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Investment expertise

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 16 Sept. to 20 Sept.):

  • In the US, the Fed FOMC cut its key rates by 25 bp (to 1.75%–2%), but Jay Powell remained cautious and came down against aggressive rate cuts, with Fed governors looking highly divided on interest rate management. The Fed’s decisions remained slightly below expectations, which were in favour of a more dovish stance, and the FOMC continued to favour insurance cuts. QE could be renewed if banks’ liquidity problems persist; however, the recent surge in money market rates should be contained by liquidity injections and lower rates on excess reserves, which, according to Powell, will make it unlikely that this will have any further impact on either the economy or on monetary policy. On the supply side, industrial production rebounded by more than expected (0.3% m/m; 0.5% m/m for manufacturing): this was broad-based but was also partly due to a post-hurricane uptick in activity. Regional business surveys were mixed: the New York Empire manufacturing and the Philly Fed both weakened from last month but at different speeds, and views on capex diverged according to the two surveys. Housing starts and building permits both rebounded strongly (to 1364 k and 1419 k respectively) and existing home sales made up ground to close to previous high levels; the NAHB confidence index rebounded further (index at 68), also nearing its previous highs.
  • In the eurozone, final inflation for August confirmed a stable yearly trend (1% y/y for headline and 0.9% y/y for core prices). The first estimate for consumer sentiment has shown some improvement, but it has been highly volatile over the past months. In Germany, the ZEW index surprised strongly on the upside with a major rebound (from -44 to -22.5) in sentiment among trade issue investors. In Italy, industrial sales and orders were more depressed than expected due to weakening demand both at home and abroad.
  • In Japan, the BoJ left its strategy unchanged. Haruhiko Kuroda mentioned that further easing could be possible but he seemed reluctant to take interest rates further into negative territory. The trade balance remained negative with both exports and imports showing a large contraction (-8% y/y). Inflation has declined as expected (from 0.5% y/y to 0.3% y/y), but core inflation stayed stable at 0.6% y/y.
  • In the UK, the BoE left its rates unchanged but became slightly more dovish should there be an extended delay on Brexit, as uncertainties could weigh further on activity and ease pressure on inflation. Retail sales (August) were weaker than expected (-0.2% m/m) and the trend slowed further (from 3.4% to 2.7% y/y). The yearly inflation trend declined thanks to lower oil prices (to 1.7% y/y from 2% y/y).
  • In China, retail sales disappointed (7.5% y/y) and industrial production was sharply weaker than expected (4.4% y/y). Fixed-asset investments remained on a low trend (5.5% y/y).
  • In Russia, industrial production stayed stable (2.8% y/y) but retail sales were weaker than expected (0.8% y/y) despite lower unemployment (4.3%). The trend in nominal wage growth weakened further, as expected (from 3.5% to 3% y/y).
  • Central bank meetings: Brazil’s central bank cut key rates from 6% to 5.50% (as expected) and Indonesia cut theirs from 5.50% to 5.25%. The Norges Bank increased rates from 1.25% to 1.50%.
  • With the exception of China and Italy, this week’s indicators were largely well oriented, with confidence recovering in Germany and industry and the real-estate market rebounding in the United States. Despite the geopolitical risks and the fallout surrounding oil, the Fed trimmed rates further while the BoJ and BoE opted for the status quo. It should be noted that it looks like Spain is heading towards fresh elections.

Important for the scenario next week:

  • In the US, news will be dominated by early estimates of the manufacturing and service PMI: the consensus expects the manufacturing index to remain weak, while the service index should make up a little ground. Regional business surveys (Philly Fed, Richmond, Kansas and Chicago) are expected to stabilise but the indices should remain moderate. Durable goods orders are expected to weaken after last month’s rebound. On the consumer side, the Conference Board index is expected to weaken from its current highs, while the Michigan index should stabilise. Spending and income data for August should remain on a relatively sustained trend and core inflation (core PCE) is expected to reach 1.8% y/y. House prices (S&P Corelogic index) should remain on a moderate trend but new and pending home sales should rebound from last month’s low numbers. After the FOMC meeting, many Fed governors will communicate and give more precise information on their positions on rate management.
  • In the eurozone, business and consumer sentiment indices will be the most interesting data. The first estimates of the manufacturing PMI are expected to make up some ground, while the services PMI may moderate after stabilising, staying well above the 50 level. The European Commission sentiment indices (industry, services and consumer indices) may rebound slightly, but downside risks are persisting across all sectors. M3 aggregates and credit are expected to be sustained, reinforced by the ECB’s recent quantitative easing programme. At country level, business sentiment is expected to stay stable in France but to improve in Germany (IFO index); consumer spending and confidence are expected to be stable in France and Spain and to improve slightly in Germany. In Italy, consumer and business confidence should remain fragile, but some improvements could be seen after the weak data seen in recent months.
  • In Japan, BoJ governor Kuroda is set to deliver several speeches during the week. The manufacturing PMI should remain below 50, while the services PMI is expected to remain above 50 after last month’s rebound.
  • In the UK, business sentiment (CBI trend index) and consumer confidence (GFK index) should remain relatively depressed as uncertainties (Brexit, politics) remain in place.
  • Central bank meetings: Colombia, New Zealand, Thailand, the Philippines, Mexico, Hungary and the Czech Republic.
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