Macro Insights: A pivotal week for the US budget, Brexit and Germany
Macro Insights: A pivotal week for the US budget, Brexit and Germany
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.
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
This document is used for informational purposes only and does not constitute, on AXA Investment Managers part, an offer to buy or sell, solicitation or investment advice. It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. Due to the subjective and indicative aspect of these analyses, we draw your attention to the fact that the effective evolution of the economic variables and values of the financial markets could be significantly different from the indications (projections, forecast, anticipations and hypothesis) which are communicated in this document. Furthermore, due to simplification, the information given in this document can only be viewed as subjective. This document may be modified without notice and AXA Investment Managers may, but shall not be obligated, update or otherwise revise this document.
All information in this document is established on data given made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. Furthermore, due to the subjective nature of these analysis and opinions, these data, projections, forecasts, anticipations, hypothesis and/or opinions are not necessary used or followed by AXA IM' management teams or its affiliates who may act based on their own opinions and as independent departments within the Company. By accepting this information, the recipients of this document agrees that it will use the information only to evaluate its potential interest in the strategies described herein and for no other purpose and will not divulge any such information to any other party. Any reproduction of this information, in whole or in part, is unless otherwise authorised by AXA IM prohibited.
Editor : AXA INVESTMENT MANAGERS, a company incorporated under the laws of France, having its registered office located at Cœur Défense Tour B La Défense 4, 100, Esplanade du Général de Gaulle 92400 Courbevoie, registered with the Nanterre Trade and Companies Register under number 393 051 826.
© AXA Investment Managers 2017