Economic Outlook – 4 December 2022


Fed Chair Jerome Powell spoke touching on many of the same hawkish themes that dominated the press conference after the November meeting of the Federal Open Market Committee, such as keeping rates at a high level for a considerable period. However, Powell acknowledged that the pace of rate hikes is likely to slow as soon as the committee’s December meeting and acknowledged that rents, an important input into the Fed’s preferred price measure, have begun to fall. However, given data lags, it will take a while before the decline shows up in the inflation calculation. Investors looked past the hawkish and seized on the dovish, driving the S&P 500 Index 3% higher on Wednesday. Powell said that the Fed wants to avoid overtightening monetary policy (which could throw the economy into a deep recession, causing the central bank to quickly reverse course) because the central bank does not want to cut rates soon Similar to October’s core CPI print, the core PCE deflator rose 0.2% in October, a softer-than-expected increase. Several underlying drivers of inflation also look to be rolling over. For example, the prices paid component of the ISM manufacturing index during November fell to the lowest level since May 2020, suggesting manufacturing input costs are declining outright. Total nonfarm payrolls rose by 263K in November. The gain represents a moderation from the robust pace seen at the start of the year, but still quite strong by historical standards. Nonfarm payroll growth has averaged 272K per month over the past three months, stronger than the average monthly gain of roughly 190K that was registered during the last economic expansion. The unemployment rate was unchanged at 3.7%, while average hourly earnings surprised to the upside and rose 0.6% during the month. Household employment, which is highly volatile and generally viewed as a somewhat less reliable estimate of hiring compared to the payroll number, dropped by 138K, the second straight monthly decline The modest downshift in job growth relative to earlier this year is not the only indication of labor market moderation. Reported earlier this week, the Job Openings and Labor Turnover Survey (JOLTS) for October revealed that job openings fell to 10.3 million from 10.7 million the month prior. Job openings remain highly elevated, but have trended lower since peaking in March. One factor that may be contributing to the fall in openings is that the number of quits has now declined in six of the past seven months The headline ISM manufacturing index fell to 49 in November, the first sub-50 reading since May 2020. The downswing shows that the factory sector is feeling the reverberations of higher financing costs in addition to growing economic uncertainty and the unwinding of the boom in goods spending. Another decline in the new orders component points to the factory sector falling further into contraction territory in the months ahead Construction spending dipped 0.3% in October, as residential spending declined for the fifth consecutive month. Sharply higher mortgage rates has evaporated the pool of home buyers, and home builders are now slashing production in response. Commercial development is also feeling the heat from higher borrowing costs. Not only did nonresidential outlays decline in October, but the forward-looking Architecture Billings Index fell into contraction territory for the first time in 21 months Real personal spending rose 0.5% in October, up from a 0.3% increase the month prior. Nominal personal income surprised to the upside and rose 0.7% during the month, but consumers increasingly appear to be relying on savings to support spending. The saving rate dipped to 2.3% during the month, the lowest rate in 17 years. Revisions also took a bite out of the pile of excess savings. Defiant in the face of inflation, the consumer represents perhaps the largest challenge for the Fed. Businesses that find that they can pass along price increases are likely to continue to do so while demand remains robust The major U.S. equity indexes ended higher, buoyed by the possibility that the Federal Reserve may slow the pace of its interest rate increases. Growth stocks outperformed their value counterparts in the S&P 500 Index, while the technology-heavy Nasdaq Composite Index posted solid gains. The “traditional economy” Dow Jones Industrial Average (DJIA), however, took a bit of a breather and ended modestly higher. Still, the DJIA did enter bull market territory on the final day of November, when it closed more than 20% above the low it hit in September 2022 In terms of data, ISM Services index is out on Monday. In October, the ISM services index slid to 54.4, marking its lowest reading in almost two and a half years with a decline in current activity and new orders. The details of the report, including the selected industry comments, suggested service firms are becoming more cautious amid economic uncertainty International Trade Balance is out on Tuesday. The advance merchandise trade data showed the goods trade balance slid to -$99.0 billion in October, marking the largest deficit in four months. Squaring the advance data with the decline in export and import prices last month suggests real goods imports will rise around 1% in October while real exports will decline around 2%  


Nationwide figures indicate that the UK housing market is now firmly in a cooling phase, with MoM figures showing negative price growth in two consecutive months. M-o-m average prices were -0.9% in October and -1.4% in November; YoY average prices fell from 7.2% in October to 4.4% in November. November’s MoM price fall is the largest since June 2020 and a considerably bigger fall than consensus predictions of just -0.3%. While financial market conditions have stabilised, it is clear that financial constraints on households continue to impact the mortgage market. Bank of England money and credit data published earlier this week highlight how the rising interest rate environment is affecting the mortgage market: latest figures show net borrowing of mortgage debt down to levels last seen in November 2021, and mortgage approvals – an indication of future borrowing – fell to 59,000 in October, which was below the previous six-month average. It is unsurprising that survey evidence suggests that mortgage affordability has become the biggest factor in stopping purchases of residential property in the UK Net mortgage debt to individuals decreased from GBP 5.9bn to GBP 4bn in Oct, and given the reports from estate agents, this simply confirms the rapid cooling of the housing market. The number of mortgage approvals was down from 66,000 in Sept to 59,000 in October, house sales are expected to fall faster and further than property prices. Mortgage rates went up a further 25bp in Oct to an effective rate of 3.09%, remembering than BoE base rates were still at 0.1% just 12 months ago.  Businesses are also increasingly cautious, with firms continuing to reduce debt, paying back GBP 7.3bn in October, the highest rate since June 2020. This debt repayment may well in some cases have been funded by corporate deposits, which declined by GBP 14.6bn in October 


Eurozone inflation in November fell more than expected to 10 percent y-o-y, compared to 10.6 percent the month before. Energy is expected to have the highest annual rate in November (34.9 percent, compared with 41.5 percent in October), followed by food, alcohol & tobacco (13.6 percent, compared with 13.1 percent), non-energy industrial goods (6.1 percent, stable compared with October) and services (4.2 percent, compared with 4.3 percent). Meanwhile, core inflation was unchanged at 5 percent as expected.  The HICP releases in November (October) for major eurozone countries were as follows: France 7.1 percent (7.1), Germany 11.3 percent (11.6), Italy 12.5 percent (12.6) and Spain 6.6 percent (7.3) The annual headline inflation rate is expected to peak in the last two months of this year and start to fall relatively rapidly early next year. That said, core inflation could prove stickier and this is why the ECB may find only limited recourse as more volatile categories such as energy and food inflation fall back somewhat. Inflation momentum is still high, as evident in the seasonally-adjusted, smoothed m-o-m percentage changes. In addition, the share of HICP categories growing at a very large inflation rate continued to increase. Concerns of a wage spiral continue to look exaggerated even as more timely indicators point to higher wage growth in the coming years. However, in the coming year, real wages are expected to remain negative, which should ultimately have a disinflationary effect as demand remains low, especially during the first half of next year. The ECB looks set to raise policy rates by a further 50bp at its upcoming December meeting Shares in Europe rose for a seventh week running, as lower inflation spurred hopes that central banks could slow the pace at which they are tightening monetary policy. Signs that China was relaxing some coronavirus restrictions also buoyed sentiment. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.58% higher. Major country stock indexes were mixed. France’s CAC 40 Index added 0.44%, Germany’s DAX Index was roughly flat, and Italy’s FTSE MIB Index slid 0.39% 


Official PMI readings for manufacturing and nonmanufacturing weakened in November. The private Caixin China General Manufacturing PMI rose more than expected to 49.4 from October’s reading. However, the measure remained under 50, indicating contraction as coronavirus outbreaks curtailed manufacturing activity nationwide Chinese stocks rose amid signs that the Fed would slow the pace of interest rate hikes and that Beijing was moving closer to fully reopening the economy after months of pandemic controls. The blue-chip CSI 300 Index climbed 2.5% for the week, logging the best week in a month, Reuters reported   

Sources: T. Rowe Price, Handelsbanken Capital Markets, MFS Investments, Wells Fargo, TD Economics, M. Cassar Derjavets