Economic Outlook – 4 December 2016

US

OPEC’s decision to cut output by 1.2m bpd to 32.5m bpd took center stage, shoring up global crude oil prices by 12% on optimism over easing oversupply. Brent and US WTI prices last traded at US$54 and US51/ barrel respectively. This breakthrough on output cut is the first for OPEC since 2008 and the first joint production cut between OPEC and non-OPEC in 15 years where Saudi Arabia and Russia will bear the biggest brunt, reducing output by about0.5m bpd each effective January 2017.

US growth was stronger than initially reported in the third quarter, with GDP now estimated to have risen at a 3.2% annualised pace. While business investment was even weaker than originally reported, stronger consumer spending helped the economy to grow at the fastest pace in two years. Support from consumers may wane a bit in the current quarter.

Household spending started the fourth quarter on a soft note, increasing just 0.1% in real terms. The disappointing print (expectations were for a 0.3% rise) can be traced to the services sector, where spending fell in October. However, last month’s drop in services spending is likely due, at least in part, to unseasonably warm weather in much of the country reducing demand for utilities. Consumers’ spending position remains in relatively good shape heading into the holidays.

The PCE deflator, the Fed’s preferred gauge of inflation, rose 0.2% in October due to rising energy prices, pushing the year-over-year rate to 1.4%. Core inflation continues to gradually climb, but at 1.7% also remains below the Fed’s target.

More likely propelling consumer confidence higher is further strengthening in hiring and wage gains. Although average hourly earnings disappointed in November, declining 0.1%, earnings are still up 2.5% over the past year and add to the evidence of a tightening labor market. Wage gains remain widespread across industries and with the labor market at or near full employment, wage pressures will increase in coming months.

Manufacturing employment fell 4,000 jobs in November, but layoffs for October were revised to a loss of just 5,000 versus 9,000 previously. Manufacturing in general is turning around though job growth in the sector has been slower to recover. The ISM manufacturing index improved to 53.2 in October matching the strongest reading for the index in more than a year and a half.

On Monday, the ISM non-manufacturing index for November will be released. The Markit PMI services index was more or less unchanged in November at a solid level of 54.7 suggesting growth has continued at above trend pace in Q4. Lately, more weight has been put on the PMIs, as they have been much less volatile than the ISMs. Overall, the ISM non-manufacturing index is at a fairly reasonable level.

On Friday, the preliminary consumer confidence index for December from the University of Michigan is released. Consumer confidence rose significantly in November, both when looking at the Michigan index (+6.6 index points) and the Conference Board (reached 107.1, new post-crisis high). The Donald Trump victory is not likely to hurt consumer confidence and the expectation is for the consumer confidence to stay in the 90-100 range in coming months.

UK

In the UK, lending to households firmed up in October, with mortgage approvals for household purchases up to 67,500 from 63,300 in September and beating the consensus forecast of 65,000. The October number surpassed the Bank of England’s (BOE) forecast of new mortgage approvals to average 65,000 per month until Q2 2017. The increase in mortgage approvals in October is encouraging, but the number of approvals is still about 3% lower than a year ago. Net consumer credit increased by GBP 1.6bn in October, in line with the two previous months and slightly higher than the consensus forecast at GBP 1.5bn. The monthly growth rate in total lending to households held steady at 0.3% in October, and the year-on-year rate was unchanged at 3.6%.

According to the GfK survey, UK consumer confidence fell back much more than expected in November. The seasonally adjusted balance came in at -8, down from -3 in October. Consensus expected -4. The fallback in sentiment was broadly based, with expectations for the economic situation 12 months ahead back down to the levels seen just after the Brexit referendum.

The UK manufacturing PMI contracted somewhat in November as the diffusion index came in at 53.4, down from 54.2 in October. The consensus expectation was for a small further increase to 54.4. The sentiment weakening seems to be affected by a rather weak current situation within manufacturing. Also, a fall in the total orders balance, primarily driven by a downward correction in export orders, weighed on sentiment in November. So far the sterling depreciation has not been passed on to customers abroad through reduced export prices, which could have improved the competitiveness of British exporters. Instead, it seems exporters have sought to lock in increased margins.

On Friday, Fitch publishes its sovereign rating of the UK. Just after the EU vote, Fitch downgraded the UK to AA with a negative outlook. As the economy has been quite resilient and financial markets are calm, Fitch is unlikely to downgrade the UK again.

EU

Over the last few days, four influential ECB Executive Board members (Messrs. Draghi, Constancio, Praet and Coeuré) have prepared the case for the extension of QE beyond March 2017. In their view, the rise in the headline rate of inflation is only “driven by statistical factors related to the mechanical unwinding of the extreme oil price declines a year ago”. They do not see a steady acceleration of underlying inflation momentum.

The Sentix investor confidence index is released on Monday. The figure has continued to surprise on the upside in recent months and is supported by strong PMIs and other survey indicators, which signal stronger economic activity. However, the upcoming Italian referendum may have had a dampening effect on investor confidence.

China

China’s onshore market liquidity conditions have been tightening since September, as growth stabilised and concerns of asset bubbles increased. In the meantime, policy tightening has been employed in banking regulation, property market and commodity futures markets. These measures imply that China intends to control the leverage ratio in the economy. This makes sense from a long-term perspective; rates are likely to remain elevated in the short term. However, a disorderly deleveraging, such as the “cash crunch” in 2013, is unlikely to take place.

The main release in China over the coming week will be inflation data. Inflation has moved higher and, in particular, producer price inflation has seen a boost from the rise in commodity prices. A further rise in PPI inflation to around 2% is to be expected, which would add further to the global reflation theme, which will be in place for the next couple of quarters. CPI inflation is also moving higher but at an expected rate of 2.2% in November it is still far below the 3.0% target.

 

Sources: Haendelsbank, HansLeong, TD Economics, Danske Bank.
2017-05-01T16:29:26+00:00