Economic Outlook – 6 August 2017

US

• US personal income was flat in July despite expectations for a 0.4% gain. The headline miss masked a quirk in the details, however, as much of the decline was due to a sharp fall in farm income. Wages and salaries increased a solid 0.4%. Real spending rose 0.1% on the month and at a 2.6% annualised rate in all of Q2; an acceleration from the 1.9% pace registered in Q1.
• US soft price growth in Q2 helped boost the inflation-adjusted numbers. In nominal dollars, the three-month annualised rate was just 3.1% in June, the lowest since March 2016. Headline and core inflation, as measured by the PCE deflator, are now half a percentage point below the Fed’s target.
• The total value of construction put-in-place unexpectedly fell to a seasonally adjusted annual rate of $1,205.8 billion in June. Private construction spending registered its third straight monthly decline, and public spending also tumbled in June, slipping 5.4%. Rising construction labor and material costs may be creating some headwinds in the industry. The producer price index (PPI) showed nonresidential input prices increasing 2.3% in June, and the three-month annualised rate was up a robust 13.2%, suggesting more upward momentum in input prices.
• The ISM indices signalled a somewhat slower pace of growth in July than they had in recent months. On the manufacturing side, the pullback was modest, as the index slowed 1.5 points from June’s level. Of the 18 manufacturing industries, 15 reported growth, and the survey respondents’ comments were generally upbeat. Looking through the month-to-month volatility, the outlook for the factory sector has largely remained unchanged: slow but steady improvement in industrial production compared to last year.
• On the services side, the slowing in the ISM index was a more precipitous 3.5 point drop to 53.9. The decline was broad-based, with the steepest drop coming from the forward-looking new orders index. Respondent comments were mixed, with some purchasing managers citing a summer slowdown that they expect to fade in the coming months. On a three-month moving average basis, both indices are hovering just above 56.
• US employers added 209,000 net new jobs in July, above the consensus expectation for a 180,000 gain. The details of the report were just as strong as the headline number suggests. Manufacturers added a solid 16,000 new jobs, and education and health, and professional and business services remained the drivers of job growth. Average hourly earnings rose 0.3% over the month and 2.5% over the year. In addition, the labor force participation rate rose a tick to 62.9 %, while the unemployment rate fell an equal amount.
• US president Donald Trump, fearing that a veto would be overridden by Congress, signed a sanctions bill that targets Russia’s energy and defence sectors. Trump’s objections to the bill stem from his belief that it encroaches on the executive branch’s authority to negotiate. Reacting to the bill, Russian prime minister Dmitry Medvedev declared that a full-fledged trade war has been declared against Russia. Russia also ejected 755 US diplomats and seized two diplomatic properties. The bill also includes sanctions on North Korea and Iran.
• The Trump administration is considering taking trade action against China and is discussing launching a probe into Beijing’s insistence that foreign companies transfer technology to local Chinese subsidiaries and partners. The administration could launch a “Section 301” action, which allows the president to impose duties on products from countries that use unfair trade practices. An announcement had been scheduled for Friday, but was canceled by the White House without explanation. Trump also this week linked trade with lack of progress on restricting North Korea’s nuclear program, suggesting the potential for trade restrictions with China unless it takes action to restrain its neighbour.
• The main news release are CPI and CPI core for July on Friday. Both inflation measures have been rapidly declining since February and are currently far below the Fed’s 2% target and there is no immediate compelling argument for a drastic uptick. Although the Fed continues to believe the tighter labour market will eventually drive inflation up and the US dollar has recently depreciated sharply, these are both effects that take a long time to work their way into the CPI numbers.
• NFIB small business optimism for July will be released on Tuesday. Since the end of 2016, when the index soared, it has drifted downwards and this trend is likely to continue. Hence, the index is expected to come in at 103.

UK

• BOE (Bank of England) voted 6 against 2 to keep rates and asset purchase target unchanged at 0.25% and £435 billion as expected but the key takeaway was from the BOE quarterly inflation report, which struck a “somewhat dovish” tone, saying economic expansion was “sluggish” and Brexit uncertainties is the biggest drag on growth prospects. This further reinforced the view that BOE will continue to keep monetary policy accommodative in the medium term, proving recent hawkishness to be rather unfounded and remains mere noises. This year’s GDP growth forecast has been cut by 0.2ppt to 1.7%, while growth forecast for 2018 has been cut by 0.1ppt to 1.6%. 2019 growth forecast was kept unchanged at 1.8%. Inflation forecast has been lifted slightly for 2017 to 2.7% (previous 2.6%) while 2018 and 2019 forecasts were left unchanged at 2.6% and 2.2% respectively.
• The release on industrial production and construction data for June are due on Thursday. In addition, the NIESR GDP estimate for July (usually a good predictor of actual GDP growth) is also due on Thursday.

EU

• In the EU, continued positive data flow shall augur well with ECB plans to begin tapering discussion in autumn. Advance estimate showed growth in the Eurozone quickened to 2.1% year-on-year and 0.6% quarter-on-quarter in 2Q (1Q: +1.9% year-on-year and +0.5% quarter-on-quarter). Jobless rate fell to an 8-year low of 9.1% in June while CPI sustained a 1.3% year-on-year increase, even though it remains below the ECB 2.0% target. Retail sales accelerated to grow more than expected by 3.1% year-on-year in June, its best in eight months driven by broad-based gains suggesting a pick-up in consumption.
• The main data release of interest is Sentix investor confidence on Monday. Sentix fell marginally from 28.4 in June to 28.3 in July but remains at a high level not seen since 2007. While business activity and economic confidence remain high, declining euro area PMIs were noticed last week. Together with recent months without gains in the major stock indices, it poses the question of whether the top has been reached. A strong argument is the stronger EUR, which is expected to drag on the euro area growth outlook and become a headwind to inflation in coming years.

China

• China is due to release data on FX reserves, the trade balance and inflation next week. FX reserves are likely to have increased, as the USD weakened significantly in July, making reserves in other currencies worth more when measured in USD. Trade data are quite volatile and very hard to predict. However, according to PMI data for July, exports were strong. Imports tend to follow overall activity, which has rebounded somewhat lately. So the underlying trend should have improved a bit. When it comes to inflation, CPI inflation is expected to be broadly flat at 1.5%; still far below the 3.0% target. PPI inflation is expected to fall slightly from 5.5% to 5.3%, as base effects might have pulled it down a bit.

Sources: Wells Fargo, MFS Investment Management, HongLeong Bank, Handelsbanken, Danske Bank