US
All the major equity market indices hit record highs at various points this week, including a Dow-S&P 500-Nasdaq-Russell 2000 flush on Monday, reflecting post-election prospects for stronger economic growth and higher corporate profits owing to the potential policy trifecta of tax cuts, more infrastructure spending and less regulation.
Data on housing was more mixed, with new home sales falling more than expected, but existing home sales surprising to the upside and reaching the highest level since February 2007. The recent climb in interest rates will likely pull forward home sales as consumers try to lock in rates, while having a dampening effect on activity in subsequent quarters. The recent backup in mortgage rates may slow but is unlikely to derail the US housing recovery.
With respect to interest rates, the Fed minutes released this week confirmed what many already believed, mainly that the economy is making progress and that a rate hike is likely to come ‘relatively soon’. The market is now fully pricing in a rate hike in December with a probability of 100%. Rising inflation expectation in the aftermath of the election have strengthened the case for a hike, while next week’s payrolls report should provide further support.
The November jobs report is due out on Friday. The October report was strong with declines in both the unemployment and underemployment rates to 4.9% and 9.5%, respectively (from 5.0% and 9.7%) and acceleration of wage growth to 2.8% year-on-year (from 2.7% year-on-year). This may be the sufficient ‘further evidence’ for the FOMC needs to raise rates in December, which is now also fully priced in by markets.
On, Thursday the ISM manufacturing index figure for November is due out. The estimate for the index is an increase to 53.3 in November from 51.9 in October in line with the Markit PMI manufacturing index, which increased to 53.9 (from 53.4 in October) this week. The manufacturing sector is gaining momentum in the US and globally.
UK
In his Autumn Statement, Phillip Hammond in the UK outlined a fiscal policy that was tighter than many had expected. Despite downwardly revised estimates for economic growth, the outlined fiscal policy is about as contractionary as the policy envisaged by his predecessor. GDP growth in 2017 and 2018 is expected to amount to around 1.4% and 1.7% respectively, revised down from the March estimates of 2.2% in 2017 and 2.1% in 2018. As a result of lower growth and income estimates, the expectations of public sector borrowing were revised up by GBP 122 billion over the coming five years. Fiscal policy will contribute negatively to economic growth ahead, as the structural deficit is expected to fall by 0.8% next year and by 0.6% in 2018. This is roughly the same tightening foreseen by the previous government in the March budget.
The UK GDP growth estimate held steady at 0.5% in Q3 as expected, and the details still showed that growth was driven solely by services, with output up by 0.8%. Industrial output and construction fell by 0.5% and 1.1% respectively. On the demand side, private investment surprisingly increased by as much as 0.9%. Private consumption increased by 0.7%, pulling GDP growth up by 0.4 percentage points. Net trade buoyed GDP growth by 0.7 percentage points and government spending contributed just shy of 0.1 percentage points.
On Wednesday, the GfK consumer confidence and Lloyds Business Barometer indicators, both for November, are due out. Consumer and business confidence has rebounded back to the levels prevailing before the EU vote. Most interesting is it that business confidence has rebounded, as it suggests that investments so far have been resilient to Brexit uncertainties. Both indicators are likely to stay around current levels, as there is no news to indicate they may have been pulled in either direction.
On Thursday, the PMI manufacturing index for November is due out. The index rebounded significantly after the initial drop in July just after the EU vote, supported by the weaker GBP and higher global PMIs. As global manufacturing PMIs are increasing and the UK manufacturers still benefit from a weaker GBP through more export orders (despite GBP having strengthened in November), PMI manufacturing could increase further.
EU
The Eurozone composite PMI increased unexpectedly in November to 54.1 from 53.3 in October. The increase took the business confidence measure to the highest level this year. The back-to-back gain with October suggests that Eurozone GDP growth looks set to finish 2016 at a slightly stronger pace. The Trump victory in the US presidential election did not seem to effect business optimism. Instead, they might have taken a cue from the benign financial market reaction to the US election, as the EUR has weakened and stock markets recouped the preceding decrease.
In the euro area, the main release is the HICP inflation figure for November on Wednesday. Headline inflation increased to 0.5% year-on-year in October up from September’s figure of 0.4% and from its bottom of -0.2% in April 16. The rising tendency is likely to continue throughout 2016 supported by an energy price-inflation pickup. Core inflation has remained steady at 0.8% year-on-year since August, and the figure is very likely to continue below 1% throughout 2016. As core inflation remains low and headline inflation is only supported temporarily by energy inflation, the ECB will not conclude that inflation is on a sustainable path.
Monday also brings the M3 money supply growth and loan growth for October. The estimate for M3 money growth is a continuation in the 5% year-on-year growth figure for October. Loan growth, however, may be heading towards a slowdown. Despite lying at 1.8% year-on-year since June, the decline in European bank equities may indicate a slowdown in loan growth.
China
On Thursday, the Chinese manufacturing PMIs will be released and is expected to decline slightly in November following the striking jump upward in October, when the PMIs posted their highest reading in more than two years. The official manufacturing PMI jumped from 50.4 in September to 51.2 in October and consensus expects it to land at 51.0 in November. The manufacturing PMI from Markit jumped from 50.1 in October to 51.2 in November; consensus expects it to drop slightly to 50.8 in November.
Hong Kong
Hong Kong’s exports unexpectedly fell 1.8% year-on-year last month, snapping two straight months of gains. The fall in exports to Japan and Germany declined at hefty pace. Exports to China, Hong Kong’s largest exports destination, was flat after a strong 5.1% year-on-year growth in September. Imports, on the other hand, remained positive for three straight months. Imports slowed to 0.5% YOY in October followed a 4.1% YOY growth in September.
Sources: Haendelsbank, HansLeong, TD Economics, Danske Bank.