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The Global Markets Weekly – 10/26/18
U.S. Economy in Good Shape Amid Jitters
A strong labor market and tax cuts have the U.S. economy in a position of relative prosperity in the third quarter of 2018, capped by a solid consumer-led GDP gain of 3.5% in Q3. Equity market corrections and bear markets around the globe are reasonably causing many to question whether results can be sustained. Fed officials are staying the course, holding that what goes up (strongly) will inevitably go down. On that front, DE’s outlook is unchanged, as we expect solid expansion will persist into 2020, possibly 2021. We also expect the U.S. equity market will continue to post repeated new highs.
Within the details, domestic demand growth remained solid at 3.1%, down from the boomy 4.0% in Q2. Capex was weak, rising only 0.8% after an 8.7% Q2 gain, offset by strength in government purchases. The expected decline in the trade gap was offset by a massive rise in inventory investment, also broadly expected. A near-term risk is inventories could drag on Q4 growth, pushing it below 3%.
Stepping back, a key for the outlook will be a resumption in capital spending ahead, which should see continued tailwinds from lower tax rates in 2019. DE views capital spending softness in the third quarter to be an aberration, with weakness in structures (-7.9%) after a mining surge in Q2, while intellectual property investment remained strong (7.9%), and equipment spending cooled for the moment after a strong Q2. Trailing company earnings results are strong, and market participants are attempting to divine the operating environment once this year’s tax cut impacts fade in 2019.
Looking ahead, the U.S. jobs report this week should show an above-consensus rebound in payrolls, while a moderate wage gain could still lift the y/y rate to a fresh high at or above 3%. Much of that is baked in the cake, and shouldn’t spook bond markets unless a string of months show peppier performance. Even then, the balance of policymakers may welcome wage pickup that lifts households’ financial position after a long period of subpar gains.
It is a busy week around the globe, see below and detail within for more.
Coming Week’s Key Indicators and Events
| Release | DE / Consensus | Comment | |
| U.S. | Oct ISM Man (Th)
Oct Payrolls (Fr) Unemployment Avg.Hrly.Earn |
-0.8 to 59 / -0.8
225K / 190K 3.6% / 3.7% 0.2% / 0.2% m/m |
ISM Surveys incredibly strong, far from recession-like conditions. Jobs rebound from weather, while wages lift above 3% y/y |
| Euro | Q3 GDP (Tu)
Flash Oct CPI (Fr) Core CPI |
0.4% / 0.4% q/q
2.1% / 2.2% y/y 1.0% / 1.0% y/y |
Slowdown in y/y growth persisting into year-end, ECB forecasts likely need downgrade in December. |
| U.K. | BoE Meeting (Th) | Hold / Hold | Spare capacity limited, inflation still sturdy on average. 2019 hike in doubt on Brexit hurdles, expect hike bias to stay. |
| Japan | BOJ Meeting (We) | Hold / Hold | Accommodation warranted as activity, prices, need support. |
| China | Oct NBS PMI (We)
NM PMI |
-0.1 to 50.7/ -0.2
+0.1 to 55 / unch |
Authorities trying to keep activity supported amid trade spat, |
| Brazil | Rate Decision (We) | Hold / Hold | Sunday election a key event despite likely Bolsonaro victory. Sell the news on BRL? |
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