Economic Outlook – 8 September 2019


  • The ISM manufacturing index fell below 50 in August for the first time since 2016, as more firms reported a contraction than an expansion in manufacturing activity. The decline in the new orders subcomponent was even more worrisome. At 47.2, new orders tied the cycle low set in 2012, and suggests activity will remain subdued in coming months. The service-side of the economy held up fairly better in August with the ISM non- manufacturing index rising to 56.4, but the services sector is not expected to remain unscathed. As more consumer products come under tariffs in coming month’s higher prices will erode purchasing power and likely lead to a decline in consumer sentiment, which may weigh on consumer spending.
  • The US trade deficit narrowed $1.5 billion in July, as exports rose and imports were held back by a drop in capital goods imports. But, a gain in goods exports is unlikely to be sustained, as the ISM manufacturing export orders subcomponent slipped negative in July and moved even lower in August. This suggests, even before the more recent escalation in the trade fight takes hold, exports should slow further.
  • Hiring slowed in August, as employers added 130,000 jobs (25,000 of which were a product of the temporary 2020 Census hiring). Private hiring rose only 96,000 in August. Slower global growth and trade uncertainty have added to the pullback in private sector hiring in recent months, as some of the most trade-sensitive industries, like manufacturing, have seen hiring slow. But, services industries, like education & health and information have also reduced hiring. The job openings rate has edged lower and today’s report underscores weaker hiring since the start of the year. A bright spot in the report was average hourly earnings, which rose 0.4%, pushing the 3-month annualised rate up to 3.6%. But wage growth struggles to break out of its recent range. As tariffs permeate more industries, firms will have even less room to raise wages.
  • Given consumer fundamentals remain in decent shape, while risks to consumer spending are elevated, the Fed is expected to get ahead of a more pronounced slowdown and cut rates an additional 25 basis points at its meeting on September 18. Officials are set to release new economic and interest-rate projections at the meeting, which will provide insight to its medium to long term outlook.
  • US stocks recorded a second consecutive week of solid gains, as optimism grew that progress will be made in the US – China trade dispute. The large-cap S&P 500 Index moved within 2.0% of its July 26 record high, while the smaller-cap indexes remained well off their 2018 peaks. Trading volumes picked up as many investors returned from summer vacations, and the Cboe Volatility Index (VIX) fell back to its lowest level since late July. Markets were closed Monday in observation of Labor Day. Within the S&P 500, energy shares outperformed as oil prices rose in response to falling US inventories and Iran’s announcement that it was scaling back its commitments under the nuclear deal negotiated in 2015. Technology shares were also strong, helped by a rise in semiconductor shares. Utilities stocks lagged as longer-term bond yields increased, making their typically above-average dividends less attractive in comparison. Potential for infrastructure damage from Hurricane Dorian may have also discouraged investors.
  • The jobs data did seem to weigh a bit on bond yields, but trade hopes helped push the yield on the benchmark 10-year Treasury note higher for the week as a whole. The investment-grade corporate bond market saw a surge of new issuance, but the new supply was met with strong demand, helped by elevated cash positions in the market due to the light new issuance calendar in the second half of August and steady inflows to the asset class.
  • CPI core for August is due out on Thursday. In the past couple of months, CPI core has surprised on the upside but this should not be taken as the beginning of a new trend given the low inflation expectations. We estimate it rose +0.2% month-on-month in August (2.2% year-on-year).
  • On Friday, retail sales data for August will be released. Last month, the retail sales control group came out much stronger than expected, indicating strong consumption growth. In light of the recession in the manufacturing sector, it is important to understand whether private consumption growth can keep up the pace. While a negative surprise is long overdue given the volatility of the time series, fundamentals still look strong.


  • The British Parliament wrestled control of the Brexit timetable away from the government last week, with the House of Commons passing a bill requiring the prime minister to ask the European Union for an Article 50 extension until 31 January if a deal is negotiated before 19 October. At present, the UK is scheduled to exit the EU on 31 October. Twenty-one members of Prime Minister Boris Johnson’s Conservative Party voted in favor of the delay, prompting the PM to expel them from the party, losing his parliamentary majority in the process. Parliament subsequently thwarted Johnson’s call for a new election as Labour Party members abstained from the vote to keep Johnson from securing the two-thirds of the House of Commons needed to approve an election. The government may attempt to hold a vote on a prospective election again on Monday, though opposition parties have said they will not agree until after the EU summit in late October, insuring the government will indeed ask for an Article 50 extension. The net effect of all of this is that no-deal risk has receded in the short-term but the risk of a general election has increased, though the timing remains uncertain.
  • UK PMIs declined further in August. The Services PMI fell to 50.6 in August from 51.4 in July and missed the consensus expectation of 51.0. Earlier in the week, the PMIs for construction and manufacturing also came in weaker than expected in August. The composite PMI fell to 50.2 in August from 50.7 in July. The consensus was 50.5. According to the survey, the companies in the services sector saw weaker rises in business activity and new work. At the same time, margins were being squeezed by sharp cost inflation. Future expectations retreated further, with growth projections dropping to the lowest since July 2016. Companies in the manufacturing and construction sectors also reported a deteriorating outlook, with new orders falling at the fastest pace in over seven and ten years respectively.
  • British house prices increased in August at the fastest annual pace in four months. House prices rose 1.8% year-on-year after a 1.5% rise in July, Halifax said, citing figures based on new methodology introduced as of this month. Halifax’s new measure of annual house price growth no longer uses an average for the previous three months. On the month, house prices rose 0.3%, after a 0.4% rise in July.
  • The number of workers hired for permanent jobs via recruitment agencies in Britain fell at the fastest pace in more than three years in August as the Brexit crisis deepened. The Recruitment and Employment Confederation and KPMG said hiring of temporary workers rose but remained close to its slowest pace in 75 months while permanent placements fell for the sixth month in a row as employers postponed hiring.
  • The British pound gained more than 1.0% against the US dollar and the FTSE 100 rose 1.25% as the chances of a disorderly exit from the European Union on 31 October decreased.
  • The monthly GDP estimate for July is due out on Monday. Based on PMIs, ‘technical recession’ (i.e. two quarters of GDP contraction) cannot be ruled out. On Tuesday, the labour market report with data for average weekly earnings and unemployment in July is due.


  • Members of the European Central Bank’s Governing Council from Germany, France, the Netherlands and Austria were among those downplaying the need for the European Central Bank to unveil a forceful package of additional easing measure at its meeting next Thursday. Markets had been led to expect a cut in the ECB’s deposit rate (pushing it deeper into negative territory), beefed up forward guidance on keeping rates low and a resumption of asset purchases before opposition to some of those policies built last week. Additional asset purchases may be placed on hold as a result of the dissent from the group of Northern European officials.
  • Italian government bonds rallied, pushing yields to record lows after Italy’s president approved the new coalition government between the anti-establishment Five Star Movement and the center-left Democratic Party, which is expected to be more EU friendly. Former Prime Minister Giuseppe Conte will resume his post and lead the coalition. Rome is expected to submit its 2020 draft budget to the European Commission in October, and the government is required to find €20 billion in savings to meet EU fiscal targets.
  • German data gave more evidence that trade disputes are pushing the German economy toward recession. German manufacturing orders fell more than expected in July as new orders from foreign buyers dropped 6.7%, much more than expected. Industrial production also disappointed, falling 4.2% on a year-on-year basis.
  • In the euro area, all eyes will be on the ECB meeting on Thursday, which will set the guidance for the months, and potentially years, to come. The uncertainty is not whether the ECB will announce new initiatives but how much it will deliver.
  • Thursday also brings industrial production figures for July. Weak industrial production has been a vital driver of the euro area slowdown, with the print falling 2.4% year-on-year in June following seven consecutive months of falling production.
  • Manufacturing PMI from Caixin/Markit surprisingly jumped back above the 50.0 threshold, to 50.4 in August, from 49.9 in July. The official manufacturing PMI fell from 49.7 to 49.5, slightly worse than expected. Better sentiment among manufacturers surveyed by Markit could be an indication of government stimulus kicking in, as infrastructure investments especially have been boosted somewhat recently. Meanwhile, the sub-index for new export orders from Markit slid, likely because exporters are hurt from the escalating trade war and the global slowdown. With only one of the two manufacturing PMIs back above 50.0, growth is expected to continue decelerating amid persistent trade turmoil.


  • Chinese trade negotiators confirmed last week that “serious” ministerial talks will take place in the coming weeks in preparation for face-to-face talks between US and Chinese trade officials in Washington in early October. Markets welcomed the news, which boosted risk appetites. However, tensions remain high as further tariffs came into force on 1 September while an additional 5.0% US levy on Chinese imports is set for 1 October.
  • China’s benchmark stock index posted its best weekly performance since June, after China’s cabinet signaled that it would roll out fresh stimulus measures to bolster an economy increasingly battered by U.S. tariffs. For the week, the benchmark Shanghai Composite Index and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, each surged 3.9%. Sentiment improved after Chinese Premier Li Keqiang issued a statement Wednesday saying that the country’s State Council called for the “timely” use of tools including broad and targeted cuts to banks’ required reserve ratios and “faster” implementation of measures to reduce real borrowing costs. China’s central bank (which typically follows State Council requests regarding required reserve ratios, or the amount of cash banks must hold in reserve) last cut the required reserve ratio in January after a similar statement from the State Council last December.
  • On the data release front, credit (aggregate finance) will indicate whether the recent decline in credit growth is indicative of the broad trend, or simply a kind of normalization after the credit splurge at the start of the year. Money growth is also set for release.

Sources: T. Rowe Price, Reuters, MFS Investment Management, Handelsbanken Capital Market, Danske Bank, Wells Fargo.