US
The US economy expanded 2.9% quarter-on-quarter annualised pace in Q3, its fastest pace in two years followed a 1.4% growth in Q2. US consumer spending advanced 0.5% month-on-month in September (August: -0.1% M-o-M), in tandem with quicker increase in income (+0.3% M-o-M vs. +0.2% M-o-M). On the services sector landscape, reports form ISM and Markit showed that the sector was still expanding last month.
The Federal Open Market Committee (FOMC) left policy unchanged at last week’s meeting. Very little was changed in the policy statement, indicating that the Fed is comfortable with the fact that markets are widely expecting a rate rise in December. Particularly important for keeping the door to a December rate hike open was the reiteration that the case for a rate increase had strengthened even as policymakers decided to hold off for the time being.
The ISM manufacturing index rose to a three-month high of 51.9 in October. The increase was driven by improvement in production, supplier deliveries and employment. New orders, on the other hand, rose at a slower pace, while backlogs of orders contracted for a fourth straight month. Factory orders for September rose 0.3% on a rise in nondurables, but core capital goods orders were revised down slightly from the advanced durables report. Non-defense capital goods orders ex-aircraft are now reported to have fallen 1.3% over the month, although they continue to improve on trend, up 5.1% on a three-month average annualised basis.
Looking at the US labour market, 161k new jobs were created last month, just below expectations, but a headline made better by a solid upward revision to September’s gain, now reported as 191k versus the 157k previously published. Moreover, the October figure remains well above the pace required to eat up the remaining slack in the labor market. The healthier labour market is manifesting in higher average hourly earnings, which were up by a robust 0.4% during the month, taking the annual wage inflation to 2.8%.
UK
October PMI numbers indicate that the British economy held up well going into Q4. While the PMIs for manufacturing were much in line with the consensus expectation, the construction PMI was a little higher than the consensus, and the services PMI was much higher than market expectations. The Markit/CIPS construction PMI rose to 52.6 in October from 52.3 in September, above the consensus forecast of 51.8.
The downturn in the construction sector seemed to continue easing in October, but the details were not as good as the headline number. The improvement in sentiment was solely due to the improvement in house building, while the balances for commercial and civil engineering activity remain weak. The fall in the new orders index to 51.2, from 52.9 in September, also suggests that the PMI could fall back in the coming months. The manufacturing PMI fell to 54.3 in October from 55.5 in September, and was only slightly below the consensus of 54.5. The fall in sentiment was mainly due to the decline in the output index to 56.0, from 60.5 in September.
At the November meeting The Bank of England (BoE) kept its monetary policy stance unchanged and dropped its easing bias, citing prospects for higher inflation due to a weaker pound. The BoE now underlines that there are limits to its tolerance for an inflation overshoot. On the other hand, the BoE expects GDP growth to be pulled lower than previously foreseen by markets’ fear of a hard Brexit.
In the UK, the most important data release this week is the NIESR GDP estimate for October on Tuesday, which will give an indication of how the economy performed at the beginning of Q4. In line with the PMIs, the estimate is likely to show that growth continued to be resilient to the Brexit uncertainties.
EU
The inflation rate in the euro zone climbed further to 0.5% in October. Even so, the ECB’s joy was probably limited given that the rise was solely due to the energy price trend. The inflation rate without the volatile prices of energy, food, drink and tobacco stuck at 0.8% and little will change here in the foreseeable future. Although the euro economy is still on a recovery path, with real GDP rising in Q3 by 0.3% on the previous quarter, the pace of expansion is unlikely to be enough to allow core inflation to rise in 2017, as the ECB predicts.
Real GDP growth in the euro zone remained unchanged at 0.3 % Quarter-on-Quarter in Q3, which was a little disappointing, given the possibility of a small increase. Thus, there were no signs that the Brexit result in June has put a brake on growth. Overall, growth in the euro zone continued the moderate (to modest) pace of the past two years, and it is worth mentioning that Q3 was the second consecutive quarter in which the annual growth (1.6%) was slightly higher than in the US, which has not happened before in the wake of the financial crisis. The recently published sentiment surveys (including the PMI and ESI) have suggested that growth has gained some ground in the beginning of the fourth quarter. This first estimate of Q3 GDP came without details on sub-components, and it is likely increased consumer spending and, to some extent, capital formation are the prime drivers, while slightly weaker exports probably subtracted somewhat from growth.
In the euro area, the Sentix investor confidence index is released on Monday. Since August, Sentix has surprised to the upside, beating consensus forecasts every month and has been among one of the many economic survey indicators suggesting continuous economic optimism despite the UK referendum and the signals of a future “hard Brexit”. Combined with the ECB’s stated commitment to a “very substantial degree of monetary accommodation”, strong PMIs observed last week and strong Ifo expectations also suggest investors’ confidence will continue rising.
China
The Chinese market has started to price in much less aggressive policy easing from PBoC as growth is stabilising and property prices are soaring. Over the past week, the party’s political bureau, China’s top policy planner, also expressed concerns over asset bubbles. Markets are likely to continue pricing out policy easing in the months ahead. China’s official and Caixin PMIs indicated that the manufacturing sector picked up steam in October. Reflecting the acceleration in the manufacturing sector, both services sector indicators were upbeat.
Japan
Bank of Japan kept its monetary policy unchanged as widely expected but conceded that it will take longer for Japan to reach its 2% inflation target than previously forecasted. In its quarterly outlook, price growth for the two years has been revised down while growth projection stayed pat. Inflation forecast for 2016 is reduced to -0.1% (previous: 0.1%), 2017 to 1.5% (previous: 1.7%) and 2018 to 1.7% (previous: 1.9%).
Sources: Danske Bank, Haendelsbank, Wells Fargo, HansLeong, Commerzbank, TD Economics.