| USA The Consumer Price Index rose 0.3% in December, more than the median economist forecast calling for a +0.2% print. The index had edged up 0.1% the month before. Prices in the energy segment progressed 0.4% as declines in two categories—fuel oil (-5.5%) and utility gas services (-0.4%)—were more than offset by gains in two others—electricity (+1.3%) and gasoline (+0.2%). The cost of food, meanwhile, rose 0.2%. The core CPI, which excludes food and energy, climbed a consensus-matching 0.3%. Following six straight monthly declines, the cost of core goods stayed flat in December as increases for used vehicles (+0.5%) and new vehicles (+0.3%) were offset by declines for medical care commodities (-0.1%) and tobacco and smoking products (-0.1%). The price of alcoholic beverages moved up 0.3%. Prices for ex-energy services jumped 0.4%, supported by strong gains for medical care services (+0.7%) and shelter (+0.5%). The^cost of transportation services edged up 0.1%, boosted by motor vehicle insurance (+1.5%) and airline fares (+1.0%). Motor vehicle maintenance (-0.3%) saw its first decline in 21 months. YoY, headline inflation came in at 3.4%, up from 3.1% the prior month and two ticks above consensus expectations (+3.2%). The 12-month core measure, meanwhile, ticked down to a 31- month low of 3.9%, which was still above the median economist forecast calling for a 3.8% print The Producer Price Index for final demand slid 0.1% in December instead of advancing 0.1% as per consensus. (The prior month’s result was revised from +0.0% to -0.1%.) Goods prices fell 0.4% on declines for both food (-0.9%) and energy (-1.2%). Prices in the services category were flat on a monthly basis. The core PPI, which excludes food and energy, remained unchanged as well, whereas the median economist forecast called for a 0.2% gain. YoY, the headline PPI rose from +0.8% to +1.0%. Excluding food and energy, it fell from 2.0% to a 3-year low of 1.8% The trade deficit narrowed for the first time in three months in November, moving from $64.5 billion to $63.2 billion. This was due almost entirely to a $6.0 billion decrease in goods imports (to $257.4 billion), led by cell phones (-$1.9 billion), pharmaceutical preparations (-$1.4 billion), and drilling and oilfield equipment (-$0.7 billion). Goods exports, for their part, retraced $5.4 billion (to $168.0 billion) on declines for non-monetary gold (-$1.9 billion), crude oil (-$1.0 billion), and organic chemicals (-$0.7 billion). As imports declined at a faster pace than exports did, the goods trade deficit shrank from $90.0 billion to $89.4 billion. Country by country, the U.S. goods deficit widened with Mexico (from $11.9 billion to a new all-time high of $13.8 billion) and Canada (from $7.2 billion to an 18-month high of $7.8 billion) but narrowed with China (from $23.9 billion to a one-year low of $21.5 billion) and Germany (from $7.5 billion to a 15-month low of $5.6 billion). The services surplus, meanwhile, grew from $25.5 billion in October to a post-pandemic high of $26.2 billion in November, as exports advanced $0.7 billion (to $85.7 billion) and imports retreated $0.2 billion (to $59.6 billion). Travel exports continued to recover but remained roughly 5.0% below their pre-pandemic level. Inversely, travel imports, which serve as a proxy for the number of Americans travelling abroad, stood roughly 20% above their pre-pandemic level The NFIB Small Business Optimism Index rose 1.3 points in December to a five-month high of 91.9. The net percentage of firms that expected the economic situation to improve moved from -42% to a still-depressed -36%. Net sales expectations rose as well, from -8% to -4%, but that did not prevent a slight decrease in hiring intentions (from 18% to 16%). Only 24% of polled businesses planned to make capital outlays in the next three months, a percentage well below the long-term average for this indicator. Perhaps this had to do with the fact that a net 8% of respondents expected credit conditions to deteriorate going forward. In fact, loans were already harder to access judging by the increase in interest paid on short-term loans reported by the NFIB over the past few months Hiring in December continued to be limited by difficulty finding good candidates: 40% of businesses reported not being able to fill one or more vacant positions. What’s more, 36% reported sweetening employee compensation in the past three to six months in a bid to attract qualified workers and 29% expected to do so in the coming months. Inflationary pressures were still palpable in the NFIB data but seemed to be losing some of their edge. Indeed, “only” 25% of businesses indicated they had raised their prices recently, tied for the lowest percentage in 32 months. Less encouragingly, the share of businesses planning to increase prices in the near future stood at 32%, the second highest level recorded in 2023 and far above this indicator’s pre-pandemic level (≈20%) US Senate Majority Leader Chuck Schumer and Speaker of the House Mike Johnson reached an agreement on topline spending figures last weekend ahead of the 19 January expiration of a temporary government funding bill. After several resignations and retirements at the end of 2023, Johnson’s GOP majority has dwindled to a single vote, leaving him little room to maneuver and giving individual lawmakers tremendous leverage to push their legislative priorities. With only a week to go before funding runs out, the passage of another stopgap measure seems likely because the details of the four remaining appropriations bills are still being hashed out. US Secretary of the Treasury Janet Yellen said this week that she is encouraged by the preliminary budget deal and is hopeful a shutdown can be avoided Federal Reserve Bank of New York President John Williams said on Wednesday that monetary policy is restrictive enough for the Fed to reach its 2% inflation goal and that meaningful progress on bringing down inflation has been made though inflation remains far above target. He said rates will normalize as inflation falls and the timing and speed of any cuts depends on the economy. Several other Fed officials downplayed the likelihood of a rate cut coming as early as March Stocks moved higher over the week, with large-cap growth stocks and the technology-heavy Nasdaq Composite Index outperforming the broader market. Several tech giants recorded solid gains, including Facebook parent Meta Platforms and chipmaker NVIDIA. Energy stocks underperformed as oil prices pulled back early in the week. The week brought the unofficial start of earnings season, with the nation’s four largest banks—JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo—reporting fourth-quarter results on Friday. Markets were scheduled to be closed the following Monday in observance of the Martin Luther King, Jr. Day holiday In terms of data release, retail sales is out on Wednesday. The consumer’s staying power remains intact. Retail sales surprised to the upside in November, rising 0.3% over the month. The control group measure, which aligns with the personal consumption expenditures component of the GDP accounts, expanded 0.9% after adjusting for price fluctuation. The outturn signaled that consumer spending will post another solid increase in the final quarter of 2023, and December looks to be in line with that notion. Real-time data on credit card usage from the Bureau of Economic Analysis show spending in total retail and food services strengthened in December relative to the prior month, and a recent report from Adobe Analytics estimates that online holiday shopping increased 4.9% over the year Industrial production is also out on Wednesday. Unlike households, the factory sector has seen activity falter over the past year. Industrial production was down 0.4% on a year-over-year basis in November. Elevated interest rates have crimped demand and production. The ISM Manufacturing Index, which has been in contraction territory for 14 consecutive months, showed new orders contracting in December. The ISM data are corroborated with regional Federal Reserve Bank manufacturing surveys that show new orders softening across the New York, Philadelphia and Richmond Fed districts in the final month of 2023. Manufacturers’ order backlogs have also thinned when accounting for inflation, which, taken together with weak new demand, suggests production ended the year on a soft note. UK The monthly GDP numbers for November have come through: GDP grew by 0.3% MoM, 0.2% YoY, although there was a fall of -0.2% in the QoQ monthly data series. The key drivers of this mild uptick were services which grew by 0.4% MoM (these figures are unsurprising given the recent good services PMI data), while production was up 0.04% and construction fell by -0.01%. Digging into services, reasonable growth was seen in ICT (computer game sales), car sales and scientific services, while financial services were lagging. Revisions to GDP earlier in the year moved the level of economic activity above where it had been at the end of 2019, so above pre-pandemic levels; more recent revisions of the GDP numbers took Q3 GDP from 0.0% to -0.1%, thus a negative number for Q4 would leave the economy in “recession”. These are, in reality, relatively minor revisions, but because economic growth figures overall are hovering around zero, the recession term comes into play Industrial Production for November has come through at 0.3% MoM, -0.1% YoY, while Manufacturing Production for November was 0.4% MoM, 1.3% YoY. The biggest boost to Manufacturing came from Pharmaceuticals (+4.8%), and to a lesser extent, computer equipment (+2.1%) and food products (+1.4%); the negatives were transport equipment and machinery (down -0.15% and -0.18% respectively). The Trade Balance shrank to GBP -14.2bn, mostly due to a shrinking non-EU trade balance which now stands at GBP -2.8bn. Construction fell by -0.6% MoM due to a fall in new work (down 2.0% against repair work which grew by 2.1% m-o-m), the fall in construction has partly been attributed to the poor weather seen in November, but higher interest rates must also be taking a toll. EU ECB President Christine Lagarde said in an interview on French television said that she thought “the worst part is behind us” in the battle to bring down inflation. She also asserted that interest rates had probably reached their peak. “I think that rates, barring any further shocks or unexpected data, will not continue to go up,” she said. “And if we win our fight against inflation, and if we are certain that inflation will indeed be at 2%, at that point rates will start to go down.” However, she declined to say when these rate cuts would occur Official data indicated that the labor market remained resilient amid an economic slowdown. The euro area unemployment rate stood at 6.4% in November, down from 6.5% in October. However, there are some signs that the labor market might be correcting. Total hours worked fell slightly in the third quarter—the first since the end of 2020—while job vacancies have declined in recent months. Meanwhile, retail sales volumes shrank 0.3% sequentially in November, after growing 0.4% in October. Germany’s industrial output unexpectedly declined 0.7% sequentially in November, in part because of shrinking orders in manufacturing. New orders increased by 0.3% month over month on a seasonally adjusted basis, falling short of expectations In local currency terms, the pan-European STOXX Europe 600 Index ended the week little changed, as traders assessed the prospect of interest rates staying higher for longer than previously expected. Major stock indexes were mixed. Germany’s DAX added 0.66%, France’s CAC 40 Index gained 0.60%, and Italy’s FTSE MIB ticked modestly higher. CHINA The consumer price index fell 0.3% in December from the prior-year period, the third monthly decline, easing from November’s 0.5% drop as lower pork prices continued to weigh on food prices. The producer price index declined 2.7% from a year ago compared with November’s 3% drop, and marked the 15th monthly decline. The latest inflation data raised expectations for some analysts that China’s central bank would lower its key policy rate and inject more cash into the financial system at its next policy meeting amid worries that sustained deflation will increasingly weigh on the economy. China’s exports rose a better-than-expected 2.3% in December from a year earlier, up from a 0.5% rise in November. Exports to Europe and Southeast Asian nations improved, while U.S. shipments fell following a brief rise in November. Imports edged up 0.2% in December, rising from November’s 0.6% decline. December’s improved results were likely boosted by the low base effect of China’s pandemic lockdowns in the prior-year period, which dampened economic activity. The overall trade surplus rose to USD 75.34 billion, up from November’s USD 68.39 billion. However, China’s exports fell 4.6% in 2023, its first annual decline in seven years as global demand softened Chinese officials announced new sanctions on five U.S. defense companies in response to the U.S.’s latest weapons sales to Taiwan. Measures included freezing the U.S. companies’ local assets and prohibiting domestic organizations from initiating any transactions with them. The move was largely seen as a retaliation after the U.S. State Department approved an estimated USD 300 million in possible military sales to Taiwan that were disclosed in December A Chinese invasion of Taiwan would shave 10.2% from world GDP in the first succeeding year, a Bloomberg analysis forecasts. US growth would decline 6.7%, and growth would decline 16.7% and 40% in China and Taiwan, respectively, the analysis showed Chinese equities retreated as data showed that China’s deflationary cycle persisted into December, raising expectations of increased government support in 2024. The Shanghai Composite Index declined 1.61%, while the blue-chip CSI 300 gave up 1.35%. In Hong Kong, the benchmark Hang Seng Index fell 1.76%, according to FactSet. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, M. Cassar Derjavets. |
