Economic Outlook – 12 January 2020


  • The first major economic indicator to hit the wire in 2020 was the ISM manufacturing report, which showed the fastest pace of contraction since the height of the 2008 recession. When the ISM non-manufacturing report was published earlier last week, financial markets were relieved to see that barometer of the service sector rise to 55.0. That is the fastest pace of expansion in four months.
  • The employment component of the services ISM remained in expansion but slipped a bit from the prior month heralding the slightly lower-than-expected employment report which showed the US economy added another 145K jobs with the unemployment rate staying put at 3.5%. It has been a remarkably good run for the labor market, but this latest report offered some indications of softening even amidst the lowest jobless rate in a half-century. Average hourly earnings edged up just 0.1% in December, after rising 0.3% in each of the prior two months. On a year-on-year basis, average hourly earnings rose by the smallest amount since July 2018. Still, for the year as a whole, the US economy added 2.1 million jobs with an average monthly gain of 176K jobs. Those are solid numbers, but short of the 223K monthly average in 2018.
  • The trade deficit narrowed to $43.1 billion in November which, barring an unexpected widening in December, means that trade will be a big boost to fourth quarter GDP. The boost is welcome but the recent decline in imports is due to importers pulling forward demand to get ahead of consumer-focused tariffs, it may be set to reverse and be a drag on GDP in coming quarters. Those consumer-focused tariffs were taken off the table with the Phase I trade deal set to be finalized at a formal signing next week in Washington.
  • Markets no longer expect an escalation in the conflict between the US and Iran after Iran launched what was seen as an unprovocative retaliatory strike on military bases in Iraq where US service members are stationed. The missile barrage was Iran’s response to the killing of Iranian general Qassem Soleimani by US forces last week in Baghdad. Tragically, a commercial airliner was shot down in the wake of Wednesday’s missile strike. The United States, United Kingdom and Canada have concluded that the plane was mistakenly downed by Iranian air defenses. One hundred seventy-six people were killed in the crash, including 63 Canadians. Earlier in the week, the Iraqi parliament passed a nonbinding resolution calling on the United States to leave Iraq, though Kurdish and Sunni lawmakers largely abstained from the vote. Also, Iran announced that it would no longer be bound by the Joint Comprehensive Plan of Action, more commonly known as the Iran nuclear deal.
  • Former US Federal Reserve Board chair Ben Bernanke told the American Economic Association that the Fed should make unconventional tools a permanent part of the central bank’s arsenal. The combination of quantitative easing and forward guidance combine for about 300 basis points of easing in the federal funds target rate, he said.
  • The large-cap benchmarks and the technology-heavy Nasdaq Composite Index pushed further into record territory, as the prospects for a wider armed conflict between the US and Iran appeared to diminish. Technology stocks outperformed, helped by continued strength in Apple following a report of stronger-than-expected iPhone sales in China. A sharp rise in the shares of cloud software firm also boosted the sector. The apparently stabilizing situation in the Middle East reversed the previous week’s spike in oil prices and weighed on energy shares. The smaller-cap benchmarks also lagged and recorded modest losses for the week.
  • The yield on the benchmark 10-year Treasury note ended slightly higher for the week after peaking Thursday. The broad municipal market produced positive returns and outperformed US Treasuries amid strong cash flows and light dealer inventories. 
  • Inflation (Tuesday), retail sales (Thursday) and consumer confidence (Friday) are due for release. The latter two are the most important from an economic market perspective to gauge if the consumer spending spree continues. Retail sales are notoriously volatile and more difficult to gauge. The inflation figure, which has been hovering slightly below the 2% mark that the Fed targets, may not be a market driver as the Fed has signalled it is on hold for now.


  • The lower house of the British Parliament approved the Brexit Withdrawal Agreement bill by a large majority, sending the legislation to the House of Lords, which is expected to pass it, keeping the United Kingdom on pace to leave the European Union at the end of the month. Last week, Prime Minister Boris Johnson opened talks with European Commission head Ursula von der Leyen, calling for a speedy trade deal but no extension of the transition period beyond the end of the year, a period in which the UK retains open trade access to the EU. Von der Leyen remains doubtful that a comprehensive agreement can be struck in such a short time period.  
  • Outgoing Bank of England (BoE) Governor Mark Carney said in a speech in London that there was a case for cutting UK interest rates promptly “if evidence builds that the weakness in activity could persist.” The UK pound fell 0.5% against the US dollar. But he also said there were signs that global growth was stabilising and that domestic confidence was improving. He highlighted that other than interest rates, the BoE would continue to rely on quantitative easing and forward guidance to fight future downturns at the effective lower bound for interest rates. He suggested that, overall, the BoE had at least 250 basis points worth of accommodation left. Separately, in an interview with the Financial Times newspaper, he said that central banks were running out of ammunition to fight a recession and that central banks would need to look to supplement monetary tools. If there was a deeper global downturn that required more stimulus than a conventional recession, it was not clear that monetary policy would be sufficient to combat it.
  • Optimism at major British companies has improved by the largest margin in at least 11 years after Prime Minister Boris Johnson won a sweeping election victory last month, according to a survey from accountants Deloitte. Some 53.0% of chief financial officers at large businesses said their optimism about the financial outlook had improved compared with three months ago, versus 9.0% in the last survey conducted in October. This was the highest proportion since the quarterly survey began 11 years ago.
  • A Christmas crunch inflicted more pain on British retailers, as changing habits and belt-tightening exposed the industry’s struggle to eke out growth and its slim margin for error. One of Britain’s best known chain stores John Lewis warned it was one of the “most severe” markets in a generation, Marks & Spencer’s described conditions in clothing and homeware as “challenging” while Britain’s biggest retailer Tesco said the market was subdued.
  • Industry data showed British shoppers cut back at the end of 2019, rounding off the worst year since the mid-1990s for retail sales amid uncertainty over Brexit, last month’s election and slowing wage growth
  • In terms of data prints, the UK monthly GDP figure (out on Monday) will shed light whether the Bank of England will ease or not in the near term, which is gaining increased attention as the 31 January Brexit date nears.


  • The December flash annual consumer price index was 1.3%, in line with expectations, compared to 1.0% the previous month. Core inflation was unchanged from the previous month and also in line with expectations, recording 1.3%. As in the previous month, the core inflation release was partly driven by base effects, given last year’s unusually low recorded rates. For the second month in a row, all four core eurozone countries showed non-decreasing rates of inflation YoY. In France and Germany inflation, at 1.6% and 1.5% respectively, remains closer to historical medians, whereas in Italy and Spain, inflation was significantly lower at 0.5% and 0.8% respectively.
  • Business activity in the eurozone firmed slightly more than expected in December, as gains in the service sector partially offset another decline in manufacturing, an IHS Markit purchasing managers’ survey showed. The composite purchasing managers’ index inched up to 50.9 from 50.6 in November, still close to the 50 level that separates expansion from contraction. The services index rose to 52.8 from 51.9, while manufacturing shrank for an 11th consecutive month. The upturn in services helped to boost companies’ confidence in the economic outlook to its highest level since May.
  • European stocks rose as Middle East tensions faded and traders anticipated that the US and China would sign an interim trade deal. The pan-European STOXX Europe 600 Index ended the week 0.39% higher, and Germany’s exporter-heavy DAX index gained 2.38%.
  • Trade unions held their fourth mass demonstration across France against proposed pension reforms and are planning to hold more at the weekend. Rail workers at public rail company SNCF have been on strike since December 5 (the longest protest at the company since 1938) which has cost hundreds of millions of euros in lost revenues. According to reports, the stoppages have been the worst since the student protests of May 1968.
  • In the euro area, the highlight is the ECB minutes (Thursday) and the final inflation details (Friday). The flash inflation figures already pointed to a strong reading of 1.3% on core inflation, but the finer details will indicate the robustness of the recent pickup in core inflation (1.3% both in November and December last year). The inflation details are important for the ECB’s assessment and the combination of a pickup in core inflation and reduced downside risks may lead the ECB to revisit the growth risk assessment, though probably not until March. The focus in the ECB minutes on Thursday will be on the framework of the strategic review.


  • At 4.5% year-on-year, consumer price inflation (CPI) in December came in below the consensus expectation of 4.7%. Food inflation slowed, reflecting a welcome 5.6% monthly drop in pork prices, the first decline in seven months. As pork is the most important item in the Chinese food basket, its shortage is a serious issue for the government, which has released supplies of frozen pork into the market. The December price decline was partly due to an unsustainable increase in the number of hogs slaughtered in November. With pork prices rising ahead of the Lunar New Year, the crisis may not be over and constitutes a mild headwind for consumer spending in the first quarter. 
  • Apart from food, inflation in China remains subdued and is unlikely to constrain further moderate easing by the People’s Bank of China. But a sustained higher oil price on account of US-Iran tensions would be an inflation headwind for China that could see the CPI inflation rate surpass the 5.0% level in the next month or so. China’s central bank said that it would “win the battle” against growing financial risks in the economy, signaling officials’ increased attention to bad loan-related problems among domestic lenders. In the near term, however, economic activity on the mainland is set to slow during the Lunar New Year holiday.
  • In terms of data, Q4 GDP is released, which it is expected to be unchanged from the previous quarter at 6.0%. It should lead to 6.15% growth for all of 2019. Data on industrial production and retail sales will also give some info on the state of the economy. Both have improved a bit in recent months.

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