Disappointing salary data increasing doubt of Dec hike The US labor departmentreleased a disappointing labor report last Friday. Non-farm payrolls grew by 156k in Aug,missing market expectation of 180k. The report also noted that Hurricane Harvey did notaffect the number because the survey was conducted before the storm. Therefore, thehurricane is likely to affect the Sept report. In addition, unemployment edged up to 4.4%,higher than market consensus of holding steady at 4.3%. More importantly, wagesremained subdued. Average hourly earnings rose just 0.1% MoM and 2.5% YoY, bothsofter than expected. The fact that salary growth remained subdued implies that inflationmay continue to run below the Fed’s target, potentially increasing Fed officials’ concernsabout reaching the inflation target. However, other economic data generally performedwell last week. The ISM manufacturing PMI rebounded strongly to 58.8, driven byimprovement in production, employment and inventory. 2Q17 GDP also revised upwardsfrom 2.6% to 3.0%, supporting by strong personal consumption and business spending.    Overall, we maintain our view that the US economy remains solid, but do not see anyimprovement in the inflation outlook. According to the latest FOMC minute, inflation dataover the next few months will be key for judging whether the Fed will raise interest ratesat the Dec meeting. In conclusion, we maintain our expectation that the Fed will beginbalance sheet normalization at the Sept FOMC meeting, but subdued wage growth willreduce the likelihood of a Dec rate hike.    ECB likely to announce gradual QE exit plan this week The ECB will hold its mostimportant policy meeting this Thursday. The central bank will present the latest staffmacroeconomic projections, and is most likely to announce a gradual QE exit plan. In thelast meeting, ECB officials showed increasing confidence about the economic outlook inthe euro zone. In addition, President Mario Draghi also gave comments about “adjustingpolicy parameters” at the ECB forum. Therefore, we believe the ECB is ready for the nextstep of policy normalization. However, we think that the process will be cautious andgradual due to two reasons. First, underlying inflation in the euro zone has notdemonstrated a convincing upward trend. Core CPI which excludes food and energy wasstable at 1.2% in Aug, which remains far off the ECB’s target of “below but close to 2%”,and is unlikely to reach the target before 2019. Second, euro appreciation may be aconcern. The euro has been the strongest major currency this year, which hasstrengthened by more than 12% since April. A strong currency not only has a negativeimpact on the competiveness of exports for euro zone countries, but is also a downsidefactor for the inflation outlook due to lower import prices. Therefore, the ECB will have tomaintain relatively accommodative monetary policy. In conclusion, we expect the centralbank to extend QE until 1H18, but the monthly purchase size will be reduced from 60bneuro to 40bn euro for 1Q18, and to 20bn euro for 2Q18. Moreover, we do not expect anyinterest rate hikes before QE ends, so the earliest possible time for a rate hike would be2H18.    China manufacturing PMI rebounds but external demand slows China released itsPMI data last week, which showed that manufacturing activities continued to expand inAug. Official manufacturing PMI rose to 51.8 in Aug from 51.4 in July, much higher thanmarket expectation. Caixin manufacturing PMI also rose to 51.6, the highest level in sixmonths. However, we see some early signs of weakening in external demand. The newexport order sub-index dropped to 50.4 in Aug, the lowest level since Jan. This wasconsistent with the recent slowdown in export growth. We believe the decline in exportorders may indicate that export growth will gradually decline over the coming few months.    Looking ahead, we believe we will see a gradual moderation in overall economic data inthe next few months. However, we expect full-year economic growth to just slow slightlyto 6.8%, well above the 6.5% target.

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