Economic Outlook – 10 March 2019


  • Last week’s Nonfarm payrolls came in well below expectations, as employers added just 20K new jobs in February after adding 311K in January. Through the volatility, the three-month average gain of 186K is still rather strong, but marks a moderation, consistent with an upward tick in jobless claims and more moderate survey evidence from purchasing managers.
  • The US unemployment rate fell to 3.8% from 4.0%. An increasingly tight labor market is finally feeding through to higher wage growth, as average hourly earnings rose 0.4%, pushing the year-on-year increase to 3.4%, the highest pace of this cycle. Yet, with the expansion pulling more into the labor force – prime age participation is up 0.4 percentage points this year (the extent of tightness, and, by extension, inflationary pressure, is perhaps overstated).
  • The ISM non-manufacturing index rebounded three points this week to 59.7, and the underlying cycle highs for business activity (64.7) and new orders (65.2) point to considerable momentum. Such strength in largest sector of the economy, if realised, would likely be justification for the final Fed rate hike, in H2 of 2019. That assumes that the Fed’s pause allows the economy to weather ongoing ‘crosscurrents.
  • The ISM manufacturing survey has more clearly succumbed to a slowdown. Down to 54.2, the index has retreated from the sky-high readings of the past couple of years amidst slowing growth overseas and no definitive signs of the long-awaited trade deal with China.
  • Despite US president Donald Trump’s efforts to narrow it, the US annual trade deficit in goods grew 10.0% in 2018, the widest on record; with services included, the deficit grew 12.0%. Imports rose 7.5% due to fast economic growth while exports grew by only 6.3% as some exports, such as soybeans and other farm products, were disrupted by retaliation against US trade policies. While the rest of the world experienced an economic slowdown in 2018, US economic growth remained strong, with a rising US dollar and increased fiscal stimulus. This boosted consumer and business spending in foreign goods, contributing to the widening of the trade gap.
  • US household aggregate wealth fell 3.7% in the fourth quarter, with the drop owed entirely to the sharp decline in equity markets. Year to date, equity markets have retraced most of their decline, with the S&P 500 up nearly 10.0% as investors attempt to price in the Fed’s dovish shift.
  • The plunge in the NAHB homebuilders’ survey accurately predicted the string of four consecutive monthly declines in housing starts, including the 14.0% drop in December. Yet optimism rebounded on the Fed’s shift and the 50 bps decline in mortgage rates, and the hard data followed, with starts bouncing back 18.6% in January. Permits have risen four out of the past five months and are now running 15.0% ahead of starts, indicating further relief is likely ahead for housing as the spring buying season begins with rates lower, price appreciation cooling and builder sentiment improving.
  • The US and China have not yet finalised a date for a summit to resolve their trade dispute. Following talks in February, the two countries made progress toward a trade deal, with China offering to lower tariffs and other restrictions on US farm, chemical, auto and other products and the US considering removing most (or possibly all) sanctions placed on Chinese products since last year. However, both sides are reluctant to hold a summit until a deal is close to being finalized. While the possibility of a late-March summit was discussed, the meeting between the two countries may be delayed until next month as more progress needs to be made. In other trade news, the US decided to end a preferential trade program with India and Turkey that had allowed them to qualify for a zero-tariffs status.
  • US stocks performed poorly throughout the week, with the major indexes suffering declines on each of the five trading days. The smaller-cap indexes, which are typically more volatile, fared worst, while the technology-heavy Nasdaq Composite Index stood out for recording its first weekly drop since late December. Volatility, as measured by the Cboe Volatility Index (VIX), rose to its highest level since the end of January, while the S&P 500 Index slipped below its 200-day moving average, a threshold that some technical traders and analysts watch closely. Within the S&P 500, the typically defensive and interest rate-sensitive real estate and utilities sectors fared best as longer-term bond yields decreased to their lowest levels since the start of the year. Energy stocks were among the worst performers as oil prices fell, and industrials shares suffered from deepening concerns over a global slowdown. Health care shares also performed poorly, weighed down in part by a decline in pharmaceutical giant Pfizer. Transportation stocks, often considered a barometer of global economic activity, were also notably weak. The Dow Jones Transportation Average recorded its longest stretch of daily declines in nearly 50 years, according to Bloomberg.
  • The yield on the benchmark 10-year Treasury note did not react decisively to the payrolls report but decreased substantially over the week in response to the ECB decision and continued dovish remarks from Fed officials. On Friday morning, the 10-year Treasury yield touched its lowest point since January 4. Municipal bond prices rallied alongside Treasuries.
  • The most important data release this week is retail sales for January on Monday. In December, the retail sales control group fell by 1.8% month-on-month, which is the biggest drop since January 2000. It is concerning but the drop is likely to remain a one-off, as this release seems out of line with other data on consumer behaviour. Numbers are expected to come in at 1.0% month-on-month (3.3% year-on-year, down from 3.5% year-on-year).
  • On Wednesday, capital goods data for January is to be released. New capital goods orders have been on a descending trend since September last year, indicating a slowdown in investments at the beginning 2019. Overall, Investments are expected to continue growing in 2019 but probably not at the same pace as in 2017 and 2018.


  • British government sources believe that Theresa May will likely lose a vote on the Brexit withdrawal agreement on Tuesday. If the measure is defeated, Parliament will vote on whether to take “No Deal” off the table on Wednesday, and a vote to extend the Article 50 period (delaying the United Kingdom’s departure) will follow if Parliament does vote against a “No Deal” Brexit. Meanwhile, the House of Lords this week voted in favour of an amendment that would keep the UK in a customs union with the EU. This could be overturned by the House of Commons, but a vote would need to take place for that to occur.
  • British employers held off from hiring permanent staff in February, adding to signs of growing nerves ahead of Brexit in the country’s otherwise strong labour market, a survey of recruiters showed on Friday. The permanent jobs index of the survey (produced by the Recruitment and Employment Confederation and accountancy firm KPMG) edged up to 50.0, the dividing line between rising or falling staff levels.
  • The Bank of England is more likely to cut interest rates than raise them in the event of a no-deal Brexit, rate-setter Silvana Tenreyro said, the latest BoE official to back the idea of coming to the economy’s rescue if it suffers a Brexit shock. The BoE has said its response to a chaotic exit from the European Union would not be automatic because a fall in the value of the pound and the imposition of tariffs on trade could push up inflation, making the case for a rate hike.
  • The most interesting one is the monthly GDP release for January on Tuesday. Based on the PMIs, growth in Q1 of 1209 seems to be just 0.1% quarter-on-quarter. However, given the large drop in December, it would not be surprising to see a print to the high side.


  • In response to a global economic slowdown, the European Central Bank revealed plans for fresh measures to stimulate the eurozone’s slowing economy. This comes less than three months after the central bank phased out a USD 2.9 trillion bond-buying program. The ECB announced that in September it will launch a new series of targeted long-term refinancing operations (TLTROs) – cheap long-term loans for banks – and keep interest rates steady through 2019 or beyond if necessary. The ECB has taken a more aggressive stance than expected and is the first major developed-country central bank to ease policy amid a softening global economy. The eurozone’s economy grew 1.1% year over year in Q4 2018, down from 1.6% in Q3.
  • European banking stocks also lost ground, dropping almost 4.0% on the week, after the ECB’s announcement, which was accompanied by the launch of a program intended to help banks extend credit to customers in hopes of stimulating the economy. The Targeted Longer-Term Refinancing Operation (TLTRO III) consists of two-year loans to help avoid a squeeze on credit, which could add to the slowdown in Europe. For banks, the news that rates would be lower for longer overshadowed the ECB’s announcement that it was launching a program of new cheaper loans to the banking sector.
  • The pan-European STOXX Europe 600 Index fell after the ECB surprised markets by taking a more dovish tone than anticipated in announcing that it would keep interest rates unchanged at least through the end of 2019. For investors, the move seemed to underscore the negative impact that trade tensions and geopolitical concerns have been having on growth in the eurozone and around the globe.
  • In the EU, the final February inflation figures will be released on Friday. The preliminary print showed headline inflation increasing to 1.5% year-on-year from 1.4% year-on-year in January, while core inflation disappointed at 1.0% year-on-year from 1.1% year-on-year in January. The drivers of this fall in core inflation will be particularly interesting since the continued absence of transmission from wages to consumer prices is becoming an increasing worry for the ECB.


  • China recorded a sharp decline in exports of 20.7% year over year in February after exports rose 9.1% in January; economists had expected a much smaller drop. In conjunction, imports fell 5.2% following a previous decline of 1.5%. The decline in exports and imports narrowed China’s trade surplus to USD 4.12 billion, significantly down from USD 39.16 billion in January. The disappointing trade data are attributed to weaker global demand and distortions from the Lunar New Year holiday. Some economists believe that the weaker outlook is due to China’s economic slowdown rather than the ongoing trade dispute with the United States.
  • Mainland Chinese stocks ended a roller-coaster week lower, as poor February trade data and bearish broker calls on two high-flying financial stocks led investors to lock in gains one week after the benchmark indexes entered a bull market. For the week, the Shanghai Composite Index shed 0.8%, while the large-cap CSI 300 Index, considered China’s blue chip index, fell 2.5%. Most of the declines came on Friday, when the Shanghai index fell 4.4% in its biggest one-day drop in five months. That day, Beijing reported that February exports tumbled 20.7%, far worse than the market’s forecast of a 4.8% decline. Imports, meanwhile, fell for the third-straight month and also lagged estimates as imports of key commodities fell across the board.
  • Chinese data on money growth and aggregate finance (credit) will be released this week. In January there was a big jump in credit, which is likely to be reversed a bit in February. The week will also bring numbers on industrial production, retail sales and fixed asset investments. They are likely to remain quite soft in the short term before any potential improvement in Q2.

Sources: T. Rowe Price, Reuters, MFS Investment Management, Danske Bank, Handelsbanken.