Economic Outlook – 13 May 2018


  • US small business optimism rose slightly in April after losing some ground in March. That followed a cycle high hit in February after the tax cuts boosted the mood on main street. The mood is still very upbeat. Strong demand is translating into rising earnings on net for firms. Small businesses are also seeing greater ability to increase prices, with the measure of price increases rising to a cycle high in March and easing to its second-highest point of the cycle in April. It is good that small businesses are finding it easier to increase prices, because tough competition for workers is pushing up wages. Hiring quality workers has become a top concern for small businesses, and the share of small businesses unable to fill open positions is at its cycle high. One-third of small businesses reported raising compensation, the highest since 2000. Optimism about earnings trends and tax policy changes are also likely contributing to the larger share of small businesses giving raises.
  • The US job openings rate rose to a record high in March, reinforcing other indications of strong labor demand in the economy. Employees are taking notice. March marked the highest number of quits since 2000. Quits typically signal confidence in the labor market and usually result in a pay increase, which bodes well for wage growth.
  • The US producer price index (PPI) rose 0.1% in April and moderated on a year-over-year basis to 2.6%. There were temperate gains across input categories, which show that while inflation is strengthening, it remains orderly. Core PPI also moderated on a year-ago basis but remains on an upward trend relative to this time last year. As an indicator for “upstream” inflation pressures, the PPI points to price increases down the line.
  • The US consumer price index (CPI) came in softer than expected in April. Headline CPI rose 0.2% during the month while core CPI rose by a more tepid 0.1%. The trend remains upward on a year-ago basis, with the CPI rising 2.5% over the year while the core CPI rose 2.1%. The recent increase in energy prices was apparent with a 1.4% increase in the energy index in April. An increase in food prices also helped push the headline higher. The softer read on core CPI follows a ramp up in Q1, which had some worried that the Fed would need to tighten policy faster than was priced into the market.
  • FOMC meeting minutes and speeches by Fed presidents suggest that FOMC members are inclined to keep to a gradual approach to policy normalisation. Measured reaction by the committee to last year’s inflation soft patch is further evidence of a gradual approach.
  • Last Tuesday President Trump announced that his administration would no longer be part of the current Joint Comprehensive Plan of Action (JCPOA). That was a 2015 deal agreed to by the US, UK, EU, Germany, France, Russia, and China that lifted sanctions against Iran in return for a promise to pause its nuclear program. Although pulling out of the agreement will have limited direct economic implications for the U.S., the imposition of sanctions on Iran and the threat to do so on those nations that continue to do business with it, is likely to deal a blow to its trade partners.
  • With US, Mexican and Canadian negotiators scrambling to conclude an updated NAFTA agreement, US speaker of the house Paul Ryan has set a 17 May deadline on the process. Ryan says Congress needs an agreement by that date in order for it to be considered in this year’s legislative session.
  • Stocks recorded solid gains, helping push all of the major benchmarks back into positive territory for the year to date. The S&P 500 Index notched its best weekly advance in two months and, on Thursday, closed above its 100-day moving average for the first time since mid-March. Financials shares were particularly strong, seemingly helped by an increase in longer-term bond yields early in the week, which offer the prospect for higher bank lending margins. Conversely, the rise in bond yields weighed on utilities shares, whose relatively high dividends became less appealing in comparison. A decrease in yields late in the week helped utilities stocks recover some ground but did not appear to derail the momentum in the financial sector.
  • The yield on the benchmark 10-year Treasury note briefly broke through the 3% barrier for the first time since late April but ended only modestly higher for the week, at 2.97%. Having outpaced Treasuries the previous week, municipal bonds maintained much of their momentum. New issuance continued to strike a healthy balance – large enough to entice investors while still small enough to result in deals being oversubscribed. The investment-grade corporate bond market saw healthy new issuance, and most deals received strong interest. Overall, shorter-term bonds saw greater demand, but attention shifted to longer-term issues as the week progressed. Meanwhile, the high yield market was mainly focused on earnings, reacting favourably as most reports were either in-line with or beat expectations. Buyers returned to the energy sector as oil prices rose.


  • As widely expected, the Monetary Policy Committee (MPC) of the Bank of England decided to keep the policy rate unchanged at 0.5%. As in March, the decision was seven to two. The QE programme was also left unchanged, and this decision was unanimous. Despite the minority still wanting to hike the bank rate, the MPC struck a less hawkish tone today than in February. In February the MPC said that if the economy developed broadly in line with expectations, “monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than previously expected.” Today the MPC just said that should the economy develop broadly in line with expectations, an ongoing tightening of monetary policy over the forecast period would be appropriate.
  • British industrial output barely rose in March, confirming a glum first quarter for the economy that looks likely to scupper a Bank of England interest rate hike later this week on Thursday. The data, released along with figures for the construction industry and overseas trade, did nothing to alter the picture of an economy that has struggled for momentum in recent months.


  • Investor confidence in the Eurozone pulled back to 19.2 in May (Apr: 19.6). Although this was against expectations for a climb to 21.0, the reading is not surprising given how economic activities have turned softer in recent months.
  • Q1 economic activity indicators confirm that the euro area is in a positive phase of the business cycle. Likewise, the ECB in its quarterly update of its macroeconomic projections, raised its 2018 forecast for euro area growth (+0.1 pp) to 2.4% and kept its forecast for 2019 at 1.9%. This revision is supported by macroeconomic fundamentals continuing to favour a expansion in the euro area over the medium-term.
  • Key European indexes ended the week higher – buoyed by rising oil prices and positive corporate news – despite political uncertainty, particularly in Italy. Trading volumes were low, and reduced volatility reflected a relatively calm market. The pan-European STOXX 600 Index ended the week up about 1.6%, marking its seventh straight week of advances. As the first-quarter corporate earnings season wound down, more European companies than usual continued to surpass earnings estimates. Investors have become less likely to bid shares up or down in tandem. Rather, companies that beat earnings estimates have been rewarded, while those missing estimates have seen sharp declines. The weakening US dollar penalised growth in the Eurozone, the firm’s traders added.


  • Trade tensions between the US and China remained in the news as both sides entered a second round of trade talks in Washington to try and head off a damaging trade war. The latest bilateral trade negotiations occur as the Trump administration is reportedly finalizing a list of Chinese products that it has targeted for punitive tariffs. The Chinese delegation’s visit to the US follows a two-day visit by US trade officials to Beijing the previous week, which produced no breakthrough. In the earlier visit, U.S. officials reportedly asked for a $200 billion reduction in the two countries’ trade deficit by 2020, plus cuts in state subsidies for an array of high-tech industries in China – a practice that Western officials have criticized for giving Chinese firms an unfair advantage.


Sources: Wells Fargo, T. Rowe Price, Handelsbanken Capital Markets, MFS Investments, TD Economics, Reuters, CaixaBank.