Economic Outlook – 19 January 2020


  • The first major economic indicator to hit the wire in 2020 was the ISM manufacturing report, which showed the fastest pace of contraction since the height of the 2008 recession. So when the ISM non-manufacturing report was published earlier last week, financial markets were relieved to see that barometer of the service sector rise to 55.0. That is the fastest pace of expansion in four months.
  • Housing starts surged 16.9% to a 1.61 million-unit pace, the highest level since December 2006. Big jumps like this are not unusual for December. The seasonal adjustment factors are huge and unseasonably mild weather, as this past month, can often lead to exaggerated jumps in the seasonally adjusted data. There is also a tendency for multifamily starts to surge at year-end, as apartment developers race to begin projects ahead of new legislative mandates.
  • Single-family starts jumped 11.2% to a 1.06 million-unit pace, the highest since July 2007. Multifamily starts surged an even stronger 29.8% to a 553,000-unit pace, a 33-year high. Permits, which are less impacted by temporary market distortions, fell in December, with single-family down 0.5% and multifamily down 9.6%. The level of construction for both single-family and apartments, however, has been strong for the entire second half of 2019, which means that even if activity stabilizes at recent levels, sizable year-on-year gains are still possible to start 2020.
  • While industrial production fell 0.3%, that was entirely due to unseasonably warm weather dragging on utilities output. Manufacturing output exceeded expectations, rising 0.2%. Aside from the GM strike and Boeing’s issues with the 737 MAX, the factory sector is showing signs of stabilizing amid a nascent rebound in global industrial output and some more positive developments in trade policy. Domestic manufacturing surveys are already beginning to reflect this, with the New York Fed (4.8 vs.3.6 expected) and Philly Fed (17.0 vs. 3.8 expected) both rising more than expected in January. The improvement in the regional surveys should eventually show up in the national ISM survey.
  • The NFIB small business index dipped slightly to 102.7 in December, but owners generally remain optimistic and expect improved economic conditions in coming months. The trade deal will likely boost confidence going forward, while impeachment proceedings may weigh on the January data. Owners are still seeing solid sales, which was reflected, to some extent, in the December retail sales report, which showed sales up 0.3%. Downward revisions took some of the shine off the report and meant that 2019 holiday sales were up 4.1% YoY. Final data for the holiday period are still a few months away.
  • Inflation, meanwhile, remains relatively tame. The CPI rose 0.2% in December, pushing the year-over-year change to 2.3%. The core CPI is also up 2.3% year-on-year. The Fed’s preferred measure (the core PCE deflator) remains stuck at 1.6%. Low inflation provides the Fed some leeway to maintain an easier monetary policy in place, and expect the Fed to remain on hold this year.
  • Federal Reserve Bank of Dallas President Robert Kaplan warned that recent US Federal Reserve liquidity injections are leading to an increase in investor risk-taking. Kaplan said he is sympathetic to the concern that balance sheet expansion is supportive of higher valuations and risk assets. He cautioned that the central bank should be mindful of those concerns as it considers further action. As of Thursday’s close, the benchmark S&P 500 Index is up nearly 3.0% so far in 2020, adding to strong 2019 gains.
  • The Swiss franc surged against the dollar and the euro after the US Treasury Department said it had added Switzerland to a list of countries whose currency practices and macroeconomic policies gave it cause for concern. The Swiss central bank has bought large amounts of foreign currencies in recent years to dampen demand for the Swiss franc, seen as a refuge by investors during times of uncertainty. The Swiss finance ministry responded in a statement that Switzerland does not in any way engage in manipulation of its currency to gain an unjustified competitive advantage.
  • A pair of important trade deals reached major milestones as US President Donald Trump and Chinese Vice Premier Liu He signed phase one of a trade agreement which mandates that China boost imports from the United States by approximately $200 billion above 2017 levels (a high water mark for US exports) over the coming two years. Progress was made on dispute resolution, intellectual property protections and opening China’s financial markets, but much work remains to be done to secure a phase two agreement in which the US will seek to curb China’s subsidies to favored industries and its aggressive industrial policy. Significant tariffs will remain in place while the negotiations continue toward a comprehensive agreement. Also, the US Senate overwhelmingly approved the US-Mexico-Canada Agreement. The deal, which has already been approved by the Mexican parliament and will be signed by the President Trump soon, awaits ratification by Canada.
  • Most of the major indexes moved to record highs, as investors welcomed the signing of a phase one US-China trade deal and some positive economic signals. The small-cap benchmarks regained market leadership for the first time in a month, although the Russell 2000 Index remained roughly 2.0% below its August 2018 peak. The small utilities sector led the gains, while energy stocks trailed the rest of the market.
  • The investment-grade corporate bond market was mostly focused on earnings releases. The primary calendar was quiet during the first half of the week due to earnings-related blackout periods. However, a few large deals on Thursday caused the week’s issuance volume to exceed expectations. The firm’s investment-grade corporate bond traders reported healthy demand for new deals.
  • In the US, January PMIs will be released on Friday and will provide some important clues on how the global economy (and especially the manufacturing sector) has started 2020.


  • Slumping economic growth, below-target inflation and dovish comments from several members of the Bank of England’s monetary policy committee have raised the odds of a rate cut when the committee meets next on 30 January. Futures markets are pricing in a 73.0% chance of a rate cut, but a bounce in purchasing managers’ indices this week could cool near-term speculation. Much of the data filtering through the market of late were collected before the United Kingdom’s general election on 12 December, during a period of heightened political uncertainty. Now that most of that uncertainty has been alleviated, the figures could stabilize, suggesting the BOE may want gather additional data before making a move.
  • The UK consumer price index rose 1.3% in December from a year earlier, the least since November 2016. The core inflation rate slowed to 1.4%. Inflation has been below the BoE’s 2.0% target since August. Separately, UK gross domestic product (GDP) grew by 0.1% in the three months to November 2019 due to weakening services and falling production.
  • British consumers failed to increase their spending for a record fifth month in a row in December, adding to signs of economic weakening that might prompt the Bank of England to cut interest rates this month. Official data showed sales volumes fell by 0.6% from November, defying the median forecast for a rise of 0.5% in a Reuters poll of economists. Sales in monthly terms have not risen since July, the longest such run since records began in 1996, the Office for National Statistics said, adding that food sales fell by the most in three years.
  • The January PMI signal will be closely watched particularly in the UK, where another weak reading of the monthly GDP print last week (indicating annual growth of a mere 0.5%; the lowest since the European debt crisis) fuelled market expectations of a Bank of England rate cut in the coming months. Markets are currently pricing a 75.0% probability of a cut at the 30 January meeting.


  • According to a preliminary estimate from the Federal Statistics Office, German GDP expanded 0.6% in 2019 versus 1.5% in 2018. This was the slowest growth rate since 2013 and below the average of 1.3% of the past 10 years, although the economy has expanded for 10 consecutive years. Growth in 2019 was mainly supported by consumption expenditures and gross fixed capital expenditures in construction. On the production side, services and construction recorded mainly high growth rates, but manufacturing slumped primarily due to an auto industry slowdown. Exports also grew at a slower pace than in previous years, rising only 0.9%.
  • At the ECB meeting on Thursday all eyes will be on the official launch of the monetary strategy review. While the clouds on the euro area growth horizon have cleared somewhat and core inflation has shown some robustness as of late, it is too early for ECB to strike a more upbeat tone on its growth risk assessment at the meeting.


  • GDP growth in China was stable in Q4 compared to Q3, at 6.0 percent year-on-year, in line with the consensus estimate. Thus, GDP growth has stabilised following a gradual decline in recent years. The stabilisation is likely a consequence of the authorities’ stimulus efforts to support growth, but also the recently signed phase one trade deal with the US. The deal removes some of the uncertainty that has dampened for instance firms’ willingness to invest, as the risk of Trump announcing a new round of tariffs on Chinese imports has receded. But even though the deal should ensure that no further tariffs are imposed, the majority of already-imposed tariffs will remain.
  • In a very heavy week for data releases, there was little to spoil the positive mood ahead of the Chinese Lunar New Year. Industrial production exceeded expectations, climbing 6.9% year-on-year in December from 6.2% in the prior month. There was also better news on trade, as December exports rose 7.6% from the year before, the first such increase since July. Money and credit also picked up a bit in December, with total social financing increasing by ¥2.103 trillion. Net government bond issues rose from ¥172 billion in November to ¥374 billion in December, indicating that fiscal easing has restarted. Although the credit data surprised positively, annual growth in M2 money supply remains below that of nominal GDP, while question marks remain over the declining efficiency of China’s credit transmission.
  • The PBoC will announce its new policy rate (Loan Prime Rate) on Monday, which is widely expected to remain unchanged. China is increasingly scaling down on further easing, preferring instead to make use of other discretionary measures to improve the financing of the private sector.

Sources: T. Rowe Price, MFS Investment Management, Handelsbanken Capital Market, Danske Bank, Wells Fargo, TD Economics, Reuters.