Economic Outlook – 5 November 2017


  • Consumer spending accelerated at the end of Q3, with nominal consumption rising 1.0% in September. Inflation trimmed off 0.4%, leaving real consumer spending up 0.6% on the month. Spending was higher for both services and goods, with durable goods posting an especially strong increase. Hurricane related purchases were likely at work in September’s gain, and the absence of equally significant income growth on the month meant Americans dipped into savings to fund spending.
  • The Fed’s preferred gauge of inflation, the PCE deflator, rose 0.4% on temporarily high gas prices caused by Harvey, but core inflation rose only 0.1%. Core inflation is up 1.3% over the year, stubbornly lower than the Fed’s target.
  • The Federal Open Market Committee left rates unchanged at their November meeting but hinted that a rate hike remains likely at its December meeting. The FOMC statement acknowledged that late-summer hurricanes had caused mild economic disruptions but that they were unlikely to persist over the medium term.
  • The employment cost index gained 0.7% in Q3, pushing the year-to-year growth up to 2.5%, which is close to the cycle high hit in 2015. The current upward trend should be more durable now that unemployment has fallen so low. Sustained strength in ECI growth would signal the Phillips curve still exists if slightly flatter, which should help inflation in the medium term.
  • The Conference Board’s index of consumer confidence surged in October to 125.9 (the highest level since 2000). While consumer confidence is now at its highest level since December 2000, the run-up in consumer confidence looks more reminiscent of the 1997 period, when consumer confidence surged out ahead of what had been an unusually slow economic recovery and eventually became the longest and one of the strongest expansions on record. Consumers’ broadly positive view on the present situation has been bolstered by continued strength in the job market and likely the upswing in the stock market.
  • The ISM manufacturing survey for October reiterated that the recovery in the factory sector is in full swing. October’s gauge fell only slightly from its cycle high point in September, underscoring the sector’s resilience from the recent hurricanes. New orders and employment held up well, though supplier deliveries were influenced by weather disruptions.
  • Last week jobs report was an apt bookend to the week of solid economic news. The US added 261,000 jobs in October and the September drop was revised away. The jobless rate fell again, now at 4.1 % (though there was also a big drop in the labor force that was more likely reflective of seasonal adjustment quirks than large scale workforce disengagement).
  • US president Donald Trump nominated Jerome Powell to replace Janet Yellen as Federal Reserve Board chair. Powell has been a member of the Fed Board of Governors since 2012. If confirmed, he is expected to maintain monetary policy continuity while rolling back some post–financial crisis banking reforms.
  • Corporate tax cuts make up the centrepiece of the tax reform proposal unveiled this week by Republicans in the US House of Representatives. Among the bill’s provisions is one that would permanently lower the corporate tax rate from the current 35.0% to 20.0%, though interest deductions for businesses would be limited. The plan retains the top 39.6% income tax rate, but raises the threshold at which the tax would kick in for married filers from $470,000 to $1 million a year. Under the proposal, the 40.0% estate tax would be eliminated in 2024, while the estate tax exemption would immediately double to $11.2 million per married couple. Unchanged under the plan would be 401(k) plans, though deductions for state and local income taxes would be eliminated. Property tax deductions would be limited to $10,000. Some of the themes emphasised in the bill are the elimination of many tax credits, deductions and exclusions, which could simplify the complex tax code somewhat. However, other provisions make it more complex in areas such as the taxation of pass-through businesses.
  • The US major indexes were mixed for the week. The large-cap indexes outperformed, and the broad S&P 500 Index managed to extend its string of weekly gains to eight, its best stretch in four years. The small-cap indexes recorded losses, extending a pattern of underperformance that has been in place for a month. On a sector basis, technology, energy, and the small real estate segment led the gains within the S&P 500, while materials and consumer discretionary shares lagged.
  • There is a very quiet week ahead in the US in terms of economic data release and none of them is likely to attract great market attention.


  • The UK Services PMI increased markedly to 55.6 in October from 53.6 in September. The October reading was much better than the consensus expectation of 53.3. Sentiment was buoyed by incoming new business. According to the survey, the positive performance was supported by improved order books and resilient client demand, notably from domestic sources. Service providers also revealed a positive trend in terms of operating expenses, as the rate of input cost inflation eased to its lowest since September 2016. Meanwhile, prices charged inflation continued to rise in October, reaching a six-month high. Employment, on the other hand, weighed on sentiment, as the rate of job creation slipped to a seven-month low. Also, backlogs of work actually decreased for the first time in eight months. According to the survey, respondents suggested that more cautious hiring strategies reflected concerns about the longer-term demand outlook, alongside efforts to alleviate pressure on margins. Confidence regarding the future outlook remained muted in October, well below the historical average and softer than seen on average in the first half of 2017. The fragile sentiment was linked to economic uncertainty and worries about business investment among clients.
  • The Bank of England’s Monetary Policy Committee hiked its policy rate from 0.25% to 0.5% this week, the first increase in more than 10 years. The move comes in reaction to a post-Brexit surge in inflation, largely because of weakness in the pound sterling that resulted in rising import prices. The MPC indicated that further rate hikes are expected “at a gradual pace and to a limited extent.” The pound fell 1% after the announcement while yields on United Kingdom government bonds declined, aided in part by concerns expressed by the MPC that the uncertainty surrounding Brexit will continue to weigh on domestic activity, which has slowed even as global growth has accelerated. The last time the MPC hiked rates was in July 2007.
  • Brexit negotiations resume on Thursday and Friday. EU leaders have said there has not been ‘sufficient progress’ in order to move negotiations from phase one to phase two (future relationship), especially due to the disagreement on the divorce bill. Both sides hope they can conclude the first phase at the EU summit in December but the divorce bill remains the biggest hurdle.


  • In China, the softer PMI prints were no cause for concern. The pace of expansion in manufacturing and services sectors moderated but remained at firm levels nonetheless.
  • The impending retirement of China’s longstanding central bank governor, Zhou Xiaochuan, was effectively confirmed last week when his name was left off the list of members of the Communist Party’s Central Committee. Although timing is unclear, some reports suggest Zhou may step down around March next year. Zhou will be hard to replace. After nearly 15 years at the top of the People’s Bank of China (PBOC), Zhou is the longest serving Chinese central bank head since the founding of the People’s Republic of China and longest serving current head of any of the world’s major central banks.
  • The focus turns to inflation and FX reserve data. Inflation will be the most interesting. PPI is expected to rise 0.6% month-on-month, leading the year-on-year rate to stay high at 6.9%. It reflects the rise in commodity prices (oil and metals) recently. However, this is likely to be the peak, as some moderation in commodity inflation over the next year seems to be coming. CPI inflation is expected to rise slightly from 1.6% in September to 1.7% in October. It is still far from the 3.0% target, though. Core inflation (headline excluding food) is a bit higher at 2.4% but still in the “safe zone”.


  • There are more upbeat signs from the Eurozone. GDP growth moderated less than expected to 0.6% quarter-on-quarter and is estimated to have quickened from 2.3% to 2.5% on a year-on-year basis in 3Q. Jobless rate fell further to 8.9% in September while confidence levels have also turned higher. In tandem with the global phenomenon of brighter growth and subdued inflation. CPI estimate moderated to 1.4% year-on-year in the Eurozone, made worse by a deceleration in core CPI from1.1% to 0.9% in October.
  • The STOXX Europe 600 Index ended the week higher, almost touching a 10-year high midweek before it receded. The blue chip German index DAX 30 also performed well, reaching an all-time high. Spain’s IBEX 35 ended flat but was strengthened early in the week, as sentiment improved after a lack of a violent reaction to the Spanish government taking control in Catalonia over the weekend.
  • In the euro area, no real market movers are scheduled for release next week. Second-tier data due includes Sentix investor confidence for November.
Sources: MFS Investment Management, Danske Bank, TD Economics, T. Rowe Price, Handelsbanken Capital Markets, Wells Fargo, Standard Life Investments