US
The key economic data for the US was the December retail sales figure that showed a rise in consumer spending driven largely by autos and gasoline. While broadly in line with expectations, sales ex-autos and gasoline were virtually unchanged from the previous month. Overall, the data is consistent with the narrative that tightening labor markets and past gains in real income growth should support consumer spending in 2017.
There is a sharp improvement in sentiment among US households, businesses and homebuilders since the election: The National Federation of Independent Business (NFIB) Small Business Optimism Index jumped the most ever (the monthly data go back to 1986) to its highest level since 2004. A record number of respondents think the economy will improve and say now is a good time to grow their business. The NAHB Homebuilder Index vaulted to its highest level since the housing bubble in 2005, led by a giant leap in sales expectations.
US import prices rose 0.4% in December, boosted by a 7.9% increase in imported petroleum prices. Import prices have risen 1.8% over the past year, the largest gain since 2012. Ex-fuel, however, prices fell for a third straight month amid lower costs for foods and beverages, capital goods, autos and consumer goods. The dollar strength is expected to remain a challenge for import price reflation in the coming months, but the rebound in energy prices should more than offset any drag. Producer prices also rose in December, increasing 0.3% over the month and 1.6% over the year. Price pressures showed additional signs of firming this week and should help reassure FOMC members that the transitory effects of the oil price slide are continuing to fade.
Fed chatters showed that policy makers were generally upbeat about the economy. Fed Lockhart and Harker were both optimistic about growth prospect this year. In addition, Fed Lockhart said that upside risk factor to growth could warrant three quarter point hikes but he forecasted two moves for 2017 as it was too soon to make a judgement without more details. Fed Rosengren said that the median forecast of three hikes “seems reasonable” reiterating that policy tightening will continue this year.
US December CPI inflation figures are due on Wednesday. The estimate is for CPI core index to increase by 0.2% month-on-month in December, implying an increase in the core inflation rate to 2.2% year-on-year, up from 2.1% year-on-year in November. However, it is a close call between 2.1% year-on-year and 2.2% year-on-year. It is possible the CPI headline index increased 0.3% month-on-month in December due mainly to higher oil prices. This implies headline inflation increased significantly to 2.2% year-on-year in December, up from 1.7% year-on-year in November, which would be the highest headline inflation rate since 2012. The sharp increase is due to a combination of the base effects of declining oil prices in December 2015 and increasing oil prices in December 2016.
On Wednesday, the manufacturing production for December is also due. Global PMIs point to a synchronised recovery, but the pickup has still not been visible in actual manufacturing production. December figures are expected to rise together with manufacturing production. The first indications on manufacturing activity in January from the Empire index will be released on Tuesday and the Philly index on Thursday.
UK
According to the ONS, industrial production increased by 2.1% (seasonally adjusted) in November, after falling by 1.1% in October (revised from -1.3%), and manufacturing was up by 1.3% in November, after falling by 1.0% in October (revised from -0.9%). The actual numbers proved to be much better than consensus expectations of 1.0% and 0.5% respectively. Total production was pulled up by an increase in mining and quarrying, following the end of a maintenance period in the oil and gas industry as the Buzzard oil field came back online. Electric power generation, transmission and distribution also pulled up due to lower than average temperatures in November.
After a stronger-than-expected monthly rise in output in November, the year-on-year UK growth rate climbed to 2.0% for total production and 1.2% for manufacturing. The manufacturing PMI survey for December reported an improved order and backlog situation, indicating that momentum in the sector strengthened during Q4. Based on past form, the PMI performance suggests quarterly manufacturing output growth of around 1% in Q4.
UK CPI data for December will be released on Tuesday. Headline inflation is expected to rise to 1.4% year-on-year, from 1.2% in November, pushed up by non-energy industrial goods, energy and food prices. Service prices rose more than expected in December 2015, which would be a small drag on total inflation. Core inflation is likely to remain unchanged at 1.4%. Overall, UK inflation is expected to move higher this year, due mainly to the weaker GBP which pushes up import prices and hence consumer prices.
EU
Data released this week suggest that the pace of economic activity in the Eurozone likely firmed a bit at the end of last year. Specifically, industrial production in Germany rose 0.4% in November relative to the previous month. Although the outturn was not quite as strong as expected, the increase in October, which was originally reported to be 0.3%, was revised up to 0.5 %. Italian industrial production rose 0.7% in November and industrial production in France jumped 2.2% during the same month. Both out-turns were significantly stronger than most analysts had expected.
The first ECB meeting of 2017 takes place on Thursday. However, No significant announcements or changes to the ECB’s policies are expected. Even though inflation has increased above 1% for the first time since 2013, this is due mainly to energy price inflation consistent with the ECB’s own forecast.
German ZEW expectations figure is released on Tuesday. ZEW expectations in December remained unchanged from 13.8 in November. An increase in January is likely since continuing optimism was reflected in strong December PMIs for the euro area.
China
China consumer prices grew at a softer pace of 2.10% year-on-year but producers’ prices accelerated to more than a five year high of 5.50%
China is scheduled to release Q4 GDP on Friday and we look for another quarter of 6.7% year-on-year growth. This would be the fourth consecutive quarter of 6.7% year-on-year. This is in line with China’s growth target of 6.5% to 7.0%. Other data suggest that growth has clearly recovered this year, as, for example, PMI and electricity production have improved significantly. However, it is hard to tell the exact level of growth.
Numbers for Chinese industrial production, fixed investment and retail sales will also be released on Friday. Unfortunately, the industrial production and fixed investment data have been a bit out of line with other signs of recovery. Given the sharp rise in credit, metal prices and steel and electricity production, these seem more reliable indicators for activity in China. When it comes to the retail sales data, these have generally trended lower but still point to consumption growth at a fairly decent rate.
Australia
Retail sales growth softened to 0.20% month-on-month in November (October: +0.50% month-on-month), posting signs that household consumption may pull the brakes on growth in the final quarter of 2016.
Sources: Haendelsbank, HansLeong, Wells Fargo, Danske Bank, TD Economics, BMO Capital.