Macro Weekly – The highest level since…

by: Han de Jong

  • Recently published data suggests global growth is set to remain robust
  • Inflation indicators continue to be very benign
  • Nomination of Powell for Fed chair suggests continuity of monetary policy
171103-Macro-Weekly.pdf (81 KB)

Confidence, the highest since…

I have highlighted robust confidence indices here many times. They provide the most up to date, comprehensive view on what is going on with the global economy. Admitted, they are ‘soft’ data, based on surveys. However, that is why one needs to look at a bunch of them to see if they paint a consistent picture. And they do!

I mentioned the German Ifo index last week already. It reached its highest level since the 1960s in October. Recent days have seen the publication of the European Commission’s Economic Sentiment Index. It rose from 113.1 in September to 114.0 in October, the highest level since 2000. Italian business confidence in manufacturing reached its highest level since 2011 in October.

The ‘highest level since’ is also a theme that applies to various confidence indices in the US. The Chicago Fed PMI rose to its highest level since 2011 in October, when it was higher only for one month. The previous time this index was higher than the most recent observation was in 2004 (also a one-off) and before that 1994. The Dallas Fed confidence index was the highest since 2006 in October. US consumer confidence according to the Conference Board’s gauge surged in October and stood at its highest level since 2000. I have to admit, that the US ISM for the manufacturing sector fell back to 58.7 in September, down from 60.8 in September, which was its highest level since 2004.

All this suggests that growth momentum in these two economies continues to be strong. This is confirmed by hard data. Eurozone real GDP grew at a rate of 0.6% qoq in Q3, after 0.7% in Q2 (upwardly revised from 0.6%). This is above what most economists consider potential growth for the eurozone. In fact, the eurozone economy has grown above potential for three consecutive years now.

US personal income and spending increased by 0.4% and 1.0% mom, respectively in September. That is strong, but, particularly the spending side may have been affected by the hurricanes. Car sales were stronger than expected in October, though the hurricanes may also have provided a boost here. US employment rose 261,000 in October, a little less than expected, but OK all the same.

…though picture more mixed in Asia

Various confidence indices in Asia were less impressive in recent days. Business confidence fell back a little in China, Korea and Taiwan in October, but remained at a high level. Business confidence in Singapore, on the other hand, surged to a new record. Taiwanese GDP accelerated in Q3 to its highest levels since 2015. But Korean export growth fell back sharply in October: + 7.1% yoy versus 35.0% in September. The September reading was astonishing and it looks like we need to average the last two months.

Subdues inflation

Eurozone inflation fell back in October. Headline inflation eased from 1.5% to 1.4% yoy while the core rates dropped from 1.1% to 0.9%. We think that continued slack in the economy is the key culprit here. Given the overall economic situation, I would think that somewhat below-target inflation is not a big problem and certainly not a justification for a continuation of super aggressive monetary policy. But then, I am not responsible for monetary policy and the ECB has announced a halving of its asset purchases starting in January.

The US Fed’s favourite inflation gauge, core-PCE, was unchanged at 1.3% yoy in September. This is actually more remarkable than the data in the eurozone as the US economy clearly has considerably less slack than the eurozone’s. The US October employment report also contained data on wages. The previous report had shown average hourly earnings up 0.5% mom in September, which was greeted by many economists as a sign that wage inflation might be picking up. However, these earnings were unchanged mom in October, pushing the yoy rate down from 2.8% to 2.4%. It would appear that this data is also affected by hurricanes. In any event, I conclude that inflation pressures remain very subdued in the eurozone and in the US.

Powell: a choice for continuity

US President Trump has nominated Jerome Powell to be the next chair. This would appear another U-turn on election rhetoric. Prior to the elections, candidate Trump had criticised the Fed for its, allegedly, overly loose policies. But by choosing Powell, he is now opting for continuity, more of what he had criticized so strongly. Just as well…