Economic Outlook – 17 January 2016


The carnage in the US equity markets continued this week. Lifting of the sanctions on Iran sent prices for both WTI and Brent to new 12 year lows below $30 a barrel.

US retail sales data for December disappointed expectations, declining 0.1%. As a result of the weak data flow, some estimates for fourth quarter real GDP growth have fallen.

Despite the apparent weakness, it is not time to give up on America’s continued growth or its domestic demand fundamentals. Importantly, job growth has maintained momentum and in combination with weak inflation has led to strong real income growth that will sustain modestly above trend economic growth over the next year.

In the US next week, focus is on CPI inflation in December due on Wednesday. While PCE core inflation (Fed’s target measure) is subdued significantly below the 2% target, CPI core inflation was 2.0% year-on-year in November.

The divergence between the US manufacturing and services sector has attracted a lot of attention in recent months. The manufacturing sector is slowing down while the services sector continues to grow steadily. The preliminary release of Markit PMI manufacturing in January on Friday will give us some insight into how manufacturing has performed in the first month of the new year. The PMI index is not followed nearly as closely as the ISM index by the markets but it is worth noting that the Markit PMI manufacturing index has not painted the same negative picture as ISM manufacturing in recent months.


Next week is busy in the euro area, especially at the end of the week with the ECB meeting Thursday. The ECB is expected to express a patient view and given the market pricing of additional rate cuts, the meeting could likely be a disappointment if Draghi does not point to further rate cuts. That said, the minutes from the December meeting suggested that the bar for cutting the deposit rate further is not as high as previously expected.

According to some rumours, the ECB is currently split in two camps with the doves arguing for additional easing due to the low oil price and the risk of persistent low inflation, whereas the hawks are likely to focus on the better growth outlook and the declining unemployment rate, which should eventually put upward pressure on wages.


The meltdown in Chinese stock markets and the marked weakening of the CNY, combined with the authorities’ clumsy communication and handling, have fuelled renewed fears about a more severe slow-down in China’s economy and turmoil in global financial markets. Economic data indicate that the slow-down has paused, as growth has stabilised and looks set to rebound later this year.

In China Tuesday brings GDP figures for Q4 and industrial production and retail sales data for December. These numbers will be watched closely by the market in the wake of the recent financial turmoil and could therefore be very important for sentiment in financial markets after a very jumpy start to the year. Positive trade numbers are expected for December, and they should be reflected in all three sets of data.

Industrial production saw its biggest fall since 2013, according to latest official data. Lower energy demand due to warmer weather caused industrial production to fall by 0.7 percent in November, compared to the month before. Throughout 2015, manufacturing experienced alternating periods of expansion and contraction, which have resulted in current manufacturing levels being lower than those experienced at the beginning of the year.

At its meeting ending on 13 January 2016, the Monetary Policy Committee (MPC) voted by a majority of 8-1 to maintain the Bank Rate at 0.5 percent.


Sources: Danske Bank, TD Economics, Handelsbanken

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