Economic Outlook – 27 October 2019


  • The legitimate slowdown in overall economic growth is exaggerated by the continuing drag from Boeing’s issues with the 737 MAX and the lingering strike at General Motors. The effect from both was apparent in September’s advance durable goods report, which saw overall orders fall 1.1%. Orders for transportation equipment fell 1.6%, reflecting declines in orders for civilian aircraft and motor vehicles. Production of motor vehicles plunged 4.2% during the month, so the effect of the GM strike should be even more apparent in October’s employment data.
  • Data for Q3 GDP growth will be reported this week. Nondefense capital goods shipments, which feed into the BEA’s measure of equipment spending, ticked down 0.1% in September. This puts nondefense capital goods shipments over the past three months down 9.2% on an annualized basis, and suggests a weak outturn for equipment spending in next week’s Q3 results. This raises the possibility of a downside surprise for the GDP report. It is important to remember, however, that GDP measures production and larger inventories (or less drag from inventories) are likely to offset some of the drop in shipments. Capital spending is not likely to meaningfully improve during Q4, although a settlement to the GM strike, progress on the trade front and some movement toward a resolution to Boeing’s issues would certainly set the stage for a better 2020.
  • Sales of new and existing homes fell modestly in September and mortgage applications also declined. The pace of home buying has picked up in recent months, so the modest decline left sales at a fairly high level. Prices of existing homes firmed this past month, reflecting the continued dearth of lower priced homes on the market. Lower interest rates also provided a boost to sales of higher priced homes, which should lift brokers’ commissions.
  • Several larger homebuilders have reported strong demand for new homes, reflecting renewed efforts to deliver more affordable homes to a rising tide of first-time Millennial buyers. There is a bit of a split in home prices, with tight inventories of existing homes leading to a bit of a reacceleration in existing home prices, at least as measured by the National Association of Realtors. Prices for new homes, however, have continued to moderate, reflecting a shift to more affordable starter homes, particularly in the South and Midwest, where land and development costs tend to be lower.
  • The US economy is still strong, with unemployment at a historically low level. However, weaker global demand and the trade war are hurting the manufacturing industry and causing a decline in corporate investment. In the service sector, confidence has also diminished (a sign that a slowdown in growth is on the way). The incoming evidence on the inflation side, with the decline in underlying inflation expectations and the Fed’s preferred core PCE inflation measure remaining below the 2% target, also supports the case for more expansionary policy. The bottom line is that there is enough in the latest data to support the case for further gradual rate cuts.
  • US stocks posted gains, although the week lacked the major daily moves driven by geopolitical news that characterized trading sessions earlier in October. Investors seemed to focus their trading on individual stocks affected by earnings reports rather than drawing broader market implications. Thursday had the largest number of earnings reports during the week, although volumes were lighter than average on the less busy earnings days. The traders also noted that sentiment seemed to become more positive than in the previous week, when many market participants appeared to be concerned about another late-year sell-off, like in 2018.
  • The data on durable goods orders and manufacturing PMI also appeared to have minimal impact on US Treasury bonds, where yields were little changed for the week. The 10-year Treasury yield remained near the top of its recent trading range at about 1.80%, with the market seeming to be indecisive about driving the yield sustainably above the 1.80% level.
  • The most important event is the Fed meeting on Wednesday where another 25bp cut is expected. While investors have fully priced in a cut, economists are evenly divided on whether the Fed will cut or stay on hold.
  • On Wednesday, the first estimate of GDP growth in Q3 is due out, which is expected to come out at 1.8% quarter-on-quarter AR. US growth has peaked, as investments are struggling in the current environment and private consumption is not growing as fast as previously.
  • On Friday, the jobs report and the ISM manufacturing index for October will be issued. Based on the Markit PMI employment subindex, a fairly weak jobs report is likely in terms of jobs growth.


  • The UK currency came under pressure last week amid ongoing Brexit uncertainty, especially after French President Emmanuel Macron blocked a European Union (EU) attempt to delay Brexit for three months. Macron was the sole dissenter at the EU leadership meeting in Brussels. The EU deferred its final decision until Tuesday. Macron reportedly wants to allow a Brexit delay until November 30, while other EU governments are willing to postpone Brexit until January 31 to allow time for a general election. UK Prime Minister Boris Johnson said that he will seek an election on December 12. However, he will need to secure the backing of two-thirds of Parliament, which will be difficult given that the Labour Party has said it will block such a move until a no-deal Brexit has been ruled out by the EU.
  • The number of new mortgages approved by British banks hit a six-month low in September, according to a survey that adds to signs the housing market is slowing again ahead of the October Brexit deadline. Industry body UK Finance said banks approved 42,310 loans for home purchase in September, compared with 42,527 in August, according to seasonally-adjusted data. However, the number of approvals for remortgaging rose to the highest level since November 2017 at 32,649.
  • British manufacturers expect their orders to fall at the fastest rate in a decade over the next three months due to the slowing global economy and Brexit uncertainty, a quarterly survey by the Confederation of British Industry showed on Tuesday. The CBI said its manufacturing orders balance sank to -19 in October from +10 in July, the lowest since April 2009. The CBI’s monthly orders balance for October sank to -37 from -28 in September, below all forecasts in a Reuters poll and its lowest since March 2010.
  • The most important print in the UK is the PMI manufacturing index due out on Friday. Despite the weakness in manufacturing in the rest of Europe, there could be another increase in the UK index, as companies may have stockpiled ahead of the 31 October Brexit deadline.


  • The ECB reiterated the need for its accommodative stance of monetary policy. The bank decided to keep rates at current levels and expects them to remain at present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, the inflation target. As announced at the previous meeting, net purchases under its asset purchase programme (APP) at a monthly pace of EUR 20 billion will resume as of November 1. It expects the duration to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates. Furthermore, the bank intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP.
  • The Eurozone Flash Composite PMI was 50.2 in October compared to 50.1 in September, and thus remained close to stagnation. Meanwhile, Manufacturing PMI was unchanged at 45.7 and Services PMI was 51.8 compared to 51.6, with all three releases below expectations. The manufacturing downturn remains the sharpest in seven years, and looks increasingly to be weighing on the service sector, which this month experienced one of the weakest expansions since 2014. Demand for goods and services fell for a second month in a row, future expectations sank to the lowest level since 2013, jobs growth hit a five-year low, just as compressed price pressures saw selling price inflation stuck at a near three-year low. This latest release will only serve to cement concerns as the policymakers try to tackle the region’s growth challenges.
  • Equity markets in Europe were mostly higher last week, buoyed by a strong start to earnings season. Brexit uncertainty and ongoing US – China trade tensions capped gains, however. The pan-European STOXX Europe 600 Index gained 1.5%, while the exporter-heavy German DAX rose more than 2%.
  • On Thursday, the October print is published with the latest chapter of the euro area inflation tragedy. The protagonist, headline inflation, is still in free fall and this fall is likely to continue to 0.7% YoY in October due to base effects in the energy component. Headline inflation does not get much support from core inflation, since it has been hovering around 1.0% in past years despite a solid uptick in wage growth.
  • Also on Thursday, the preliminary Q3 GDP print is issued. In Q2 there were signs that domestic demand is slowing. PMIs took a further plunge in September pointing to almost stagnant Q3 growth. The service sector can compensate for some of the weakness from the ongoing industrial recession and hence a quarterly growth rate of 0.2% quarter-on-quarter is possible.


  • In its World Economic Outlook, The International Monetary Fund projected growth of 5.8% for the Chinese economy next year, which is a reduction from the 6.1% forecast for 2019 (6.6% growth in 2018). IMF Deputy Managing Director Tao Zhang said, “In recent years, what’s going on in the world … we have trade tensions, we have other geopolitical forces, we have all these uncertainties around the world … these add further downside pressures to the Chinese economy.” China’s projected slowdown next year contrasts with the IMF’s forecast for a recovery in the global economy. The fund said it expects a global economic growth rebound to 3.4% in 2020 after an anticipated slowdown to 3% this year (from 3.6% in 2018) partially due to uncertainties caused by the US – China trade war.
  • Chinese stocks posted a weekly gain, as a string of solid earnings reports and a large liquidity injection by the central bank boosted buying sentiment. For the week, the benchmark Shanghai Composite Index edged up 0.6%, and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, added 0.7%. Decent third-quarter earnings reports from a few bellwether companies eased worries about corporate earnings weakness at a time when China’s economy is under growing pressure from the US trade war and a broader economic slowdown.
  • China reported its economy grew a below-forecast 6.0% in the third quarter, marking its slowest growth pace since 1992. Stocks also received a boost on Tuesday, when the People’s Bank of China (PBOC) injected 250 billion yuan, or roughly USD $35 billion, into the financial system. The PBOC’s move marked the largest amount of cash it has injected into the economy since May and was intended to ensure ample liquidity in China’s banking system ahead of a month-end deadline for companies to pay taxes, Bloomberg reported.
  • The important PMI data are due for release. The expectations are mixed. Three could be some downside risk for Caixin PMI manufacturing simply because the increase in the past months seem too good to be true. A decline is possible. For the official PMI manufacturing from NBS a flat reading at 49.8 is expected. The NBS PMI has been painting a softer picture but still shows some signs of improvement lately.

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