Economic Outlook – 15 December 2019


  • An agreement between the White House and Democrats in the House of Representatives was reached this week paving the way for passage of the US-Mexico-Canada trade agreement, a reworking of the nearly three-decade-old NAFTA accord. Officials from the three countries met in Mexico last week to approve revisions to the agreement, which is set for passage in the House before year-end. Additional labor provisions were among the amendments approved in order to secure Democratic backing.
  • US President Donald Trump and Chinese Vice Minister of Commerce Wang Shouwen each confirmed that the US and China have reached preliminary agreement on a phase one trade deal. Though its details are hazy, it is said that the deal will include the cancelation of tariffs scheduled to take effect Sunday Additionally, 15.0% tariffs will be reduced to 7.5% while 25.0% tariffs will remain in place. China agreed to unspecified agricultural purchases, to intellectual property protections, and to opening up its market to US financial services firms, among other measures. It has been reported that if China fails to live up to its commitments, the US will reserve the right to reinstate tariffs via a so-called “snapback” provision.
  • On Friday morning, the Commerce Department announced that retail sales excluding the volatile auto sector rose only 0.1% in November, well below consensus expectations. Spending fell sharply at restaurants, bars, and clothing stores, suggesting that consumers were growing more cautious about discretionary purchases. Weekly jobless claims, reported Thursday, also surged to the highest level in over two years, although complications with seasonal adjustments due to the exceptionally late Thanksgiving holiday may have been to blame.
  • The tariffs that have gone into effect thus far have had minimal impact on inflation. The CPI goods categories that most align with the tariffs implemented to date have added only 0.05 % points to inflation over the past year, which is about 0.1 points more than their contribution in the five years before the new tariffs went into place (when those categories where on average a drag on inflation). Looking at all core consumer goods, prices were unchanged in November after declining the prior two months. Driving core inflation higher, however, was a pickup in core services. The underlying trend in inflation remains fairly steady. Overall consumer price inflation ticked up to a 2.1% year-on-year pace in November, but the core index was stable at 2.3%. The producer price index suggest that domestic inflation pressures remain generally tame.
  • In FOMC Chair Powell’s press conference last week, he noted he would need to see a “significant” and “persistent” increase in inflation before it would be likely that the committee would raise rates again. Last week’s inflation data continue to show few signs of the trend in inflation breaking meaningfully higher anytime soon.
  • The major indexes ended higher after another week in which trade headlines appeared to hold sway over sentiment. The large-cap Dow Jones Industrial Average and the S&P 500 Index moved to new record highs, as did the technology-heavy Nasdaq Composite Index. News of a preliminary US – China trade deal boosted semiconductor shares, helping technology stocks outperform within the S&P 500 Index. Energy stocks were also strong as trade optimism pushed oil prices to three-month highs. The small real estate sector underperformed.
  • Reports of a preliminary trade agreement resulted in a bounce in Treasury yields on Thursday afternoon, but yields then fell back Friday and ended the week lower as investors seemed to respond to the weak retail sales data.
  • In terms of economic data releases, the most interesting releases are the preliminary PMIs for December, due on Monday. While US PMIs have moved slightly higher, the overall story is still that Q4 GDP growth has been slower than in Q3. Recent jobs growth has been strong but the focus is on the employment sub-index to see whether it expects this to continue.


  • British Prime Minister Boris Johnson’s Conservative Party swept to victory in the UK general election, achieving a majority of at least 78 seats in the 650-seat House of Commons. The Labour Party secured only 203 seats to the Tories’ 364, its worst showing since 1935, prompting Labour Party leader Jeremy Corbyn to announce that he will resign his leadership post in early 2020. In the wake of the vote, Parliament is expected to pass the withdrawal agreement, which Johnson negotiated with the European Union in October, by Christmas, setting the stage for the United Kingdom to quit the EU on 31 January. The UK and EU have until the end of 2020 to negotiate a trade agreement, unless an extension of no more than two years is requested by July, something Johnson has previously ruled out. In response to greater clarity over Brexit, the pound rallied and gilt yields firmed modestly.
  • Sales growth at Britain’s supermarkets slowed in the last quarter, industry data showed on Tuesday, as shoppers delayed their Christmas preparations ahead of the national election. Market researcher Kantar said all of Britain’s big four supermarket groups (market leader Tesco, Sainsbury’s, Asda and Morrisons) recorded sales declines over the period and lost market share to the German-owned discounters Aldi and Lidl which are aggressively opening new stores.
  • In the UK, the Boris Johnson era has begun and the first thing to look out for is whether Parliament will vote on his Brexit deal on Friday 20 December, which is the first opportunity given that new members of parliament are sworn in on Tuesday 17 December and the parliamentary opening (Queen’s Speech) is on Thursday 19 December.
  • The flash PMIs for December are due out on Monday, which will be interesting given they are in recessionary territory below 50. The labour market report for October is due on Tuesday, which will be interesting, as many soft indicators suggest employment growth has slowed sharply, which is not yet visible in the hard data.


  • At newly elected President Christine Lagarde’s first policy meeting, the European Central Bank (ECB) kept its ultra-easy monetary policy stance and bond-buying program unchanged due to the subdued inflation outlook. Lagarde (who describes herself as an owl rather than a hawk or a dove) said risks remain tilted to the downside but had become somewhat less pronounced. Incoming data pointed to continued muted inflation pressures and weak growth dynamics, although there were some signs of stabilization in the growth slowdown, she said. She also said headline inflation was likely to rise somewhat in the coming months, although indicators of inflation expectations stand at low levels. Lagarde repeated her call for all European decision-makers to introduce more growth-friendly policies.
  • A widespread strike, having already lasted more than week, continues across France as workers protest a proposed gradual transition from existing multiple public and private pension schemes to a less generous universal plan put forward by the government. In reaction to the proposal, transport union officials have warned that the strike could extend through the Christmas holidays. Workers are opposed to the envisioned change to a points-based universal system. Under the plan, those born before 1975 would remain under the current system while the new system would apply to those entering the workforce in 2022. For people currently in the workforce, the new system would apply beginning in 2025.
  • The Swiss National Bank (SNB) maintained its negative interest rate policy given a subdued inflation outlook. There had been speculation that the SNB might lower its rates to offset upward pressure on the Swiss franc. The SNB said it remained willing to intervene on the foreign exchange market as necessary while taking the overall currency situation into consideration. SNB Chairman Thomas Jordan countered criticism of the policy stance and added “as soon as the outlook will change, then we will change, but we have no good idea when that will happen because it really depends on the international environment.”
  • The December PMI figures on Monday. In November, the manufacturing PMIs in both Germany and the euro area edged up for a second month. Although it seems that the worst of the manufacturing malaise is over, activity continued to slow in the service sector, setting the scene for growth around 0.1% quarter-on-quarter in Q4.


  • China’s Communist Party wrapped up an annual three-day Central Economic Work Conference and pledged to maintain “prudent” monetary policy. In a summary carried by state media, China said it would maintain economic growth next year within a “reasonable range.” Analysts said that the statement signaled that Beijing would likely maintain an annual gross domestic product target of about 6.0%, a pace consistent with the country’s broader economic slowdown as well as the official goal of doubling the size of China’s economy within a decade.
  • Chinese stocks surged for the second straight week as momentum picked up toward a “phase one” trade deal, staving off the imposition of fresh US tariffs on nearly $160 billion of Chinese goods that were set to kick in over the weekend. For the week, the benchmark Shanghai Composite Index rose 1.91%, and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, added 1.69%.
  • On the data front, it is time for industrial production, retail sales and fixed asset investments. Growth in these measures is expected to move broadly sideways and thus signal GDP growth around 6.0% in Q4. New home prices are also up for release. A continued moderate house price inflation is likely with a monthly run-rate around 6.0%, as has been the case lately.

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