Economic Outlook – 19 February 2017


Federal Open Market Committee (FOMC) Chair Yellen went to Capitol Hill for her semiannual testimony. While uneventful for the most part, clear signals were sent that the FOMC intends to hike rates at a slightly faster pace this year. With respect to understanding when the FOMC may decide to halt reinvestments of maturing portfolio holdings, Yellen indicated that to consider reducing the size of the Fed’s balance sheet, the committee wants to ensure that “the economy is on a solid course and the federal funds rate has reached levels where we have some ability to address weakness by cutting it.”

Retail sales data for January posted an impressive 0.6% gain on the back of a 1% rise in December. Control group sales, which feed into the calculation of GDP, rose 0.4% to start the year. Some of the gain, however, is likely due to higher inflation boosting the nominally reported sales figures. Headline CPI rose 0.3% in January, taking the year-over-year rate of consumer inflation to 2.5%. Core consumer inflation edged higher to 2.3% on a year-over-year basis.

Housing starts fell 2.6% in January to a 1.25 million units pace after posting an impressive 11.3% gain in December. The more volatile multi-family starts pulled back for the month while single family starts rose 1.9%. The forward-looking housing permits data indicated that the downshift is likely temporary. The NAHB/Wells Fargo Housing Market Index fell in February suggesting that some of the post-election jump in builder sentiment has begun to fade.

Industrial production fell 0.3% in January as a drop in utilities output weighed on the index. The plunge in utilities output due to the warmer weather for the month was the largest declines since January of 2006. Manufacturing output rose 0.2% in a sign that the sector was slowly improving. That said, the industrial sector of the economy continues to face headwinds from a strong US Dollar and soft global demand.

Business inventories rose 0.4% in December in an early sign that businesses are beginning to feel a bit more optimistic about future growth prospects. Total sales were up 2% with gains across the supply chain. Inventories have boosted growth over the last couple of quarters but given that the pace of sales and inventory building appear to be more in line, they are expected to have a negligible effect on GDP growth this year.

US service and manufacturing PMIs for February are due to be released on Tuesday. Both PMIs are at levels indicating a tailwind for the overall economy and have furthermore been rising steadily since late summer 2016. However, Chinese manufacturing PMI decreased slightly in January and a slowdown in China may potentially spill over to US manufacturing PMIs. On the other hand, the regional PMIs for manufacturing were strong and hence manufacturing PMI is expected to increase in February.

On Wednesday, the FOMC minutes from the February meeting are due out. The statement did not contain much interesting news, but the minutes may enlighten us on the different stances within the FOMC.


UK labour market numbers showed that employment had increased by 38,000 in the three months to December and the labour force increased by 31,000, leaving the number of unemployed down by about 7,000. The unemployment rate held steady, at 4.8%. The more timely claimant count figure fell by a surprisingly large amount, 42,000, in January. The December number was revised to a drop of 20,000, from the previous estimate of a fall of 10,000. However, the ONS encourages people to be cautious when looking at this month’s numbers, as there are currently problems surrounding the seasonal adjustment of the data. On the more disappointing side, average weekly earnings showed a year-on-year growth rate of 2.6% in January, down from 2.7% in December. That was lower than the consensus expectation of 2.7%.

Focus is on the debate on the Article 50 debate in House of Lords, which begins next week on Monday. The Lords are not expected to delay the bill and the UK remains on track to trigger Article 50 by the end of March.

The second estimate for UK GDP growth in Q4 is due out, and the expenditure components such as private consumption and investments in Q4 are included for the first time in this release. While growth continued at the same pace in H2 2016 after the EU vote, GDP growth is expected to slow down this year.


Risk premium on French government bonds are back up to the levels seen during the 2012 crisis. But even if Marine Le Pen does not win the French presidential election, the real problem of monetary union would remain: different approaches to economic and monetary policy. Radical Eurosceptic are no longer in the mood for compromise, and are pushing to restore full national control over economic and monetary policy. More tumult lies ahead for the Eurozone, with no end in sight for the ECB’s loose monetary policy.

The consumer confidence for February is due to be released on Monday. Consumer confidence proved very resilient to political turmoil stemming from Brexit and the election of Donald Trump last year. Weaker consumer confidence is expected in February in line with the turn in other sentiment indicators. That said, as the unemployment rate continues to decline, consumer confidence is expected to remain at a high level, thereby pointing to continued solid growth in private consumption.

On Tuesday, PMI figures for the Eurozone are due out. Overall, PMIs are expected to see a downward correction in line with the fall across other survey indicators (IFO and ZEW expectations). In manufacturing, recent months have shown an increase in output, but the order-inventory balance indicator has weakened and points to a downward correction in manufacturing PMI. In service, a decline is expected in line with the other survey indicators, although the strong business expectations reported in January could help withhold a decline.


China exports expanded 7.90% year-on-year to USD 182.76 billion in January followed an annual drop of 6.20% year-on-year in December. Quicker exports were driven by US, Japan, ASEAN and European Union. Imports surged by a double digit pace during Chinese New Year (+16.70% year-on-year). Trade surplus rose to a one year high of USD 51.35 billion and further upside bias is expected on trade performance going forward as downside risks dwindled. Adding to signs of mounting price pressure, CPI accelerated by 0.40 percentage points to increase 2.50% year-on-year in January, marking its quickest growth since November 2013.

The release of interest in China next week will be property prices for January. After sharp price increases in 2016, recent tightening measures have worked to dampen house price inflation.


Sources: Commerzbank, Haendelsbank, Danske Bank, Hong-Leong Bank.