Economic Outlook – 12 March 2017


In the light of the recent positive readings, the FOMC is expected to raise the target range for the Fed funds rate on March 15th by 25 bps to 0.75% to 1.00% (an 88-bp midpoint), with the other policy rates following suit (interest rate paid on reserves to 1.00%, overnight reverse repo rate to 0.75% and discount rate to 1.50%). The question is now how many hikes to expect for the rest of the year. FOMC members have repeated that they believe three hikes this year is appropriate but this decision will have to be confirmed in the light of potential deteriorating macroeconomic scenario.

Employers added 235,000 new jobs in February while hiring in January was revised higher. Over the past three months, hiring has averaged 209,000 and suggests that the trend in job growth has strengthened a bit since the second half of last year. Hiring was widespread in February, but particularly strong in the goods producing sector. Mining payrolls rose by 8,000, which was the largest increase since before oil prices began to collapse in mid-2014. In another sign that the factory sector is on firmer ground, manufacturing payrolls rose by 28,000 and are now up over the past year. Mild winter weather also appears to have boosted construction employment, which jumped by 58,000. Service sector employment was more in line with its recent trend, increasing by 140,000 last month.

With the unemployment rate signalling the labor market is near full employment, attention has shifted to wage growth. Although average hourly earnings in February came in a touch short of expectations by rising just 0.20%, January’s disappointing print was revised up a tick. Over the past year, wages are up 2.80% compared to a 2.40% increase this time last year.

The trade deficit widened to $48.5 billion as a $1.1 billion increase in exports was swamped by a $5.3 billion jump in imports. Some of the widening reflects the recent pick up in import prices. Import prices have firmed over the past few months as oil prices have recovered, and prices for imported products have now increased more than export prices over the past year.

On Wednesday, the debt limit suspension expires. The US may enter a period of fiscal uncertainty, as the Republicans do not have a clear majority in the Senate, so the Democrats (and fiscal hawks within the Republican Party) can filibuster any legislation on the debt limit. Also next week, the Trump administration is expected to publish its budget proposal for the 2018 fiscal year running from Q4 2017 to Q3 2018.

Both CPI and retail sales data for February are due on Wednesday. CPI core has been relatively stable around a level slightly in excess of 2.00% year-on-year for around a year now, while CPI has only recently broken above 2.00%. CPI core is expected to increase 0.25% month-on-month (2.30% year-on-year) and CPI rose 0.20% month-on-month (2.60% year-on-year) in February.


UK manufacturing production fell 0.90% in January after growing 2.20% in December (revised from 2.10%). The turnout in January was slightly weaker than the consensus expectation of a 0.70% drop. Total industrial production fell 0.40% in January, slightly less than the consensus expectation of -0.50%, but December numbers were revised down to growth of 0.90% from 1.10%.

According to ONS, performance was mixed across the four production sectors, but manufacturing provided the largest downward contribution to the contraction in growth. However, water supply, sewerage and waste management also contributed to the fall in output. These decreases were partially offset by increases in mining and quarrying and in the electricity, gas steam and air conditioning sectors. The monthly decrease in manufacturing was largely due to a decrease in pharmaceuticals, falling by 13.50%. Pharmaceuticals can be highly erratic, with significant monthly changes, often due to the delivery of large contracts. Transport equipment offsets some of the overall weakness within manufacturing. It provided the largest upward contribution, increasing by 2.60%, with motor vehicles, trailers and semi-trailers increasing by 4.70%.

Prime Minister Theresa May suffered her second defeat in the House of Lords in less than a week, as the Lords voted for an amendment to the EU bill demanding a ‘meaningful vote’ on the final Brexit deal. The next round in the parliamentary ‘ping pong’ between the two chambers has been set for Monday. The House of Commons will probably vote down both the most recent recommendation from the Lords and an earlier one demanding protection of EU citizens currently living in the UK. After being debated in the House of Commons, the bill will be returned to the House of Lords, which is not expected to delay the process any further. UK media reports suggest Theresa May could trigger Article 50 as early as Wednesday 15 March.

The Bank of England’s (BoE) March meeting ends on Thursday and no policy change is expected. The BoE is expected to maintain the Bank Rate at 0.25% and keep its neutral stance by repeating that it could move in ‘either direction’.


Keeping monetary policy unchanged, ECB revised both GDP and inflation forecasts higher. Main refinancing rate was left at zero, deposit rate at -0.40% and affirmed that monthly asset purchases will be reduced to 60 billion euros starting next month. Exports and investment were the main growth drivers in Q4, contributing to the sustained 0.40% quarter-on-quarter GDP growth. RBA also held cash rate unchanged at 1.50% at this week’s meeting and the accompanying policy statement suggests that another rate cut is not under consideration for now. Signalling the end of policy easing, inflation is expected to pick up over the course of 2017 to be above 2.00%.

EU industrial production figures for January are due for release on Tuesday. Production to bounce back from the large monthly fall of 1.60% in December 2016 and mirror the development in Germany, where it experienced a 2.80% monthly increase as announced on Wednesday. For the euro area, a monthly increase of 1.20% is expected.

Wednesday sees the release of euro area employment figures for Q4 2016. It is likely employment growth continued in Q4, with 0.30% quarterly growth. Growth in employment has been consistent since 2014 and, despite the rising participation rate; unemployment rate is expected to fall.

Next Wednesday, the Dutch people elect their parliament. Outside the Netherlands, the focus is on the election result of euro-sceptic Geert Wilders and his party, the PVV. While it should do better than in autumn 2012, it is unlikely to form part of the government. As most political parties in the Netherlands favour an expansionary fiscal policy, the new government will probably tolerate budget target shortfalls by other euro countries. However, it could be less willing to compromise – possibly due to pressure from Wilders – should other rescue packages be placed on the agenda.


China’s PPI staged a strong 7.80% year-on-year increase in February but CPI print softened to 0.80% year-on-year last month, the latter dragged by the decline in food prices. The slowdown in consumer inflation is not expected to prevail on the back of firm domestic demand and broad based recovery in global demand will drive CPI print to move toward PBOC’s target of 3.00% for the year after increasing 2.00% in 2016. Exports slipped 1.30% year-on-year (USD 120.08 billion) and imports growth accelerated to 38.10% year-on-year (USD 129.23 billion). Trade turned to a deficit for the first time in thirty-six months but trade balance is expected to turn positive soon after seasonal distortion in January and February.

Focus will be on industrial production, fixed asset investment and retail sales (Tuesday). Unfortunately, overall industrial production has not seemed to be a good reflection of Chinese activity. Instead the sub-components electricity production and steel production have correlated well with indicators such as PMI and housing activity. Hence, looking closer at these than at the total industrial production number seems wiser. Judging from PMI surveys, activity levels were still quite robust in Q1. A gradual slowing over the rest of 2017 seems likely, as policy has moved from pushing the gas pedal down to stepping gently on the brake. This should lead to slower investment growth this year.


Sources: Haendelsbank, Danske Bank, Wells Fargo, Wells Fargo.

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