Economic Outlook – 27 August 2017

US

• New home sales posted a 9.4% monthly drop in July to a 571,000-unit pace, but June’s print was revised up 20,000 units to 630,000. While 9.4% in one month is eye-catching, new home sales are notoriously volatile and gains or drops of that magnitude are not unheard of. July’s print was more of a stumble, and the trend in new home sales remains on a steady upward trend. Demand for new homes appears to be improving further, according to NAHB/Wells Fargo homebuilder survey, which rose solidly in August. July’s stumble in sales alleviated some pressure on inventories, as the months’ supply of homes rose. Most of the increased inventory of new homes for sale were either under construction or not yet started. In addition, sales were up on the month for homes not yet started. This suggests that demand remains strong, and the shortage of existing homes on the market further boosts the need for new home development.
• Persistently lean inventories continued to restrain resales in July, with existing home sales registering a slight decline of 1.3% to a 5.44 million-unit pace from 5.51 million units in June. The median price of existing homes slipped slightly from its record high in June, while the average price rose to another record. The typical home was on the market for 30 days in July, up from 28 days in June but still marked the fourth month in a row that homes were on the market for less than a month. The solid job market and low mortgage rates support demand, but the dearth of inventory is pushing prices up faster than incomes are rising.
• Durable goods declined 6.8% in July, which was to be expected as Boeing orders came down to 22 in July, down from 184 in June. The underlying details of the report indicated factory conditions were much better than the headline suggests. Orders for capital goods, excluding aircraft and defence, were up a solid 0.4% in July after June’s flat reading. Shipments in the same category, which is a useful gauge for the business investment category in the GDP calculations, rose 1 % in July. The three-month annualised pace accelerated for orders and shipments of core capital goods, a welcome shift in momentum, which bodes well for GDP growth in the second half of the year.
• According to the Wall Street Journal, the US government is considering a ban on the trading of some Venezuelan debt by US-regulated financial institutions. Bonds issued by the Venezuelan government and the state-owned oil giant PDVSA could be subject to the freeze, the report says.
• According to media reports, senior Trump administration officials and congressional leadership have agreed on an outline for significant reform of the US tax code. The framework includes lowering individual and corporate income tax rates while phasing out or doing away with popular deductions for things such as mortgage interest payments and state and local taxes. Equity markets rallied early in the week on the reports. However, late Thursday afternoon reports surfaced that congressional leaders do not expect to release a joint tax plan with the White House in September. Trump’s chief economic advisor, Gary Cohn, told the Financial Times on Friday that starting next week the president’s calendar will revolve around tax reform. One criticism of Trump during the health care debate was that he did not “sell” the policy to the public. It looks as though he will seek to do so on tax reform.
• The US Department of the Treasury levied fresh economic sanctions on several Chinese firms and a Russian firm, as well as Chinese and Russian individuals, for helping supply materials to North Korea’s nuclear and ballistic missile programs. The United States seeks to interrupt the flow of hard currency that allows North Korea to acquire components from abroad.
• The ADP employment change in August is due for release on Wednesday. For 82 consecutive months, employment has risen and the latest jobs reports from June and July showed employment gains of 231,000 and 209,000, respectively. However, the latest ADP report for July reported 178,000, which was slightly below the estimate of 185,000. In August, ADP employment is likely to rebound up to 185,000. The second GDP estimate for Q2 is also due for release on Wednesday but no significant revisions in the figure are expected.
• PCE inflation figures for July will be released on Wednesday. The CPI reported a 1.7% year-on-year increase in July, slightly below the estimate of 1.8% but higher than June’s figure of 1.6%. PCE tends to follow the development in CPI, so PCE also is expected to slight rise in July to 1.5% year-on-year.
• On Friday, the August jobs report is due for release. Focus remains on the unemployment rate and wage growth as these remain crucial for the Fed’s decisions on quantitative tightening. In line with the continued growth in employment, further declines in the unemployment rate are to be factored in. However, wage growth is expected to remain around current levels for some time and to fail to show a significant pickup as the second round effects of several years with low inflation are dragging wage growth.
• The ISM manufacturing PMI is also due for release on Friday. After increasing to 57.8 in June, the ISM manufacturing PMI declined to 56.3 in July. The decline was led by a slowdown in new orders, production and employment but the high levels still witness-expanding activity.

UK

• UK GDP growth in Q2 was unrevised at 0.3% quarter-on-quarter, according to the second release from the ONS. Year-on-year GDP rose by 1.7% in Q2, down from 2.0% growth in Q1. On the production side, GDP growth in Q2 was driven solely by services, which pulled GDP growth up by 0.4 percentage points. Manufacturing and construction both fell and pulled GDP growth down by 0.05 and 0.08 percentage points respectively. On the demand side of GDP, there was relatively strong growth in government spending and investment in Q2, while growth in both household spending and business investment slowed from Q1. Private consumption rose a mere 0.1% (down from 0.4% in Q1), which was the weakest quarterly growth rate since Q4 2014. Business investment showed zero growth, down from +0.6% in Q2. On the positive side, net exports improved, with exports up 0.7% (up from -0.7% in Q1); imports were also up 0.7% (down from 1.7% in Q1) on the quarter. Economic sentiment indices, such as the GfK consumer confidence and PMI surveys, suggest momentum going into Q3 is limited. UK GDP growth for 2017 as a whole is expected to land at 1.6%, while the BoE has 1.7%. The Bloomberg consensus is 1.5%.
• The kick-off of the third round of Brexit negotiations between the UK and the EU. The parties are set to continue negotiations in phase 1 (divorce bill, citizen’s rights and Irish border). The negotiations are set to face difficulties following the poor election result for PM Theresa May, as the cabinet is divided and does not have unanimous goals for the negotiations.
• On Thursday, consumer confidence is due for release. In July, consumer confidence declined to -12, which is the lowest level since 2013 and the same level as observed immediately following Brexit. The declining trend is likely to continue in August.
• The Markit manufacturing PMI is due for release next Friday. Last Wednesday, the euro area manufacturing PMI increased contrary to the consensus expectation and increases were observed in both Germany and France. Particularly surprising was the increase in new orders driven by higher new export orders despite the headwind from EUR appreciation. Given the positive surprise in euro area manufacturing PMIs, UK manufacturing PMIs is also expected to report an increase in August.

EU

• Flash composite PMI for the eurozone increased slightly to 55.8 in August from previously 55.7. This was the first increase in four months and it hence compares well with the recent more elevated readings in investor barometers as well as the Sentix. The PMI thus maintains a healthy level in the third quarter, suggesting that Q3 economic growth will continue at the healthy pace of the second quarter.
• Looking at sector PMIs, it was a bit surprising that manufacturing was the main contributor to the improved sentiment, as it rose to 57.4 in August from previously 56.6. Hence the recent surge in the EUR does not (so far) seem to be increasingly worrying manufacturers. On the other hand, the service PMI decreased more than expected to 54.9 from 55.4, even though there have been robust retail sales and a continued fall in unemployment. But the negative stock markets in August have probably weighed on consumer confidence. Furthermore, on the national level, the German flash composite PMI increased to 55.7 in August from 54.7 in July whereas the corresponding French reading stayed flat at 55.6 in August.
• The loan growth for July, due on Monday. In 2017, loans to households have been rising at the fastest pace since 2009, confirming that the ECB’s accommodative monetary policy measures are transmitting to the real economy. The July figure is expected to report 2.7% year-on-year growth, up from 2.6% year-on-year in June.
• M3 money supply growth in July will be released on Monday and the consensus is the figure in July remained around 5.0%, as observed over the past three months.
• The euro area HICP figures for August will be released next week. Headline inflation is expected to be 1.4% in August and the small increase will be most likely due to energy price inflation. However, the core inflation price pressure remains moderate and is still not sufficient to drive headline inflation towards 2%. This should also be reflected in August’s core inflation figure, which is expected to be 1.1% year-on-year. It looks like there is still not enough underlying price pressure to increase core inflation significantly and to drive headline inflation towards the ECB’s target of just under 2%, especially considering how the appreciation of the euro is now becoming a headwind to growth and inflation in the euro area.
• The euro area unemployment rate is also due for release on Thursday. The unemployment rate continues to fall and reached 9.1% in June. The consensus is it fell further to 9.0% in July, as employment and activity indicators remain at high levels, reflecting the optimistic economic expectations that persist in the euro area.

China

• The main mover in China next week is manufacturing PMI for August – both the official and the private Caixin index where a small decline in the Caixin index is possible after a surprising rebound over the past two months to 51.1 for July. Some measures of credit impulse point to a decent financial tightening in China over the past year and recent home sales and house prices have pointed to a cooling of the housing market. The official PMI manufacturing fell to 51.4 in July and the consensus is it fell slightly further to 51.2.

Sources: Wells Fargo, MFS Investment Management, HongLeong Bank, Handelsbanken