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The Chief Economist's weekly update

The Chief Economist's weekly update

To help you navigate through the economic news, here is a summary of last week’s main events and what to look out for next week.


Last week’s key economic news (from 19 August to 23 August):

  • In the US, flash PMI for manufacturing and service sectors both disappointed, showing falls from last month; moreover, the services PMI fell significantly (from 53 to 50.9), pointing to lower demand and some spillover from uncertainties on trade and low industrial activity. Existing home sales rebounded to levels seen in 2017–2018 and prices remained firm, but new homes sales have weakened after their rebound past month and prices of houses sold remain in a negative trend. The latest FOMC minutes revealed diverging views on interest rate management among Fed governors and only an agreement not to pre-set future easing; the June decision was justified by weak global activity outside the US and its impact on US industry; trade uncertainties and low inflation also supported this mid-cycle adjustment. The door was opened to the possibility of another cut in rates in September, but the Fed could deliver below-market expectations due to a lack of consensus on an aggressive cut. Ahead of the Jackson Hole meeting, several Fed governors reiterated their positions on rate management, revealing the same diverging tone as the FOMC minutes and no more appetite to an aggressive rate cut.
  • In the eurozone, the manufacturing and services flash PMI were both higher than expected and they had rebounded from last month; German business confidence estimates stopped declining and it improved slightly from last month, although it stayed below 50. The service sector still looks more resilient than the manufacturing sector, depending on a potential renewal of a trade war, particularly in Germany. Consumer confidence (preliminary data for August) decreased further after a modest rebound last month. Final inflation was a tad lower than expected (-0.5% m/m) and the yearly trend has moderated from 1.3% y/y to 1.0% y/y, with core inflation slipping from 1.1% y/y to 0.9% y/y.
  • In Japan, the July trade balance has shown increasing deficit (adjusted data) as exports have contracted further. The preliminary manufacturing PMI stayed stable (49.5), while sentiment has improved in services PMI (51.7 after 51.2). Inflation has eased from 0.7% y/y to 0.5% y/y but core inflation remained quite stable at 0.6% y/y.
  • Central bank meeting: Indonesia cut its key rates from 5.75% to 5.50%.
  • While debate intensified on the potential for future rate cuts and monetary easing on the part of the Fed and the ECB, the signals from the global industrial cycle remained worrying: while a recession is not on the horizon in the short term, the growth cycle looks more vulnerable to shocks (trade, political and geopolitical) than last year.

Important for the scenario next week:

 

  • In the US, second estimates for Q2 GDP are expected to ease slightly from 2.1% to 2%. The various regional business surveys due during the week (Dallas, Richmond and Chicago) should reveal a shift in sentiment in the manufacturing sector after both positive and negative trade-related news in recent weeks: after a modest improvement for some surveys last month, there are clear risks of renewed falls in indices, even if they are set to steer clear of any recessionary levels in the short term. In parallel, durable order goods are expected to regain further, but core orders could be flat after their past month rebound. On the consumer side, personal income and spending (July) should remain on a positive trend and core PCE is expected to stabilise on a 1.6% y/y trend. Consumer confidence (Michigan index) is expected to be up slightly after having fallen last month, while the Conference Board index could moderate from its record highs reached in July. In housing, prices should remain moderate (S&P Corelogic/Case-Shiller index, FHFA house index), and pending home sales should remain flat after last month’s rebound.
  • In the eurozone it will be a busy week. Eurozone M3 is expected to stay on a solid trend (4.5% y/y), as is private-sector lending. After PMI, the EC sentiment indices (manufacturing, services and households) should stabilize, notably in the manufacturing sector, while services should confirm a more constructive picture. Early inflation estimates (August) should remain close to last month’s figures (1.1% y/y for headline; 0.9% y/y for core). The eurozone’s unemployment rate is expected to remain stable (7.5%). Many indicators will be published at country level relating to industrial, consumer and retail sales confidence; among them, markets should focus in particular on German data. The IFO index could slightly ease further, while the labour market should remain on a stable trend and the unemployment rate unchanged (5%); German retail sales and consumer confidence could be volatile, with some downside risks; last, second estimates for Q2 GDP should confirm a mild contraction (-0.1% q/q according to initial estimates). In Italy, business sentiment and industrial activity will be interesting given renewed uncertainty on the political front following the Italian PM’s resignation. In France, business and consumer sentiment is expected to maintain its recent levels after the rebound seen in Q2.
  • In Japan, the labour market should remain on a positive trend, with unemployment continuing to remain low (2.3%). Retail sales should be moderately positive, as precautionary purchases could occur ahead the next rise in VAT. Industrial production is expected to remain volatile and could generate downside risks.
  • In the UK, consumer confidence, after having enjoyed a modest improvement last month, is looking shaky in light of uncertainties surrounding the politics and Brexit. Business surveys and house price indices will also be published, as will M4 and credit growth.
  • Central bank meetings: South Korea, Hungary and Israel
  • US data should confirm that the consumer side will remain on a positive trend, while volatility and potential renewed weakness could be seen in the supply side. The housing sector lagged behind in any significant reaction to lower long-term yields. European data could remain vulnerable, particularly for German industry, as risks (trade, Brexit, China) remain in place, fuelling recession risks. For the moment, labour markets are in relatively good shape and no negative spillover has yet been seen from weak economic activity and confidence in industry.
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