Economic Outlook – 26 November 2017

US

• Data on existing home sales came in slightly above expectations. Overall sales rose 2.0% in October, rising to a 5.48 million unit pace, following a smaller than initially reported 0.4% increase in September. Those two gains followed three consecutive monthly drops during the summer months that have raised some concerns that the housing recovery is running out of steam. On a year-on-year basis, existing home sales are running 0.9% below their year-ago level.
• The apparent weakness in existing homes sales does not appear to be due to a lack of demand. Homes are selling quickly and home prices are rising solidly. The National Association of Realtors noted that the typical home sold in just 34 days and that 47.0% of existing homes sold in one month or less. Homes that are priced around the median of $247,000 or less are also selling very quickly and there are very few homes available at lower price points. The median price of an existing home has risen 5.5% over the past year.
• Advance orders for durable goods fell 1.2% in October and orders for the key non-defence capital goods component also fell during the month, albeit by a much smaller 0.5%, marking their first decline since June. Most of the drop in overall orders was due to an 18.6% pullback in orders for non-defence aircraft. That highly volatile component had risen 33.0% or more during each of the past two months and appears to be primed for another big up month, given the strength in orders reported by Boeing and Airbus at the Dubai Air Show.
• In what will likely be one of her last public appearances as chair of the US Federal Reserve, Janet Yellen said this week that the challenge the Fed faces is how to craft a monetary policy that maintains a strong labor market while also moving inflation back up toward the Fed’s 2.0% target. Yellen expressed surprise at the low levels of inflation in 2017, given low unemployment figures and stable prices for the dollar and oil. Yellen’s term ends on 8 February, and she recently announced that she will resign from the Board of Governors upon the confirmation of Jerome Powell as her replacement as chair.
• Many participants thought that “another increase in the target range for the federal funds rate was likely to be warranted in the near term if incoming information left the medium-term outlook broadly unchanged”, the minutes from the Federal Open Market Committee (FOMC) meeting on 31 October/1 November said. Moreover, participants generally judged that financial conditions remained accommodative, despite the recent increases in the exchange value of the dollar and Treasury yields. In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential build-up of financial imbalances. They worried that a sharp reversal in asset prices could have damaging effects on the economy. It was noted, however, that elevated asset prices could be partly explained by a low neutral rate of interest.
• Stocks rose in a holiday-shortened week of light trading, bringing the major indexes to new intraday records (US markets were closed Thursday for the Thanksgiving holiday and closed early Friday). Small-cap stocks, which are typically more volatile, recorded the largest gains. The technology-heavy Nasdaq Composite Index also performed especially well, helped by the strong performance of several technology and Internet-related giants, including Facebook, Apple, Alphabet (Google), and Amazon.
• US PCE inflation figures for October are due out on Thursday. Based on the CPI numbers for October (which are usually a good predictor for PCE), PCE core is expected to come in at 0.2% month-on-month (1.4% year-on-year against 1.3% year-on-year in September) and PCE headline 0.1% month-on-month (1.5% year-on-year against 1.6% year-on-year in September). The lower headline than core inflation in October reflects negative contributions from energy commodities, which was caused by decreasing fuel prices after hurricanes.
• US ISM manufacturing figures for November are due on Friday. Based on regional PMIs, one would expect a slight increase in ISM, but Markit PMI tells a completely different story. Hence, uncertainty is large, but a slight fall to 58.0 is expected.

EU

• ECB minutes showed numerous options were put on the table for discussion and policy makers were concern over unwarranted speculation on further extension on the QE programme come next year, which the central bank sees as not justifiable at the current juncture in the absence of major new shocks. Similar to the Fed, there were discussions to replace reference made to inflation outlook to a broader dimension when deciding on monetary policy stance in the future.
• According to Markit, the Eurozone economy gained momentum in November with the Composite PMI rising to a surprisingly strong 57.5, up from 56.0 in October. A more stable index was expected, and the recent market jitters in the financial markets, as well as higher energy prices, have not affected business confidence much. Hence, the soft barometers now suggest that real GDP growth could accelerate in the fourth quarter to 0.8 % quarter-on-quarter and thus, did once again not show many signs of giving in to the less upbeat hard data.
• In Germany, talks between Chancellor Angela Merkel’s Christian Democratic Union (CDU), the Greens and the Free Democratic Party (FDP) broke down on Sunday evening, throwing Germany into a nearly unprecedented political crisis. As a result, German president Frank-Walter Steinmeier has appealed to the centre-left Social Democratic Party (SPD), the second largest vote getter in the 24 September general election, to form a grand coalition with Merkel’s party. SPD leader Martin Schulz has thus far declined to join a coalition, believing that being a coalition partner in the previous government hurt his party at the polls in September. Steinmeier has appealed to Shultz to reconsider for the good of the country. If the SPD does not acquiesce, fresh elections in early 2018 seem likely.
• In the euro area, the key release is the HICP figures for November, due on Thursday. Headline inflation decreased to 1.4% year-on-year in October down from 1.5% year-on-year. Core inflation also took a dip, reporting 0.9% year-on-year down from 1.1% year-on-year in September. Especially service price inflation played a major role in the decline, as volatile components such as package tours and services related to transport saw drops, while Italy registered a sharp decrease in education prices, which also weighed on service price inflation. The October dip may be the beginning of a declining trend, but instead expect core inflation to bounce back to 1.1% year-on-year in November.

UK

• At a mid-December summit, the European Union will determine whether sufficient progress has been made in the Brexit negotiation in three key areas in order for talks to advance on a second track on the future trade relationship between the two sides. The three areas of critical importance to the EU are the rights of EU citizens residing in the United Kingdom, the “divorce bill” payment the UK will pay as it leaves the EU and the thorny issue of how to deal with the border between Northern Ireland and the Irish Republic. In an effort to advance negotiations, the UK government has floated payment figures of as much as €40 billion. Press reports indicate that EU officials have received the overture positively. Of the three policy areas, the border of Northern Ireland is seen as the most difficult to settle. Complicating that delicate issue is the precarious state of the Irish Republic’s government, with the country’s deputy prime minister embroiled in scandal.
• The second estimate of UK GDP growth confirmed the preliminary estimate of 0.4% quarterly growth in Q3. The year-on-year rate was also unrevised at 1.5%. The components of the output approach were also broadly unrevised from the preliminary estimate, with services remaining the strongest contributor. The second GDP estimate also provides a breakdown of the demand side of the economy, and according to the ONS, private consumption was the main contributor to GDP growth in Q3. Household spending grew by 0.6%, up from 0.2% in Q2. However, some of the rebound in Q3 was due to car purchases, driven by timing issues in response to increases in vehicle excise duty on high-polluting vehicles. Total capital formation increased by 0.2% in Q3, with business investment growth softening to 0.2% in Q3 from 0.5% in Q2. Net trade growth was negative in Q3, with exports falling by 0.7% and imports increasing by 1.1%. The decrease in exports was due to a 1.8% fall in goods exported, partially offset by 0.6% positive growth in services exported. Fuels, specifically oils and chemicals, drove the decrease in goods exported. The increase in imports was partly due to the stronger private consumption (cars), but also due to non-monetary gold.
• PMI manufacturing for November is due on Friday. As the equivalent index for the euro area rose to 60 (the highest since 2000), the UK index is expecting to rise to 58.0, which, however, is still below the euro index. The UK manufacturing sector is benefiting from increasing global demand despite Brexit uncertainties.

China

• China’s stock market benchmark slumped last Thursday as a sell-off in the domestic bond market that started in October spilled into the country’s stock market. The Shanghai Composite notched its biggest drop in nearly a year and closed at a two-month low when U.S. markets were closed for Thanksgiving. Yields on highly rated, five-year Chinese corporate bonds and the country’s 10-year sovereign bonds both hit their highest levels in three years, reported Bloomberg. Weakness in Chinese bonds emerged last month amid rising concerns that Beijing would start to tighten conditions to reduce risks in the country’s indebted financials sector. However, recent criticism in state-run media about the run-up in Chinese stocks also raised caution—particularly after reports highlighted the risks in a Chinese spirits company that has become the world’s most highly valued liquor maker, after a huge rally in its shares in the past year.
• The focus in China next week will be on PMI manufacturing from both the official as well as private (Caixin) offices. A decline in Caixin manufacturing PMI to 50.5 in November is possible (consensus 51.0, previous 51.0) as signalled by a decline in commodity price momentum. The official PMI manufacturing is projected to fall to 51.2 (consensus 51.5, previous 51.6). The ongoing credit tightening in China is expected to weigh on housing and investment growth.

Sources: MFS Investment Management, Danske Bank, T. Rowe Price, Wells Fargo, TD Economics, Handelsbanken Capital Markets.