Economic Outlook – 13 January 2019


  • The Fed appears increasingly likely to hit the “pause” button in March amid financial market volatility, trade uncertainty and an overall moderation in economic growth. In a speech this week, Fed Chairman Powell reemphasized that the Fed would exercise patience and watch the economic data carefully, a sentiment that was echoed by Fed Vice Chairman Clarida. Given a strong labor market and contained inflation, the consensus is for two hikes from the Fed in 2019. However, the Fed has clearly struck a more dovish tone recently making a pause in March more likely.
  • Despite dueling national addresses from US president Donald Trump and Representative Nancy Pelosi and Senator Chuck Schumer, the Democratic leaders in the US House of Representatives and Senate, no progress was made last week toward ending what could become the longest government shutdown in 40 years. Historically, shutdowns have not been very economically disruptive, but if this (partial) shutdown drags on, tax refunds could be delayed and programs such as housing assistance for low-income families could be disrupted. Furthermore,  it has already substantially slowed down the stream of economic data that is compiled and released by government agencies that receive federal funding, notably the US Department of Commerce, which houses  both the Census Bureau and Bureau of Economic Analysis. As a result, reports on factory orders, the trade balance and the Treasury monthly budget statement were all postponed.
  • The Bureau of Labor Statistics, which is a component agency of the fully funded Department of Labor, has remained open and released the latest CPI data for December. The report revealed that overall inflation remains in check, as the overall index fell 0.1% during the month, mostly owed to a 3.5% drop in energy prices. Given lower oil prices, the energy component will continue to be a drag on the overall index in coming months. Meanwhile, core inflation continues to gradually edge higher. The core index, which excludes energy and food, increased 0.2% during the month is up 2.2% over the past year. Recent firming in core inflation is primarily a result of increases in shelter costs and medical care services, which rose 0.3% and 0.4%, respectively, in December.
  • The ISM non-manufacturing index fell from 60.7 in November to a still-elevated 57.6 in December. This falloff was somewhat less dramatic than what occurred in the manufacturing index during the month. In contrast to its manufacturing counterpart, the new orders component of the services index edged higher to a six-month high of 62.7, which indicates that the service sector is poised to expand at a solid rate.
  • The NFIB Small Business Optimism Index also fell slightly, the fourth consecutive monthly decline. Most of the pullback came from the share of business owners expecting the economy to improve over the next six months, likely a result of financial market volatility that has plagued Wall Street lately.
  • US stocks rose for the third consecutive week. Small-caps outperformed, and the gains helped make the Russell 2000 Index the last major benchmark to emerge from bear market territory (a decline of over 20.0% from recent highs). Within the S&P 500 Index, industrials shares performed best, helped by strength in railroads and a sharp rise in Boeing. Energy shares were also especially strong for much of the week as oil prices rallied, although they gave back a portion of their gains on Friday. Financials lagged, and health care stocks also underperformed despite the news of another large merger in the sector – Eli Lilly’s proposed USD$8 billion acquisition of Loxo Oncology. Volatility continued to moderate, with the Cboe Volatility Index (VIX) hitting its lowest level in over a month, while higher-valued growth stocks outperformed slower-growing value shares.
  • The yield on the benchmark 10-year US Treasury note ended the week slightly higher as the safe-haven bid moderated a bit. Municipal investors were eager for the first significant new issuance of 2019, which features a USD$7 billion calendar. The return of supply to the market, coupled with the downward movement in Treasury bond prices, led to weaker performance through the week. Traders noted that the front-end of the yield curve seemed to be the focus of most of the week’s trading activity.
  • Many FOMC members are scheduled to speak this week (ahead of the next FOMC meeting on 30 January) but markets and economists have probably understood by now that the Fed is going to be patient about raising rates again, supporting the call for a summer hike, probably in June.
  • In terms of indicators this week, the Empire PMI manufacturing, the Philly Fed index, the NAHB Housing Market Index and consumer confidence from University of Michigan will be interesting and deserve a close look.


  • The British Parliament is scheduled to vote on the withdrawal agreement negotiated with the European Union by the government of prime minister Theresa May on Tuesday 15 January. May is expected to lose the vote, and, having lost a vote on an amendment this week, must present an alternative plan in just three days. With a growing risk of the United Kingdom failing to ratify an agreement with the EU, momentum is growing for it to ask the EU to extend the Brexit date while May tries to negotiate a deal that can be passed by Parliament. Should the government lose the most important vote of its tenure, pressure may grow on May to call a general election to try to settle the Brexit question.
  • Britain’s economy grew at its weakest pace in half a year in the three months to November as factories suffered from tough global trade conditions and the approach of Brexit, official data showed last Friday. Gross domestic product was 0.3% higher than in the previous three-month period, down from growth of 0.4% in the three months to October and matching the consensus of a Reuters poll of economists. Manufacturers suffered their longest period of monthly declines in output since the financial crisis, hurt by weaker overseas demand, the Office for National Statistics said.
  • British retailers failed to increase their Christmas sales for the first time since the depths of the global financial crisis a decade ago, adding to signs of an economic slowdown ahead of Brexit. Consumer spending appears to be fading fast after a summer surge as concerns among shoppers about the outlook for 2019 outweigh the benefit from weaker inflation and a modest pick-up in wages. The British Retail Consortium (BRC) said its members reported zero YoY total sales growth in December, the worst performance for the month since 2008.
  • After the government was defeated on the so-called ‘what next’ amendment, Prime Minister May is now forced to present her plan B within three days if she loses the vote (and the House of Commons is able to make amendments to her statement). While the House of Commons has taken more and more control of the Brexit process, mostly in order to prevent a no-deal Brexit, the main headache is that there has not yet emerged a credible alternative to May’s deal backed by a majority in the Commons.
  • Jaguar Land Rover unveiled plans to cut 4,500 jobs in the UK, while Honda said it would shut its UK plant for six days to avoid a disruption from a disorderly Brexit.
  • Industrial production data for Germany and France, the eurozone’s two largest economies, fell sharply in November, the governments reported this week. In Germany output fell 1.9% while in France it was down 2.1%. Italy and Spain saw output decline 1.6% and 1.5%, respectively. The soft data reinforce the notion that while the European Central Bank has ended its asset purchase program, rate hikes are probably more than a year away. There was one bright spot last week: unemployment in the euro area fell to 7.9% in November, the lowest level since October 2008.


  • The pan-European STOXX Europe 600 Index gained as optimism about US and China trade talks outweighed signs of economic slowing in Germany and France and the announcement of layoffs in the region’s auto sector. Auto stocks came under pressure last week as Ford Motor announced an overhaul of its European business, which would entail thousands of job cuts.
  • On Thursday, the final euro area inflation figures for December will be released. Core inflation surprised again on the downside in the preliminary print and remained unchanged at 1.0%. In the details, of interest will be any signs that recent strong wage growth is starting to exert upward pressure on some of the components of service price inflation.


  • Technical talks at the vice-ministerial level in Beijing between the US and China reportedly made progress this week and were extended for a day. Progress was reported on issues such as China increasing purchases of US agricultural and energy commodities, but major issues remain, such as China’s subsidies to state-owned enterprises and respect for intellectual property rights. Those are expected to be tackled in senior-level talks in Washington on 30 and 31 January.
  • While there has not yet been an official announcement from the Chinese government, sources told Reuters last week that the China will lower its 2019 economic growth target to 6.0% to 6.5% from around 6.5% in 2018. Growth of about 6.2% is needed over the next two years for China to reach its objective of doubling its gross domestic product this decade. Ongoing trade tensions with the US have put that goal in jeopardy.
  • China’s stock markets and currency advanced as momentum picked up toward a possible trade deal with the US, raising hopes for resolving a trade standoff that has dimmed the global growth outlook. For the week, the Shanghai Composite Index added 1.5% and the large-cap CSI 300 Index, China’s blue chip benchmark, rose 1.9%. The yuan rose to a five-month high versus the US dollar and gained 1.9% for the week, its best five-day performance since July 2005.
  • Focus in China is set to be on Chinese trade balance and money and credit data. The data on trade balance is still distorted by the trade war, which led to some frontloading of exports to the US from China. From the PMI data, data tells export orders fell a lot at the end of 2018. The expectation is for credit and money data to be interesting, as it should reveal that some of the monetary easing measures are feeding through to the economy. There have been some tentative signs of a bottom in money and credit growth in recent months.

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