Economic Outlook – 15 May 2016


Retail sales rose a robust 1.3% in April. Spending was lifted by rebounding auto sales and higher gasoline prices, but core sales also performed well, up 0.6% on the month.

First-quarter growth was likely not as bad as originally anticipated and appears to have averaged closer to 1.0% than the original 0.5% estimate. Growth is tracking above 2.0% for the second quarter, suggesting the American economy will bounce back from yet another early-year slowdown.

Consumer spending should continue to be supported by rising wage growth, which is now showing up in a broad range of indicators. Given the rise in saving recorded over the past several months, households are in good position to loosen their purse strings.

Domestic demand is again gaining traction. Consumer spending should be supported by rising wage growth, which is now showing up more broadly. Given the rise in saving recorded over the past several months, households are in good position to loosen their purse strings. It won’t be long before this shows up in higher inflation.

Last month’s FOMC statement, in acknowledging “growth in economic activity appears to have slowed”, heralded a new higher data standard if the Fed was to feel confident about hiking rates again. If you are data dependent and the data disappoint meaningfully (which they tended to do during Q1), the onus increases on subsequent data to show even more improvement. April retail sales did just that. But, if you recall, payrolls didn’t … the non-factory ISM index and Michigan did but the manufacturing ISM didn’t.


Sterling has eased again, GBP volatilities are on the up. Is the market pricing in an higher Brexit risk? At closer inspection that is not a very plausible explanation. Instead speculative investors seem to be shying away from bets against a Brexit at present as they fear a high volatility in GBP exchange rates until then. Recent poll results indicate a Brexit is becoming more and more unlikely.

The most important data release for the UK this week is the labour market report for March due on Wednesday. Looking at the single month change in employment, it was unchanged in January and fell in February, the first fall since May. The employment series is very volatile (which is why the headline series is based on a 3M average) but another weak employment print would indicate that the labour market has slowed.


On Thursday, the ECB releases its minutes of the monetary policy meeting in April but it is not expected to attract much attention given last week’s ECB meeting did not contain any major news. On Tuesday, ECB’s Chief Economist Peter Praet speaks about economic reforms in Brussels. At the latest ECB meeting, Draghi put a renewed emphasis on the need for structural reforms and Praet is expected to be more specific in terms of how long-term, sustainable growth should be achieved.


China’s FX reserves rose for the second consecutive month in April, which has largely eased the concerns of strong capital outflows. However, several studies suggest that the increase in headline FX reserve numbers is mostly due to favourable valuation effects.

In China, fixed investments growth is expected by consensus to have increased to 11.0% year-to-date from 10.7% in March. An even higher growth rate is likely, as the authorities’ efforts to stabilise economic growth seem to be kicking in. The authorities have eased monetary policy, utilised fiscal policy and facilitated local government infrastructure projects.

Furthermore, the housing market recovery is on track, partly due to lower interest rates twinned with an easing of property market and lending regulations. Property investments are supporting overall fixed investments. Property prices have been increasing for a while and sales have taken off too. There is, however, still an overhang of unsold properties and it is yet to be seen if the housing market recovery is persistent.


Sources: Danske Bank, BMO Capital, Commerzbank, TD Economics.

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