Economic Outlook – 19 March 2017


The Federal Reserve raised its short-term target rate 25 bps at its March FOMC meeting, with one dissent. Median projections were largely unchanged and still point to three hikes in 2017 and 2018. The target range now rests between 0.75% and 1.00%. The timing of the next rate hike remains elusive, but with political risks looming including raising the US debt ceiling and use of extraordinary measures, reignited Brexit talks, and the first-round for the French presidential election in April, some uncertainty is expected to seep in ahead of the June FOMC meeting.

Headline and core nominal retail sales grew only marginally in February, suggesting a below-trend pace in personal consumption in Q1. In part, the modest headline sales reading in February reflects a delay in tax refund payments for households that claim earned-income tax credits (EITC) or additional child tax credits (ACTC). According to the Internal Revenue Service (IRS), beginning this year, tax refunds for households that claim EITC or ACTC on their tax return were held until February 15 but did not arrive until the week of February 27.

Harsh winter conditions and unseasonably cold temperatures and the Northeaster will likely show up in seasonally-sensitive monthly indicators in March including average weekly hours, initial jobless claims, construction spending, retail sales, utilities output, housing starts and sales activity. In particular, the March storm marked the fifth episode over the past decade that fell on a workday during the nonfarm payroll (NFP) reference week. Indeed, headline NFP only slipped during one significant snowstorm, but the monthly difference in average weekly hours tumbled during each bout and the number of persons who usually work full time but had reduced hours due to bad weather also surged.

On Friday, PMI manufacturing for March is due. Given that Markit PMI was significantly below the level suggested by ISM and Empire in February, one could be tempted to call for an increase in PMI manufacturing in March in order to close part of this gap. However, it is worth keeping in mind that manufacturing activity has been increasing since last summer partly on the back of a recovery in the oil market. Without further increases in the oil price, the given level is probably as high as we are going to get. Also, there are signals of a deceleration in economic growth during Q2 this year, which should also cap growth in the manufacturing sector. Thus, the manufacturing PMI is expected to stay around the current level.

Core capital goods orders for February, which is due to be released on Friday too. Both new orders and value of shipments bottomed out in mid-2016 and they are expected to move higher in coming months.


As expected, the Bank of England (BoE) decided to keep the Bank Rate unchanged at 0.25% and the bond purchase programme was also left unchanged. However, the decision to keep the interest rate unchanged was not unanimous; Kristin Forbes voted against it and considered it appropriate to increase the Bank Rate by 25 basis points. The dissent came as the economy once again is performing on the strong side of expectations. Indeed, the BoE revised its estimate for Q1 GDP growth to 0.60% from 0.50%. However, the BoE still expects a slowdown in aggregate demand over the course of this year, and notes that the recent slowdown of retail sales is consistent with this expectation.

CPI inflation data for February on Tuesday. Despite increasing inflation, it is likely that Bank of England will remain on hold for a long time, as Bank of England puts more weight on growth/labour market data than inflation.

Retail sales data for February are released on Thursday. Retail sales make big swings from month to month and only account for around 6.00% of GDP. That said, markets tend to react to the release and the February data will be interesting, as retail sales have been weak in December and January suggesting slower private consumption growth. The question is whether this was just noise, or whether slower real wage growth due to higher inflation has begun to have affect consumption.


Reportedly, the ECB council discussed an early interest-rate increase at the last meeting. This has spurred speculation that monetary policy in the Eurozone is about to reach the turning point. An end to the ECB’s expansive monetary policy is likely later rather than sooner. In keeping with its announced strategy, the bank is likely to first taper bond purchases and then raise rates – unless core inflation defies expectations and rises faster than the ECB is predicting.

In the euro area, wage growth for Q4 2016 is due for release on Monday. Wage growth has been subdued in recent years despite a continuously falling unemployment rate. Wage growth figure is important in explaining core inflation and the low wage growth is one of the main reasons core inflation also remains subdued. While the ECB predicts sharply rising wage growth and core inflation in coming years, ECB seems to be too optimistic and the wage growth figures for Q4 is likely to remain broadly unchanged from Q3.

The euro area consumer confidence is due to be released on Thursday. In February, consumer confidence dropped to -6.2 from -4.8 in January. Still, consumer confidence is not expected to diverge from its increasing trend. The unemployment rate is still declining and as consumer confidence proved resilient to political turmoil regarding Brexit and the election of Donald Trump in 2016, the uncertainty regarding the upcoming European elections should have a limited impact on consumer confidence. Overall, hence consumer confidence is expected to be around -5.1 in March.


Seasonal fluctuation aside, the barrage of January and February data suggest that China’s fundamental is on the mend, putting economic momentum on solid footing in the first quarter and paving the way for sustained growth pace for the rest of the year. The activity indicators for January and February combined were overall solid and stronger than expected. The main surprise came from fixed investments, as growth increased from 8.10% YTD year-on-year in December to 8.90%. That corresponds to an even stronger uptick in the ordinary year-on-year growth rate from 6.50% to 8.90%. The growth surge was mainly driven by property construction investments, indicating that the property boom has not ended. The boom is expected to fade soon, as the government’s measures to cool the overheated property market take effect. Industrial production growth also increased more than expected whereas retail sales growth slowed. The latter was largely driven by dwindling car sales as the boost from a temporarily lowered tax on cars fades.


Sources: Haendelsbank, Danske Bank, Wells Fargo, HongLeong Bank.

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