Macro Insights: A pivotal week for the US budget, Brexit and Germany

Macro Insights: A pivotal week for the US budget, Brexit and Germany

04 December 2017

Solid momentum in the US, but a budget deal has yet to be concluded. Last week saw a rush of data and surveys that continue to suggest solid momentum in economic activity, not least with an upgrade in third quarter GDP growth estimates to 3.3% from 3.0%. It remains difficult to differentiate between underlying trends and short-term, hurricane-driven bounce-back in, for example, data such as the record-high Richmond Fed manufacturing index print for November, or the second successive decline in domestic auto sales, which brings them back in line with pre-hurricane levels. This week’s employment report will be the market highlight. With consumer confidence at highs not seen since 2000 and the closely watched Institute of Supply Management manufacturing survey remaining at a robust level, we continue to see payrolls pointing to a further tightening in the labour market and a quickening pace of annual pay growth this month. Congress will demand more attention. A Budget deal is required by 8 December to avoid a government shutdown. This could be a stretch with many contentious elements yet unresolved, including the treatment of children of illegal immigrants, spending constraints, the debt ceiling and ongoing hurricane relief funding issues. Most likely, we will see a short-term continuing resolution extension this week, requiring a Budget before 22 December. Meanwhile, following the Senate’s 51-49 vote to pass its tax bill, the process of reconciling the two Chambers’ separate bills to one will need to commence.

Focus returns to Brexit negotiations. In the UK, an intense passage of negotiation in the run up to December’s EU Summit (next week) appears to be moving towards achieving the ‘sufficient progress’ on separation issues, required to allow the EU-UK negotiations to move on to future trade and transition talks. EU officials have described progress at 90%.  In recent weeks, the UK government has shifted position over the divorce bill, increasing its offer. There also appears effective resolution of the outstanding differences over EU citizens’ rights. The specifics of the Irish border appear to remain unresolved, but with all sides intent on avoiding a hard border it is hoped to avoid this issue derailing progress at next week’s Summit. However, concessions associated with achieving this progress have prompted some backlash domestically, which will further test the Prime Minister’s authority. Sterling has rallied around 3% against the US dollar and 1.5% against the euro from November’s lows on the news. Economic data on November’s retail spending will be keenly watched this week as will the broader services PMI index for November. Both will help define the outlook for fourth quarter GDP growth, which we expect at 0.3%.   

Euro area inflation disappoints, while coalition talks resume in Germany. Euro area November inflation came in a bit short of expectations at 1.5% y-o-y (vs consensus at 1.6%) while core remained stable at 0.9% with both services and non-energy industrial goods price inflation unchanged at 1.2% and 0.4% respectively. In Germany, coalition talks have begun this week between German Chancellor Angela Merkel CDU/CSU and Martin Schulz’s SPD to form a grand coalition in an attempt to break the political deadlock. The SPD may also discuss the coalition and its stance at its national convention from Thursday to Saturday.

China’s PMI rebound likely due to technical factors; China’s National Bureau of Statistics said its measure of PMI ticked up to 51.8 from 51.6 in November, while the services sector growth accelerated to 54.8. The move contrasted with the market expectation of a small decline and could be driven by an increase in activity following October’s excessive weakness due to the Golden Week holiday. We continue to see growth decelerating modestly going into the yearend and 2018.

Upcoming events:
US: ISM non-manufacturing index print (Tuesday) November nonfarm payroll (Friday), current debt ceiling agreement expires (Friday)
UK: October manufacturing output (Friday)
Euro area:  November Euro PMI (Tuesday), German industrial output (Thursday), Q3 Euro GDP revision (Thursday)


Market and asset types measured by the following indices: Equities = MSCI. Fixed Income = JP Morgan and BofAML. 

The Research & Investment Strategy (R&IS) team at AXA Investment Managers present their views on recent developments and the factors shaping markets over the week ahead. For more information on the R&IS team or any of the above comments, please contact us or follow us on social media for updates throughout the week


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