Economic Outlook – 30 June 2019


  • The US Commerce Department reported last week that durable goods orders declined 1.3% in May, surpassing consensus expectations for a scant 0.3% decline.
  • The good news: Taking the May decline at face value likely overstates the weakness of factory activity in May. Boeing’s ongoing struggles with its 737 MAX fleet of aircraft were largely to blame for the decline in orders, given the volatile non-defence aircraft component declined nearly 30.0% over the month. That followed almost a 40.0% decline the previous month and obscures a modestly firmer trend in underlying core orders.
  • The bad news: Recall it is non-defence capital goods shipments that feed into the BEA’s estimates of equipment spending in the GDP report, which, on a three-month average annualised basis, were down 11.3% in May. That is not a good sign for Q2 equipment spending, but again, this is entirely due to the halt in Boeing shipments. Ex-aircraft, non-defence capital goods shipments are up at a 1.7% pace, and suggest a moderately firmer trend in investment spending.
  • Uncertainty regarding trade has also likely weighed on consumer confidence in recent months. But the slower job growth in May was also likely a factor in the weakness. While the labor market is still hot by most measures, it is not as strong as it was according to measures of consumer confidence. The jobs plentiful index has rolled over in recent months, and is worryingly reminiscent of what was experienced in prior cycles. The job opening rate and small business hiring plans have also come down slightly, though they too remain high. It is possible that businesses are holding off on hiring until trade tensions dissipate. But if these patterns hold, job growth could slow in coming months, something the Fed is likely monitoring. Despite uncertainty, spending data have fared slightly better. Personal consumption rose 0.4% in May, following an upwardly revised 0.6% in April and suggest personal consumption expenditures are on track to come in north of 3.0% in the second quarter.
  • Inflation fared better as well, with the PCE deflator rising 1.6% on a year-ago basis in May. Even despite the modestly firmer footing in Q2 inflation, data last week are unlikely to dissuade the Fed from cutting rates later this year.
  • Following the FOMC meeting last week, Fed speakers were out in full force explaining and defending the committee’s shift from patience to willingness to do more. Most notably, Chairman Powell reiterated that significant crosscurrents had hit the U.S. outlook in the period between the FOMC’s May and June decision. Among these, deteriorating business sentiment and slowing global growth rang the loudest.
  • President Trump reiterated last week that he believes he has the legal authority to remove Jerome Powell as Chairman of the Federal Reserve Board and demote him to the Board of Governors. The US president said that the Fed would be better off if monetary policy were run by outgoing European Central Bank head Mario Draghi. In a speech on Tuesday, Powell said that short-term political pressure can be damaging to the central bank’s independence. The Fed chair reiterated that the Fed will closely monitor incoming data and that it will act appropriately, while acknowledging that the economic outlook had worsened since May. However, Powell cautioned that it is important that the Fed not overreact to swings in sentiment, a comment that somewhat cooled speculation that the Fed will cut rates 50 basis points at its meeting in July.
  • New home sales fell sharply in May, adding to the spate of challenging data for the housing sector. While lower mortgage rates should give some support to housing demand, this may be offset in part by increased economic uncertainty, leading would-be homebuyers to hold off on making big purchases. Indeed, measures of consumer confidence fell in May, with a drop in expectations for the future leading the pullback.
  • After calling off a counterstrike against Iran last week, President Trump this week announced additional sanctions against Iran. Part of the US strategy is to drive Iran’s oil exports to zero. India, a major consumer of Iranian crude, announced this week that it has halted imports from Iran and that it will look to the US and to Saudi Arabia to fill any supply gaps. While increasing economic pressure on Tehran, the US also reiterated it is willing to negotiate with the Islamic Republic, a call that so far has gone unheeded.
  • As Q2 earnings season approaches, analysts are forecasting a second straight decline in S&P 500 earnings per share. Q1 earnings contracted 0.6%, and analysts have projected a 2.6% decline in Q2. That would be the first back-to-back decline since late 2015 through early 2016. Downward revisions are especially prevalent among US-based multinationals, given the headwinds and supply chain disruptions stemming from the trade war.
  • The major indexes were mixed for the week. The large-cap benchmarks moved back from the record highs they had established the previous week, while the S&P MidCap 400 Index and the small-cap Russell 2000 Index recorded modest gains but remained below their late-2018 peaks. Technical analysts on Wall Street are particularly focused on whether stocks will break with a recent pattern of pulling back from new highs. The record established by the S&P 500 during the previous week was the fourth such run in the past 17 months, with all occurring within a 3.0% range (2,872 to 2,950).
  • The weak data and geopolitical tensions sent the yield on the benchmark 10-year Treasury note below 2.0% for the first time since President Trump’s election victory in November 2016.
  • ISM manufacturing for June is due out on Monday and the jobs report for June is due out on Friday. ISM is expected to decrease and come in at 50.8, down from 52.2 The US manufacturing sector is not immune to the global slowdown but the index will likely remain just above the important 50 threshold. That said, risk is skewed on the downside.
  • The average monthly increase in nonfarm payrolls has declined to 164,000 this year, from 223,000 in 2018. Employment growth is expected to come in around 175,000. Average hourly earnings will likely rise  +0.2% month-on-month in June, unchanged at 3.1% year-on-year.


  • Britain’s current account deficit with the rest of the world ballooned to its highest since late 2016 earlier this year, official figures showed on Friday, though much of the increase was driven by volatile gold trades. At first glance, the bigger shortfall in the deficit, which Bank of England Governor Mark Carney has long warned leaves Britain dependent “on the kindness of strangers”, suggested greater vulnerability for the world’s fifth-largest economy ahead of Brexit. The deficit widened by 6.3 billion pounds in the first three months of 2019 to 30.0 billion pounds, or 5.6% of economic output, its biggest since the third quarter of 2016. However, the ONS said the rise was driven by imports of unspecified goods, mostly gold from London’s major trading hub, rather than a fundamental weakening of the trade balance.
  • British consumers have turned gloomier about the economy and the outlook for their personal finances, according to a survey by market researchers GfK that adds to signs of a lacklustre second quarter for the economy. The GfK consumer sentiment index, which has been negative since shortly before the June 2016 Brexit referendum, fell to -13 in June from May’s seven-month high of -10. The reading was below the median forecast in a Reuters poll of economists of -11. A measure of consumers’ willingness to make major purchases was its weakest since November.
  • The PMI manufacturing index (due out on Monday) is likely to fall further, as it remains elevated compared with the equivalent euro area index and stockpiling ahead of Brexit is finished. There are no strong reasons to believe the PMI Services Index (due out Wednesday) should move much in either direction and it is expected to continue indicating GDP growth is running close to 0.0%.


  • In the euro area, the flash annual consumer price index year-on-year was, as expected, stable at 1.2% in June, with no change from a month ago, whereas core inflation increased barely above expectations to 1.1% year-on-year, up from 0.8% last month. A significant driver behind this month’s higher core inflation was, once more, services inflation, marking the end of an unusually volatile period related to the timing of Easter this year. On a five-year basis, average core inflation remains below 1.0%, increasing pressure on the ECB to act, following more dovish communications from ECB chief Mario Draghi.
  • The yield on the 10-year German bond fell to -0.34% as European economic indicators continued to disappoint. The European Commission’s economic sentiment indicator dropped to its lowest point in nearly three years in June as confidence fell dramatically in Germany and Italy. The deterioration was driven by a drop in confidence in the export-driven industrial sector, which has come under pressure from global trade tensions. Confidence in the services sector also declined, as did consumer confidence. The widely watched Ifo Institute also reported that the mood among German business leaders fell for the third consecutive month and hit its lowest level in five years, while the forward-looking GfK consumer confidence survey for July came in below expectations.
  • Italy’s budget standoff with the European Union came down to the wire when Italy’s anti-establishment coalition decided to delay setting a lower deficit target for 2020. The European Union’s College of Commissioners has until next week to decide what to do with Italy and is required to report to the eurozone finance ministers in early July. Italian Prime Minister Giuseppe Conte said Rome is holding a constructive dialogue with the European Commission to avoid a disciplinary procedure.
  • There are no market movers this week.


  • US President Donald Trump and Chinese President Xi Jinping met on Saturday on the sidelines of the G20 summit in Osaka, Japan. Observers put very low odds on a comprehensive trade agreement being struck at the meeting, but they put a fairly high probability on the two sides agreeing to resume talks. Earlier last week, US Secretary of the Treasury Steven Mnuchin said that, prior to talks breaking down, the US and China were about 90.0% of the way to a deal. Mnuchin said he thinks there is a path to an agreement, and he hopes talks can be completed by the end of the year. If China returns to the bargaining table, Trump is expected to hold off on imposing additional tariffs on the remaining $300 billion in imports from China that are not yet subject to levies. Trump said he expects very big trade deals with Japan and India.
  • Chinese stocks softened for the week as traders stayed cautious ahead of a widely anticipated meeting between President Trump and his Chinese counterpart Xi Jinping at the Group of 20 summit. The benchmark Shanghai Composite Index declined 0.8% and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, shed 0.2%. However, both indexes rose for the month amid positive signals on trade earlier in June. The Shanghai benchmark rose 2.8% and the CSI 300 Index gained 5.4% in June as investors grew more optimistic that the G-20 meeting between both leaders would, at a minimum, lead to the resumption of trade talks that broke down last month.
  • The Chinese PMI manufacturing for June will likely look weak. The official NBS PMI already fell sharply in May, while the private Caixin PMI manufacturing held up still. However, the Caixin PMI is expected to correct lower in June from 50.2 to 49.5.

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