Economic Outlook – 24 September 2017

US

• The Federal Reserve is further along in reducing monetary stimulus, with four rate hikes under its belt. This week it formally announced that it will start reducing the size of its $4.4 trillion balance sheet in October. The pace will be very gradual, with the monthly runoff amounting to 0.2% of its balance sheet. The process was already laid out clearly in June, and as such there was little reaction in the longer end of the curve.
• What could cause these projections to not be realised? It likely has nothing to do with the hurricanes, as the FOMC will look through their near-term impacts on growth and inflation. It likely has everything to do with underlying inflation performance. Indeed, in the presser, Chair Yellen referred to the recent slowdown as a “mystery”, as the previous widespread belief that it was driven mostly by idiosyncratic or temporary factors is waning. The next few CPI and PCE prints will be critical in either ameliorating these concerns (December is on) or fanning them further (December is off).
• US home resales fell 1.7% to a seasonally adjusted annual rate of 5.35 million units in August, the lowest since August 2016. A sharp decline of 25% year on year in home sales in Houston, related to Hurricane Harvey, accounted for most of the overall decline in sales. The South saw a 5.7% decline. Continued aftereffects of the hurricane are expected to negatively impact home sales in September.
• Top Republicans on a US Senate panel proposed a budget deal that would allow for up to $1.5 trillion in tax cuts over the next 10 years. The tax cuts would add to the current $20 trillion federal debt, which is projected to increase to about $30 trillion over the next decade. Republicans hope to pass the bill by year-end.
• Last Thursday, US president Donald Trump signed an executive order that will allow him to take action against anyone who finances and facilitates trade with the North Korea. Trump plans to use the measure to cut off funding for North Korea’s nuclear weapons program and to put pressure on its economy. The president addressed the United Nations General Assembly earlier this week, encouraging members to take further action to influence the regime.
• This Friday, US Personal Income & Spending for August will be released. Headline PCE inflation is expected to firm to 1.5% in August, reflecting a 0.3% rise in prices on the month. Driving the August pickup are energy prices, led by higher gasoline prices amid the Hurricane Harvey disruption. In line with the CPI report, the core (ex food & energy) index to post a 0.2% month-on-month increase, its first since February. Unrounded, however, the monthly gain should be more modest than its CPI counterpart due to different weightings for housing and medical care in particular. As a result, core PCE inflation is expected to be unchanged at 1.4% year-on-year. However, this should mark the bottom of the cycle, barring disappointment in future readings.
• On Tuesday the Conference Board consumer confidence for September will be released. While on Friday, the University of Michigan consumer confidence (also for September) will be released. The numbers usually move more or less in tandem and the preliminary Michigan numbers indicate a fall in the Conference Board numbers to 121.5. Note that despite the fall, both indicators will still be at very high levels, indicating continued support for consumer spending.
• On Wednesday, core CAPEX orders for August are due to be released. Although core CAPEX has been trending upwards since last summer at approximately 0.5% per month, overall industrial production fell 0.9% month-on-month in August. Hence, an unchanged core CAPEX in August is likely. However, uncertainty is particularly large for August due to the hurricanes.

China

• Last Thursday, Standard and Poor’s downgraded China’s long-term sovereign credit rating from AA- to A+, following a similar downgrade by Moody’s in May. S&P claimed that China’s sustained period of strong credit growth has increased its economic and financial risks. The credit rating agency expects credit growth will persist at levels that increase the country’s financial risks for the next two to three years. In addition, S&P demoted China’s short-term rating from A-1+ to A-1.
• The Caixin PMI manufacturing index for September on Friday will be released next week. It has been increasing in recent months in line with the pickup in metal prices. However, recently, metal prices (and not least iron ore prices) have come down. This will likely show up in a lower PMI soon, possibly already in the September data for PMI. A decline to 51.0 from 51.6 in August is thus possible.
• What’s going on? China has ramped up steel production over the summer as it has to be cut down going into the winter months out of pollution concerns. Hence, seasonality has changed and it is therefore not captured by the seasonal adjustment. It makes PMI higher now but most likely lower in the winter months.

UK

• In a speech to the International Monetary Fund (IMF) in Washington DC, Carney said there would likely be “some withdrawal of monetary stimulus” in order to bring inflation back to the BoE’s 2.0% target, according to the BBC. Inflation beat expectations in August rising 0.3% to 2.9%, its highest since 2012, as it continued to feel the effects of the sterling devaluation following the UK’s vote to leave the European Union last year.
• The two most interesting releases are GfK consumer confidence and Lloyds Business Barometer for September in the night between Thursday and Friday (Friday at 01:00 CET). Both consumer and business confidence indicators have declined, supporting a shared view that UK growth will remain subdued in coming quarters. September figures are not expected to alter this picture.
• The fourth round of Brexit negotiations is scheduled to begin on Monday, which is going to be interesting after PM Theresa May’s speech in Florence today. Also, the UK Labour Party Conference begins on Sunday and it has become softer on Brexit after the parliamentary election in June, which has not made life easier for the UK government.

EU

• The eurozone flash Composite PMI surprised on the upside in September when it rose more than expected to 56.7 (55.7), almost regaining the territory lost during the summer. Consensus expected a small decrease. The number concludes the readings of the third quarter and, even though the average reading is a bit lower than second quarter, it suggests that GDP growth should remain robust.
• On a national level, both German and French Composite PMI rebounded strongly by 2 index points to 57.8 and 57.2 respectively. After the past month’s dip, the rebound brought the optimism back to the highest level since 2011, in both countries. The rebound was mainly driven by the service sector, while manufacturing PMI increased slightly, thus still not reflecting increasing worries about the stronger EUR. Some of the gains could reflect increased political optimism as Chancellor Merkel looks set to stay in power after the general election on Sunday. In France the increase might reflect optimism about President Macron’s upcoming labour reforms.
• In an attempt to prevent Catalonia from moving forward with a banned independence referendum, Spanish police raided Catalan government offices on Wednesday, arresting at least 12 Catalan government officials. In response, tens of thousands of people protested outside several regional government offices and in several Catalan cities.
• On Monday, the German Ifo expectations are due for release. The Ifo expectations have increased rapidly throughout 2017. From 103.2 in January, Ifo has climbed to 107.9 in August and a further improvement in September is possible. This week, ZEW beat consensus and increase to 17, up from 10 in August. In light of this increase, Ifo is likely to show further optimism and increase to 108.4.
• M3 money growth and loan growth for August are due out on Wednesday. In July, M3 growth was reported at 4.5% year-on-year, which is somewhat lower than the 4.9% to 5.0% level reported in previous months. However, money growth is likely to return to this range in August. With regard to loan growth, adjusted loans to households seem to have plateaued at 2.6% from May to July and a similar figure in August is the most likely bet.

Sources: MFS Investment Management, Handelsbanken, TD Economics, BMO Capital