Economic Outlook – 18 December 2016

US

The big news was the second rate hike out of the FOMC since 2006. FOMC committee members signaled that more rate hikes may be needed in 2017, which sent interest rates higher across the yield curve. A closer look at the “dot plot” showed six FOMC members look for three rate hikes next year, but six members think the Fed will hike less than three times.

US retail sales climbed a very slight 0.1% in November to start the holiday shopping season. More concerning was the subdued 0.1% growth in control group sales and a downward revision to the October control group sales data.

US consumer and producer price data for November released this week continued to support the case for firming price pressures going into 2017. The headline Consumer Price Index is now up 1.7% on a year-over-year basis with core inflation up 2.1%. The higher consumer price environment means the disappointing nominally reported retail sales report will likely translate into more modest real consumer spending growth in Q4.

US housing starts fell 18.7% to a 1.09 million-unit pace in November, which only partially reverses October’s 27.4% surge in new home construction. More forward-looking housing permit data showed that the downshift may persist in December.

US industrial production fell in November, as utilities output and manufacturing both contracted for the month. The pullback in manufacturing activity continues to reflect a challenging environment for manufacturers with the stronger US dollar and sluggish global growth environment. Both of these factors also appear to be holding back the pace of inventory building, which fell 0.2% in October.

Next week, the preliminary Markit Service PMI for December will be released on Monday. The consensus is for a move slightly higher to 55.0 in December, from 54.7 in November, indicating solid Q4 growth.

On Thursday, the preliminary capital goods (CapEx) orders for November are published, where it need to be confirmed whether shipments finally moved significantly higher. As the manufacturing sector is gaining momentum and orders have moved up lately, CapEx shipments are expected to start moving up soon.

UK

CPI inflation increased by 0.2% in November, pulling the 12-month growth rate up to 1.2% from 0.9% in October. 12-month growth in core inflation was 1.4%, up from 1.3% in October. The outcome was slightly higher than the consensus expectation, but in line with the Bank of England’s November forecast. Inflation was pulled up by petrol and food prices, which are factors that typically respond quickly to changes in the exchange rate. The volatile clothing prices also pulled up in November. Furthermore, it seems that inflation pressure continues to build rapidly as producer input price inflation rose to 12.9% in November, from 12.4% in October.

Weakening signs are starting to show in the labour market as employment actually fell by 6,000 in the three months to October. This is the first decline since mid-2015. The consensus expectation was for a rise in employment of 50,000. The unemployment rate held steady at 4.8%, but this was due to a larger drop in the labour force, caused by a rise in the inactivity rate. The timelier claimant count measure of unemployment rose by 2,400 in November, after an upwardly revised increase of as much as 13,300 in October. The development in claims now clearly indicates that the unemployment rate should soon start to rise.

Retail sales came in much as expected and registered a monthly rise of 0.2% in November, taking the 12-month growth rate to 5.9%. Excluding auto fuel, the 12-month growth rate was 6.6%, down from 7.5% in October. However, sales growth in November was pulled up by strong Black Friday sales, and the development in consumer confidence suggests sales growth should ease considerably ahead.

The most important data releases are the PMIs for December, which are due in the first week of January. The risk seems to be skewed towards a fall in PMI services due to lower services confidence, so a fall from 55.2 to 54.2 is likely, which still indicates solid growth in the service sector. PMI manufacturing is expected to rise to 54.0 from 53.4, as the euro area PMI manufacturing index rose.

EU

The flat Composite PMI was primarily attributable to a pick-up in the manufacturing PMI (to 54.9), while the service PMI (at 53.1) decreased a bit. Manufacturing PMI rose to the highest level since January 2014. While probably gaining some support from the recent weaker EUR and optimism about global growth (i.e. the US and China), there was little evidence of negative effects from the recent increased political uncertainty. The slight decrease in the service PMI likely took a cue from the recent weaker retail sales and the surge in inflation expectations. On the national level, especially the French PMI increased, with manufacturing PMI reaching a new high since 2011 while the service PMI also rose for another month, taking the Composite PMI to 52.6. A fall in German service PMI implied a slight decrease in the Composite PMI (to 54.8).

There seems to be little understanding that the inflation rate for the Eurozone could almost double in December to 1.1%. This will support the upward trend in inflation expectations even if the rise is attributable alone to the movement of energy prices. But the ECB’s joy is unlikely to last if the core inflation rate will not pick up noticeably again in 2017, contrary to the ECB’s hopes. In other words, an end to ultra-expansionary monetary policy is still not in sight.

German IFO expectations are scheduled for release on next Monday. German survey indicators including the IFO expectations have signaled strong GDP growth in Q4 16. The tendency continued with the German ZEW figures for December, where the current situation figure was the highest since September 2015, while the expectation remained at 13.8.

On Wednesday the euro area consumer confidence figure is due to be released. Consumer confidence has remained surprisingly high and resilient to the political turmoil related to Brexit and Donald Trump. However, with the slower employment growth and increased oil price, downside risks may drag on December consumer confidence.

China

China’s IPI and retail sales growth surprised on the upside in November as dwindling headwinds uplifted domestic demand in the final quarter of the year. Fueled by increased production in power and heat ahead of the winter, IPI rose at a slightly quicker pace of 6.20% year-on-year (YOY) last month (October: +6.10% YOY). Retail sales quickened to 10.80% YOY after growing 10.00% YOY in October, affirming a pick-up in domestic demand.

In addition, fixed assets investment sustained a 8.30% YOY growth in January- November. The rather upbeat slew of November data, including an earlier release indicating positive exports growth for the first time in eight months, showed that China is poised to grow between 6.50% to 7.00% this year.

China is still battling a major exodus of capital. As expected, the government has responded by reversing recent steps to deregulate capital movements. Since the beginning of this month, companies face the prospect of no longer being able to transfer dividend payments abroad. These measures may help to apply the brakes in the short term, but in the longer term they will deter potential investors. In the medium term, further capital controls seem more likely than a return to the cautious deregulation of recent years.

The main release over the next two weeks in China will be PMI manufacturing for December released on New Year’s day. PMI from both the official NBS and the private Caixin index have been strong lately. While some slowing of the Chinese economy in 2017 is possible, the economic growth is expected to remain strong in the short term, as a strong housing market and infrastructure boost this year have yet to peak. There are early signs that the regional tightening towards housing is starting to work.

 

Sources: Haendelsbank, HansLeong, Wells Fargo, Danske Bank, Commerzbank.
2017-05-01T16:26:28+00:00