Economic Outlook – 26 May 2019


  • US durable goods orders fell 2.1% during April. Orders have been influenced by volatile aircraft orders in recent months, and this was again the case. The grounding of the Boeing 737 MAX and subsequent negative headlines have led to net cancellations, which weighed heavily on April’s outcome. The civilian aircraft component of orders fell 25.1% while shipments declined 16.0%. That said, the weakness in orders extends beyond commercial aircraft. Core CAPEX orders also slipped 0.9%, and have slowed to 2.5% year-on-year. Overall, manufacturing activity should continue to be subdued in coming months amid heightened trade frictions and sluggish global growth.
  • Lower US mortgage rates have helped stymie the sharp pullback in home sales seen last year but have not reversed it. Declines in both new and existing home sales during April mask an overall improving trend in the housing market. New home sales came in below expectations, falling 6.9% in April. However, the report contained significant revisions to prior months’ data, which showed sales reached a cycle-high 723,000-unit pace during March. Furthermore, the 673,000-unit sales pace hit in April was the fourth strongest since 2007. New home sales have likely been helped by builders offering discounts to clear rapidly rising inventories, however the trend is clearly improving and sales are now running 7.0% ahead of their year-ago pace.
  • Existing home sales also posted a drop and fell 0.4% during the month. While underwhelming, existing sales remain fairly solid and are running just slightly below their year-ago pace. A significant breakout is unlikely this year, but sales should be stronger than they have been the past few months. The rate on the 30-year fixed-rate mortgage fell to 4.14% in April, the lowest point since early last year. A pickup in purchase applications has followed. Through May 10, the purchase application index is 4.0% above the level averaged last year during that same period.
  • The minutes of the early May meeting of the Federal Open Market Committee indicate that the US Federal Reserve was relatively unconcerned by the recent drop in inflation and slowdown in growth. However, the meeting took place before the US-China trade talks broke down, so the Fed’s patient approach to adjusting interest rates might have shifted a bit in recent weeks. Market expectations have clearly shifted, with several rate cuts priced into markets in coming years, and 10-year Treasury note yields have fallen to their lowest level since September. The minutes of the early May meeting of the Federal Open Market Committee indicate that the US Federal Reserve was relatively unconcerned by the recent drop in inflation and slowdown in growth. However, the meeting took place before the US-China trade talks broke down, so the Fed’s patient approach to adjusting interest rates might have shifted a bit in recent weeks. Market expectations have clearly shifted, with several rate cuts priced into markets in coming years, and 10-year Treasury note yields have fallen to their lowest level since September.
  • US stocks ended lower for the week, with the technology-heavy Nasdaq Composite Index falling the most as investors worried about the impact of rising US-China trade tensions on global supply chains. Several news reports noted that the narrowly focused Dow Jones Industrial Average had suffered five weekly declines, marking the longest losing stretch since 2011. The broader major indexes recorded only their third weekly drop, however.
  • US energy stocks performed worst within the S&P 500 Index, as oil prices suffered their sharpest weekly declines of the year. The typically defensive utilities sector recorded gains, and health care shares also outperformed as Humana, Anthem, and UnitedHealth Group made up some of the ground lost in recent months due to worries about a possible “Medicare for All” system promoted by presidential candidate and US Senator Bernie Sanders.
  • Tech stocks fell Monday on news that large US technology companies were halting sales to Chinese telecommunications giant Huawei following a new set of export restrictions announced by the White House the previous week. On Tuesday, the major indexes recovered their losses after the Trump administration granted temporary exemptions to firms doing business with Huawei. Stocks fell back again on Wednesday, however, following news that the White House was reportedly considering blacklisting more Chinese tech companies.
  • The disappointing data and the continued search for perceived safe-haven assets due to trade concerns pushed the benchmark 10-year Treasury note yield down to around 2.31%, its lowest level since late 2017. The drop pushed the 10-year yield back below the three-month Treasury bill yield – a yield curve inversion that has typically preceded an economic downturn.
  • Next week will be fairly slow in terms of US data and a better sense of how resilient the US economy is to the global slowdown the following week will be provided by the ISM manufacturing and the May jobs report.


  • The Eurozone Composite PMI index increased slightly to 51.6 in May, from 51.5 previously. Manufacturing PMI and Services PMI both saw marginal decreases to 47.7 and 52.5 respectively. The divergence in signs with the composite index is likely a result of seasonal adjustments. In terms of levels, all three indices, but especially manufacturing, remain below the 25th percentile over a five-year horizon. In Germany, PMIs remained roughly unchanged, thus disappointing forecasts of an expected uptick in manufacturing. Meanwhile, the Ifo business climate index suggested business confidence has reached a four-year low. In France, both the Composite and Services PMIs continued to increase and reached their highest levels since November last year, suggesting tentative signs of an upturn.
  • Amid global trade conflict, slowing economic growth and an unresolved Brexit process, voters across the EU head to the polls this weekend to vote for members of the European Parliament. The voting began in the UK on Thursday and continues across the EU throughout the weekend. Both the Conservative and Labour Parties are expected to perform poorly. Ironically, the newly formed Brexit Party is expected to win the lion’s share of the vote, sending the largest number of the UK’s MEPs to a legislative body that the party does not want the UK to be a member of.
  • Euro area HICP figures are due out on Tuesday, 4 June. In April, the ‘Easter effect’ pushed core inflation up by 0.5pp to 1.3% year-on-year but the May print will probably be a more reliable guide to the trend in actual underlying inflation pressures. As the Easter boost to travel-related service prices wanes, both headline and core inflation ae expected to drop back in May, to 1.6% and 1.1%, respectively.


  • British prime minister Theresa May announced that she will resign on 7 June, shortly after a state visit to the United Kingdom by President Trump. May will stay on as a caretaker until a new Conservative Party leader is chosen, in a process that will likely extend into July. While the Conservatives are expected to choose a Brexiteer to lead the party given its Leave-Remain split of Conservative Party members within the House of Commons, it remains unlikely that the UK will leave the European Union without a deal. However, risks of a general election being called have risen.
  • British shoppers paused in April after three months of strong buying, according to official data that showed continued underlying strength in consumer spending even as the Brexit political crisis unfolded. Monthly retail sales volumes were flat last month, the Office for National Statistics said, stronger than a median forecast for a 0.3% decline in a Reuters poll of economists. During the three months to April, sales rose 1.8%, the fastest growth by this measure since August last year.
  • British employers offered staff pay rises averaging 2.5% as part of wage settlements in the three months to April, industry data showed on Thursday, matching the trend seen earlier in 2019. Human resources data firm XpertHR said pay settlements had hovered around the same for the past four months, despite a small pick-up in inflation. “Many of the current pay awards are lower than employees received in 2018, suggesting that there is little scope for higher rises this year,” XpertHR analyst Sheila Attwood said.


  • Fears of a protracted trade battle between the US and China intensified last week. China’s president, Xi Jinping, said that the country, in dealing with the US, must prepare for a new Long March (seen as a heroic episode in Communist Party history) and encouraged the China to remain resilient in the face of hardship. Xi also obliquely threatened to withhold Chinese exports to the US of rare earth elements. These are essential raw materials found in many high technology products. The moves came after the US weighed blacklisting several Chinese video surveillance firms just days after banning China’s Huawei Technologies from importing US technology, though that ban has been deferred for 90 days and Trump hinted that despite national security concerns Huawei might be included in an eventual trade deal. China’s Ministry of Commerce said that the US must correct “wrong actions” if it wants to revive trade talks. US Secretary of the Treasury Steven Mnuchin said that no talks are scheduled but that it is unlikely that any additional tariffs will be put in place in the next 30 to 40 days. That would give US president Donald Trump and President Xi time to meet at the G20 summit in Japan in late June, potentially forestalling any further levies. Trump pointed to the G20 meeting as a potential turning point in resolving the conflict, saying there is a good possibility of a deal with China.
  • Chinese stocks fell for the week as the intensifying US-China trade battle spilled into the technology sector following reports that the Trump administration was considering penalizing more Chinese tech companies one week after it placed telecommunications leader Huawei Technologies on a blacklist. For the week, the benchmark Shanghai Composite Index shed 1% and the large-cap CSI 300 Index, China’s blue chip benchmark, fell 1.5%, according to Reuters. Friday marked the fifth straight weekly decline for the Shanghai benchmark and the third straight weekly loss for the CSI 300.
  • The focus in China will be on the official PMI manufacturing data. Previously, it had been expected to rise further in the coming months as sentiment was starting to improve. However, with the sharp setback in the trade war, the PMI is expected to move sideways at quite a low level in the coming months. It is likely it will remain unchanged in May at 50.1 while there is no room for falling back to the very low levels seen in January. Stimulus is increasingly feeding through, which puts a floor under growth.  However, uncertainty is quite elevated at the moment and if the trade war drags out, the recovery would likely be postponed further.
  • Other focus points will be industrial profits for April and the development in the US-China trade war. One of the things to look out for now is whether there is any retaliation against the US ban on US firms doing business with Chinese tele-giant Huawei, which represents a big hit to the company.

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