Daily Agenda: What Does a Global Slowdown Mean for the U.S.?

Inflation data in China cools down; U.K. employment figures pleasant surprise; financial sector earnings on deck.


Jeff Kowalsky

With the Federal Reserve Beige Book set to be released this afternoon, a key question facing investors this morning is whether the U.S. economy can sustain its momentum in the face of a global slowdown and if not, what that means for corporate earnings. David Rosenberg, chief economist at Gluskin Sheff in Toronto, wrote yesterday that the two may not be one and the same. In his note, he argued that there would be only a residual direct impact on the U.S. economy from a recession in Germany. “Just do the math: exports from the U.S. to Germany could totally evaporate and that would knock a grand total of 0.3 percent from U.S. GDP,” Rosenberg wrote. While a slowdown in the euro zone may be insignificant to the domestic economy at large, analysts have recognized the key impact on specific equity sectors and investor sentiment in general.

Inflation cools in China. Consumer and producer inflation index levels for September registered a sequential contraction with headline prices at the cash register falling to 1.6 percent versus the same month last year and a reduction in food prices, a politically sensitive area. With price growth now significantly below official government targets and other signal of slackening demand, there is growing consensus among economists for lower official gross domestic product projections.

BlackRock and Citigroup surprise to the upside. A number of key financial sector companies will report quarterly earnings today and tomorrow. Yesterday’s earnings announcements were a mixed bag, with BlackRock and Citigroup beating forecasts while Wells Fargo met analysts’ expectations and J.P. Morgan disappointed slightly. Goldman Sachs will post results before the open tomorrow. After the market closes this afternoon, eBay and Netflix will announce third-quarter results, providing insight into U.S. online consumer trends.

Latest Europe numbers show spotty results. Consumer inflation in Germany was flat for the month, stabilizing at a level well below price growth targets set by the European Central Bank. In the U.K., September labor data for improved by more than forecast. With European Union states facing a deadline today to submit annual budgets to the European Commission, it is likely that EU leadership will discuss further austerity measures in the coming days.

Portfolio Perspective: Lower Fuel Costs help Offset the Impact of Slowing Global growth on the U.S. EconomySal Guatieri, BMO Capital Markets

After a lull, the U.S. data schedule picks up this week, with key reports on September retail sales, the Fed’s Beige Book, industrial production and housing starts. A pullback in auto sales likely kept retail sales flat in the month, though firmer chain-store receipts and the launch of the iPhone 6 should see decent underlying strength. A sturdy consumer could provide a solid bulwark for the U.S. if the global economic waves mount. Industrial production is expected to rebound strongly from the prior month’s dip. Ditto for housing starts, which likely bounced back above 1 million. The last Beige Book cited a pickup in economic activity, with more districts growing moderately rather than modestly. The update should maintain this tack. It might also cite increasing concerns about global economic weakness, a higher dollar and geopolitical events, however. If these concerns are starting to weigh on business confidence, they could make the Fed reluctant to change its forward rate guidance at the October 28–29 meeting.


The data this week should support our estimate of 3.2 percent growth during third-quarter 2013. Last week, however, we shaved our 2015 forecast a tenth to 3.0 percent due to the higher dollar and weaker global backdrop, with a partial offset from the 10 percent slide in gasoline prices the past three months. That slide could be far from over.

Sal Guatieri is a senior economist at BMO Capital Markets in Toronto.