Insight’s Global economic outlook for the week – as at 8 December, 2017

From

Matthew Merritt

Market and economic review

Markets: profit-taking in equities while the US yield curve continues to flatten

Stocks were buoyed at the start of the week by progress on the US tax bill, but equity market gyrations were the most notable feature of the week as profit-taking on year-to-date winners continued to be an obvious theme. Asia Pacific markets in particular were softer, with weaker commodity prices and fears of tighter financial regulation in China weighing on sentiment until better macro data, released on Friday, allowed markets to bounce and stage a partial recovery. Movements in other risk assets were much more subdued. Government bond markets performed well with yields moving lower while, in the US treasury market, curve flattening continued to be the dominant theme.

Data: global PMIs highlight broad growth

The start of the week saw the release of final November purchasing manager’s indices (PMIs) across a raft of countries. Aggregating the indices for the 31 countries that we follow, 27 showed improvements while moderation was seen in only four – a clear indication of the breadth in the current cyclical upturn. The end of the week saw Japanese GDP surprise on the upside while Chinese trade data was strong with both exports and imports higher than expected. The week ended with the US labour market report: non-farm payrolls came in marginally ahead of expectations while the unemployment rate held steady at 4.1%, which was in line with forecasts. Given the strength of the labour market, wage data was always going to be a focal point and, once again, average hourly earnings came in below expectations.

Politics: progress on a number of fronts

In Germany, the Social Democratic Party conference voted in favour of allowing its leader to engage in coalition talks with Angela Merkel’s Christian Democratic Union party, which could end the current political impasse and thereby avoid the need for fresh elections. In Brexit negotiations, Friday saw a breakthrough over the North-South Irish border issue, which was the sticking point in agreeing the ‘divorce settlement’. Negotiations can now move onto the second stage, which will focus on trade and transitional arrangements. Over in the US, a partial government shutdown was averted as both the House (235-193) and the Senate (81-14) voted in favour of extending government funding for two weeks until 22 December.

Outlook

Inflation and central banks take centre stage

The week ahead will see the release of a raft of inflation data from a range of key countries. The US CPI release on Wednesday is the clear highlight. The lack of inflation around the world has been the source of much debate in 2017. Last week saw US Q3 unit labour costs revised down following a downward revision to wage income in US national accounts. Against that background, the Federal Reserve meeting on Wednesday 13 December will be closely watched. The market has fully priced in a 25bp hike, which would be the third this year. At its November meeting, the Federal Open Market Committee upgraded its description of the economic growth to “solid” from “moderate” and little of the intervening data would have caused them to change that assessment. Attention will be focused on any adjustments to their economic forecasts, and signals as to their thinking on the inflation conundrum. Jerome Powell takes over as chair when Janet Yellen’s term expires in February.

The Bank of England (BoE), the European Central Bank (ECB) and the Swiss National Bank also have their policy meetings next week (on Thursday). The BoE is likely to remain on hold after it hiked rates last month for the first time in a decade. No change in rates is expected by the ECB, and the market is not expecting any additional guidance on the likely path of quantitative easing withdrawal. However, it will release its economic forecasts through to 2020.

Brexit decision

European Union (EU) leaders will formally decide at a summit next week whether there has been sufficient progress on the UK’s EU exit terms to allow the start of the second phase of the negotiations, which will focus on trade and the transitional period. Commentary today suggests they will give the go-ahead, but exploratory talks on the future relationship are unlikely to begin until next year.

Taxes and President Trump

Members of a special committee merging bills from the Senate and House are aiming to enact a version of President Trump’s tax reforms before the Christmas break, but without Democratic support they need almost total unity in order to pass legislation. US foreign policy will also remain in the spot light, following elevated tensions in the Middle East last week.
The value of investments and any income from them will fluctuate and is not guaranteed (this may be partly due to exchange rate fluctuations). Investors may not get back the full amount invested. Past performance is not a guide to future performance. Unless otherwise attributed the views and opinions expressed are those of the fund manager at the time of publication and are subject to change. The content of this document is valid for one month from date of issue.

By Matthew Merritt, Head, Multi-Asset Strategy Team

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