Economic Outlook – 17 March 2019


  • US January retail sales report was released last week and it showed a bounce-back in consumer spending after what was the worst month for retailers since the Great Recession. Stripping away volatile components (food, autos, gas and building materials) the control group measure fared even worse in December, declining 2.3%, or the largest monthly decline since 2000. Given that this measure is a good proxy for the goods portion of personal consumption expenditures in the GDP report, the 1.1% rebound in January calmed fears of a prolonged retrenchment in spending.
  • December, a key shopping period for consumers, was plagued by a market sell-off, which cramped consumer confidence and reduced household wealth. But, with financial markets having regained all of the ground they gave up in December, and confidence measures trending higher, spending doesn’t appear to be falling off a cliff, but it will be weaker in the first quarter.
  • Prices data for February remained more or less in check. The Consumer Price Index edged up in February, but lower energy prices over the past year have held down the headline index on a year-on-year basis. With core inflation running at a 2.1% annualized pace over the past three months and on a year-on-year basis, the underlying price trend remains at the Fed’s target, suggesting there is little need (from an inflation perspective) for it to move swiftly on further rate hikes.
  • In last week’s payroll report, average hourly earnings hit a new cycle high in February, but such heating labor costs have only modestly passed through to consumer inflation. Stronger productivity growth and historically high profit margins present some scope for companies to eat higher labor costs, and suggest inflation is unlikely to get out of hand anytime soon.
  • Producer prices also remain subdued, rising 0.1% in February, and 1.9% on a year-on-year basis. Through the volatility, core PPI inflation moderated to 2.3% year-on-year. The recent trend here has remained consistent with that seen from consumer prices, and further affirms that a renewed gain in inflation remains minimal.
  • The hard data for durable goods were fairly positive, considering the volatile readings on new orders from the ISM manufacturing index in recent months. Core orders and core shipments both notched 0.8% gains over the month. The headline was pushed up by a large gain in aircraft orders (non-defense and defense aircraft orders) were up 13.1%. Despite volatility in the orders component, uncertainty remains on how durable goods could be impacted in coming months due to the grounding of the Boeing 737 MAX aircraft.
  • US president Donald Trump acknowledged this week that China would likely prefer to conclude a trade agreement in advance of any meeting between Trump and China’s Xi Jinping in the wake of the failure to reach an agreement at the US-North Korea summit last month in Hanoi. China is said to be fearful that Trump could walk away from a deal if there are still unresolved issues when the leaders meet. The US president said he’s open to either finalising a deal in advance of Xi’s visit or negotiating some final points in person with him. Chinese state media reported on Friday that the two countries have made concrete progress on the text of the agreement.
  • Stocks posted solid gains for the week. The technology sector, which forms the largest segment of the S&P 500 Index, performed best, helped by strength in Apple shares due to enthusiasm over the expected announcement of a new video streaming service. Shares in graphics chipmaker Nvidia were also especially strong. Industrials lagged, weighed down by a sharp decline in Boeing shares following a second fatal accident involving its new 737 Max airliner. The strong performance of tech shares led to the outperformance of the tech-heavy Nasdaq Composite, which became the strongest major index for the year-to-date period. Having spiked the previous week, volatility, as measured by the Cboe Volatility Index (VIX), fell sharply and reached a five-month low.
  • US stocks were strong out of the gate for the trading week, helped by growing expectations that the US and China would soon reach a trade agreement. Investors seemed particularly encouraged by remarks from the head of China’s central bank at a news conference, in which he pledged that China would not devalue its currency to boost exports or to use it as a weapon in trade disputes.
  • China worries, the mixed US economic signals, and a softer-than-expected inflation reading on Tuesday sent the yield on the benchmark 10-year Treasury note under 2.6% in early trading Friday, its lowest level since a brief plunge at the start of January. Municipal bonds outperformed Treasuries for much of the week, helped by a light new issuance calendar.
  • In the US, the most important event is the FOMC meeting on Wednesday, where the target rate is expected remain unchanged at 2.25% to 2.5% with no major changes to the statement. The big question is what the Fed will signal about being ‘patient’. The Fed is expected also to lower its ‘dot’ signal to one rate hike in 2019 (down from two), also for 2020 and 2021. It would not be surprising if the Fed signals ‘one and done’. That said, the Fed has begun downplaying the importance of the dots, so be careful putting too much weight on them going forward.


  • The British Parliament undertook a series of votes to clear a path toward Brexit, which is scheduled to happen on 29 March, though how and when the United Kingdom’s withdrawal from the European Union will take place remains uncertain. Lawmakers rejected Prime Minister Theresa May’s proposed withdrawal agreement for a second time, though the margin of defeat was somewhat narrower this time. Parliament then voted against leaving the EU without a deal under any circumstances, at any time. Finally, a large majority voted to allow a short delay in the Brexit process, though any delay would require the unanimous approval of the 27 other members of the EU. May is expected to seek a third vote on the withdrawal agreement ahead of a European summit late in the week. The prime minister is said to be prepared to argue to euroskeptic legislators that if her deal is not approved, Brexit will face a protracted delay that would necessitate UK participation in upcoming elections for the European Parliament, a body the UK is trying to quit.
  • British house prices are growing at their weakest pace since 2011 as the prospect of Brexit weighs increasingly on the housing market, according to a survey published on Thursday. The Royal Institution for Chartered Surveyors (RICS) said its monthly house price balance sank to -28 in February (the lowest since May 2011) from -22 in January.
  • Britain’s economy picked up in January after a weak December but the bigger picture remained one of growth stuck in low gear ahead of Brexit, official data showed. The country’s giant services industry more than reversed its fall in December and there was a turnaround in manufacturing which has shown other signs of factories ramping up their stocks to hedge against the risk of a chaotic Brexit. Gross domestic product in January alone jumped by 0.5%, its biggest increase since December 2016, more than reversing a 0.4% fall in December.
  • The most important event is the EU summit on 21 and 22 March, where the EU leaders have to respond to both UK’s refusal of the new Brexit deal and proposal of extending Article 50. While EU leaders are clearly annoyed by Brexit, as they also have other issues to deal with, it is probably more problematic for the UK to kick the can further down the road. However, given the size of May’s defeat, EU leaders will discuss whether they prefer to offer a long extension.
  • The Bank of England is expected not to change policy or send new signals at its meeting concluding on Thursday. The Bank of England seems in no hurry to raise rates in the current environment with weaker UK data, slower growth in rest of Europe and high Brexit uncertainty.


  • Eurozone industrial production rose a stronger-than-expected 1.4% month-over-month in January. Manufacturing activity tends to be more sensitive to the economic cycle than output from services. Those countries reporting improvements in activity include Spain, the Netherlands, Italy and France while Germany continued to display weakness (-0.8%). Last week, the influential Ifo Institute lowered its 2019 German economic growth forecast to just 0.6% from 1.1% on weaker foreign demand for industrial goods.
  • The STOXX Europe 600 Index finished the week higher, boosted by improved US and China trade prospects and the declining probability that the UK would leave the European Union by the 29 March deadline. The week was dominated by Brexit politics as UK lawmakers voted on a series of legislation ahead of the looming deadline.
  • On Friday, the euro area March flash PMIs are due out. In February, the print showed a divergence between services and manufacturing, when manufacturing PMI fell to 49.3 from 50.5 while services rose to 52.8 from 51.2 in January. This divergence supports the two-sided story of rising domestic demand, which supports the service sector, while the global slowdown continues to weight on manufacturing.
  • In Germany, Tuesday brings the March ZEW index, where the focus is on further signs of stabilisation in business expectations, in spite of the falling trend of the current situation.


  • At the conclusion of the annual National People’s Congress, Premier Li Keqiang said that China has the capacity to reduce reserve requirements and interest rates in order to support economic growth. The country has been undertaking targeted forms of stimulus in recent months, but thus far has refrained from the large-scale stimulus efforts it has undertaken in the past as it attempts to rein in leverage.
  • Following the announcement of several kinds of measures to boost economic growth, many had hoped for the January/February hard economic data to show signs of a growth rebound, but that did not turn out to be the case. As usual, January and February data are published together to avoid distortions from the Lunar New Year holidays due to changes in the timing of the New Year celebrations from year to year.
  • Fixed investment growth performed best by increasing from 5.9% year-on-year in December to 6.1% year-on-year in January/February. This masks lower growth of investments by industrial companies but higher real estate investments. Retail sales growth was stable at 8.2%, but it was, after all, probably too early to have hoped for a boost from the recently announced VAT tax cuts. Industrial production growth slowed more than expected from 5.7% year-on-year to 5.3%, the lowest in a decade. All in all, growth seemed to be at best stable in the beginning of the year. That should ease fears of a collapse in Chinese growth but is not enough to convince market participants that China’s authorities once again are able and willing to do whatever it takes to keep growth high.
  • There are no key market movers in China this week.

Sources: T. Rowe Price, Reuters, MFS Investment Management, Danske Bank, Handelsbanken.