US
- In the US, there are signs that the shutdown has had a negative impact on activity. The pace of expansion in the services sector decelerated in January. The ISM non-manufacturing index fell to 56.7 in January from 58.0 in December, reflecting concerns about the government shutdown, which negatively impacted new orders.
- Front-and-center was December’s retail sales report, which unexpectedly dropped 1.2%. Control group retail sales, which factor into GDP, also fell 1.7%, the sharpest decline since 2000. This report should be taken with a degree of skepticism, however consumer spending appears to have lost some momentum headed into 2019.
- The headline consumer price index (CPI) was left unchanged in January, as lower overall energy prices weighed on the topline index. However, the less-volatile core measure rose 0.2% for the fifth consecutive month. Overall, core inflation continues to trend higher, yet remains contained with few signs of any sizable moves in either direction. Core inflation is up 2.7% annualised over the past three months, and has risen 2.2% over the past year.
- Lower energy prices led to a 0.1% dip in the producer price index (PPI). Core producer prices, which exclude energy and food, increased 0.3%. With inflation largely contained, the FOMC will likely feel less pressure to lift rates at its upcoming March meeting.
- Industrial production (IP) disappointed, falling 0.6% in January which was weaker than expected. The weakness can be tied to the 0.9% drop in manufacturing production, as both mining and utilities production experienced gains. In a separately released report, the NY Fed’s Empire Manufacturing Index rose to 8.8%, offering some hope for a near-term rebound in IP.
- Small business optimism appears to have been adversely impacted by the shutdown. The NFIB index slipped 3.2 points to 101.2 in January, the lowest level since 2016. Financial market weakness towards the end of 2018 likely played a role, but uncertainty arising from the 35 day-long government closure clearly weighed on sentiment. The monthly decline also mirrors the steep drop in the Wells Fargo Small Business Survey to start the year. While optimism has faded somewhat, the index remains high relative to historical averages. More firms are reporting difficulty finding labor, which continues to signal a tight labor market. By contrast, firms have become somewhat less upbeat about the future and have expressed more guarded optimism surrounding the prospects for 2019.
- According to the JOLTS survey, there were over 7.3 million job openings in December, a record high. Furthermore, the number of job openings exceeded the number of jobless for the third straight month. Initial jobless claims have also mostly recovered from the uptick seen post shutdown. Claims for the week ending February 9 rose slightly to 239,000, but remain at an exceptionally low level.
- US congressional negotiators have cobbled together a package to fund approximately 25.0% of the US government for the remainder of this year. The agreement includes $1.375 billion dollars for barriers along the southern border of the United States, which is significantly less than the $5.7 billion sought by the White House. President Trump is expected to sign the bill but is also expected to declare a national emergency in an attempt to shift more funds to border barrier construction.
- With two weeks to go in the US-imposed 90-day window to negotiate a trade deal with China, media reports suggest that US president Donald Trump is considering extending a moratorium on raising tariffs on Chinese imports for an additional 60 days. Negotiators met in Beijing this week to try to reach agreement over US demands for structural reforms from China and over the thorny issue of verification. Progress was made, and the Wall Street Journal reports that the two sides are closer to issuing a memorandum of understanding that could form the basis of an agreement. When agreement on issues such as intellectual property and forced technology transfer is close, Trump and Chinese president Xi Jinping are expected to try to push a deal over the finish line.
- The major US equity indexes posted gains for the eighth consecutive week, as optimism that the US and China would forge a trade deal before the US raises tariffs offset weak December retail sales data. Stocks in the energy and industrials sectors within the S&P 500 Index generated the strongest returns, while utilities and financials were the laggards. The S&P 500 Index held above its 200-day moving average, an important technical support level for some market participants.
- The 10-year US Treasury yield increased modestly over the week despite a sharp decrease on Thursday following the release of the unexpected drop in December retail sales. Inflation data continued to show limited upward pressure on prices, with the January consumer price index increasing 1.6% from the year-earlier period. The January producer price index declined 0.1% from December.
- In the US, Markit PMIs for February (preliminary) are due out on Thursday. Markit manufacturing PMI is expected to stabilise around the current level of 54.9. While the US is not immune to the global slowdown, expansionary fiscal policy is pulling in the other direction.
- Capital goods data for December are due to be released on Thursday. New capital goods orders fell unexpectedly in November, which shows a slowdown in investments as the end of 2018. Investments are expected to continue growing in 2019 but probably not at the same pace as in 2017 and 2018.
UK
- A motion to back British prime minister Theresa May’s efforts to renegotiate the terms of the Brexit withdrawal agreement was defeated in Parliament on Thursday, as was a motion calling for a three-month Brexit delay. With just six weeks to go until the United Kingdom is scheduled to withdraw from the European Union, how the exit will shake out remains very much in doubt. Perhaps the UK’s chief Brexit negotiator, Olly Robbins, has the inside track. He was overheard by a reporter in a Brussels bar saying that a reworked deal or a significant Brexit delay are the most likely results.
- British retail sales rebounded strongly in January as steep clothing discounts attracted wary shoppers, bucking a slowdown in consumer spending ahead of Brexit. Retail sales volumes jumped by a monthly 1.0% after their biggest fall in December in a year-and-a-half, the Office for National Statistics (ONS) said, far above the median forecast in a Reuters poll of economists for a 0.2% rise.
- January UK inflation is in line with BoE and small impact. The largest downward contribution to the change in the 12-month rate came from electricity, gas and other fuels, with prices overall falling between December 2018 and January 2019 compared with price rises the same time a year ago. This was partly offset by airfares. There were small signs of rising labour costs feeding through to service inflation, remaining at 2.5%. Inflation seems unlikely to fall further over the nearest year. The drag on inflation from the Ofgem price cap will be reversed in April when the cap rises and food price inflation is also set to rise.
- The most important release next week is the labour market report for December. The unemployment rate is expected (three-month average) was unchanged at 4.0%, but it is probably a close call as to whether it fell to 3.9% or not.
EU
- Spain’s lower house rejected the Socialist government’s 2019 spending plan this week, prompting a snap election scheduled for 28 April. Pro-Catalan independence groups withheld support for the government’s budget over the issue of independence for Catalonia and Madrid’s prosecution of leaders of the independence movement. This will be the third Spanish election in four years. European political uncertainty has been on the rise of late, highlighted by disagreements within Italy’s fractious left-right coalition, recent riots in France and Chancellor Angela Merkel’s lame duck status in Germany.
- German GDP was unchanged in the final quarter of 2018 in the wake of a Q3 decline, allowing Europe’s largest economy to narrowly avoid falling into a technical recession, or two consecutive quarters of negative growth. Slowing global growth and ripple effects from ongoing US–China trade friction continue to weigh on demand for European exports, as exemplified by the dramatic 4.2% drop in eurozone industrial production in December.
- The pan-European STOXX Europe 600 Index rose about 3.0%, buoyed by fresh signs of progress in US – China trade negotiations. France’s CAC 40, Germany’s DAX, and the UK’s FTSE also advanced. Gains came despite more signs of slowing in the eurozone economy and the ongoing impasse over Brexit.
- On Thursday, the February flash PMIs are due out. In January, PMIs signaled that the euro area economy is edging closer to stagnation (indicated by PMI level around 50) with manufacturing PMI falling to a 50-month low at 50.5 while service PMI showed signs of stabilisation. Falling new orders and the ongoing political disputes still point to some downside risk for the manufacturing index, which is expected to fall to 50.2 in February. There might be scope for a rebound in services PMI to 51.4 in light of strengthening domestic demand.
China
- With two weeks to go in the US-imposed 90-day window to negotiate a trade deal with China, media reports suggest that US president Donald Trump is considering extending a moratorium on raising tariffs on Chinese imports for an additional 60 days. Negotiators met in Beijing last week to try to reach agreement over US demands for structural reforms from China and over the thorny issue of verification. Progress was made, and the Wall Street Journal reports that the two sides are closer to issuing a memorandum of understanding that could form the basis of an agreement. When agreement on issues such as intellectual property and forced technology transfer is close, Trump and Chinese president Xi Jinping are expected to try to push a deal over the finish line. Optimism over a potential deal helped support global markets this week.
- Chinese stocks rose as mainland investors returned from a weeklong Lunar New Year holiday in a buying mood. However, reports of ongoing disagreements between US and Chinese trade negotiators raised doubts about the likelihood of both sides striking a deal by March, when the US is set to ratchet up tariffs on Chinese imports. For the week, the Shanghai Composite Index added 2.5% and the CSI 300 Index of major stocks in Shanghai and Shenzhen climbed 2.8%, marking the biggest weekly gain in three months for both indexes, according to Reuters.
- The Chinese data point of interest is house prices, which is expected a quite healthy pace of increases as monetary policy has turned looser over the past six months.
Sources: T. Rowe Price, Reuters, MFS Investment Management, Danske Bank, TD Economics, Handelsbanken.
