Economic Outlook – 30 July 2017

US

• US economic growth bounced back in the second quarter, up 2.6 % after a downwardly revised 1.2 % growth in Q1.
• US residential fixed investment fell 6.8 % in Q2 following its impressive 11.1 % increase in the first quarter. Mild weather was a boost to construction in the winter months, which was partially at play in the Q1 jump. With more normal weather in the spring, the housing market in Q2 reflected two competing economic pressures; strong income and job growth is pushing up demand while the supply of available homes remains stubbornly lean.
• US home sales data for June underscored this imbalance. Existing home sales declined more than expected, falling 1.8 % to a 5.52M-unit annual pace. Much of the crowding out has been on the lower end of the price range. Homes priced less than $250,000 account for the smallest share of sales in four years, when the National Association of Realtors began tracking the distribution. The resulting pressure on home prices continues to build; both median and average prices of resales were at record highs in June.
• The Conference Board’s Consumer Confidence index surprised to the upside in July. The University of Michigan’s consumer sentiment survey indicated election euphoria was wearing off, though the confidence measure disputed that notion. Mixed messages from the two measures of the mood of the consumer, the most important source of economic growth, bear watching. Confidence about the present situation is the highest it has been since the early 2000s, as consumers are increasingly finding jobs plentiful. Consumer sentiment about the current situation has also skyrocketed in recent years, echoing the idea that the U.S. economy is on solid footing and more consumers are benefitting from it. The two surveys also show diminished expectations, though the confidence survey reversed in July, which suggests the unease over Washington gridlock may have a smaller impact on the consumer than initially thought.
• A strong jump in aircraft orders boosted US durable goods orders by 6.5 % in June, though orders excluding transportation, a proxy for future activity, eased from May’s stronger-than-first-reported showing. Core shipments, a proxy for current business investment, also eased somewhat. The three month annualised rate softened to its lowest pace this year for both orders and shipments of core capital goods.
• FOMC meeting took centre stage last week with policy makers left rates unchanged at 1.00-1.25% as expected and offered no surprises in its policy rhetoric. Policy makers continued to express concerns over softer than expected inflation, which should not be viewed as a dovish surprise as it is merely a reaffirmation of its recent stance on inflation outlook. In terms of growth assessment, the FOMC committee commented that labour market in the US has continued to strengthen and that economic activity has been rising moderately so far this year. While there are little to suggest another rate hike is on the cards in the near term, the Fed is moving a step closer to balance sheet reduction, saying balance sheet reduction will begin “relatively soon”, which reinforces the case for a September tapering.
• US nonfarm payroll and other job reports for state of health of the US economy and its implications on the Fed policy direction will be the highlights of the week. Nonetheless, inflationary outlook is increasingly garnering more attention vis-à-vis labour data from policy makers. The nonfarm report will overshadow other equally important readings on personal income/ spending, PCE core, ISM and PMI manufacturing and services as well as trade balance.
• Despite their effort being pronounced dead on several occasions, US Senate Republicans took up health care reform again last week after a dramatic return to the Capitol by Senator John McCain, who was recently diagnosed with brain cancer. Vice President Mike Pence broke a 50–50 tie to allow the Senate to begin debate on several Republican-sponsored legislative options. Ironically, McCain helped scuttle the final alternative, a “skinny repeal” bill that would have ended Obamacare’s individual mandate, among other provisions. Now that the health care bill has been defeated, Senate leaders hope to move on to tax reform and to passing a spending bill in order to avoid a government shutdown at the end of September.
• Amid a swirl of controversy, US president Donald Trump, in an interview with the Wall Street Journal last week, reiterated his desire to slash the US corporate tax rate to 15% from 35% while lowering the tax burden on the middle class. Additionally, Trump kept open the option of raising taxes on upper-income earners. The president did not rule out reappointing Fed chair Janet Yellen, but said that economic advisor Gary Cohn, former president of Goldman Sachs, is also under consideration for the post. In a press release on tax reform on Thursday, congressional leaders and administration officials agreed to table the border-adjustment tax that would have taxed US imports.

UK

• UK economy, which grew at a slightly faster pace of 0.3% QOQ in 2Q, as expected, marking only a modest pick-up from the 0.2% growth in 1Q. Growth in the services sector (+0.5%) was dampened by declines in manufacturing (-0.4%) and construction (-0.9%). The modest growth traction suggests the UK economy is still plagued by Brexit uncertainties. This, coupled with the softer inflationary prospects, would continue to tie the hands of BOE policy makers in the foreseeable future.
• BOE is scheduled to meet next Thursday and along with it the release of BOE Inflation Report. It will be interesting to see if more policy makers are joining the rate hike camp. RBA MPC meeting on Tuesday is also worth watching after the differences between RBA Deputy Governor and the tinge of hawkishness seen in its minutes of the July meeting.
• Extending from last week’s releases, various PMI gauges (Markit, Nikkei, Caixin, AiG) of manufacturing and services readings are due in the UK to offer the first glimpse of conditions going into 3Q of the year.

Japan

• BOJ minutes revealed that there is “a long way to go” before the central bank’s 2.0% targeted inflation is met, a benchmark which policy makers said is crucial for the Japanese economy. In addition, board members discussed about the “recent growing interest” from the markets about BOJ exiting its current policy stance. Some policy makers believed that it is important for the central bank to “thoroughly explain and gain better understanding” of BOJ’s thinking on policies.
• In a midyear review, the International Monetary Fund maintained its forecast for 3.5% growth in gross domestic product this year. The fund raised its outlook for Japan.
• Extending from last week’s releases, various PMI gauges (Markit, Nikkei, Caixin, AiG) of manufacturing and services readings are due in Japan to offer the first glimpse of conditions going into 3Q of the year.

EU

• In the Eurozone, advance estimate of 2Q GDP growth will take centre stage with expectations for a better reading taking cue from improvement seen in recent releases. CPI, PPI, unemployment rate and retail sales are among other first tier data in the pipeline.

China

• Credit rating agency Moody’s has upgraded its outlook on the Chinese banking system to stable from negative. Moody’s sees receding concerns over China’s massive shadow banking sector following action from regulators to curb systemic imbalances. It also expects nonperforming loans to stabilise near current levels.
• Extending from last week’s releases, various PMI gauges (Markit, Nikkei, Caixin, AiG) of manufacturing and services readings are due in China to offer the first glimpse of conditions going into 3Q of the year.

Sources: Wells Fargo, MFS Investment Management, HongLeong Bank