Economic Outlook – 7 July 2019


  • Employers added 224K jobs in June. That pushed the three-month average up to 171K, but the 172K average over the first six months of this years is down substantially from the 211K average the prior six months. The unemployment rate edged back up to 3.7%, and wage growth came in a touch weaker than expected at 0.2% (3.1% on a year-ago basis).
  • Factory activity continues to struggle due to tariffs. Although the ISM manufacturing index held up better than expected in June at 51.7, the new orders component of the index barely skirted a contractionary print and, at 50.0, hit a three-and a half-year low. The services sector, on the other hand, has been more resilient to trade uncertainty. The ISM non-manufacturing index remained firmly in expansionary territory, though concern specifically regarding tariffs was noted by respondents.
  • Trade data through May show goods exports have yet to return to their peak which occurred in May 2018, the month before the steel and aluminum tariffs went into effect and the trade war began in earnest. Tariffs have not reduced overall imports, nor have they made a dent in the overall trade deficit, which has widened 27.7% since the start of 2017. Instead, domestic importers may be re-routing foreign supply chains.
  • There is still a solid case for a 25- basis point “insurance” cut when the Fed meets later this month. But, as long as signs point to continued, albeit slower, economic growth, insurance is likely to mean one or two rate cuts and not four or five as financial markets are currently pricing. Fed speeches over the next two weeks will be key in communicating this to the public and financial market participants.
  • The S&P 500 Index advanced to record highs this week as the markets welcomed a fragile trade truce between the US and China. Investors are fully pricing in a quarter-point cut at the 31 July meeting of the Federal Open Market Committee and also pricing in around a 30.0% chance of a half-point cut as inflation expectations sag. The yield on the benchmark 10-year US Treasury note fell to 1.95%, the lowest level since late 2016. Equity investors anticipate that a fresh wave of global economic stimulus will help the US economy avoid a recession in the next year or two, though bond investors seem less convinced.
  • The pace of stock buybacks slowed for the first time in seven quarters in Q1, the Wall Street Journal reported last week. Members of the S&P 500 Index bought back $205.8 billion in Q1, down from a record $223 billion in Q4. Buybacks have been the biggest source of demand for stocks, more than twice that of exchange traded funds, the second biggest demand source. A downturn in buybacks could be a headwind for the market.
  • US President Donald Trump said that he intends to nominate two new members to the US Federal Reserve Board of Governors. The nominees are Judy Shelton, an economist who is currently US executive director at the European Bank for Reconstruction and Development and Christopher Waller, the director of research at the Federal Reserve Bank of St. Louis. Shelton has been a noted Fed critic and has advocated for lower interest rates. Waller is an advocate of central bank independence.
  • CPI core is due out Thursday and likely rose +0.2% month-on-month in June, which translates into an unchanged annual inflation rate at 2.0% year-on-year.
  • Several Fed speeches are scheduled for this week and FOMC meeting minutes will be out on Wednesday. It will be interesting to learn about the different stances within the Fed. As repeated at the last FOMC meeting, the Fed ‘will act as appropriate to sustain the expansion’.


  • British companies are more worried about Brexit than at any time since the 2016 referendum decision to leave the European Union and they plan to reduce investment and hiring, a survey of chief financial officers showed. The survey conducted by Deloitte, a financial advisory firm, found that 83.0% of the CFOs believed that leaving the EU would hurt Britain’s long-term business environment. Only 4.0% said it was a good time to take on more balance sheet risk, the lowest %age since the collapse of Lehman Brothers in 2008 which helped trigger the financial crisis.
  • Britain’s economy has slowed sharply after a strong start to 2019 when companies were rushing to prepare for the original Brexit date in March which has been delayed until the end of October.
  • Growth in British unit labour costs, a early signal of inflation pressures ahead, slowed to 2.1% in the first three months of 2019 but it was the sixth quarter in a row when costs grew by more than 2.0% in annual terms. British employers have been on a hiring spree recently, pushing up pay for workers at the quickest pace in a decade, one of the few bright spots for the economy ahead of its departure from the European Union. Many economists have linked the jobs boom to uncertainty about Brexit which has made employers favour hiring workers (who can be laid off quickly) over longer-term commitments to investing in equipment
  • News out of the UK about Brexit is likely to be limited next week with the outcome of the Conservative Party leadership contest not set to be announced until 22 July.
  • Insight in where growth in Q2 will arrive with the monthly GDP estimate for May due on Wednesday. After a strong start to the year helped by pre-Brexit stockpiling, the sector has struggled of late as PMIs have fallen back.


  • European leaders have nominated International Monetary Fund Managing Director Christine Lagarde to succeed Mario Draghi as the president of the European Central Bank. Prior to running the IMF, Lagarde was the French finance minister. Markets welcomed the nomination by driving European yields lower in the expectation that Lagarde will maintain the ECB’s expansive monetary policy. Leaders also nominated German defense minister Ursula von der Leyen to lead the European Commission, replacing Jean-Claude Juncker.
  • The German bund yield, which serves as a benchmark for the region, touched a new record low of -0.40%, as prospects of renewed eurozone stimulus drew investors to bonds. The yield on France’s 10-year sovereign note sank further below zero, touching -0.1%. Yields on two-year government notes ended the week below zero across the eurozone.
  • The pan-European STOXX Europe 600 Index, the UK’s FTSE 100 Index, and exporter-heavy German DAX index all rose slightly throughout the week amid increased hopes that the European Central Bank (ECB) will supply fresh rounds of monetary stimulus to keep the region’s slowing economies afloat.
  • The ECB minutes from the June meeting will be out on Thursday. At the press conference, Draghi stressed that the governing council discussed several options at the meeting including a rate cut and a restart of QE. Draghi in his Sintra speech sent a strong signal to markets that more stimulus is coming. Hence, markets will look out for clues in the minutes on how ready the governing council stands in announcing immediate steps already at the 25 July meeting.
  • Industrial production data for May will be out on Friday. The April figures pointed to a weak start for the industrial sector into Q2 and business surveys such as the PMI and Ifo point to further setbacks ahead.


  • Chinese stocks posted a weekly gain, as investors reacted with relief to a temporary cease-fire on tariffs struck by President Trump and his Chinese counterpart Xi Jinping last week, but the absence of any news about the resumption of talks tempered optimism about a lasting solution. The benchmark Shanghai Composite Index added 1.1%, and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, gained 1.8%.
  • Investors bid up Chinese stocks after Trump and Xi met at the Group of 20 summit in Japan and agreed to restart talks and the US suspended the application of fresh tariffs on Chinese goods. However, neither country offered a timeline for future face-to-face negotiations, lending uncertainty about the timing of a resolution. Additionally, an influential blog linked to China’s state media said that all US-imposed tariffs on Chinese goods must be removed immediately as part of any deal ending the conflict, Bloomberg reported Friday. Chinese officials have previously stated that Washington’s refusal to scrap all tariffs (along with other burdensome demands) were behind the collapse of trade negotiations in May.
  • Data on money and credit, CPI/PPI and trade balance will be released this week. On consumer price inflation, there has been an increase lately due to higher food prices, which is related to the African swine fever. Producer price inflation (PPI) on the other hand is facing downward pressure from lower commodity prices. A decline from 0.6% year-on-year to 0.3% year-on-year is likely. Trade data will give more clues to the state of exports in June following the escalation of the trade war. The data are quite volatile, though, so they should be taken with a grain of salt. The money and credit data will give more clues on how much the monetary easing over the past year is feeding through to the economy. There has been some tentative improvement in recent months.

Sources: Wells Fargo, T. Rowe Price, Reuters, Danske Bank, TD Economics.