Economic Outlook – 8 October 2017


  • In the US, employment contracted for the first time in seven years last month as Hurricanes Harvey and Irma disrupted work and typical hiring. NFP (nonfarm payroll) contracted by 33,000 jobs in September, led by a 111,000 decline in the leisure & hospitality sector. Average hourly earnings rose a stronger-than-expected 0.5% but the drop in the low-paying leisure & hospitality industry flattened the average wage last month. Roughly 1.5 million people reported that they were unable to work during the survey reference period, which was the week that Hurricane Irma hit Florida. Yet paradoxically, the number of people defined as employed last month jumped by 906,000. That was the biggest one-month increase since 2013 and more than four times the average over the past year.
  • The US manufacturing sector looks to have been relatively unshaken by the recent storms. Factory orders for August rose 1.2% in August amid strong demand for durable goods. Non-defence capital goods order ex-aircraft are now up 7.2% on a three-month average annualised basis and point to solid equipment spending in the months ahead. The timelier ISM manufacturing index suggests the positive momentum carried into September. At 60.8, the index rose to its highest level since 2004. Some of the headline’s gain was attributable to longer supplier delivery times; usually a sign of growing demand at suppliers, but in the most recent month lengthened by supply chain disruptions. Nevertheless, supplier delivery times have been lengthening since the start of the year and look to have encouraged more hiring.
  • The US construction activity has slowed. The 0.5% rise in August construction outlays came on the heels of a 1.2% pullback, which was twice as steep as what was initially reported. Elsewhere outside the manufacturing sector, however, activity continues to expand. The ISM non-manufacturing index leapt to a new cycle in September. The pickup was supported by rising current activity, new orders and employment, but also longer supplier delivery times.
  • While the nominal trade deficit continued to narrow, US export volumes retreated for the second consecutive month. The fact that petroleum exports fell sharply suggests that the Gulf refinery outages played a significant role in reducing export volumes. Having said that, import volumes also retreated, as ships were unable to dock and unload at many Texas ports.
  • Bloomberg News reported this week that aides to US president Donald Trump have narrowed the list of candidates for chair of the US Federal Reserve to four, or perhaps five, people. Trump has reportedly spoken with Fed chair Janet Yellen about re-upping, though she is not expected to receive reappointment, according to the report. Sitting Fed governor Jerome Powell, former governor Kevin Warsh and National Economic Council director Gary Cohn have all reportedly spoken with the president about the position, while Stanford University economist John Taylor has apparently not been interviewed but is said to be under consideration. All are known quantities to the markets, with Warsh and Taylor seen as the most hawkish of the group.
  • The US House of Representatives took the first step toward passing a tax overhaul by approving a fiscal- year 2018 budget blueprint. Congress must pass a budget before a tax bill is allowed, under Senate budget reconciliation procedures, to pass in that body with only 51 votes, rather than the 60 needed to end a filibuster. Passage of the House measure ups the odds that tax reform could be enacted early in 2018.
  • In the US, the most important data release this week will be CPI and CPI core figures for September. CPI core is expected to have increased 0.2% month-on-month (1.8% year-on-year against 1.7% year-on-year in August), which is a bit more than the trend seen over the past half year. If this holds, headline CPI is likely to come out at 0.6% month-on-month (2.3% year-on-year against 1.9% year-on-year in August). However, this is a lot stronger than normal, which is due to a strong contribution from energy prices coming from increases in gasoline prices (caused in part by the increasing oil price, but also due to the hurricanes hitting in late August/early September).
  • Friday also brings retail sales control group figures for September. August saw a decline of 0.2% month-on-month and it is possible some of this was reversed in September. Hence, retail sales control group is expected to have increased 0.4% month-on-month.
  • This week brings several speeches by FOMC members. Note that the minutes from the FOMC meeting on 19 and 20 September is due for release on Wednesday. Any comments about discussions regarding whether the FOMC members have a target level in mind for when to stop QT will be of interest. However, they are not expected to reveal much about this, as they are likely to want to keep it an open question in order to preserve their flexibility to adjust QT as they move along.


  • The composite PMI was 54.1 in September, slightly up from 54.0 in August. The consensus expectation was 53.8. Behind the small uptick in the composite was an increase in the services PMI to 53.6 in September from 53.2 in August. The consensus expectation was for a sideways movement. The reason for the small improvement in the services PMI was a modest strengthening of business activity, while growth in incoming business and employment declined. The employment component is nevertheless above its historical average, indicating a labour market that is still strong. The sub-index measuring future business expectations also fell back. The components measuring incoming new business and future business expectations are below their historical averages.
  • According to the survey, relatively subdued domestic demand acted as a drag on activity growth. Concurrently, service providers remained under pressure from sharply rising operating expenses, which contributed to the fastest rate of prices charged inflation since April. While survey respondents cited a range of supportive economic fundamentals, including healthy labour market conditions and resilient consumer spending, there were also reports that worries about the business outlook had acted as a growth headwind. Service providers commented on subdued business-to-business sales and delayed decision-making on large projects in response to Brexit related uncertainty.
  • This week, UK production and construction data for August, and CEST and NIESR GDP estimate for Q3 are due out, which is usually a good predictor of the first estimate of GDP growth. According to the PMIs, growth is likely to have remained around 0.3% quarter-on-quarter in Q3, i.e. half of the growth in the rest of Europe.


  • Capacity cuts within steel and coal industries has been deemed a success by the authorities, as they have lowered overcapacity and supported the overall economy by boosting commodity prices, thus profit. The authorities have already come a long way, but they are likely to implement further coal and steel cuts.
  • Most also agree that economic growth is beyond its peak and that it looks set to slow gradually over the rest of this year and in 2018 particularly. The main reason is tighter monetary policy in general and the recent crackdown on shadow financing specifically, which should dampen overall growth and especially fixed investments. The property market and thus construction activity should also dampen ahead due to higher mortgage rates and the many measures taken to dampen house price increases. Leading indicators such as house sales already indicate slowing activity.
  • This week, China may release the Total Social Finance credit data over the next week. Credit growth has slowed sharply over the past year due to the crackdown on shadow finance and the data will give more input on whether this is continuing. The tighter credit conditions is part of the reason a moderate growth slowdown over the next year is possible driven by a cooling of the housing market.


  • In the Euro area, little to take away from ECB minutes, which merely echoed the rhetoric communicated in the last policy meeting. While market expectations are building for stimulus withdrawal, with some expecting some announcement in the coming meeting, the minutes reiterated the need for monetary policy to stay “persistent and patient”, signalling the ECB is in no hurry to taper. In tandem with exchange rate concerns of some major central banks, ECB also cautioned that a firm EUR could impact growth and inflation development in the region. While there is signs growth prospects are brightening, there are no “convincing signs of sustained convergence” in inflation towards the ECB’s close to 2.0% target.
  • In the euro area, the Sentix investor confidence is due out on Monday. In June, Sentix was at 28.4 (its highest since July 2007) but saw marginal declines in July and August to 27.7, suggesting Sentix could have peaked. However, September saw a new increase to 28.2 and with the rising Euro Stoxx 50 in September, Sentix is likely to rise further to 28.5 in October.
  • The German industrial production for August is also due for release on Monday. In July, industrial production was unchanged from June while July’s factory orders declined 0.7% month-on-month. However, in light of the strong rebound in factory orders in August, stronger industrial production in August is in order, and the figure is likely to report a 0.8% monthly increase.


Sources: Wells Fargo, MFS Investment Management, Danske Bank, HongLeong Bank, TD Economics, Handelsbanken Capital Markets

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