The U.S. mid-term elections result may create some future policy conundrums, but seems unlikely to derail a still strong U.S. economy. In Europe, by contrast, only a few bright spots are visible through the gloom. China concerns persist too.
1. A “split” U.S. Congress will have implications for policy, but U.S. economy remains in good shape.
The results of the U.S. midterm elections could create policy opportunities as well as risks. On the positive side, the Republicans and Democrats could cooperate on hiking infrastructure (page 2) and Democrat control of the House of Representatives could also create a check on President Trump’s trade policies. But a “split” Congress could also create long-term issues around future approval of the revised NAFTA agreement and the debt ceiling. But what is not in doubt is the continuing vigor of the U.S. economy: 250,000 jobs added in October, and good Q3 earnings results aided by positive surprises in the consumer discretionary sector. Annualized wages growth of 3.1% will provide yet another reason for the Fed to raise rates again in December, as we have predicted.
2. Recent European data may hint at better things to come, but there are still many reasons to be cautious.
While the U.S. landscape is brightly lit, Europe is still overcast. As we discuss on page 2, while Eurozone Q3 GDP growth was disappointing, it is possible to identify bright spots through the gloom, for example in rising core inflation and a strong labor market. But, overall, European markets remain weighed down by trade-related concerns (page 6), as well by Italy and Brexit worries. GDP growth may pick up in Q4, but any acceleration is likely to be modest and bund yields may be pulled in opposing directions by the anticipated end of ECB net asset purchases in December (which we still expect) and risk-off sentiment (page 7). But we could see a reversal of the usual EUR seasonal weakness in November, as market expectations around the U.S. come down marginally after the “split” election result and European expectations stabilize (page 9).
3. Chinese foreign trade in October beat expectations, but concerns remain here and elsewhere in Asia.
China concerns will also remain important. Chinese trade data was surprisingly strong in October, with the USD value of exports growing by 15.6% YoY in October (vs. 12.2% for January-September YoY) and imports rising by 21.4% (vs. 20%). Next Wednesday we will get data on Chinese retail sales and industrial production, which may shed more light on the Chinese economy. With China, the key questions and around the extent and effectiveness of government stimulus measures; elsewhere in Asia, the immediate worries may be rather different. In Indonesia, for example, GDP growth remained reasonably strong in Q3 despite repeated rate hikes by the Bank of Indonesia to defend the currency: external funding risks remain, however, as we discuss on page 5.
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