Economic Outlook – 14 January 2018


  • The Job Openings and Labor Turnover Survey (JOLTS), import price index and producer price index all came in a bit on the soft side. Job openings edged down for a second straight month in November, a respite from the sharp run-up over the first three-quarters of 2017. Openings are up 4.4% over the past year, but that marks a slowdown from earlier and, if sustained, suggests a more moderate pace of hiring ahead. Though progress has been painfully slow, the quit rate has slowly crawled higher, suggesting improved worker confidence in the labor market.
  • The headline producer price index (PPI) unexpectedly fell in the month, and core measures of the index were softer-than-expected across the board. Despite a depreciating trend for the dollar and robust survey/production data for US firms, the December import price index and PPI showed few signs of imminent price pressures from these sources.
  • The consumer price index (CPI) met expectations for headline growth, up 0.1% in December, and topped expectations for the core index, which rose 0.3%. On a year-on-year basis, headline CPI was up 2.1% and the core has risen 1.8%. Though this was higher relative to the Bloomberg consensus, the core CPI has hovered between 1.7% and 1.9% every month since March last year, a stable string of readings that suggests a continued gradual pace of monetary policy tightening by the FOMC.
  • US retail sales rose 0.4% in December, boosted by stronger sales from non-store retailers, building material retailers and food service places. Control group sales, which excludes food, gas, building materials and autos and feeds directly into the consumption line of GDP, rose 0.3% in December and November was upwardly revised to a robust 1.4% reading.
  • The US federal budget was $23.2 billion in December and $225 billion through the first three months of federal fiscal year 2018. US Treasury yields jumped at the long-end of the curve as concerns arose about a surge in Treasury issuance on the horizon. Since September, spend has been nearly $200 billion above the Congressional Budget Office’s 2018 budget deficit forecast. This expected surge in net Treasury issuance can be attributed to three main factors: (1) bigger deficits from the tax cuts, (2) greater spending across the board and (3) a backlog of debt to be issued as a result of the Treasury being up against the debt ceiling for much of 2017.
  • The National Federation of Independent Business reported this week that its confidence index, which measures the mood of US small business owners, reached a record high in 2017, averaging 104.8 for the year. Tax cuts and regulatory reform were cited as catalysts.
  • US stocks recorded a second week of solid gains, as investors digested the first fourth-quarter earnings reports and celebrated some strong economic data. The S&P 500 Index recorded its first daily decline of 2018 on Wednesday, marking the end of the index’s best start to the year since 1987. China played a surprisingly large role in US investor sentiment early in the week. Stock futures fell sharply before the start of trading on Wednesday on reports that China was considering slowing or even halting its purchases of Treasuries. The news pushed the yield on the 10-year Treasury note to 2.6%, its highest level in 10 months, and led to fears of a disruption in global financial markets.
  • Few would have expected populist US president Donald Trump to venture to the seat of the globalist establishment, the World Economic Forum, held annually in Davos, Switzerland, but he will be the first US president since Bill Clinton to do so. Clinton attended in 2000, the final full year of his presidency.
  • US industrial production for December (due to be released on Wednesday) is the main market mover this week. The current trend in industrial production is decent and based on ISM manufacturing production there is room for an uptick in growth of industrial production. Both Markit and ISM PMIs point towards decent growth, although ISM seems to indicate stronger growth than currently expected. Note that all series are very volatile and one should not put too much weight on a single observation.
  • Several speeches by FOMC members are also due and particular attention should be paid to any further comments about the likelihood of another hike as early as March and a possible shift to price level targeting.


  • UK industrial production (IP) matched the consensus and increased by 0.4% in November after increasing 0.2% the month before (revised from 0.0%). Manufacturing production also increased by 0.4% in November, up from 0.3% in October (revised from 0.1%). The consensus expectation for manufacturing production was +0.3%.
  • According to the ONS, energy supply provided the largest contribution to IP growth in November, due mainly to the temperature being warmer than average in October and colder than average in November. Manufacturing output also provided an upward contribution to the month-on-month increase, with output rising for the seventh consecutive month. Partially offsetting the broad-based strength within manufacturing was a fall of 3.4% for transport equipment. The downward contribution came from a decrease of 7.1% in motor vehicles, trailers and semi-trailers (the largest fall since August 2014). The UK car industry is one of the sectors potentially hardest hit by Brexit, and the Society of Motor Manufacturers and Traders has lately warned that a failure to secure a Brexit deal and end Brexit uncertainty will potentially lead to a marked deceleration in car sales over the coming two years.
  • UK manufacturing PMI has suggested momentum has picked up notably since summer, but there is considerable uncertainty among survey respondents about the sustainability of the upturn. Based on past performance, the PMI output index suggests that output growth could hold up at least in the near term.
  • The most important data release this week is CPI inflation for December on Tuesday. CPI headline is expected to fall to 2.9% in December, from 3.1% in November, due mainly to a lower contribution from food prices. Core inflation is likely to fall from 2.7% to 2.6% due to a decrease in service price inflation. Despite the higher oil prices, overall inflation pressure is expected to fade this year, as food prices seem to have peaked and GBP has stabilised in recent months. Underlying inflation pressure is still muted, as wage growth remains subdued.


  • Usually, the minutes of the ECB policy meetings do not get a lot of attention and merely reflect the key points already known from the policy meeting. This was basically also the case for last week’s release of the December minutes. However, it had a hawkish touch, or at least markets seemed ready (these days) to interpret it that way. The ECB revealed a “widely-shared view among members of the governing council that communication would need to evolve gradually, without a change in sequencing, if the economy continues to expand and inflation converges further towards the governing council’s aim”. Both of these conditions seem to have been fulfilled in the ECB’s own view (rising inflation is still questionable, though). Draghi did admit at the policy meeting that guidance on rates will gain importance, but the minutes revealed that the ECB members agreed that forward guidance could be revisited in early 2018. That said, the ECB’s own outlined policy path during 2018 does call for significant change in guidance during 2018, but perhaps not as early as the minutes could suggest.
  • More than three months after the 24 September 2017 general election in Germany, which saw earlier attempts to form a coalition with smaller parties fail, Chancellor Angela Merkel has struck a deal to enter into formal coalition talks with the Social Democratic Party (SPD), with whom Merkel’s Christian Democratic Union had governed from 2013 to 2017. The SPD membership will put the matter to a vote on 21 January. Without a deal, Merkel would either have to lead a minority government or call fresh elections.
  • As earnings season began, European equities ended the week higher amid generally positive economic and geopolitical news. Early in the week, the Europe STOXX 600 Index touched its highest point since August 2015 with the automobiles, commodities, and financials sectors all rising. The FTSE 100 Index of UK blue chip stocks notched three successive record-breaking days as the pound’s weakness and stronger-than-expected manufacturing and industrial output reports boosted stocks.
  • The final December HICP inflation figures are due on Wednesday. Headline inflation declined to 1.4% in December, due mainly to lower energy price inflation, while core inflation remained unchanged at 0.9%. No revision is expected, but attention should be paid to which items have weighed on service price inflation, as this HICP component will be key for core inflation to pick up. Overall, core inflation is likely to average only 1.1% in 2018, in line with the ECB’s new forecasts.


  • Foreign exchange reserves rose $20.7 billion to $3.14 trillion in December, the People’s Bank of China (PBOC) reported, marking the eleventh straight month of gains in the country’s war chest. Strength in non-dollar currencies drove December’s increase, the PBOC reported, adding that China’s economic performance contributed to stable cross-border capital flows in 2017. Changes in China’s foreign reserves (the world’s largest) are being assessed monthly to gauge how much Beijing is dipping into its cash stockpile to support its currency. The yuan rebounded 6.7% against the dollar in 2017 following three straight years of depreciation.
  • Chinese exports climbed 10.9% in dollar terms in December from a year ago while imports rose 4.5%, according to customs data. December’s consensus-beating exports gain reflected buoyant demand for Chinese goods amid synchronised global growth. For the year, China’s exports rose 7.9% and imports climbed 15.9% in dollar terms. Meanwhile, China’s politically sensitive trade surplus with the US widened to a record $275.8 billion in 2017, accounting for nearly two-thirds of the country’s overall trade surplus of $422.5 billion.
  • The key focus in China this week is the GDP reading for Q4 (and thus the whole year). A rise of 6.7% year-on-year seems in line with consensus. This would leave GDP for the whole year at either 6.8% or 6.9% depending on the rounding. However, what is more noteworthy is that nominal GDP growth has increased substantially. Coming from 6.5% in late 2015, nominal GDP growth is now above 11.0%. This is due partly to higher industrial prices (and in particular to higher demand in the construction sector) and has been the main reason profit growth has increased a lot. Apart from stronger construction demand, prices have been supported by reductions in capacity as part of the supply-side reforms.


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

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