Economic Outlook – 2 April 2017


Comments from a few top Fed officials last week suggest that the path of policy tightening may be steeper than expected. Two hawkish Fed officials suggest that more than three hikes may be possible for this year. Agreeing with Rosengren, Fed Williams said that he “would not rule out more than three increases”. Fed Dudley, Fischer and George were also pointing to brighter economic prospect this year.

US household sentiments was the highest in sixteen years amid more positive outlook about the economy coupled with rising stocks and firm jobs gains. Manufacturing and services PMI were lower for a second straight month but remained above the 50 threshold in March. The economy grew at a more moderate but solid pace of 2.10% quarter-on-quarter in Q4 after robust growth of 3.50% quarter-on-quarter in Q3.

Quantitative measures of output from the US BEA, which also produces the quarterly GDP figures, haven’t look great. The Atlanta Fed GDPNow model, which gives less weight to qualitative surveys, projects growth of under 1.00% for Q1. Weak figures for real consumption through February, and mediocre tax receipts reported by the Treasury, have weighed on this estimate.

After suffering a stinging defeat in his first major legislative initiative, President Trump is likely to turn his focus to taxes in the hope of unifying the Republican congressional caucus. That may prove easier said than done, as the approximately 1 USD trillion in savings over 10 years that was expected from the repeal of Obamacare and its replacement with the American Health Care Act (AHCA) is now off the table. Trump must now decide whether to risk further political capital by advocating an ambitious comprehensive tax reform plan or to play it safe and advocate a smaller programme of tax cuts. Should negotiations drag on, markets may not receive the fiscal stimulus that they’ve been expecting this year. Some fear stimulus could be smaller than expected and later in arriving, perhaps not until 2018.

A leaked draft of a US Department of Commerce memo showed that the Trump administration will seek quite modest changes to NAFTA (the North American Free Trade Agreement), countering more bombastic proposals made on the campaign trail by President Trump prior to his election. Trade jitters have been receding in recent weeks, but investors will keep a close eye on the first meeting between Trump and Chinese President Xi Jinping in Palm Beach, Florida, on 6th and 7th of April.

The labour market report for March on Friday. The labour market has been in good shape over the past two months and this trend is likely to continue. The service sector is benefiting from the general economic upturn driven by domestic demand. Manufacturing employment has begun to recover and likely to continue, as both ISM manufacturing and Markit PMI continue to stay at solid levels. However, the March numbers will probably be affected significantly by the very harsh weather conditions in the middle of March. A total of 160,000 new jobs is the new target in March of which the service sector provided 160,000 and manufacturing 15,000. Weather conditions are likely to have affected construction employment primarily, which likely fell in March.

On Monday, ISM manufacturing for March is due. ISM manufacturing has soared over the past couple of months, emphasising that there is progress in manufacturing. In the same period, there has been a divergence between ISM and PMI manufacturing emerge. Based on this, one would argue that ISM manufacturing could be in for a fall. However, regional manufacturing indices continued rising in March. Thus, there are mixed signals concerning the March ISM figures.


The United Kingdom formally began the process of withdrawing its European Union membership last week by triggering Article 50 of the Lisbon Treaty. The UK and EU now enter into a two-year negotiation to iron out such thorny issues as the legal status of EU citizens residing in the UK and that of UK citizens living within the EU, “hard” or “soft” borders and how (and how much it will cost) to extract the UK from the EU’s finances. EU president Donald Tusk said a free trade agreement can only be discussed once sufficient progress has been made on the divorce process. Also last week, the Scottish parliament voted 69–59 to authorise a second referendum on independence from the UK. Scotland voted to remain in the EU in last June’s Brexit referendum.

UK household borrowing decreased in February as inflation hit a three year low. Net borrowing dropped £ 0.2 billion to £ 1.4 billion as personal loans, overdraft and car loans increased 11.10% while credit card debt climbed 9.30%.

The PMI service index on Wednesday will attract attention after it declined in both January and February, suggesting GDP growth has slowed in Q1 2017 to around 0.30% to 0.40% quarter-on-quarter down from 0.70% quarter-on-quarter. The service confidence indicator suggests the PMI service index could have moved up marginally to 53.7 in March, which, however, would not change the impression that growth slowed at the beginning of 2017. PMI manufacturing is due out on Monday and given the corresponding index for the euro area continued higher in March, an increase to 55.2 is expected.


The annual HICP inflation in the Eurozone decreased more than expected to 1.50% in March, from previously 2.00%. Expectations were likely lowered yesterday with the release of weaker-than-expected German and Spanish CPI numbers. The decline marks an end to the significant positive base effect in the preceding months. The reversal of the base effect was most pronounced this month and is likely to be only moderate in the coming couple of months.

The unemployment figure for February is due for release on Monday. From its January level of 9.60%, unemployment is expected to fall to 9.50%, continuing its steady decline since 2013. Business sentiment suggests that unemployment will continue declining as the PMI employment indicator especially within services showed strength in January and February.

Retail sales figure for February is due out. After three months of monthly declines, retail sales are likely to show a modest monthly increase in February of 0.50%. While the labour market continues to show progress, consumer confidence declined in February and consumption growth is projected to slow in 2017, as there will be headwind from weaker real wage growth due to the pickup in inflation. Based on this, retail sales should not be growing significantly in coming months.


Hong Kong exports rose 18.20% year-on-year to HKD 241.70 billion in February after a 1.20% year-on-year drop, in January. Shipments to China, Japan and Taiwan drove increase in headline exports last month and after February’s low base and seasonal distortion, more moderate exports growth is expected in March. On the other hand, Singapore’s industrial production climbed 12.60% year-on-year in February, building on a revised 3.80% year-on-year output growth in January. IPI print echoed the improvement in non oil domestic exports number due to seasonal distortion but is unlikely to sustain a double digit increase in March.

The Caixin PMI for the manufacturing sector on Monday. The official PMI manufacturing on Friday surprised slightly on the upside and pointed to continued strong growth in March. A rise to 52.0 is expected from 51.7 in February. A strong housing market kept the Chinese growth picture upbeat at the beginning of 2017 but exports are providing strong support currently due to the weaker yuan and global recovery.


Sources: Haendelsbank, Danske Bank, HongLeong Bank, MFS Investment Management, CIBC.

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