Weekly Macro Review - 4th September 2017


We had a spate of consumer borrowing figures last week which revealed the country continued to load up on debt last month albeit at a slower pace than before.


We had a spate of consumer borrowing figures last week which revealed the country continued to load up on debt last month albeit at a slower pace than before. The annual growth in borrowing through credit cards slipped to its lowest rate of expansion for 16 months, albeit at a level +9.8% higher than in July 2016. Clearly consumers who are being squeezed by spiralling inflation and benign wage growth are simply trying to maintain their standard of living which is understandable, but unsustainable over the medium term. Interestingly, mortgage approvals spiked sharply last month, rising by +5.3% compared with June. The 68,700 loans signed off during the month were the highest since March last year and was supported further by a surge in remortgage approvals. The record low mortgage rates on offer should offer further support to the housing sector with the Bank of England unlikely to enact any form of policy tightening in the near term.

Despite the ongoing uncertainty surrounding Brexit (last week's talks did little to abate the issue), the Manufacturing sector powered ahead during August. Its monthly PMI spiked to 56.9 from the 55.1 reported last time, its quickest pace of growth for 5 months. The increase was driven by faster growth in output, domestic orders and employment. Growth in new export orders also remained robust. Business conditions improved across the board and confidence amongst those companies included in the survey hit one of the highest levels in 12 months. Unsurprisingly the data was well received, especially the pick-up in new orders as that should filter through to increased output over the next few months. Brexit concerns will continue to linger but for the moment, the manufacturing sector appears to be on solid footing. The question is how long will it last?


It was a busy week of US data releases, the most significant being that of the preliminary calculation of Q2 GDP. The pace of growth was revised sharply upwards to an annualised rate of +3.0% with the improvement driven largely by strong consumer activity. Increased business spending was also a

significant contributor to the 40 basis points (bps) revision which was also a substantial acceleration over the disappointing +1.2% growth seen during the first 3 months of the year. Current expectations are for the +3.0% pace to be broadly maintained for the second half of the year with any loss of output from Hurricane Harvey likely to be made up before the year is out.

Friday's labour market report was a little disappointing with non-farm payrolls missing expectations for August. 156,000 new jobs were created during the month, considerably lower than forecasts and more than 30,000 less than the level seen back in July. However, August is a notoriously difficult month to forecast due to different start times of the new school year and fluctuations in summer employment. In terms of the headline unemployment rate, that ticked up by 10bps to 4.4% with the participation rate steady at 62.9%. Wages rose by just +0.1% during the month equivalent to an annualised increase of +2.5%. The next couple of reports are likely to be distorted by the fallout from the Texan hurricane so it could be a while before we get another clean set of numbers as the recovery progresses.

The Institute for Supply Management released its PMI equivalent for the Manufacturing sector on Friday. Activity hit its highest level for 6 years during August with the index rising by 2.5 points to 58.8 with the sub-indices for both production and new domestic orders reaching levels above 60.0. Employment also rose sharply with 36,000 of the new jobs outlined in the payroll figures coming from the sector. The largest 6 industries surveyed all reported accelerating activity and whilst new export orders growth did slow somewhat, the recent weakness in the Dollar should be beneficial for the sector going forward.


Unemployment across the region held steady at 9.1% during July, 90bps lower than the same month last year and the joint lowest rate since February 2009. The German jobless rate dropped to a record low of 3.7% which offset slightly higher rates in both France and Italy. The other big news from the Eurozone last week was that of inflation which rose to a higher-than expected +1.5% last month. It represented a 20bps increase over the level seen back in July although remains 50bps below the target level set by the European Central Bank. The biggest contributor to the increase was the cost of energy which increased by around +4.0% with alcohol and tobacco prices up by 2.0%. Core inflation, which strips out the more volatile components of the headline data remained unchanged at +1.2%.


Manufacturing growth accelerated last month according to the latest set of official PMI numbers. Its index rose by 0.3 to 51.7, a level that is hardly something to get excited about although crucially, is in growth territory. Higher production and new orders helped drive the data on this occasion, particularly from overseas whilst business confidence rose to its highest level for 5 months. Disappointingly, the Services sector saw its slowest growth since May last year with the 53.4 reading just over 1.0 point lower than the level recorded in July. Chinese media company Caixin released its own PMI figure for the Manufacturing sector on Friday. The data, which focuses on the smaller companies in the economy, showed modest growth of 51.6 which was 0.5 higher than the previous level. It was the third straight month of growth for the sector following a quickening of inventory build and higher prices.


There were several notable Japanese releases last week. Firstly, the unemployment rate matched expectations during July to remain close to full employment at just 2.8%. The last time unemployment was consistently this low was during the early 1990s when it dropped as low as 2.0%. The jobs to applicant ratio ticked up once again, this time to 1.52 available positions which represents the highest ratio recorded for 43 years.

Despite slowing slightly, retail sales increased on an annualised basis for the 9th consecutive month during July. This was largely due to shoppers spending less on clothes and cars than previously. Expectations for consumer spending in August aren't overly optimistic after a month of particularly poor weather that kept people indoors. Additionally, rising tensions with North Korea which saw the country fire a missile over Japan last week could undermine confidence across the country. The final number of the week was industrial production which dropped back into negative territory in July with the sector impacted by a reduction in inventory levels. The fall was bigger than expected with the -0.8% reduction double the level expected by the market. Nonetheless, overall sentiment in the sector remained generally positive, supported by strong domestic demand and rising export numbers.

Other Snapshots From The Week

Last week's Brexit negotiations were underwhelming which shouldn't be overly surprising considering the complete lack of progress since Article 50 was evoked back in March. There remains a considerable difference between the proposed “divorce bill” with both parties viewing the legal requirement in a completely different light. David Davis is now weighing up the possibility of Britain joining the European Free Trade Association, potentially as a temporary measure to avoid significant tariffs coming into place when we exit the EU at the end of March, 2019. But with no real plan or strategy in place it remains to be seen where we will find ourselves in 19 months' time. One thing is guaranteed - uncertainty, uncertainty, uncertainty.

The Week Ahead

This week is particularly busy for macro data both at home and abroad. Domestically, PMI figures for the services and construction sectors are due following the impressive manufacturing data last week. In the US, the latest factory orders numbers are out tomorrow and are followed by key trade data and the ISM non-manufacturing PMI on Wednesday. The Federal Reserve also releases its latest economic review in the form of its Beige Book later in the week. PMI's are also the standout numbers from the Eurozone this week although the ECB policy meeting on Thursday is likely to garner most of the attention. In Asia, the final reading of Q2 GDP is expected in the early hours of Friday morning with Chinese focus likely to be on the export and import numbers which are due on the same day. Chinese inflation is also expected although not until Saturday morning.

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