US
US GDP growth bounced back in the third quarter after disappointing readings in the first two quarters of the year. Annualised growth climbed 2.9% with consumer spending and net exports leading the way in terms of contributions to headline growth. Equipment and residential investment subtracted from growth in the quarter as nonresidential investment bounced back in to positive territory as the negative effects of oil price declines begin to fade. The pace of inventory building contributed to growth for the first time since the first quarter of 2015.
US consumer confidence slipped 4.9 points in October to 98.6. Even with the slight pullback in confidence the overall level is consistent with consumer spending serving as a key support to growth. The downward trend in the expectations component of the index is more concerning as it could suggest a downshift in real spending behavior could be on the horizon. With consumer spending serving as the one consistent support to GDP growth over the past few quarters, any downshift in spending could have a dramatic effect on headline GDP growth.
US durable goods orders fell 0.1% in September while August orders were revised higher. A drop in defense capital goods weighed on the measure with some offsets from stronger transportation goods orders. Core capital goods orders are now showing signs of a bounce-back, suggesting that equipment spending is likely to return to positive territory in the fourth quarter.
The odds of a rate increase in December have continued to climb higher this week, rising to about 75% from 67.5% a week ago and 54% last month. Expectations were buoyed by hawkish Fedspeak and solid domestic data. Following declines in the prior month, sales of new single-family homes and pending home sales both surprised to the upside in September. With near-term market expectations for monetary policy converging to those of the Fed and the economic data remaining supportive, the FOMC will likely use this week’s statement to communicate its intentions to raise rate in December.
UK
According to the October update from CBI, it seems domestic issues are starting to weigh more notably on British manufacturing. The headline CBI index of total order volume fell to -17 in October from -5 in September and was far weaker than the consensus expectation of -5. Total orders were pulled down by deterioration in domestic orders, while export orders increased slightly, helped by the weakened GBP. According to the CBI survey, optimism among business leaders has improved markedly after plummeting immediately after the Brexit vote. Nevertheless, companies have reduced employment over the past three months for the first time since 2010 and are planning even deeper employment cuts in the coming months. Investment plans improved somewhat in Q4, but are still weak compared to the level ahead of the Brexit vote.
The UK GDP growth in Q3 was considerably stronger than both the Bank of England’s (BoE) expectation and the consensus. In its August Inflation Report, the BoE expected GDP to grow by 0.1% in Q3, but since then, monthly numbers have indicated that growth has slowed much less than that. The consensus expectation for GDP growth in Q3 was 0.3%. The actual growth rate turned out to be even better at 0.5%, down from 0.7% in Q2. At the moment only supply side numbers are released, and according to these numbers both manufacturing and construction activity fell in Q3, pulling total GDP growth down by 0.05 and 0.09 percentage points respectively. The service sector, on the other hand, increased even more than foreseen and pulled total GDP growth up by 0.64 percentage points.
This week the main event is the BoE meeting on Thursday. This is one of the big meetings (also called ‘Super Thursday’), as the policy announcements is released, minutes, an updated Inflation Report and Mark Carney hosts a press conference. As the UK economy has been quite resilient to the Brexit uncertainties so far, the BoE is not expected to announce more easing at the November meeting. According to the first estimate released yesterday, GDP grew 0.5% quarter-on-quarter in Q3, which is much higher than the BoE’s projection in the latest Inflation Report from August. In other words, the BoE is expected to maintain its rate at 0.25%, the government bond purchases target at GBP435bn and the corporate bond target at GBP10bn.
EU
The composite PMI rose strongly in October to 53.7 from 52.6 in September, thereby reaching the highest level this year. This was stronger than expected and so far suggests that growth will pick up in the final quarter this year. Some of the increase was due to a correction after a couple of sluggish summer months especially within manufacturing. The PMI as such supports the fact that the ECB should not be overly alarmed about growth sentiment for now. Additionally, the Composite PMI output price index rose to 50.5 and thus shows increasing prices for the first time since 2011.
In the Euro area, the main release is the HICP inflation figures for October on Monday. In September, there was an expected rise in inflation to 0.4% year-on-year, from 0.2% year-on-year in August. Inflation for October is likely to be at 0.5% year-on-year, as the oil price has continued higher. Looking ahead, the shared view is that inflation will continue rising throughout Q4 16 as energy price inflation starts having a positive impact on inflation. Core inflation is likely to remain unchanged at 0.8% year-on-year in October. Even if inflation increases above 1.0%, the ECB will not conclude that inflation is on a sustainable path as long as core inflation continues to lack a convincing upward trend. Mario Draghi recently confirmed this as he said “we will look through blips”.
China
China’s economy grew 6.7% year-on-year in Q3 2016. On a seasonally adjusted basis, the economy grew 1.8% quarter-on-quarter, unchanged from last quarter, illustrating a stabilising trend. As external demand remains sluggish, China’s growth is largely supported by domestic demand, especially the property sector. However, the rapid growth in property prices has fuelled concerns of an asset bubble, and the Chinese authorities have again tightened the property policies.
Japan
The Japanese government 80 trillion yen a year asset purchase program was ineffective in stoking price growth and reviving domestic spending. September’s data showed that annual household spending and inflation continued to plunge. The surge in October’s Nikkei manufacturing PMI above the expansionary threshold for the first time in nine months offered some hope that economic growth may pick up in the fourth quarter this year although likely to be gradual.
Sources: Danske Bank, Haendelsbank, Wells Fargo, HansLeong, Commerzbank, TD Economics.