US
The Fed left its policy rate unchanged “for the time being.” The case for a rate hike has strengthened with three members wanting to lift rates this week, exemplified by a rare triple dissent. The Fed has all but set itself up for a hike later this year, with most members remaining optimistic for the economic outlook. Future rate hikes are likely to be more gradual, with the Fed’s own projections toned down alongside potential growth estimates.
Last week, the US housing market indicators came in largely below the consensus estimates for August. Housing starts fell 5.8% in August to an annualised rate of 1.14 million units after averaging over 1.2 million units in the previous two months. Despite the August drop, the trend in the housing recovery seems headed in the right direction. New home building has averaged a seasonally adjusted annual rate of 1.16 million units in 2016. Moreover, single-family home building appears to be gaining momentum as apartment development levels off.
This week, the preliminary Markit service PMI index for September will be made available, where it will be key to see if the weak signals from the service sector continue. The index has been right about the weak GDP growth rates in the past three quarters, so another weak print will be a strong sign that GDP growth in Q3 may have disappointed as well, as the service sector is supposed to be the main growth drive.
This week, the preliminary durable goods orders for August will be released, where the weak development in core capital goods (investment goods) remains a concern. Non-residential investments have been a drag on US growth for quite some time. Shipments of core capital goods have not bottomed out. This indicates that actual investments are still weak, but it was encouraging that new orders rose in July.
EU
Last week, the Eurozone Composite PMI showed another small decline, in line with expectations. The index decreased to 52.6 from 52.9 in August and reached a 20-month low. Despite the decrease, the PMI continues to suggest that GDP growth in Q3 will keep its modest pace from Q2. This is in line with the ECB’s assumption at the recent policy meeting and it should not change the risk assessment tilted to the downside.
The weakness in the sector PMI was found, as expected, in the Services PMI, which decreased to 52.8 in September from 52.8 and reached the lowest level since December 2014. Hence, it is more evident that domestic demand is weakening as several tailwinds such as, past lower energy prices and lower unemployment, are waning. If it was not for the Manufacturing PMI, the Composite PMI would have fared worse in September, as it unexpectedly increased to 52.6 in September from 51.7. This might have gained influence by the improvement in UK manufacturing activity.
In the EU, the German ifo expectations for September are released on Monday. The ifo business expectations dropped in both July and August whereas the financial ZEW expectations rebounded in August and remained unchanged in September.
Last week, the German manufacturing PMI was promising and is almost back at the pre-Brexit vote level of 54.5, but the service sector showed decreasing figures. Overall, this leads to believe the ifo expectations will increase although the disappointing service PMIs will drag on the ifo expectations through the retail component.
The focus remains on the economic impact of the UK’s EU vote and UK politics. As more “hard” economic data for the time after the EU vote are awaited, the most important releases are the GfK consumer confidence and Lloyd’s Business Barometer for September, due on Friday. As expected, business confidence has so far taken the biggest hit, as consumers remain quite optimistic, though the level is not as high as before the EU vote.
China
The key release in China this week is Caixin PMI manufacturing on Friday. It has trended higher since late 2015 but it is expected to move sideways in September before declining moderately going into 2017 as the boost from stimulus and housing construction fades a bit. Inventories have also been rebuilt which should dampen growth a bit during Q4.
Japan
The Bank of Japan announced two new policy measures aiming to target the interest rate on the longer-end of the curve at zero, and pledging to let inflation overshoot the target. Still, a lack of an interest rate cut fanned the view that the BoJ may be running out of ammunition, which together with fears that these moves are too late, has thrown into question the efficacy of the new measures.
Instead of cutting benchmark interest rate or raising the annual increase in monetary base, BoJ seeks to influence the yield curve by advocating purchase of JGBs to keep 10-year bond yields at the current level of close to zero percent, to re-anchor inflation expectations.
Sources: Danske Bank, Haendelsbank, Wells Fargo, TD Economics.
