Economic Outlook – 4 August 2019


  • The Fed cut rates for the first time since December 2008, lowering the fed funds rate 25 bps to 2.25% in a move widely telegraphed by Fed officials and wholly anticipated by financial markets. Attention was more focused on the Fed’s next move, and whether or not 25 bps would be sufficient to “sustain the expansion.” Markets took the move as a mildly hawkish cut, with the yield curve flattening and equities falling in response. Chair Powell gave investors a lot to digest in his post-meeting press conference, particularly with his mixed messaging on whether or not this cut was the start of an easing cycle. Powell termed it a “mid-cycle adjustment” but also indicated the Fed was not necessarily done.
  • The FOMC also announced that its balance sheet run-off would conclude in August, two months earlier than planned. This move can be seen merely as an act of policy consistency; the Fed would not want to have two of its policy levers pointing in opposite directions. Two committee members – Esther George and Eric Rosengren – dissented, likely in recognition of the strong 4.3% rise in personal consumption in Q2 and continued labor market strength.
  • Nonfarm payrolls rose 164K in July, right in line with market expectations and the FOMC’s characterization of the labor market as “strong.” The unemployment rate held at 3.7% and average hourly earnings rose 3.2% year-on-year, which is not enough to convince the Fed that inflation is set to rise meaningfully higher.
  • The ISM manufacturing index fell to 51.2, still positive but close to stalling as the global growth slowdown and the cloud of uncertainty surrounding trade policy weigh on the sector. The Chicago PMI also fell to the lowest level since December 2015.
  • Frustrated at the slow pace of trade talks and citing China’s failure to purchase large quantities of US agricultural products and halt the shipment of fentanyl to the United States, President Donald Trump announced 10.0% tariffs, effective 1 September, on the approximately $300 billion in US imports from China not already subject to a 25.0% levy. The tariffs are expected to impact an array of consumer products that had previously avoided duties.
  • With global supply chains in flux owing to the ongoing US – China trade dispute, Vietnam has benefited, and it has become a source of concern for the US Trade Representative, Robert Lighthizer, who warned Vietnam last week that it must take steps to reduce its $40 billion trade surplus with the US by expanding imports of US goods, services, agricultural products and intellectual property. Additionally, the US is on the lookout for US-bound goods from China transshipped through Vietnam in an effort to avoid US tariffs. 
  • US stocks suffered their worst week thus far in 2019 as investor sentiment was dealt twin blows by disappointing signals from the Federal Reserve and the announcement of new tariffs on imports from China. Most of the market’s declines came late in the week as both trading volumes and volatility spiked, with the Cboe Volatility Index (VIX) hitting its highest level since May. The technology-heavy Nasdaq Composite Index fell the most, but the small-cap Russell 2000 Index stood out for being pushed back into correction territory, or more than 10.0% below its August 2018 closing high.
  • The investment-grade corporate bond market saw robust issuance as the week began, but primary market activity subsided ahead of the Federal Reserve’s rate announcement. Yankee bonds US dollar-denominated issues from European companies – underperformed due to growing Brexit concerns.


  • The British government has earmarked an additional £2 billion to be spent preparing for any no-deal Brexit outcome. That brings total spending on Brexit preparations to £6.3 billion. Since taking office just over a week ago, Prime Minister Boris Johnson has repeatedly stated that while he prefers to negotiate a withdrawal agreement with the European Union, the United Kingdom will leave the EU on 31 October with or without a deal. In parliamentary news, the Conservative Party’s majority was cut to a single vote after it lost a seat following a by-election in Wales on Thursday.
  • As expected, the BoE was rather cautious in describing the economic outlook. According to the BoE, underlying growth in the UK appeared to have slowed to a rate below potential due to intensifying Brexit-related uncertainties and weaker global growth. The BoE noted that global trade tensions and soft global activity had led to a substantial decline in advanced economies’ forward interest rates and a material loosening in financial conditions, including in the United Kingdom. An increase in the perceived likelihood of a no-deal Brexit had further lowered UK interest rates and led to a marked depreciation of the sterling exchange rate, according to the BoE. The BoE pointed to considerable data volatility as a result of Brexit uncertainties. The BoE now expects GDP to flat-line in Q2 after growing by 0.5% in Q1. Compared to the May forecast, the GDP forecast was lowered in the shorter end as Brexit continues to weigh on activity growth. However, from late 2020 onward, the GDP forecast was higher, caused by a lower conditioning path for market rates. The BoE’s forecast for unemployment was slightly higher in 2020 – 2021 compared with the May Inflation Report. The BoE’s forecast for inflation was also slightly higher in the years 2020 – 2021.
  • The IHS Markit/CIPS construction Purchasing Managers’ Index (PMI) rose to 45.3, a less severe contraction than June’s 43.1 (which was the weakest reading in more than 10 years) but still well below the 50 level at which growth begins. Economists polled had expected the index to recover more strongly to 46.0. A sharp drop in new orders (down for four months in a row) meant a quick turnaround was unlikely and confidence in the sector was the lowest since November 2012, IHS Markit said.
  • House prices increased by 0.3% compared with a year earlier after rising by 0.5% in June, a level of growth that has only been weaker once since early 2013. A poll of economists had pointed to a 0.1% rise in July. In monthly terms, house prices also rose by 0.3%, a touch stronger than the median forecast in the poll for a rise of 0.2% and up from 0.1% in June. Nationwide chief economist Robert Gardner said uncertainty was weighing on the housing market which has slowed since the 2016 decision by voters to leave the European Union.


  • Preliminary data on GDP growth for the eurozone in the second quarter fell to 0.2% quarter-on-quarter, from 0.4% previously, and also decreased in year-on-year terms to 1.1% from 1.2% last quarter. This was in line with (or slightly above) expectations in quarter-on-quarter (year-on-year) terms. Although this release lacks detailed breakdowns, yesterday’s disappointing French GDP growth for Q2 was, to a large extent, driven by tepid household spending. The slow rate of growth is consistent with the slide in manufacturing (PMI) and comes despite the pickup in recent months in the service sector (PMI).
  • Stock markets in Europe closed sharply lower for the week. Stocks tumbled on Tuesday following President Trump’s tweet expressing discontent about China’s purchases of US agricultural products. Markets skidded again on Friday in response to the White House’s announcement of new tariffs on Chinese goods. The move shook global financial markets as the escalation in the US – China trade war dampened the prospects for global economic growth. The pan-European STOXX Europe 600 Index, the exporter-heavy German DAX, and Italy’s FTSE MIB Index recorded steep losses.


  • Manufacturing PMI from Markit increased to 49.9 in July from 49.4 in June, in line with the official manufacturing PMI which increased to 49.7 from 49.4. Both outcomes were slightly better than expected by consensus. The uptick follows three months of sharp declines, and the stabilisation of manufacturing confidence is likely a consequence of the authorities’ economic stimuli. The resumption of trade talks with the US might also have diminished manufacturers’ pessimism. Still, both PMIs remain below the 50 threshold and the uptick is not enough to convince us that economic growth has stopped slowing.
  • Chinese shares slumped after the latest US tariff escalation brought an abrupt end to the temporary ceasefire struck between President Trump and his Chinese counterpart Xi Jinping at the G-20 summit at the end of June. For the week, the benchmark Shanghai Composite Index shed 2.6%, and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, sank 2.9%. Both indexes fell more than 1.0% on Friday, after Trump announced the tariff hike on Twitter while markets were closed Thursday night in China.

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