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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 7 Oct. to 11 Oct.):

  • In the US, inflation remained stable; CPI was flat over the month due to a sharp decline in energy and used car prices, while rents and health costs showed a regular monthly rise. Headline inflation stayed on a 1.7% y/y trend and core prices on a 2.4% y/y trend. Producer prices declined by more than expected (-0.3% m/m), driven by lower energy, food and warehouse prices; their trend also declined from 1.8% y/y to 1.4% y/y. Business sentiment in small- and medium-sized firms (NFIB index) eroded, as expected, due to lower confidence about the direction of the economy, but decisions on capex remained high, moderating the fall seen in the headline index. Consumer confidence (Michigan) has strongly rebounded, on improving personal financial situation; expectations have just increased moderately with some cautiousness on future labour and economic situation. The JOLTS survey revealed lower turnover and a weakening momentum in job openings (705,100 from 717,400 the previous month), but absolute numbers remained high.
  • The minutes of the latest FOMC meeting confirmed that the FOMC cut rates due to uncertainties on trade, weak foreign growth and low inflation; however, there was no consensus on the policy relating to the risks from trade; the review and discussion on monetary tools simply mentioned a larger use of the balance sheet and of strategies to reverse inflation weakness, but no major new decisions are expected. Speeches from many Fed governors confirmed the persistence of a lack of consensus on managing key rates, leaving the door open to further dissention in the October meeting; Jay Powell stayed relatively confident on US growth while mentioning that the Fed will expand its balance sheet, being more active on money markets following the increase of its purchases of Treasury bills; he mentioned that the details of these operations will be given by the October meeting, but he insisted these measures are not a renewed QE programme.
  • In the eurozone, industrial production data painted a mixed picture across sectors and countries but pointed to persistent fragilities. In France, industrial production (September) fell by more than expected in all major sectors (-0.8% m/m in manufacturing) and business confidence eroded slightly, notably driven by lower confidence on future production. In Germany, production surprised on the upside with a 0.3% m/m rebound, thanks to firmer activity in intermediate and capital goods, while the situation remained depressed for the consumer and energy sectors. In contrast, German orders were more depressed than expected (-0.6% m/m from -2.1% m/m the previous month), exports fell again, and the trade and current account surpluses weakened. Production in Italy rebounded (0.3% m/m from -0.8%m/m) in major industrial sectors, but its yearly trend turned more negative (-1.8% y/y). In Spain, production also rebounded by more than expected (0.9% m/m) on firmer activity in capital goods but weakened in consumer goods. The ECB minutes revealed a consensus in favour of immediate action on rates and on calling for more support from countries’ budgetary policies; the only stumbling block is that there are clear divisions among governors on several important topics such as the outlook, the use of the monetary tools, their limits and, of course, on QE, for which the lack of strong support from all governors was more than obvious. Christine Lagarde is about to take up the reins of leadership of a highly divided ECB, which could lead to some stalemate in decision-making in the coming months and push any new major monetary steps back to next year.
  • In Japan, household spending remained on a sustained trend, as expected (1% m/m), ahead of the rise in VAT; labour cash earnings were also negative (-0.2% y/y), which is not particularly positive for future consumer spending after the VAT rise. PPI and core machine orders showed a negative yearly trend.
  • In the UK, the retail sales proxy (BRC index) fell by more than expected (-1.7% y/y), as did industrial production (-0.6% m/m) and the proxy for monthly GDP also declined (-0.1% m/m from 0.4% m/m the previous month). Sentiment on house prices improved slightly but future sales are expected to decline sharply. On the political front, negotiations between Merkel and Johnson revealed a low probability of reaching a deal before 31 October, but Juncker mentioned that negotiations would still go on. Separately, the UK government announced that 88% of products should not attract import taxes for one year following the UK’s departure from the EU.
  • In China, the services PMI (Caixin) declined by more than expected (by 1 point) from past month.
  • The deterioration in the political climate has never been more obvious than at the beginning of the week, with the emergence of high tensions on several fronts, be they economic, political or geopolitical (for example, in the UK, the EU, Turkey and between the US and China). These factors have fed volatility on the markets but not on the cycle’s visibility. The new head of the IMF sounded the alarm on a global, synchronised economic slowdown and called for budgetary support measures to be taken. Nevertheless, official communications surrounding the US–China trade negotiations at the end of the week have pointed towards a partial trade deal, an agreement on currencies and a temporary truce on tariffs. A ray of hope has also emerged on the Brexit front following a meeting between the UK and Irish prime ministers. Separately, the decisions taken by the Fed and the ECB showed significant divergences among their members that limit any future action they may take. Alongside the complexity of US–China relations, European fragility was again seen in depressed and country-based asynchronous industrial activity, as shown by volatile order books and deteriorating sentiment.

Important for the scenario next week:

  • In the US, the most important data next week should be retail sales: the consensus expects them to remain on a positive trend (0.3% m/m) and core sales (a monthly proxy for consumption in the GDP calculation) to stay on a stable trend (0.3% m/m). On the supply side, regional business surveys (New York, Philly Fed) could reveal mixed or weak sentiment across regions, as headwinds remain in place across the different sectors. Industrial production (September) is expected to show a modest contraction (-0.1% m/m) after the rebound in August, probably due to the strike in the automotive sector. Housing starts are expected to erode after the rebound seen the previous month and the NAHB index (sentiment) is expected to remain stable after the rise. The release of the Fed’s Beige Book should validate the scenario of the current moderate growth, with downside risks related to trade and to weak industrial activity. Many Fed governors will issue communications.
  • In the eurozone, industrial production should remain moderate but slightly better oriented after the decrease seen in August. Final inflation (September) data should validate the low trend in place (1% y/y for headline and core inflation). At country level, the German ZEW index could weaken further, notably after the rebound in expectations last month; in Italy, industrial orders and sales could remain depressed, while final data for French inflation (September) could validate the expected decrease to 1% y/y. On the political front, the two-day European Council summit (17–18 October) will be important in deciding whether Brexit will happen at the end of the month, or whether to accept a further extension of Article 50.
  • In Japan, final industrial production data (August) should confirm the initially estimated decline (-1.2% m/m). Inflation is expected to stay low (0.3% y/y for headline; 0.6% y/y for core inflation).
  • In the UK, in a highly uncertain political environment, retail sales should stay volatile and could decline for another month; the unemployment rate should remain low, but doubts are increasing on the pace of employment growth and also on the momentum on wages, while the consensus still expects a stable 4% y/y trend in wage growth. Inflation (September) should rebound to 2% y/y but uncertainties exist with the mix of a volatile currency and oil prices. The housing price index should confirm an ongoing moderate trend.
  • In China, it will be a busy week in terms of economic data with ongoing US–China trade negotiations. Industrial production and fixed-asset investments are both expected to remain on a moderate trend, but the consensus expects a modest rebound in production (4.9% y/y from 4.4% y/y the previous month). Q3 GDP is expected to show moderate but decent growth (6.3% y/y from 6.2% y/y). Retail sales should show a firmer trend (7.8% y/y from 7.5% y/y). Inflation is expected to stay high (2.9% y/y), while PPI should remain in negative territory (-1.2% y/y).
  • Central bank meetings: South Korea.
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