DR.CHENJIAZI ZHONG

In Brief

• U.S.: FOMC meeting September 20: Fed is leaving short-term interest rates unchanged, but December Fed hike possible; QE unwind, fiscal progress?
• Eurozone: Eurozone upturn regains momentum in September; ZEW current sentiment situation; German general elections on September 24
• U.K.: U.K. households experience the strongest squeeze on finances for three years in the third quarter of 2017
• Japan: August exports rose 18.1% YoY vs. est. 14.3%; weakness in the Yen has helped exports
• China: Yuan fixed back; downgrade ahead of politburo
• LEIs: Signaling softer global activity over next six months

On the U.S.

The Federal Reserve is leaving short-term interest rates unchanged, while announcing a plan to start shrinking its massive bond holdings in a move to normalize its balance sheet. The Federal Open Market Committee (FOMC) said September 20 that it would keep the federal funds rate in a range of 1% to 1.25%, but Fed officials hinted that they might raise rates one more time by year-end if inflation rises. Their latest economic forecasts show policymakers expect three rates hikes in 2018, which would bring the benchmark rate to between 2% and 2.25% by the end of next year. The Fed announced it will begin unwinding its balance sheet. Fiscal stimulus could boost the outlook.

On Europe

The headline HIS Markit Eurozone PMI increased to 56.7 in September from 55.7 in August, a four-month high; inflows of new orders showed the largest monthly increase since April 2011, representing a renewed surge in demand. Flash Eurozone Services PMI Activity Index grew to 55.6 from 54.7 in August, which is a four-month high; service sector activity showed the largest rise since May. Flash Eurozone Manufacturing PMI Output Index increased to 59.5 from 58.3 in August, a 77-month high, and flash Eurozone Manufacturing PMI increased to 58.2 from 57.4 in August, a 79-month high; the outperformance of manufacturing relative to services also increased to the widest since January 2014.

The faster pace of business activity growth and the upturn in demand in September was accompanied by rising price pressures. Input cost and selling price inflation gathered pace for a second successive month, with both reaching the highest rates since April. Prices charged for services rose to the greatest extent since May, while the increase in factory gate prices was the joint-highest since June 2011.

ZEW current situation sentiment, as well as expectations towards rates, inflation, and markets, were little changed in September in the euro area countries. Economic expectations ticked up slightly across the board. Euro area consumer confidence moved largely sideways again. While the soft data is topping, the hard data is still catching up. Solid growth is still on track for the third quarter.

German general elections are this Sunday, September 24th. According to the polls, Chancellor Merkel’s party, the Christian Democratic Union, and its sister party, the Christian Social Union, are expected to claim most seats in the Bundestag again. As a result, Chancellor Merkel would serve for her fourth term. The AfD and FDP parties are unlikely to gain overwhelming popularity, ousting Merkel. Yet the two parties are likely to garner over 5% of the vote each and thus enter the 19th Bundestag. If so, it would be the first time the AfD, the Populist Party in Germany founded a few short years ago, gains national parliamentary representation.

On the U.K.

September data confirmed that U.K. household finances deteriorated at the sharpest pace for three years in the third quarter. The seasonally adjusted IHS Markit Household Finance Index (HFI) was down to 42.8 in September from 43.4 in August and well below the neutral 50.0 threshold. The average index reading dropped to 42.6 in the third quarter, which was the lowest since the third quarter of 2014.

Intense pressures on household finances were recorded across all regions in September, driven principally by the on-going squeeze on real incomes from higher prices and low wage growth. The amount of cash available to spend continued to fall at one of the steepest rates seen over the past three years. However, spending rose again, and at an increased rate, fueled by a combination of modest growth in income from employment and reduced savings.

Households meanwhile indicated a continued recovery in their house price expectations from the 10-month low seen in June. Expectations for finances in the next 12 months September data also indicated that UK households expect a sustained deterioration in their financial well-being over the next 12 months. However, the seasonally adjusted index edged up to 47.8 from 47.3 in August, to signal the lowest degree of pessimism for seven months. There was a wide divergence across UK regions during September.

On Japan

Japanese exports and imports surged in August, with both treating expectations as a recovery in trade appeared to gain momentum. Exports rose 18.1% from a year earlier, the biggest increase since November 2013. Imports climbed 15.2%. The trade surplus was 113.6 billion yen. Shipments of autos to the U.S. increased 28.3%, though part of the increase in overall shipments to the U.S. can be attributed to lower exports the previous year, according to the Ministry of Finance. Shipments of electronic parts to Asia rose 21.6%. The weakness in the Yen has helped exports, which is key for Japan.

On China

China’s yuan firmed against the U.S. dollar on September 22 as the greenback pared gains made following the Federal Reserve’s hawkish policy statement and as investors took the latest Chinese sovereign rating downgrade in their stride. However, the Chinese currency remains on course for its second weekly loss. It has lost more than 1,500 pips from a 21-month peak hit on August 8 as a rallying yuan forced authorities to put a brake on its rise and relax some restrictions on capital outflows.

S&P cut China’s credit rating, as China’s attempts to reduce risks from its rapid buildup in debt are not working as quickly as expected and credit growth is still too fast. This follows a similar downgrade by Moody’s in late May, but the timing raised eyebrows as it came just weeks ahead of one of the country’s most politically sensitive events, the twice-a-decade Communist Party Congress (CPC). It is tough to see much rocking the boat before the key Politburo reshuffle in mid-October.

On LEIs

The OECD’s Leading Economic Indicators (LEIs) continue to indicate economic activities in the third quarter and fourth quarter will be milder in most G7 countries, as (a) the nominal reacceleration concludes, (b) the “spinach” period commences in U.S. politics, and (c) real growth drivers are pushed out further and further. On the flip side, LEIs for India, China, and Mexico are all reaccelerating, signaling better 2H17 growth in each of those countries. However, the OECD’s Total LEI is still showing the global economy will undergo a softer patch over the next six months.