Economic Highlights

The latest bank lending data suggested that pre-Budget worries were having a more limited effect on households than might have been expected. Mortgage approvals, for example, jumped to a two-year high of 65,650 in September, reflecting the more powerful effect of falling mortgage rates. However, rates might turn into more of a headwind following the post-Budget rise in bond yields. Consumer Credit growth of £1.2bn was lower than the £1.4bn in August, but still matched the year-to-date average. The latest PMI readings showed the continuing divergence between weak manufacturing (49.9) and more resilient services (52.0). Futures markets continue to expect a 0.25% cut in the base rate by the Bank of England this week.
 

Non-Farm Payroll growth came in at a cycle low of 12k and the unrounded unemployment rate ticked back up to 4.14% from 4.05%. In the event, bond investors seemed to interpret Friday’s data as being too much affected by one-off strikes and hurricane disruption if the 9 basis point rise in the 10-year yield can be taken at face value. Strikes accounted for a shortfall of 41k according to the BLS, but it declined to offer a number for hurricane disruption. However, in the household survey, 460k people reported being unable to work because of bad weather. Just to add to the uncertainty, the initial response rate to the household survey was the lowest since 1991, again casting doubt on the credibility of the numbers. There is little doubt that labour market momentum is waning, but it is not necessarily about to crash. Nevertheless, the Federal Reserve is expected to cut the Fed Funds rate by 0.25% this week.
 

Last week produced stronger-than-expected GDP and inflation data. The first showed euro area GDP growing by a solid +0.4% quarter-on-quarter in Q3 (vs +0.2% expected), with upside surprises in Germany (+0.2% vs -0.1% expected), France (+0.4% vs +0.3%) and Spain (+0.8% vs +0.6%) outweighing the downside in Italy (0.0% vs. +0.2% expected). On the inflation side, Germany’s flash inflation print for October saw the harmonised HICP measure come in at +2.4% year-on-year (vs +2.1% expected). That helped lead to an upside surprise in eurozone inflation. Headline inflation climbed back at the ECB’s target of +2.0% in October (vs +1.9% expected), while core CPI remained at +2.7% (vs +2.6% expected). The ECB’s next meeting is scheduled for December, and it, too, is expected to deliver another 0.25% rate reduction.
 

The latest PMI readings, both official and private sector increased from September’s, leaving the composite prints at 50.8 for the official state survey (up from 50.4) and at 51.9 for the Caixin (up from 50.3). This could be evidence of a positive sentiment shift following the stimulus announcements in September, but we would prefer to see more evidence before getting too excited.