Economic Outlook – 16 December 2018


  • US consumers are catching a break on inflation just in time for the holiday shopping season. After rising for seven straight months, the consumer price index was unchanged in November. Lower prices at the pump thanks to oil prices tumbling have led to an easing in inflation. After increasing2.9% on a year-on-year basis as recently as July, headline CPI is up only 2.2%.With oil prices falling further in the first half of December and unlikely to return to USD76 a barrel anytime soon, inflation dynamics are looking more favourable for real consumer spending in the next few months.
  • The core CPI rose 0.2% in November with goods and services both picking up. The 0.2% rise in core goods overstates the trend somewhat, however. Used auto prices jumped more than 2.0% for the second straight month, more than unwinding the 3.0% drop in September. At the same time, the resilience of the dollar is keeping the cost of imported goods muted. Like the consumer price index, import prices were held down by the drop in oil prices last month, leading to a monthly decline of 1.6%. But prices for nonfuel imports have also eased, declining 0.3% last month.
  • The lion’s share of core inflation, however, is services. Services excluding energy, which account for 75.0% of the core index and 60.0% of headline CPI, rose a trend-like 0.2% in November. After a soft couple of readings, shelter costs picked up, but a sustained acceleration is doubtful given emerging pressure on home prices. But an increasingly tight labor market and firms’ willingness to raise prices suggest upward pressure on prices elsewhere.
  • The modest inflation backdrop bodes well for real consumer spending but dented retail sales, which are reported in nominal terms, in November. Total retail sales rose a modest 0.2% in November. The headline was held back by a 2.3% drop in gas station sales as prices tanked. Excluding sales at gasoline stations, auto dealers and food service establishments, holiday retail sales rose 0.8%. That points to the make-or-break holiday shopping season getting off to a solid start this year.
  • While consumer spending looks to be on solid footing, the latest data on industrial production hint at some modest cooling. Total production rose 0.6% in November, helped by a 3.3% rise in utilities as temperatures were below their seasonal averages. Despite the aforementioned decline in oil prices, mining rose 1.7% over the month, but is likely to cool in coming months given expectations of lower oil prices to remain.
  • One of the most helpful early warning signs of a slowing economy is a persistent rise in weekly jobless claims. Economists were beginning to grow concerned as claims have been edging higher over the past several months. However, this week’s decline in claims to 206,000 was close to the 49-year low of 202,000 posted in mid-September. Elsewhere, US data were mixed this week. Retail sales rose 0.2% in November, as expected, while industrial production rose a more-than-expected 0.6%.  Flash purchasing managers’ indices were weaker than expected, with the manufacturing PMI slipping to a 13-month low of 53.9 in December from 55.3 in November.
  • Seven appropriations bills need to be approved by 21 December or about 25.0% of the US government will run out of funding. President Donald Trump insists he will not sign the funding bills unless they include USD5 billion to fund a border wall. So far, Trump has rejected an offer from Democratic legislators of USD1.6 billion earmarked for border security. A two-week funding extension was put into place on 7 December, so another temporary measure could be put in place. The new Congress will be sworn in on 3 January, dramatically altering the makeup of the House of Representatives, which will be under Democratic control. Government shutdowns have typically lasted a few days in recent years (and have not had significant market impact) but there appears to be little willingness to negotiate at present.
  • The major benchmarks ended lower for the week. The technology-heavy Nasdaq Composite Index held up best and was the sole benchmark to emerge from the week in positive territory for the year-to-date period. Smaller-cap shares performed worst, with both the S&P MidCap 400 Index and the Russell 2000 Index hitting new 52-week lows. Within the S&P 500 Index, utilities shares performed best, while financial shares were notably weak because of concerns over tighter lending margins due to declines in longer-term Treasury yields.
  • The US investment-grade corporate bond market traded with a firmer but somewhat defensive tone throughout the week. Bonds in the technology/media and telecommunications segment and those issued by some overseas banks were notable outperformers as credit spreads (the additional yield offered by riskier bonds over comparable-maturity Treasuries) tightened. Issuance was modest due to recent volatility. High yield bonds mostly tracked equities, as technical conditions helped insulate the sector from major swings. No new deals have come to the market in December, and the dearth of supply has helped offset the impact of flows out of the asset class.
  • In the US, the Federal Reserve is expected to raise the target range by 25bp to 2.25% to 2.5% at its meeting next week (a technical detail is that the interest rate on excess reserves is expected to be raised by only 20bp in order to get the effective Fed Funds rate back in the middle of the target range). The big question is what the Fed will signal going forward, as many have interpreted recent Fed speeches by Powell and Clarida dovishly.


  • Last Wednesday in the UK, it was confirmed that enough letters had been written (at least 48) by Tory MPs to trigger a vote of no confidence inTheresa May as UK prime minister. Theresa May needed 159 of 317 votes, a simple majority, to survive. In the end, she got 200 votes and thereby won the vote by a solid margin. Her victory means she cannot be challenged as party leader again within the next 12 months.
  • A measure of British house prices hit a six-year low in November as the approach of Brexit put off buyers and sellers, a survey of property valuers showed on last Thursday. The Royal Institution of Chartered Surveyors (RICS) said its house price balance sank to -11 in November from -10 in October, its lowest since September 2012, before Britain’s economy began to shake off the after-effects of the global financial crisis. Price falls were most acute in London and the south east of England where property prices are highest, exposing them higher purchase taxes on expensive homes as well as worries about the impact of Brexit on the capital’s financial services sector.
  • British workers had their biggest pay rise in a decade in the three months to October as the country’s strong labour market showed no sign of weakening ahead of Brexit. Average weekly earnings, including bonuses, rose by 3.3% on the year, their biggest rise since the three months to July 2008 and comfortably beating a median forecast of 3.0% in a Reuters poll of economists.
  • In the UK, the focus remains on the Brexit after another hectic week this week. The main headache is that there is no majority for anything in the House of Commons and there need to be more big clashes before things can calm down. The UK House of Commons goes on Christmas holiday on Thursday and returns on 7 January.
  • Major changes are not expected to the policy signals from the Bank of England as it is one of the interim meetings. While activity data have been to the weaker side lately, the BoE has already pencilled in lower growth, at 0.3%,in Q4 of 2018. Wage growth has surprised to the upside and the unemployment rate to the weak side, netting each other out.


  • In the EU, the December flash Composite PMI decreased more than expected in December to 51.3 from previous 52.7. The declining trend thus strengthened in December and brought the sentiment to the lowest level since July 2013. The drop was likely especially influenced by the recent French unrest. Hence, it remains to be seen to what extent the weakness in sentiment spills over to actual activity data as the PMI has been high relative to actual growth the past year. For now the PMI suggests that growth will tick in around 0.3% to 0.4% quarter-on-quarter in the fourth quarter. The soft PMI data were probably especially influenced by the “yellow vests” protests as French Composite PMI collapsed in December, as the biggest monthly decrease since 2011 took the index below the 50-treshhold (49.6), and thus indicated contraction for the first time since February 2016. Especially the service PMI in France was hard hit as one might had expected. Meanwhile, the German PMI was more stable and only decreased slightly to 52.2 in December from previous 52.3 probably helped by retail and construction sentiment as both services and manufacturing saw larger declines.
  • The European Central Bank confirmed its asset purchase program will come to an end this year and reiterated that rate hikes will not come until at least after the summer of 2019. However, market expectations of the first rate hike have been pushed out to early 2020, given a soft economic outlook for the eurozone. Purchasing managers’ indices continue to trend lower, as they have throughout 2018, amid headwinds from Brexit, unrest in France and an ongoing budget battle between Rome and Brussels. The ECB shaved 0.1% off its growth and inflation forecasts for 2019, which now stand at 1.7% and 1.6% respectively.
  • After four weeks of violent protests in the streets of Paris and other large French cities, Macron announced he will roll back a fuel tax hike and a tax on pension benefits while introducing monthly bonuses of €100 to minimum-wage workers. That package will add approximately €10 billion to France’s budget deficit, pushing it well above the EU limit of 3.0% of gross domestic product. The moves come at a time when Italy is struggling to reduce its deficit to below 2.0% at the behest of the EU or face disciplinary measures.
  • The final euro area November HICP numbers are due this week and no revisions are expected. The flash estimates showed headline inflation at 1.96% year-on-year (the first time since May that it fell below the ECB’s target). More importantly however, core inflation disappointed and fell back to 1.0% year-on-year from 1.07%, driven by lower service price inflation. Seasonal effects from lower airfares as well as a fall in communication and housing service prices might have contributed to the lower core inflation, so the decline might not be of persistent nature.
  • German Ifo figures are due on Tuesday. Since September, both business expectations and the current situation have dropped, but expectations are still above the July level. In the past months, there have been some signs of stabilisation in the euro area soft indicators (except PMI’s). However, the external environment still remains a challenge for German businesses and hence there may be scope for another small decline in the December Ifo reading.


  • Though high-level talks are still in the preliminary phase, China has signaled a willingness to make changes to its Made in China 2025 programme, which lays out industrial policy for certain high-tech industries. Whether the changes will placate US negotiators remain to be seen. Early indications are that China is willing to allow the participation of foreign companies in the plan. One concession would be China’s dropping of numerical goals of increasing domestic content to 70.0% by 2025. Elsewhere, China has resumed purchases of US soybeans and crude oil while rolling back tariffs on US-made autos to their pre-trade war level of 15.0% from 40.0%. China’s desire to engage more deeply with the US on trade seems to be driven by a sharp decline in domestic economic activity. Auto sales have fallen for five straight months and could post their first year-over-year decline in sales since the early 1990s. The pace of industrial production slowed more than expected in November, rising at a 5.4% year over year pace compared with October’s 5.9%. Retail sales reflected the slump in auto sales, rising 8.1% year over year in November compared with forecasts for a 9.0% pace. Meanwhile, the White House this week made it official: Tariff rate hikes originally scheduled to come into place 1 January will be delayed until 1 March, when talks with China are set to conclude.
  • China’s economy still seems to be slowing down amid trade war concerns and past deleveraging efforts. Retail sales growth fell markedly and more than expected from 8.6% year-on-year in October to 8.1% in November. The weak retail sales figures are among other things due to a further weakening of car sales, as the tax cuts on cars from 2016 to 2017 have been rolled back. New cuts have been announced, but have not yet kicked in. Retail sales growth fell despite that it was supported by record sales on “Singles’ Day”, China’s biggest shopping day on November 11. Growth of industrial production also fell (from 5.9% year-on-year to 5.4%) against expectations of unchanged growth. Growth fell even though production should have been supported also in November by that exports to the US has been moved forward in anticipation of the expected hike of US import tariffs at year-end. This hike has now been cancelled/postponed at the meeting between Trump and Xi. But since the meeting took place on 1 December, the decision should not have affected the November data.
  • The main focus in China will remain on the trade talks with the US, which seem to be progressing nicely. There are more signs that a trade deal is within reach within the next 3 to 6 months.
  • On Saturday, new home prices are expected to still show a solid pace of gains. House price inflation has picked up again recently to around 10.0% year-on-year on the back of monetary easing and low inventory levels.
Sources: Wells Fargo, T. Rowe Price, Reuters, MFSInvestment Management, Handelsbanken Capital Market, Danske Bank.