China over the next two weeks will be PMI manufacturing (Official released on 31 December and Caixin released on 2 January 2018). A moderate decline is to be expected as policy tightening and production curbs on steel, aluminium and construction in the North East of China will weigh on manufacturing activity.
  • Chinese industrial profits are also released. Growth has been very strong this year due to rising producer prices and rising activity, hence an increase would be order.


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