USA
- Buoyant Q3 GDP growth after upward revision
- Solid November employment report release with post-crisis low in unemployment rate
The U. S. economy recovered strongly in Q3 after sluggish growth in the first half of the year. Q3 GDP growth was revised upward to 3.2 % (q/q, annualized rate) from 2.9 % according to the second estimate from the Bureau of Economic Analysis (BEA). The growth rate of personal consumption expenditure was also revised up from 2.1 % to 2.8 %.
The personal consumption expenditure (PCE) inflation rate moved higher from 1.2 % to 1.4 % (y/y) in October, as widely expected. The core PCE inflation rate remained unchanged at 1.7 % (y/y) in the same month.
The most prominent leading indicator for the U. S. manufacturing sector – the ISM manufacturing survey – recovered in November (rising from 51.9 to 53.2) and now indicates expansion in the manufacturing industry for the third consecutive month.
On Friday 2nd December, the November employment report was released. Non-farm payroll job growth was 178.000 after 142.000 new jobs were created in October (revised down from 161.000). The unemployment rate fell surprisingly from 4.9 % to 4.6 %.
Following the presidential election last month and market expectations about higher growth and inflation, U. S. treasury bond yields have been rising in line with solid fundamental economic data flow. The market-implied probability of a Fed rate hike this month (FOMC on 13th/14th December) has moved to 100 %.
Eurozone
- Solid sentiment in November
- ECB meeting top event in the week ahead
In the Eurozone, economic sentiment improved in November (Figure 1). The composite purchase manager index (PMI) surprisingly inched up from 53.3 to 54.1 and remained solidly in territory that is indicating an expansion in economic activities (> 50). The increase was induced by improvements in both the manufacturing (from 53.5 to 53.7) and the services sector (from 52.8 to 54.1). The Eurozone PMI hike was supported by rising country results for France (from 51.6 to 52.3), while the German composite PMI slowed moderately (from 55.1 to 54.9). Italy’s manufacturing PMI indicator rose surprisingly from 50.9 to 52.2 in November.
Other major sentiment surveys fared also well in November including the German ifo-index and the sentiment indicator of the European Commission (EC). The forward-looking expectations component of the ifo business climate survey indicates a growth recovery in the 4th quarter after a weak German GDP outcome in Q3 (0.2 % q/q). The EC economic sentiment indicator reached its highest level since December of last year. The country-level results improved in France and Spain, while German and Italian outcomes were lower in November. The EC survey that is conducted in Austria also improved in recent months. The economic sentiment survey that is conducted by Italy’s statistics office (ISTAT) among 4,000 companies in the first half of the month declined moderately in November, what was far from a slump despite the upcoming referendum (4th December) and surrounding uncertainty. The entire set of November soft data supports a continuing resilience of Eurozone economic activities despite headwinds from political events (Brexit, U.S. election, Italian referendum). The results are also in line with around 0.3 % quarterly GDP growth in the last quarter of this year.
As widely expected, Eurozone inflation inched up further from 0.5 % to 0.6 % (y/y) in November according to the flash estimate. The core CPI inflation remained sticky at 0.8 % (y/y). The core price index – excluding volatile components such as food and energy – has been far below its long-term average (~1.7 %) following a rapid fall since the Euro crisis in 2011/12. The headline inflation rate has been recovering from a low at -0.2 % in April implying that EMU-wide deflationary pressures have been fended. Consumer price increases will have averaged 0.2 % in 2016 and are expected to rise gradually to 1.2 % next year and 1.6 % in 2018 according to the September forecast of the European Central Bank (ECB).
The ECB is going to release updated quarterly economic projections next week when the December meeting of the governing council (GC) will take place on Thursday. Market-based longer-term inflation expectations (5 years forward inflation swaps) have recently recovered coinciding with rising actual inflation and moderately rising yields, fairly solid economic data for the Euro Area and ‘Trumponomics’-induced expectations about higher U.S. growth, inflation and treasury yields (Figure 2).
Most investors expect that the GC will announce to prolong the monthly asset purchases (‘QE’) beyond March 2017, for example, for a period of six to nine months, although it is less clear to market participants whether the ECB will continue to purchase asset at a monthly volume of 80 bn EUR or at a reduced volume (f. ex. 60 bn EUR). It is unlikely that the GC will announce a ‘tapering’, i. e. a step-wise monthly reduction of the purchase programme with the intention to end the bond purchases by end-2017. Possible adjustments to the terms and conditions of the asset purchase programmes are also on the table for next Thursday.
CEE
- Sentiment surveys improved in November
In Central Europe, sentiment brightened in November in line with positive outcomes of the Eurozone sentiment surveys. Poland’s manufacturing PMI index moved into expansion territory (51.9 after 50.2) and the Czech index remained solidly above the expansion threshold (52.2 after 53.3). The volatile Hungarian manufacturing PMI indicator remained at an elevated level (56.6 after 57). Despite moderate Q3 GDP growth (see UNIQA Capital Markets Weekly as of 28th November), the results would contradict a further growth slowdown in the months ahead and point to transitory effects during the last quarter.
Russia’s PMI index surged for the fourths consecutive month in November (53.6 after 52.4 last month) and indicates improving conditions in the manufacturing industry. Recently, monthly real sector data has not confirmed this trend and rather suggested a slow advance after the economic contraction.