Weekly Macro Review - 31st July 2017


The main domestic focus last week was on Wednesday's GDP data which arrived in line with market expectations.



The main domestic focus last week was on Wednesday's GDP data which arrived in line with market expectations. The ONS calculated figure was by no means anything to shout about; the economy grew by a meagre +0.3% over the period, hardly a resurgence after the +0.2% delivered in Q1. The economic growth dial has barely moved at all this year, unsurprising considering the overreliance on consumer spending. The rapid rise in inflation on the back of Sterling weakness and the fact that sustained wage growth has been largely non-existent or even negative means that conditions are hardly favourable for the average man or woman on the street. Expect further stagnant activity as we move through the second half of 2017.

Monthly mortgage approvals continued to fall during June, data from the British Bankers Association revealed. 40,200 new approvals were signed off in the month which was just below the figure seen back in May and the lowest since December last year. We mentioned in a previous article that Banks across the country are planning to tighten up conditions further amid spiralling personal debt, reducing the availability of riskier loans in the housing market. Prospective homebuyers with deposits of less than 10% are likely to be targeted so there is every chance that the approval numbers could sink even lower over the coming months.


Unlike the sluggishness seen at home, the US economy rebounded sharply in Q2, growing at an annualised pace of +2.6% which was 10 basis points (bps) ahead of expectations. After the weakness seen in Q1 (where growth was downgraded by 10bps to a benign +1.3%) consumer spending returned strongly with exports also rallying in the period. No doubt the data benefitted from a spike in durable goods orders, which rose by +6.5% last month, the 5th straight month of increased

invoices following a huge jump in demand for civilian aircraft. The data, which is closely monitored for signs of strength or weakness in business spend, can be heavily influenced by the volatile aircraft component and last month was no different with a +131.2% surge in fresh orders. Stripping that figure out, underlying orders were largely unchanged from the previous month.

In our previous update, the US housing market came into focus following strong releases of both newly granted building permits and construction starts for June, both of which should bode well for near term output levels. This week, we had the release of sales data which painted a mixed picture with new home sales rising as those of existing properties fell. Despite demand for homes remaining at lofty levels, an inventory shortage is constraining the market for new homes and the issue is not being helped by the fact that costs of land, labour and importantly timber are rising quickly. Inventory levels are also proving troublesome in the existing home marketplace where supply has now fallen for 25 consecutive months. Compared with a year ago, the number of homes available for sale is more than -7.0% lower with the average sales price +6.5% higher at $263,800.

As expected, this week's Fed Open Market Committee meeting was largely a non-event with no change implemented to the existing 1.00-1.25% base interest rate. However, the US Central Bank did indicate that it will start to reduce the size of its balance sheet “relatively soon”; this compares to its prior guidance that it would happen at some point “this year”. It is currently expected that the process of unwinding the Bank's historic Quantitative Easing programme (it has accumulated some $4.5tn of Treasuries and Mortgage Backed Securities since the financial crisis) will commence in September.


Production indices in the Eurozone surprised on the downside last week, albeit growth continued to tick along at a decent clip. Manufacturing growth was impacted by a modest slowdown in Germany although the 58.3 level of the German index is nothing to be concerned about being the third highest level seen over the last 6 years. The Services sector meanwhile was unchanged at 55.4, a modest pullback in the two largest economies in the region being offset by those in the peripheries. The overall composite pulled back by half a point to 55.8, implying a quarterly economic growth pace of around +0.6%.


There were no major data releases/significant macro events in China last week.


Japanese inflation held steady at +0.4% during June, the 6th straight month that core CPI has been positive but still someway off the +2.0% target set by the Central Bank. Nonetheless, considering how weak inflation has been for the last 3 decades, a consistent period of price appreciation is a positive outcome. Inflation could benefit in the near term from rising wage pressures as unemployment is now at just 2.8%, the joint lowest level since 1994. The jobs-to-applicant ratio is just as impressive - during May there were 151 jobs available for every 100 persons looking for work. There is hope that these tight labour conditions could push wage growth higher in the near term.


In between insulting the LGBT community and encouraging police aggression, President Trump had another disappointing week as his fresh attempt at repealing “Obamacare” failed once again. The proposed legislation collapsed during the early hours of Friday morning after former Republican presidential candidate and current senator for Arizona John McCain, voted against its introduction. It left the overall vote at 51-49 against the repeal's implementation and represented the third failed attempt at rolling back Obamacare.

Greece made a successful return to financial markets after selling €3bn worth of its new 5-year bond last week. It was the first time that the Greek government has sold bonds since 2014 with more than 200 bids received on this occasion. The 4.625% yield no doubt acted as a draw for investors although it is worth noting that the yield is more than 30bps lower than the last time funds were raised 3 years ago. Based on the success this time around, the Greek finance minister hinted towards a second and third sale in the not too distant future. Perhaps this is a sign that confidence is finally returning to the country after many years of economic and political hardship.

Week Ahead

This week is a particularly busy one for economic data, the most significant being that of Eurozone GDP and Inflation. Global production indices are also released, kicked off by the official Chinese numbers in the early hours of this morning. Later in the week, Chinese media agency Caixin releases its own PMI data which focuses on the smaller entities in the economy, as opposed to the large, state owned entities caught up in the headline numbers. Domestic manufacturing and Services PMI's are released on Tuesday and Thursday respectively whilst in the US, the Institute for Supply Management releases its own PMI equivalents. Arguably the most important dataset of the week arrives on Friday in the form of July's labour

market report in the US which will contain non-farm payrolls, unemployment levels and wage information. Central bank focus will be on the Bank of England as it hosts its MPC meeting on Thursday.

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