Economic Outlook – 19 May 2019


  • US industrial production fell 0.5% in April. A drop in utilities output offset an increase in mining. The real sore spot in the report, however, was the 0.5% drop in manufacturing output. Consistent with softness at the retail level, auto production fell 2.6%, but just as weak was production of machinery – an ominous sign for business investment. Output in the manufacturing sector has not risen since December and is down 1.6% since then.
  • Data for retail sales and housing starts for April support the view that the domestic economy remains healthy. Although retail sales pulled back in April, this came after a very strong March. Some payback was to be expected. Even with the decline, the strength in March, alongside continued income gains supports a very healthy 3.0% quarterly annualised rate of expansion in consumer spending in the second quarter.
  • Both the Empire and Philly Fed surveys improved more than expected in May. General sentiment was a bit better than the details when looking at each index on an ISM-weighted basis (the headline for each survey is derived from a separate question on general business conditions). One factor weighing both ISM-weighted Fed indices, however, was a contraction in inventories. Given the massive build in the first quarter, a reduction was inevitable and suggests orders remain strong enough to where production should firm up soon, barring a further escalation in the trade war.
  • The NFIB Small Business Optimism Index rose to a four-month high in April, but smaller firms have less bargaining power with suppliers and are therefore more susceptible to higher input costs. Owners had already begun reporting poor sales as a growing concern, suggesting limited scope to pass on higher prices.
  • Housing starts rose 5.7% in April. Building permits also improved, and do not look to have been quite as low as previously thought. The pullback in mortgage rates, lower material costs and improved builder sentiment should help to keep the rebound in residential construction intact.
  • The major indexes ended lower after a midweek rally erased most of a steep drop on Monday. Large-caps outperformed smaller-cap shares, and the small-cap Russell 2000 Index ended the week as the sole major benchmark in correction territory, or down over 10% from its August 2018 highs. Technology stocks within the S&P 500 Index outperformed, and strength in AT&T shares boosted the communication services sector. Deere & Co. weighed on industrials shares after cutting its sales and earnings outlook on Friday, citing both Chinese trade concerns and a delayed planting season due to heavy rains and flooding in the US Midwest. Volatility, as measured by the Cboe Volatility Index, spiked on Monday but fell back throughout the rest of the week.
  • Trade war fears led investors to the perceived safe haven of US government bonds, pushing the yield on the benchmark 10-year Treasury note down to its lowest level in nearly a month. The municipal market performed in line with Treasuries. The largest deal of the week, USD$725 million of Allegheny County Hospital Authority revenue bonds, was roughly 10 times oversubscribed. As a result of record-high gross tax receipts in April, New Jersey announced that it would make deposits into its “rainy day” fund for the first time in over a decade. This follows news of other fiscally stressed states, particularly Illinois and Connecticut, also beating revenue expectations.
  • On Wednesday, the FOMC minutes are due and it is more about the details, as the Fed has clearly hinted that it expects to be on hold for some time.
  • On Thursday, Markit preliminary PMIs are due out, which should provide a signal of how growth has performed in Q2. Recently, manufacturing PMIs have added to the signs that the economy is set to slow and that the manufacturing sector is not immune to what happens in the rest of the world.
  • On Friday, preliminary core capex is due out. Core capex has softened recently but remains at a high level and investments are expected to continue to increase over this year.


  • Polling in advance of next Thursday’s elections in the United Kingdom for the European Parliament show Prime Minister Theresa May’s Conservative Party falling to fifth place, according to some polls. The Brexit Party, formed just weeks ago and led by Brexiteer Nigel Farage, leads the polling. Another defeat next Thursday, after a poor showing in local polls earlier this month, will increase the pressure on the prime minister to resign soon. She has previously indicated that she will leave office once the withdrawal agreement with the European Union is passed by Parliament, though it has failed to pass on three tries and cross-party talks with the Labour Party have broken down. After May said she would set a timetable for her departure in early June, former London mayor and UK foreign secretary Boris Johnson indicated last week that he will take part in an upcoming leadership contest.
  • The British pound lost more than 2.0% against the US dollar after Brexit talks between Britain’s Conservative and Labour parties broke down Friday, with Labour leader Jeremy Corbyn saying that his party would vote against Prime Minister Theresa May’s Brexit deal in early June. The latest impasse comes two weeks before another parliamentary vote on the UK’s withdrawal from the European Union (EU). The pound also came under pressure after Brexit supporter and former UK Foreign Secretary Boris Johnson announced that he could stand for the Conservative Party leadership. Markets took both developments as making a no-deal Brexit more likely.
  • Britain’s unemployment rate fell to its lowest since the mid-1970s in early 2019 as employers hired in the run-up to the original date for Britain’s EU departure, but there were signs that Brexit was beginning to weigh on the jobs boom. The rate edged down to 3.8% in the first quarter, its lowest since the three months to January 1975, the Office for National Statistics said on Tuesday. Unemployment dropped by 65,000, the most in more than two years. But employment growth slowed to 99,000, well below a median forecast of 135,000 in a Reuters poll of economists, and wage growth lost momentum too.
  • The Bank of England, preparing for a possible no-deal Brexit, is trying to harness reams of real-time digital data on traffic jams, card payments and shipping in case it has to make a snap decision to raise or cut interest rates. The BoE typically has plenty of time to think about its next steps for the world’s fifth-biggest economy. It announces its rate decisions every six weeks or so after studying established economic indicators, many of which take weeks to prepare.
  • In terms of soft economic data releases, CPI inflation for April is due out on Wednesday and retail sales are due out on Friday.


  • This month’s upcoming elections to the European Parliament are set to be particularly important, given the timing of selection processes for key EU leadership positions. In line with improving economic conditions, trust in EU institutions has improved. Although anti-establishment parties are likely to boost their support, riding on anti-incumbent sentiment over immigration policies and pocketbook economics, the probability of translating this into policy shifts within the EU is relatively low. Differences in populist parties’ ideological as well as policy preferences are likely to raise barriers to a cohesive euro-sceptic bloc. More likely is a coalition including either the greens or the liberals, which if anything ought to result in more EU integration rather than less. Yet the coming bargaining process as the ruling coalition in the European Parliament moves from two to more parties still carries risks, and this factor will likely offset the relief of populists failing to gain significant power, with an expected net neutral market impact overall.
  • On Friday, President Trump announced he would delay a decision to impose tariffs on automobiles imported from Europe, Japan, and other countries for at least six months. Last year, Trump threatened to place 25.0% tariffs on car imports from the EU. Since that threat, neither the US nor the EU has begun official trade talks.
  • Italy’s Deputy Prime Minister Matteo Salvini ratchetted up tensions with the EU, saying that he would be prepared to see Italy’s deficit rise above EU limits if it were to boost employment. His words sent Italy’s 10-year bond yield as high as 2.75% on Wednesday, as concern about an Italian showdown with Brussels reemerged.
  • The pan-European STOXX Europe 600 Index rose for the week, rebounding from a two-month-low hit on Monday, despite the increase in US-China trade tensions. The German DAX Index and Italy’s FTSE MIB Index also gained after the previous week’s losses.
  • German and euro area flash PMI, German ifo and ECB minutes will all be released on Tuesday. The latest months’ gloomy PMIs have been somewhat at odds with the brighter hard macro data. Despite the 0.4% quarter-on-quarter Q1 GDP growth, the euro area manufacturing PMI remained below the recession-indicating territory of 50 for the third successive month in April, while the service sector still seemed to underpin growth. There is room for a very limited rebound in the manufacturing print to 48.3 on the back of the improving order situation in the April survey. The latest negative developments in the trade negotiations between the US and China could weigh on the PMIs and on the German ifo print, which will be out on Thursday as well. Thus, there is scope for a decline in the expectations component, while some stabilisation in the business climate print is expected on the back of the hard macro data.
  • The ECB minutes from the 11 April meeting may prove uneventful for the market. While there is interest in the discussion on inflation and the growth outlook to assess the ‘delayed-not-derailed’ message from Mario Draghi, it is unlikely there will be any new colour on this, or on the potential ‘tiering system’ and the upcoming TLTRO3 modalities.


  • With expectations of a near-term resolution of the US-China trade conflict low, the skirmish appears to be entering a more drawn-out phase. US president Donald Trump offered soothing words early in the week, describing the disagreement between the world’s two largest economies as “a little squabble” and saying that he expects a fruitful meeting with China’s president, Xi Jinping, at the G20 summit in late June. Trump said he has not decided whether to impose a 25% tariff on the balance of China’s exports to the United States after last week hiking levies on exports amounting to USD$200 billion. China retaliated by announcing it will hike existing 5% to 10% tariffs to between 10% and 25% on 1 June while exempting commercial aircraft and crude oil.
  • While seeking to calm the situation, the Trump administration also sought to intensify pressure on China by signing an executive order banning US purchases of telecommunications equipment from China’s Huawei Technologies. At the same time, the US Department of Commerce restricted US companies from selling or transferring technology to the tech giant. China responded by saying in a front-page commentary in the state-run People’s Daily newspaper that the US must show sincerity if it is to hold meaningful trade talks. China cast the US as a bully and pushed back on US claims of China’s malfeasance on trade.
  • All three monthly activity indicators fell in April and came in weaker than expected by consensus. Industrial production growth was already poised to correct down from the surprising and hardly realistic jump in March. But growth plummeted from 8.5% year-on-year in March to only 5.4% in April, hereby fully reversing the March gain. Retail sales growth fell from 8.7% to 7.2%, the lowest since 2003, and growth of fixed investments also fell.
  • Both the escalating trade tensions and the markedly weak April activity figures increase the chance of more stimuli from the authorities. That will mitigate but not completely counter the trade war impact and the structural growth slowdown, and growth is going toward stabilisation at best before slowing again later this year. Still, full-year 2019 growth forecast is due to be revised upward following the strong GDP growth in Q1.
  • For the week, the Shanghai Composite Index and the large-cap CSI 300 Index, China’s blue chip benchmark, returned about -1.9% and -2.2%, respectively. Chinese stocks initially fell sharply due to trade tensions with the US, but shares battled back amid expectations that Beijing would roll out more fiscal and monetary stimulus to boost a slowing economy. Equities slumped again on Friday, however, as hopes for a resumption of trade talks dimmed due to negative comments from state-run media.
  • There are no market movers in China this week.

Sources: T. Rowe Price, Reuters, MFS Investment Management, Danske Bank, TD Economics, Handelsbanken Capital Market.