Economic Outlook – 14 May 2017


  • The National Federation of Independent Business (NFIB) Small Business Optimism Index kicked off the week with a small decline of 0.2 points in April. The decline was led by a drop in expectations for improvement in the economy, which fell 8 points following the initial unsuccessful attempt to replace the Affordable Care Act. Despite the dip, confidence remains high, and the employment segments of the survey signalled even more pronounced labor market tightening. The share of respondents saying that it is hard to fill job openings edged up to 33% in April, the highest level since November 2000.
  • The Job Openings and Labor Turnover Survey (JOLTS) showed job openings rose slightly in March, ending the month at 5.7 million. With a relatively high share of employers struggling to fill positions, involuntary separations remain limited; the layoff and discharge rate is near an all-time low. The quit rate held steady at 2.1% in March, the level at which this measure has hovered for most of the past year. Although this marks an improvement from earlier in the cycle, wages have still failed to accelerate thus far in 2017. With the share of small businesses reporting jobs are hard to fill at a 17-year high, an acceleration in quits would bode well for a pick-up in wage growth later this year.
  • Inflation showed some continued signs of firming this week. Led by higher industrial supplies and fuel costs, import prices increased 0.5% in April. Excluding fuel, import prices increased 0.3% and are up 1.1% over the past year. Over the past three months, non-fuel import prices have risen at a 3.5% annualised clip, the fastest pace since 2011. Producer prices also surprised to the upside, rising 0.5% in April compared to expectations for a 0.2% increase. Excluding food, energy and trade services prices jumped 0.7%, the largest increase in the three and a half year history of the series.
  • Retail sales rounded out the week this morning. Sales were disappointing in April, but upward revisions to March’s initial reading suggest personal consumption growth may have been a bit stronger in Q1 than initially reported. The series is adjusted for the timing of Easter, however, and it will be a different story in the personal consumption data. Building materials, motor vehicles and parts and electronics outperformed, while clothing, furniture, and food and beverage sales were soft.
  • President Trump’s health care reform and tax cut agenda have faced significant legislative challenges, but those headwinds stiffened considerably after the president removed from office embattled Federal Bureau of Investigation director James Comey. Measures that require a 60-vote majority in the 100-seat United States Senate will be extremely difficult to enact given the charged political environment. Republicans, with 52 senators, hold a fragile majority.
  • Volatility, as measured by the Chicago Board Options Exchange Index (VIX), fell to its lowest level since 1993 this week amid unusually calm equity trading conditions. The VIX, at 10.6 on Friday morning 12 May, is running at roughly half of its twenty-year average, according to Reuters. Analysts are struggling to explain the unusually placid market environment, with one well-known pundit this week pinning the blame on social media. The VIX slipped as low as 9.7 on Monday 8 May.
  • The Empire manufacturing PMI will be released on Monday and Thursday brings the Philly Fed Index – both for May. In recent months, there has been a divergence between regional manufacturing PMIs and overall PMI/ISM. However, the gap between ISM and PMI has started to close and regional PMIs are expected to fall from their current extremely high levels. Although confidence indicators are expected to decrease within the manufacturing sector, a significant slowdown in actual manufacturing activity appears unlikely.
  • The coming weeks also bring speeches by FOMC members James Bullard (non-voter, dove) and Loretta J. Mester (non-voter, hawk), which are not that important given that they have spoken recently.
  • Although implemented in disciplined fashion, the effect of OPEC production cuts has evaporated. Owing to the rapid recovery in US oil production OPEC obviously only has limited influence on prices via supply curbs. Even so, the agreement is likely to be extended at the next OPEC meeting. While this could certainly send the oil price a bit higher in the second half of the year, it is unlikely to be more successful than the cuts implemented so far in the longer-term.


  • As expected, the Bank of England (BoE) kept the Bank Rate unchanged at 0.25%, and the QE programme was also kept unchanged, in line with consensus expectations. The decision to keep the QE programme unchanged was unanimous, while the decision to keep the Bank Rate unchanged was a 7-1 vote. BoE Monetary Policy Committee (MPC) member Kristin Forbes wanted to increase the Bank Rate to 0.5% at this meeting.
  • The MPC noted that domestic economic activity had slowed markedly in Q1 2017 and that the slowdown had been most pronounced in consumer-facing parts of the service sector. The MPC now expects a similarly moderate pace of growth in Q2 and beyond. In the MPC’s central forecast, weaker consumption rising net trade and investment largely balance this year. The GDP estimate for this year was reduced a notch to 1.9%, from 2.0% previously, while the estimate for 2018-2019 was increased to 1.7% and 1.8% respectively from 1.6% and 1.7% previously. The BoE noted that CPI inflation had been somewhat higher than expected in the February Inflation Report and CPI inflation was expected to rise further above the target in the coming months, with the near-term profile being slightly higher than in the February forecast. The expected overshoot of CPI inflation relative to the target could be wholly accounted for by the projected degree of imported inflation. However, the Committee judged that although domestically generated inflation had been rising, it was currently below the level broadly consistent with the inflation target.
  • On Tuesday, CPI inflation for April is due, which likely rose from 2.3% in March to 2.8% year-on-year. The large increase is due mainly to a rebound in volatile prices such as airfares and a continued pass-through of a weaker GBP to consumer prices. Note that many UK gas and electricity companies have lifted their prices from April, which makes it more difficult to estimate the contribution from the energy component. Also, the timing of Easter (April 2017, March 2016) complicates things. Despite higher inflation, Bank of England is unlikely to hike anytime soon, as it is more worried about slower growth and the political uncertainty in coming years.
  • The labour market report for March is due. Unemployment rate (3M average) is likely to be unchanged, as there is still no evidence that Brexit uncertainties and slower growth have hit the labour market. The annual growth rate in average weekly earnings (3M average) is expected to fall from 2.2% to 2.1%, meaning that nominal wage growth continues to be subdued despite higher inflation.


  • The European Commission (EC) has upgraded its 2017 growth forecasts to 1.7% (previous 1.6%) and left its 2018 growth forecast unchanged at 1.8% for the euro area. Inflation forecasts were however tweaked lower to 1.6% and 1.3% for 2017 and 2018 respectively (previous 1.7% and 1.4%). Job market is expected to improve with unemployment rate falling to 9.4% in 2017 and further to 8.9% in 2018. The EC also sounded more optimistic, saying risks to outlook have become more balanced even though it remained tilted to the downside with US economic and trade policies, China reforms, banking system health in Europe and Brexit negotiations as key risks.
  • Concerns over the sustainability of Greek debt have caused in the International Monetary Fund to bypass the past several rounds of funding for the indebted Eurozone member. But the IMF looks likely to rejoin the bailout in the weeks ahead, and continues to push European authorities to grant Greece debt relief. An agreement is expected at a meeting of Euro group finance ministers on 22 May.
  • On Tuesday, German ZEW expectations will be released. ZEW expectations saw a significant jump from 12.8 in March to 19.5 in April and a further increase to 21.3 in May is in order. Relief over the French presidential election pro-EU outcome is likely to drive ZEW expectations for both Germany and the euro area as a whole upward further. The case for a higher ZEW is also supported by rising Sentix expectations in May.
  • Euro area consumer confidence is released on Friday. Falling unemployment continues to support rising consumer confidence, which increased to -3.6 in April from -5.0 in March. Consumer confidence is expected to rise further to -3.1 in May. Although political events seem to have limited effect on consumer behavior, the election of Emmanuel Macron could potentially give further tailwind to consumer confidence.


Sources: Commerzbank, Wells Fargo, Danske Bank, MFS Investment Management, Handelsbanken, HongLeong Bank

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