Economic Outlook – 25 November 2018

US

• The biggest surprise last week in the US was the eight point drop in the National Association of Homebuilders (NAHB)/Wells Fargo Housing Market Index in November. This month’s plunge to 60 was the largest drop since February 2014, with declines in both builders’ assessment of current sales and future sales expectations indices. The expected buyer traffic index notably dropped below the 50 demarcation line, which means more builders see conditions as bad than good, and suggests the potential for further moderation in coming months.
• New housing starts data also point to weakness in the single-family market. While overall housing starts rose 1.5% in October, all of the gain was concentrated in the multifamily component, which rose 10.3%. Breaking down this gain further, projects with five or more units rose more than 6.0% over the month. This pickup primarily reflects apartment projects, and suggests that the multifamily market could have room for further upward momentum going forward. Conversely, single-family building permits declined 0.6% in October. Permits are running below starts, and point to single-family construction remaining lacklustre in coming months.
• Existing home sales rose 1.4% in October to a 5.220-million unit pace after declining 3.4% in September. Although total sales rebounded in the month, the strength in October’s reading was concentrated in the condo/co-op component, which rose 5.3% in the month, compared to a lower 0.9% rise in single-family sales. Compared to a year ago, however, total existing sales are down more than 5.0%.
• Revised consumer sentiment data for November confirmed that while consumers’ overall assessment of the economy largely remains positive, the home buying outlook is less bright. The percentage of respondents stating home-buying conditions are good continued its downward trend to 64.0% in November’s final reading, while the survey also cited that “favourable home buying conditions remain at depressed levels”.
• Data on business spending were less impressive, with durable goods orders declining 4.4% in October, on the heels of a downwardly revised 0.1% drop in September. The typically volatile defence and non-defence aircraft components fell sharply, and gains in other sub categories were also largely lacklustre. An important measure of business spending, core capital goods orders excluding aircraft, was flat in October, and the three-month annualised rate dropped to its lowest since March.
• Expectations that the US Federal Reserve will raise interest rates twice in 2019 are beginning to fade, as evidence of a global economic slowdown mounts. While the Fed is still expected to hike next month, the picture has become murkier for next year. Though US growth remains fairly robust, the pace of global growth continues to slow. Indeed, flash European purchasing managers’ indices declined to their lowest levels since late 2014, and falling crude oil prices are signalling weakening demand in addition to a supply overhang. Financial markets have been grappling with the transition from a decade of highly accommodative financial conditions to tighter conditions worldwide, as uncertainty on the global trade front has dented investors’ confidence. Against this backdrop, the Organisation for Economic Co-Operation and Development lowered its 2019 global growth outlook to 3.5% from an earlier 3.7% forecast.
• US stocks endured a second week of losses due mostly to sell-offs on Monday and Tuesday. The technology-heavy Nasdaq Index performed worst, dragged down by declines in heavily weighted Internet and technology stocks, and was the only major index to dip under its late-October lows. Tech selling contributed to relative weakness in higher-valuation growth stocks, which underperformed slower-growing value shares for the fourth consecutive week. Energy stocks were also particularly weak, dragged down by a continuing tumble in oil prices, which reached their lowest level in over a year. The typically defensive utilities sector held up best. Markets were closed Thursday in observance of Thanksgiving, but trading volumes were somewhat elevated in advance of the holiday.
• Longer-term Treasury yields ended only slightly lower for the week despite the disappointing economic data and equity market weakness. The magnitude of recent declines and anticipation of an upcoming rate hike from the Federal Reserve may have provided some upward pressure. Given the holiday week and a very light new issuance calendar, activity in the municipal market was relatively subdued.In the US, PCE core inflation numbers for October are due to released on Thursday. Based on the CPI index, PCE numbers are expected to come in at 0.2% month-on-month and – 1.9% year-on-year, which is just below the Fed’s 2.0% target.
• On Thursday, FOMC meeting minutes are due out. Recently, markets have interpreted this as the Fed having struck a more dovish tone. However, the Fed is not expected to stop its hiking cycle until the 3.0% neutral interest rate is reached. After that, it is more stop and go. Markets will probably scrutinise the minutes for anything that backs the dovish interpretation.

UK

• After months of negotiations, leaders of the 27 remaining members of the European Union and the United Kingdom ratified the terms of the UK’s withdrawal from the EU. Getting an agreement in Brussels looks to be far easier for Prime Minister Theresa May than having the pact ratified by the British Parliament next month. The proposal is extremely unpopular, with some critics saying the deal puts Britain in a worse position than if it had retained its EU membership. The two main things to look out for in the near term are whether there will be a ‘no confidence’ vote in Theresa May and whether the supporting party, Ulster’s DUP, will pull its support for the government. With respect to the former, it is proving more difficult for the Brexit hardliners to secure the 48 ‘no confidence’ letters than they had imagined. With respect to the latter, the DUP chose to abstain from the budget votes (or even voted against the government) earlier last week, which is against the confidence and supply deal between May and the DUP. The big question is whether this is just a warning shot, or whether the DUP is indeed about to pull its overall support.
• The British public’s expectations for inflation over the coming year edged up this month, but longer-term expectations dropped to an eight-month low, a monthly survey showed on Friday. Year-ahead inflation expectations rose to 2.7% in November from October’s 2.6%, while expectations for the next five to 10 years sank to 3.1% from 3.2%, the lowest since March.
• Black Friday spending in Britain fell year-on-year, credit card data showed on Friday, dealing a blow to retailers who had hoped for strong sales at the start of the Christmas shopping season. Barclaycard, which processes nearly half of all UK debit and credit card transactions, had as of 1300 GMT seen a 12.0% drop in the amount spent, though the volume of transactions was 15.0% higher than seen at the same point of last year’s Black Friday.

China

• The war of words between China and the United States resumed last week ahead of scheduled trade talks on the sidelines of next week’s G20 summit in Buenos Aires. The United States trade representative updated its Section 301 investigation and found that China “has not fundamentally altered its unfair, unreasonable and market distorting practices.” China fired back that the charges were groundless and totally unacceptable. If the two sides are unable to come to an agreement next week, US tariffs on Chinese imports are likely to rise to 25.0% at the turn of the year from the current 10.0%.
• Markets in mainland China and Hong Kong slumped on Friday following a report that the US government was lobbying its allies to avoid buying equipment from Chinese telecommunications equipment maker Huawei Technologies, citing security concerns. The benchmark Shanghai Composite Index sank 2.5% on Friday, its biggest percentage loss in a month, while Hong Kong’s benchmark Hang Seng Index shed 0.4%, falling 1.0% for the week. More than 100 companies listed on China’s exchanges in Shanghai and Shenzhen were halted from trading after they fell 10.0% on Friday (the one-day maximum allowed by the country’s market regulators).
• The key focus in China over the coming week will be the meeting between Chinese President Xi Jinping and US President Donald Trump at the G20 meeting. A meeting and dinner are reportedly planned for Saturday 1 December. There is a high likelihood of an agreement that contains a ceasefire in the trade war and a plan for high level negotiations to reach a deal at some point in 2019.
• The PMI composite index disappointingly fell again in November for a third consecutive month, this time to 52.4 from 53.1 in October, whereas a rather stable development was expected. This is the lowest activity since December 2014. Signs of weakness thus extended into the fourth quarter, making it less likely that there will be a clear rebound in GDP growth here.

EU

• The EU has once again rejected Italy’s proposed 2019 budget and has begun an excessive deficit procedure which subjects Italy to fines equaling 0.2% of its gross domestic product. Italy’s leaders are unconcerned by the threats, vowing to make good on campaign promises of a universal basic income, cutting taxes and lowering the retirement age.
• European stocks fell throughout the week as Brexit and Italy’s budget woes continued to worry investors. The pan-European STOXX Europe 600 Index lost ground in line with a wave of global selling, led by tech shares.
• The November flash inflation numbers are due on Friday. In October, core inflation finally took off and rose to 1.1% year-on-year and headline inflation remained above the ECB’s target, coming in at 2.2% year-on-year in October (the highest rate since 2013). However, headline inflation was driven mainly by rising energy prices and as oil prices in EUR terms have fallen from EUR63 to EUR55 per barrel since the beginning of November, this print is expected to come in at 2.0% year-on-year and for the core to remain at the current level.
• On Monday, German Ifo numbers for November are due out. After the business climate deteriorated further in October, some stabilisation is likely in business expectations in the November print, but there could be a further decline in the current situation assessment similar to the latest ZEW signal.

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