Economic Outlook – 12 February 2023

The trade deficit widened from $61.0 billion in November to $67.4 billion in December. The expansion was due in large part to a 1.8% surge in goods imports (to $258.8 billion), led by consumer goods ($4.1 billion) and automotive vehicles/parts ($2.9 billion). Good exports, meanwhile, contracted 1.7% (to $168.1 billion) on decreases for industrial supplies and materials (-$3.1 billion) and consumer goods (-$1.0 billion). As imports grew while exports contracted, the goods trade deficit went from $83.2 billion to $90.6 billion. On a country-by-country basis, the U.S. goods deficit widened with Canada (from $4.2 billion to $5.1 billion), China from $21.3 billion to $23.5 billion) and narrowed with the European Union (from $20.3 billion to $18.4 billion).The services surplus, meanwhile, widened from $22.2 billion to a 36-month high of $23.2 billion, as exports inched up (+0.9%) and imports retraced (-0.5%). Looking at 2022, the trade deficit increased 12.2% ($103.0b) from 2021 on the back of higher two-way trade. Indeed, exports surged $453.1b (17.7%) while imports rose $556.1b (16.3%) The University of Michigan Consumer Sentiment Index rose from 64.9 in January to 66.4 in February. This marks a third consecutive rise. The increase was due to an improvement in current perspectives while longer-term ones edged down. The former improved from 68.4 to 72.6, while the latter decreased from 62.7 to 62.3. Twelve-month inflation expectations rose from its lowest print since April 2021 (3.9%) in January to 4.2% in February Consumer spending slipped at end of last year, and real personal consumption expenditures are expected to be more or less flat in the first quarter. Data on consumer credit flows in December underscore the pullback. Revolving credit, which is mostly composed of credit card debt, increased $7.2 billion during the month—the smallest increase since August 2021. Non-revolving credit, which includes installment debt such as auto and student loans, rose a more modest $4.4 billion. Higher financing costs and an uncertain outlook are likely dampening consumer credit demand Following last week’s blowout nonfarm payroll report, market attention turned to Chair Powell’s interview with David Rubenstein at the Economic Club of Washington on Tuesday. During the interview, Powell acknowledged January’s jobs report was much stronger than expected and pointed to the strong labor market as a sign that the economy could achieve a soft landing.Specifically, Powell stated, “I would say it kind of shows you why this will be a process that takes a significant period of time. The labor market is extraordinarily strong. And by the way, it’s a good thing that inflation has started to come down without it. That has not happened at the cost of the strong labor market.” Powell’s remarks largely reiterated the comments he made at the FOMC’s post-meeting conference on February 1. The FOMC is expected to press ahead with 25 bps rate hikes at each of its next two meetings, although the exact amount of additional tightening is uncertain as the FOMC turns toward data dependency mode. Wherever the fed funds target range peaks, it is likely that the Committee will not begin easing policy until early 2024 The Fed announced the parameters for its 2023 stress test of large banks: the US unemployment rate rises nearly 6 1/2 percentage points, to a peak of 10%. The increase in the unemployment rate is accompanied by severe market volatility, a significant widening of corporate bond spreads and a collapse in asset prices US President Joe Biden delivered the annual State of The Union address to a joint session of Congress this week. Investors noted the president’s proposal to quadruple the 1% tax on stock buybacks that took effect earlier this year, as well as his renewed call for a “billionaire’s tax” on unrealized gains. Neither proposal is expected to gain traction due to opposition from Republicans, who control the House of Representatives The major benchmarks ended lower in a week with relatively few important economic releases or other concrete drivers of sentiment. Sector performance was relatively uniform within the S&P 500 Index, with energy stocks being the notable upside outlier and communication services shares the prominent laggard. A recent pattern of short covering—or the buying of certain stocks by hedge funds and others to cover previous bets that the shares would fall—was perceived by many to be coming to an end The yield on the benchmark 10-year U.S. Treasury note increased solidly over the week as investors appeared to continue digesting the previous week’s strong January payrolls report. The yield curve inverted further—Bloomberg reported that two-year Treasury yields moved to their highest level over 10-year yields in four decades—as fears grew that the Fed would need to push the economy into recession in order to tame inflation In terms of data release, NFIB is out on Tuesday. Small business sentiment posted a steeper decline than expected in December, down 2.1 points to 89.8. The index spent all of 2022 below its long-run average of 98. The December survey continued to show pessimism among respondents regarding expectations for the economy and earnings trends. This week’s reading will be the first of the new year and the Bloomberg consensus is for a slight improvement. There were a few encouraging parts of the December NFIB report. A lower percentage of respondents reported higher selling prices compared to previous months, and there was also a notable decline in the share of respondents who struggled to fill open positions CPI print is out on Wednesday. Consumer inflation is slowing. The headline CPI fell 0.1% in December, and the final month of 2022 marked the third consecutive increase in the core index of 0.3% or less. A major decline in gasoline prices helped keep headline inflation in check, but the signs of slower inflation extended beyond prices at the pump. Grocery store prices grew at the slowest pace since March 2021, and core goods prices declined for the third consecutive month, led lower by another decline in prices for used autos 

The UK narrowly avoided a recession at the end of 2022, with QoQ GDP figures for Q4 registering at 0%. Monthly estimates show that GDP fell by 0.5% in December, but this was offset by monthly growth of 0.5% in October and 0.1% in November. While economic growth rose by an estimated 4% in 2022, following a 7.6% increase in 2021, the downturn in 2020 means the UK’s economy remains smaller than its pre-coronavirus level: the level of quarterly GDP in Q4 2022 is now 0.8% below its pre-covid level There was a surprise uplift in business investment in Q4 2022: expectations were for business investment to fall by 0.3% on the quarter, yet it actually rose by 4.8%. This leaves business investment now equal to its pre-covid level. Private consumption saw modest growth of 0.1% in Q4 2022, helping to prop up GDP growth. However, quarterly growth flat-lined due to the increase in private consumption and business investment being offset by declines in net trade: exports saw a quarterly fall of 1% while imports rose by 1.5% UK’s FTSE 100 closed lower on Friday as worries of high interest rates overshadowed data showing the British economy narrowly avoided entering a recession in the fourth quarter, while a rise in energy shares limited declines. The blue-chip index (.FTSE) shed 0.5%, backing off from record highs hit on Thursday, and posted a weekly fall of 0.31%. Declines in the FTSE 100 were still smaller than those of European stocks, as the STOXX 600 index (.STOXX) closed about 1% lower. Even as upbeat earnings and higher commodity prices aided sentiment earlier in the week, worries persisted about the Federal Reserve’s aggressive tightening cycle, and as officials from the Bank of England appeared split about the need for further rate hikes 

Several European Central Bank (ECB) policymakers reasserted their hawkish stance in the wake of the most recent rate-setting meeting, warning against complacency in the fight against inflation. Comments by Executive Board member Isabel Schnabel seized the market’s attention at the start of the week. The recent slowing of inflation wasn’t necessarily due to ECB policy, she argued, while stressing that underlying inflation was still extraordinarily high. German Bundesbank President Joachim Nagel, Latvian central bank Governor Martins Kazaks, and Dutch central bank Governor Klaas Knot all suggested that rates would have to rise further after what is expected to be another half-point increase in March The German Finance Ministry said it expected the winter slowdown to be mild because of strong industrial order books, an improvement in confidence, and easing supply bottlenecks. Earlier, data showed industrial production in December fell 3.1% sequentially, largely due to slowdowns in energy-intensive industries. However, industrial orders rose 3.2% on the month—the biggest increase in more than year—thanks to strong domestic and eurozone demand. Meanwhile, delayed data showed that inflation in Germany, when adjusted for comparison with other EU countries, slowed by more than expected, hitting a five-month low of 9.2% in January Real retail sales decreased by 2.7% from the previous month in December, slightly more than consensus expectations calling for a 2.5% decline. On a YoY basis, retail sales were down 2.8%. Declines stemmed from both food (-2.9%) and non-food (-2.6%) products. Retail sales edged down in most countries in the single-currency area, including in Germany (-5.3%) and France (-1.0%) Shares in Europe weakened on concerns about overly aggressive central bank policy that might prolong an economic downturn. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.62% lower. Major stock indexes were mixed. Italy’s FTSE MIB Index gained 1.18%. However, France’s CAC 40 Index fell 1.44%, Germany’s DAX Index declined 1.09%  

China reported that its consumer price index picked up 2.1% in January from a year ago, in line with estimates, while producer prices fell more than expected due to lower commodity costs. The latest data showed that China isn’t likely to experience runaway inflation similar to the U.S. and Europe and raised expectations that the central bank would keep policy supportive to bolster the economy The spy balloon incident raised the prospect of further sanctions on China from the U.S. after the Biden administration announced a sweeping ban on U.S. companies selling advanced semiconductors and certain chip manufacturing equipment to China last October. Relations with China and the U.S. debt ceiling will be the key public policy catalysts moving markets in 2023, and risks for both are skewed to the downside. Possible U.S. measures that could be enacted in the next two years include outbound investment screening for investments in China as well as further export controls on the country Chinese stocks retreated as the spy balloon controversy fanned tensions with the U.S. and offset expectations of faster economic growth following China’s exit from pandemic controls. The Shanghai Stock Exchange Index and the CSI 300 Index both recorded slight declines for the second straight week as the diplomatic crisis over the balloon in U.S. airspace reminded investors of the geopolitical risks of investing in the country     
Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, National Bank of Canada, Reuters, M. Cassar Derjavets