Economic Outlook – 29 September 2019


  • Consumer Confidence fell by a larger than expected 9.1 points to a still respectable 125.1. Consumers grew more cautious about both the present situation and future conditions. The robust assessment of the labor market a month earlier was also completely reversed.
  • The Conference Board’s survey was out of sync with the University of Michigan’s Consumer Sentiment Survey, which reported Friday morning. Consumer sentiment rose 1.2 point to a solid 93.2. Measures of consumer confidence tend to track spending and employment conditions over time but do a poor job of predicting month-to-month changes.
  • Consumer spending for August came in slightly below expectations, rising just 0.1%, while spending growth for the prior month was revised 0.1 %age point lower to just a 0.3% gain on an inflation-adjusted basis. The smaller rise in consumer spending brings outlays a touch well below the consensus which had been looking for a stronger gain. Consumers appear to be in solid shape, however. Nominal personal income rose 0.4% in August, led by wages & salaries, which rose 0.6%. With income outpacing spending, the saving rate rose back above 8%. Consumers certainly have the wherewithal to keep spending on a solid path.
  • Advance orders for durable goods rose 0.2% in August, but the key nondefense capital goods ex-aircraft orders fell 0.2% and saw orders for the prior month revised from a 0.2% gain to unchanged. Shipments rose modestly. The orders numbers are clouded by the slowdown in Boeing’s 737 Max production as well as the GM strike, which is beginning to have some impact on parts inventories.
  • Speaker of the US House of Representatives Nancy Pelosi this week announced a formal impeachment inquiry of President Donald Trump. The speaker had previously been reluctant to pursue impeachment but endorsed the latest effort after allegations that Trump pressured the president of Ukraine to investigate a political opponent. Markets have taken the news in stride, mindful that removing the president from office requires a two-thirds majority of the Senate, meaning a significant number of Republican senators would have to vote for his conviction, which seems unlikely at this stage.  
  • On a more positive note, Mr. Trump and Japan’s Prime Minister signed a trade-enhancement agreement that will lower agricultural tariffs in Japan, industrial tariffs in the US and set new rules for digital trade between the two countries. The limited accord is potentially the first step in a broader trade agreement between the two countries.
  • Equities recorded losses for the week, as the policy environment appeared to dominate sentiment. For the second consecutive week, small-cap shares underperformed large-caps, calling into question what some had seen earlier in the month as the first signs of a reversal of market leadership back into economically sensitive small-cap shares. The small-cap Russell 2000 Index ended the week up roughly 13% for the year to date, versus a gain of about 18% for the large-cap S&P 500 Index. Within the S&P 500, the typically defensive utilities sector outperformed, while communication services, health care, and energy shares lagged.
  • The disappointing data and political worries may have played a role in a modest decrease in longer-term Treasury yields. The investment-grade corporate bond market experienced some weakness, with marginal widening of credit spreads (an inverse measure of the sector’s relative appeal) across most sectors despite light new issuance. In issuer-specific news, Philip Morris and Altria bonds saw spread volatility amid headlines that the tobacco companies had abandoned merger negotiations, largely due to growing concerns about the dangers of e-cigarettes.
  • ISM manufacturing and ISM non-manufacturing for September are due on Thursday and the jobs report for September due on Friday. The regional Philly and Empire PMIs suggest ISM manufacturing will come in stronger month-on-month in September. The Markit PMI also recovered to a five-month high at 51.0 in September.
  • The labour market has shown weakness for some time, which makes sense as economic growth has slowed in recent quarters. Monthly changes in nonfarm payrolls tend to be volatile and hence are difficult to predict, but the warning signs from the Markit PMI employment index are of concern, which suggests employment growth has fallen below the breakeven rate of ~100,000 per month. Decelerating employment growth is an important recession tracker.


  • The Supreme Court ruled last week that Prime Minister Boris Johnson gave Queen Elizabeth II unlawful advice to suspend Parliament for five weeks. Parliament was called back into session. What little momentum there appeared to be toward a withdrawal agreement with the European Union appears to have stalled with the EU’s chief negotiator Michel Barnier saying the UK’s latest proposal is unacceptable. Markets remain calm on the assumption that the immediate risk of no deal has been reduced, Article 50 will be extended and that a general election will take place late this year. 
  • The Bank of England may need to cut interest rates in the likely scenario that high levels of uncertainty over Brexit persist, policymaker Michael Saunders said on Friday in the first clear signal that the BoE is considering a cut.  Last week, without directly raising the prospect of cutting interest rates, the Bank of England said Brexit and slower world growth were increasingly causing Britain’s economy to perform below potential. Saunders (who was one of the first BoE policymakers to vote for higher interest rates in 2017 and 2018) said it was now his view that the unpredictable path of Brexit would effectively act as a “slow puncture” for the economy.
  • British consumer sentiment has fallen to a six-year low due to increased worries about job security and the impact trade tensions and political uncertainty will have on individuals’ finances, a survey showed on Thursday. Market research company YouGov said its monthly consumer sentiment indicator, compiled with economic consultancy Cebr, dropped to 103.4 in September from 104.0 in August, its lowest level since May 2013. “It is clear now that the UK has shifted into a slower growth mode due to a combination of ongoing domestic political uncertainty and global economic headwinds,” said Kay Neufeld, head of macroeconomics at Cebr.
  • While UK stocks rose, the pound came under pressure, falling 1.4% against the US dollar, after Bank of England (BOE) policymaker Michael Saunders said that the BOE might want to consider lowering rates even if a Brexit deal is reached. He noted that uncertainty, which would act as a brake on the UK economy, is likely to persist even if a no-deal Brexit is avoided.
  • The PMIs for September are due out. They are expected to continue to show that the UK economy is growing slowly. One interesting thing to watch is the inventory component of the PMI manufacturing index, as companies have yet to start stockpiling ahead of the 31 October deadline as they did before the 29 March deadline.


  • European Central Bank Executive Board member Sabine Lautenschlager resigned on Wednesday (effective 31 October) in protest over the recently announced package of stimulus measures. Lautenschlager is the second German ECB board member to resign in protest of extraordinary monetary policy measures. Juergen Stark did the same in 2011. 
  • The flash eurozone manufacturing purchasing managers index (PMI) fell to its worst level in nearly seven years, with the reading at 45.6 in September, down from 47 in August. Any reading below 50 indicates worsening conditions. German manufacturing PMI fell to 41.4 in September from 43.5, the worst reading in more than a decade. Weakness was also seen in the services sector, where the flash eurozone services PMI fell to an eight-month low. New orders for goods and services fell at their fastest pace in in more than six years.
  • Equity markets in Europe were slightly lower on the week, as weak economic data and U.S.-China trade tensions continued to dampen sentiment across the region. The pan-European STOXX Europe 600 Index dropped 0.48%, the exporter-heavy German DAX was 0.85% lower, and the euro lost 1.2% against the US dollar.
  • The September flash HICP inflation prints for both Germany and the euro area are due on Monday and Tuesday, respectively. The euro area numbers are of high interest since it is not only headline inflation that has slumped (to only 1.0% in August), but market-based inflation expectations are also sliding again and are back below levels when the ECB September package was announced. Furthermore, core inflation has been hovering around 1.0% in the last two years, despite a decent pick-up in wage growth. This is challenging the ECB’s credibility in delivering its inflation mandate.
  • After years in the works, the €STR (euro short-term rate) will be introduced next week amid EONIA ceasing to be calculated as known (and permanently discontinued on 3 January 2022). The first €STR fixing will be published on Wednesday, 2 October, based on 1 October data. €STR will be set entirely on daily information relating to money market transactions, not only to the interbank lending (as EONIA), but would also include other bank lending, such as money market funds, etc. The €STR is an unsecured borrowing rate (compared to EONIA, an unsecured lending rate). The €STR is calculated as a volume-weighted trimmed mean (with high/low 25% removed). The €STR is expected to fix around -54bp given the fixed spread of 8.5bp and the current EONIA level at -0.457%.


  • Chinese negotiators will travel to Washington on 10 & 11 October to resume high-level trade talks. US President Donald Trump continues to downplay talk of a limited agreement on a discrete set of issues. However, market speculation is running high that a “mini-deal” is in the works that would see the US postpone tariff increases scheduled to take effect in mid-October and in December in exchange for China committing to make significant purchases of US agricultural products. 
  • Chinese stocks retreated as a lack of positive catalysts gave investors little buying incentive ahead of a weeklong holiday. For the week, the benchmark Shanghai Composite Index sank 2.5%, and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, gave up 2.1%.
  • On the economic front, China reported that profits at industrial companies fell in August, reversing the previous month’s gain, amid a slowdown in industrial production and sales and a drop in producer prices. The fall in producer prices (also known as factory gate prices, a key barometer of industrial demand in China) is worrisome for Beijing, which has lately stepped up easing measures to boost the slowing economy.
  • The September PMI data are due this week. A drop is expected in the private Caixin PMI manufacturing index from 50.4 to 50.0 (consensus 50.2). It has stayed at a higher level than the official PMI manufacturing index from NBS. The latter is expected to rise from 49.5 to 49.7 (consensus 49.6) in September. Overall, these levels reflect a weak Chinese economy but not a recession.

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