Economic Outlook – 25 June 2017
- In the US housing market, single-family and multifamily starts and permits fell in May despite the still-elevated level of builder sentiment. Relieving some of the worries, existing home sales came in stronger than expected in May, rising 1.1% to a 5.62 million-unit pace. Existing home sales are used to calculate broker commissions in the residential investment component of real GDP growth.
- The US median home resale prices continued to increase in May, with single-family climbing 6.0% relative to a year earlier. That said, the housing market still faces well-known challenges, namely tight inventories, an insufficient number of finished lots and shortage of available construction workers. Mortgage purchase applications fell for the second straight week in the week ending June 16; the drops follow a huge 10.0% spike a week earlier, however.
- The price of a barrel of West Texas Intermediate crude oil extended its decline this week amid rising global inventories. WTI prices have fallen in excess of 25.0% from their $58.30 high, which was posted on the year’s first trading day. Energy company shares have been under pressure, while spreads in the sector’s high-yield bond market have widened over benchmark Treasury yields this week. The sharp decline in energy prices will make it that much more difficult for the US Federal Reserve to reach its 2.0% inflation target in the foreseeable future.
- US post-election optimism has somewhat dwindled as the University of Michigan Index dropped to a seven-month low of 94.5 in June (May: 97.1). Manufacturing sector data somewhat optimistic as Kansas City Manufacturing Index rose to a three-month high and signalled that modest acceleration in factories expansion may contribute to overall GDP growth this quarter.
- Thirty-four big US banks passed the first round of the Fed’s stress test this week. Next week, the central bank will announce whether it will allow the banks to return capital to shareholders. Some banks may begin to reduce their capital if the Fed approves. That could be seen by markets as a sign of confidence that the banking system is strong and positioned well to withstand a significant economic downturn.
- Given that last week’s decision to hike was not unanimous and the fact that inflation has drifted lower, FOMC members appeared to be on the defensive. Vice-Chair Fischer pointed to “high and rising” home prices as one of the hazards of keeping rates low for long. While echoing support for last week’s decision, other Fed speakers appeared to take on a more dovish tone, with Harker and Evans putting an emphasis on waiting for further proof to hike again. Bullard (non-voter) suggested that the expectation for rates rise to 3.0% over the next two and a half years is “unnecessarily aggressive.”
- Friday brings US PCE inflation figures for May. PCE inflation has fallen quite substantially over the past couple of months and PCE core inflation read 1.5% year-on-year in April. The May print of the CPI figures indicates that headline PCE was unchanged in May (0.0% month-on-month), implying 1.5% year-on-year. Core PCE is expected to have increased by 0.1% month-on-month and 1.5% year-on-year.
- On Thursday, the third release of US GDP figures for Q1 is due and no revisions are expected compared with both the first and second releases of 1.2% quarter-on-quarter. Chicago PMI for June is due on Friday. Although ISM manufacturing has been declining since the beginning of this year, the Chicago PMI has kept on rising. It is expected to start moving more in line with ISM manufacturing, so we expect a fall to 58.0.
- US Conference Board consumer confidence for June and the final numbers of University of Michigan consumer confidence for June are due on Tuesday and Friday, respectively. Consumer confidence has been declining since it peaked early in the spring but is still at very high levels. Hence, Conference Board consumer confidence is expected to have fallen to 116.0 in June.
- In the UK, report from the Confederation of British Industry showed that factory order books surged to the highest in almost 30 years as exports demand improved. The CBI index climbed to 16 in June from 9 in May as the gauge for exports jumped to the highest in 22 years. On a separate report, Rightmove House Prices increased at its slowest pace in four years amid slower wage gain and intensifying risks from Brexit negotiation.
- Negotiators from the United Kingdom and the European Union met on Monday in the first formal Brexit negotiating session. The one breakthrough from the talks was the UK’s acquiescence to EU demands that the divorce bill must be settled before the EU begins to negotiate a new trade arrangement. Late in the week, Prime Minister Theresa May met with EU leaders in Brussels and laid out her plan to protect the rights of the three million EU citizens living in the UK, allowing them permanent residence. May called on leaders to grant British citizens living in the EU the same rights.
- The index of services for April is due for release on Friday and it will give a first indication of GDP growth in Q2. The growth in the index of services has been declining for some time and falling real wages will continue to be a negative drag on private consumption and, hence, service production.
- The fall in UK real wages is also evident in consumer confidence and the GfK Consumer Confidence for June, released on Friday, is likely to continue signalling that consumers are not very optimistic.
- After years of fighting for inclusion in MSCI’s influential stock indices, China finally received word that some of its A shares will be included in the indices in mid-2018. Just fewer than half of the 448 A shares will be included in the indices and at an initial weighting of just 5.0% of each stock’s market cap. These restrictions are an effort by MSCI to incentive China to further liberalise its stocks markets.
- The key release in China next week is official PMI manufacturing, where there could be some downside risk. PMI was broadly flat in May but the private version of PMI from Caixin showed a big fall and most of leading indicators show a clear loss of momentum in Chinese manufacturing. One of these indicators is electricity generation. Downside risks to Chinese growth are always present this year following the policy tightening that started in mid-2016 and was strengthened in early spring with the crackdown on shadow finance. In particular, construction and infrastructure growth are expected to slow down.
- The eurozone flash composite PMI fell from 56.8 to a five-month low of 55.7 in June, which was below both consensus (56.6). It is still early days, but the flat development last month and the decline in June could be evidence that the rising trend in the PMI has been broken. However, despite the drop in June, the composite PMI is still relatively healthy with the average for Q2 at the highest level for over six years, consistent with still solid real GDP growth in Q2 even though growth may not have accelerated. It is however also evident that the economy might have lost some growth momentum as of late.
- In the euro area, the first release of interest is the German ifo expectation, due for release on Monday. The ifo expectation increased from 105.2 in April to 106.5 in May, which is its highest level since February 2014. This figure is expected to decline to 106.1 in June, as the German ZEW and Sentix have both declined in June, and the weakening business cycle indicators in the US and China could still weigh on the German business expectation.
- On Wednesday, data on ECB M3 money supply growth and loan growth for May will be released. While M3 is estimated to have continued showing around 5% yearly growth, loan growth might have continued its upward trend. In particular, adjusted loans to NFCs increased from 1.9% in February to 2.4% in April. It is expected to have increased further in May, as credit demand continued to increase.
- The HICP inflation figures for June are due to be released on Friday. Headline inflation jumped to 1.9% due to Easter in April and fell back to 1.4% in May. A further decrease to 1.2% in June is expected, mainly because the support from energy price inflation is wearing off on the back of the latest decline in the oil price. However, looking beyond energy prices, underlying price pressure is still not picking up, meaning inflation is not yet close to showing a sustained convergence to 2.0%.
Sources: Wells Fargo, MFS Investment Management, Handelsbanken, Danske Bank, HongLeong Bank, TD Economics