Economic Outlook – 12 May 2019


  • The trade deficit widened slightly in March to $50.0 billion. Exports posted an increase for the third consecutive month, but imports jumped 1.1% after a measly gain in February and a drop in January. The widening does not look to be quite as large as the BEA estimated heading into the initial release of Q1 GDP, suggesting the boost from trade may get revised lower.
  • The bilateral deficit with China narrowed in March to the smallest gap in about three years. Soybean exports, which had been caught in the crosshairs of the trade battle, jumped more than half a billion dollars, presumably contributing to the narrower deficit with China. With trade tensions flaring again and the possibility of retaliatory tariffs, exports to China may come under renewed pressure.
  • At the eleventh hour, China reportedly backed away from multiple concessions it made earlier in negotiations toward a comprehensive trade agreement with the United States. Chief among the issues is the Chinese government’s unwillingness to write into law many of the commitments it made during the months-long negotiations. The sharp reversal in China’s negotiating posture prompted the administration of US president Donald Trump to increase levies from 10.0% to 25.0% on $200 billion of goods imported from China earlier today while threatening to impose a 25.0% tariff on an additional $325 billion in Chinese goods in short order. In reply, China vowed to take “appropriate countermeasures.” Though hopes for an agreement have diminished, President Trump, after receiving a letter from Chinese president Xi Jinping, said Thursday afternoon that a deal is still possible.
  • Tensions between the US and Iran intensified as the US dispatched an aircraft carrier strike group and a bomber task force to the Middle East amid indications of planned attacks on US interests in the region by Iran or its proxies. Further heightening concerns was news that Iran will end some of its commitments under the 2015 Joint Comprehensive Plan of Action, which was intended to limit the country’s nuclear program. Iran said it will begin stockpiling heavy water and low-enriched uranium, and it threatened to rebuild nuclear facilities and resume enriching uranium unless Europe, China and Russia agree to facilitate Iranian oil sales and banking transactions within 60 days. European leaders were quick to reject the ultimatum. In other news, fears of increased authoritarianism in Turkey accompanied word that the mayoral election in Istanbul, Turkey, which the ruling party lost in March, will be re-run. The opposition party’s candidate holds a small lead over the candidate from Turkish president Recep Tayyip Erdogan’s PKK party. Finally, multiple short-range missile tests by the North Korean military have raised concerns that ballistic missile tests could be revived, increasing regional tensions. Strains increased further when the US seized a North Korean ship carrying coal in violation of United Nations sanctions.
  • US consumer prices rose 0.3% during April and 2.0% over the year, a somewhat softer increase than expected. The topline measure was boosted by higher energy prices, which saw a monthly increase of 2.9% alongside rising oil prices. Shelter prices gained 0.4% in April, stemming from higher rents of primary residences. However, food, apparel and used vehicle prices each registered a monthly decline. Excluding volatile food and energy prices, prices rose 0.1% during the month but ticked up to a 2.1% gain over the past year.
  • US producer prices were also fairly tame in April, but suggest inflation is edging up again. Prices for goods and services made by domestic producers increased more slowly than expected in March, but that was largely due to the volatile trade services component, which measures retail and wholesale margins. The most preferred measure of core PPI, which strips out food, energy and trades services, rose 0.4% and has turned up again on a year-over-year basis. At 2.2%, however, and with only moderate growth in input costs, the upturn does not suggest inflation is about to become unhinged.
  • The US Federal Reserve issued its second financial stability report last week. It showed that the central bank remains concerned by the high levels of nonfinancial corporate debt, particularly with regards to the leveraged loan market. The central bank expressed concerns that a shock to the economy from slowing global growth, trade tensions or a disruptive Brexit could expose vulnerabilities in the US financial system. However, the Fed also pointed out that the financial sector appears resilient, with leverage low and funding risk limited. Asset valuations remain high relative to their historical ranges and risk appetite remains elevated, the report said. Despite an uptick in equity market volatility this week, MFS global market strategist Rob Almeida notes that high yield bond prices have remained fairly firm. However, he warns that when credit markets lag equities on the downside, they can catch up quickly.
  • A rally Friday afternoon pulled back the major indexes from their worst weekly declines since late December as the US – China trade dispute escalated. The technology-heavy Nasdaq Composite Index performed worst, but the small-cap Russell 2000 Index stood out for being the only major benchmark to temporarily move back into correction territory, or down over 10.0% from its August 2018 highs. Within the S&P 500 Index, information technology shares performed worst, dragged lower in part by a decline in Apple. Industrials and materials shares were also weak as investors worried about rising trade barriers. The typically defensive consumer staples sector held up best. Volatility, as measured by the Cboe Volatility Index (VIX), spiked to its highest level since late January.
  • US Treasury yields decreased amid reduced risk appetite as trade tensions between the US and China ratcheted higher. In a development that may signal impending upward pressure on yields, however, a Wednesday auction of benchmark 10-year Treasury notes was met with markedly weak demand. Bloomberg reported that the so-called cover ratio of submitted bids relative to bonds for sale was the lowest since March 2009.
  • On Wednesday, retail sales control group numbers for April will be released which will give the first indication of private consumption growth at the beginning of Q2. Retail sales are expected to continue to show strength, but it is important to keep in mind that data is quite volatile on a monthly basis.


  • Britain’s economy got a sharp one-off boost in the first three months of 2019, official figures showed on Friday, as manufacturers rushed to deliver orders before a Brexit that never came. Gross domestic product grew at a quarterly rate of 0.5% in the first quarter of 2019 after a sluggish 0.2% in late 2018, in line with expectations from the Bank of England as well as the consensus forecast in a Reuters poll of economists.
  • British long-run public inflation expectations rose back to their long-term average of 3.2% last month, while short-run inflation expectations held steady at 2.7%, a monthly Citi/YouGov survey showed on Thursday. The share of respondents who did not know where inflation was likely to head remained higher than normal, which might reflect Brexit uncertainty, Citi’s economists said.
  • The British pound also took a hit from the global risk-off trade emanating from increased US – China trade tensions. The British pound tumbled 1.3%, as risk aversion and Brexit uncertainty pressured the currency. Hynes believes it will be difficult for the pound to gain ground as long as Brexit talks between the UK government and opposition Labour party remain at an impasse.
  • On Tuesday, the labour market report for March is due out. The labour market has performed well despite Brexit uncertainties and other survey indicators suggesting otherwise. Otherwise, focus will be on the European elections campaigning ahead of election day on 23 May.


  • Economic growth in Germany, Europe’s largest economy, is expected to grow just 0.5% in 2019, down from the European Union’s earlier forecast of 1.1% growth this year. At the eurozone level, the growth outlook was trimmed to 1.1% this year versus an earlier 1.2% forecast. Italy is expected to grow just 0.1%, making it difficult for the country to remain within European Union deficit limits.
  • The euro dropped earlier in the week but managed to gain 1.6% against the US dollar by week’s end. On Friday, Germany reported an unexpected rise in March exports. Exports rose 1.5% from February and 1.9% from a year earlier, a sign that Europe’s largest economy may be in better shape than previously forecast. German industrial output also unexpectedly increased in March. However, the European Commission (EC) cut its eurozone growth forecast to 1.2% in 2019 from its previous forecast of 1.3%, noting that the region’s economy has been weighed down by the US – China trade fight and Brexit uncertainty. The EC added that Italy’s budget deficit is on pace to reach 3.5% in 2020, above the 3.0% ceiling set by the European Union’s fiscal rules.
  • Risk aversion swept across European markets, which followed global stocks lower after increased global trade tensions overshadowed solid corporate earnings and some improved economic data. The pan-European STOXX Europe 600 Index lost 3.5% and the German DAX index was down about 2.9%. Volatility for the EURO STOXX 50 Index of blue-chip companies rose to a five-month high.
  • The second Q1 GDP growth estimate and with it the first German Q1 GDP estimate are due out on Wednesday. Despite the dire PMI readings, the euro area economy grew 0.4% quarter-on-quarter in the year’s first quarter. The stronger-than-expected growth likely came from durable domestic demand and was due to the industrial sector no longer being a drag on growth.
  • On Tuesday, both the euro area and German ZEW indices for May are released. The latest months have shown a divergence between current conditions and expectations, where expectations have risen in contrast to loosening current conditions; hence, it will be known later whether this trend reverses on the back of the stronger hard macro data.


  • Total social financing, the broadest measure of credit and liquidity in the Chinese economy, grew much slower than expected in April, at half of March’s pace. Analysts expect the slowdown to prompt China’s central bank to further ease monetary policy, especially as trade tensions with the US grow.
  • Mainland Chinese stocks slumped as trade-related uncertainty built up over the week, giving local investors added incentive to sell their holdings in one of the world’s best-performing stock markets this year. For the week, the Shanghai Composite Index and the large-cap CSI 300 Index, China’s blue-chip benchmark, shed roughly 4.5% and 4.7%, respectively, pushing them both near three-month lows.
  • While Trump’s latest tariff escalation dealt a blow to investor sentiment in the short term, many analysts think it won’t have a lasting impact on China’s economic fundamentals. China’s economy is much less export-dependent than most people realize. Despite being a huge exporter, China’s net exports accounted for about 2% of its total gross domestic product in 2017. Moreover, China currently trades far more with other developing countries than it does with the US, Europe and Japan.
  • The April batch of industrial production, retail sales and fixed asset investments will be released this week. A setback is possible, not least of all in industrial production growth which jumped significantly higher in March. In general, April data disappointed after a strong March, which was likely boosted by Chinese New Year effect.

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