Macro Weekly – Fed cuts and pauses, US and eurozone GDP marginally better

by: Han de Jong

  • US and eurozone GDP data marginally better than expected
  • Some sign of life in key Chinese PMI
  • Fed cuts and pauses
  • Hong Kong shows what unrest can do
191101-Macro-Weekly.pdf (204 KB)

US GDP growth amounted to 1.9% qoq annualised in Q3. That was a touch better than expected, but lower than the last couple of quarters. Private consumption was strong. Other elements of the report were unexciting and much in line with expectations. As the US economy is experiencing weakness in manufacturing, just like many other countries, we still expect the overall economy to slow further during the next couple of quarters. A recession, however, is very unlikely in our view. The softening manufacturing sector is already leading to somewhat weaker jobs growth, a trend we expect to continue. As the improvement of labour market conditions weakens, so will income growth, consumer confidence and growth of private consumption. Personal income growth in September came in at 0.3% mom after August’s revised 0.5%. Spending growth was a little softer at 0.2% mom in both months. This implies savings have gone up a little. The savings rate is relatively high by historical standards, implying the US consumer is financially comfortable. A drop in income growth could be compensated by a drop in the savings rate making a sharp downturn in consumer spending unlikely.

US PCE inflation fell back in September. Prices were unchanged on the month as they were in August, while the yoy rate fell from 1.4% to 1.3%. The Fed’s favourite inflation measure, core PCE, was also unchanged in September after rising 0.1% mom in August. The yoy rate fell back from 1.8% to 1.7%.

Below-target inflation and muted growth has created the room for the Fed to ease this year. At their latest policy meeting they cut rates for a third time this year. We had pencilled in a fourth cut in December, but the Fed seems to indicate they are going to adopt a wait-and-see attitude. We still believe one more cut is coming but have pushed it out to early next year.

Eurozone GDP still growing, but likely to lose further momentum

Eurozone GDP grew 0.2% qoq according to preliminary numbers. That was a touch better than expected. We continue to think that growth will disappear altogether in the next while, though we would not call that a recession. Manufacturing is in the doldrums and leading indicators in services suggest that growth is services is set to soften. The European Commission’s index of Economic Sentiment fell further in October: 100.8 versus 101.7 in September. Meanwhile, it isn’t all bad. There are scattered signs that things may be bottoming out in specific places. Dutch producer confidence, for example, has been stabilising since June, having fallen earlier in the year.

Domestic demand is still doing reasonably well in the eurozone, but international trade is a significant drag. The outlook therefore depends to a great extent on the outlook for international trade. Unfortunately, it is not easy to determine what will happen to international trade in the quarters ahead as it depends crucially on developments in the US-China conflict, possible further protectionist measures by US president Trump against other nations (European cars?) and also on domestic growth in the largest economies.

Signs of life in China’s PMIs

The PMIs in China paint an interesting picture. The NBS PMIs (they are the measures as published by the central bank) fell in October. The manufacturing index fell from 49.8 in September to 48.3 in October while the non-manufacturing index fell from 53.7 to 52.8. That does not look promising. However, the rival Caixin index showed a different picture The manufacturing series rose to 51.7, up from 51.3, but, more importantly, registering its fourth consecutive monthly improvement. A key difference between the NBS measures and the Caixin ones is that the sample of Caixin is more geared towards private sector companies. The Chinese policymakers have taken a range of measures to stimulate economic growth, focussing on the private sector. The relatively better performance of the Caixin PMI therefore may be suggesting that these measures are working. That would be good news for the Chinese economy and also for the world economy at large. But, it is early days yet.


Hong Kong in recession

Hong Kong has been plagued by unrest for a while now. This is leaving its mark on the economy. GDP had already contracted 0.4% qoq in the second quarter and shrank a staggering 3.2% qoq in Q3. The yoy rate of growth collapsed from +0.5% in Q2 to -2.9% in Q3.