Economic Outlook – 20 January 2019


  • The steady flow of US macroeconomic data that markets and the US Federal Reserve rely on in order to gauge the health of the nation’s economy has been somewhat disrupted by the partial US government shutdown. For instance, US retail sales data for the critical holiday selling season have been delayed by a lack of funding for the US Department of Commerce. This week’s personal income and spending data may be delayed as well. However, data continues to flow from departments that were funded earlier in the cycle. The interruption makes the Fed’s job that much more difficult as it interprets conflicting economic signals. Federal Reserve Bank of New York president John Williams noted Friday morning that while economic tailwinds are fading, he forecasts that growth will come in a range between 2.0% and 2.5% this year, a performance he sees as “consistent with a healthy, growing economy”.
  • The Trump administration now estimates that the partial government shutdown will subtract 0.1% from the pace of economic growth each week, doubling its earlier forecast of a 0.1% drop every two weeks, taking into account ripple effects on government contractors. Surprisingly, the White House forecast is more aggressive than Wall Street’s. With the first quarter of the year generally the weakest for GDP growth, an extended shutdown could put growth into negative territory for the quarter.
  • The shutdown is exacting a toll on those least responsible for it. Anecdotes continue to highlight the hardships that furloughed federal employees are experiencing. These include workers turning to payday loan companies and food banks, while also taking on side hustles, such as driving for Uber, in order to make ends meet. Although federal employees will eventually be paid for lost wages, the near-term pain is clearly taking a toll.
  • The US housing market has been an area of concern in recent months, as buyers and builders have grappled with higher mortgage rates and costs that have led to a further deterioration in affordability. Homebuilder sentiment plummeted in December, sparking fears that the slowdown was set to intensify this year. While the NAHB index remains well-below its level this time last year, builders reported better conditions in January with the index edging up two points.
  • The postponed release of the December retail sales report – arguably the most important retail report of the year – comes as U S growth prospects look increasingly reliant on consumers. Private retails sales reports painted a strong picture of spending in December. Redbook same-store sales, which closely track core retail sales, at physical stores were up were more than 6.0% every week in December.
  • The Empire and Philly Fed surveys for January were mixed on the headline, but details pointed to slower activity in the factory sector. The headline of both surveys are derived from independent questions on business activity; constructing each index like the ISM (equal weighting of production, new orders, employment, supplier deliveries and inventories) showed further slippage.
  • The ISM and regional PMIs remain in positive territory, however, and hard data suggest industrial output is hanging in there. Overall industrial production rose 0.3% in December, while manufacturing output rose 1.1% amid a nearly a 5.0% jump in autos production. With global growth easing and trade/general policy uncertainty elevated, it would not be surprising to see manufacturing production ease up over the next couple of months.
  • US stocks recorded their fourth consecutive week of positive returns and built on their strong start to 2019. The gains pulled the large-cap benchmarks out of correction territory, or within 10.0% of their recent highs, but the Nasdaq Composite Index and the smaller-cap benchmarks remained below that threshold. Within the S&P 500 Index, financials shares led the gains, helped by better-than-expected earnings reports from some large banks. The defensive utilities and consumer staples sectors lagged the overall market, with the former also dragged lower by a bankruptcy announcement from Pacific Gas and Electric (PG&E) due to expected liabilities from the recent California wildfires. Trading volumes were somewhat muted, especially early in the week, and volatility, as measured by the Cboe Volatility Index (VIX), continued its recent downward trend.
  • The quarterly earnings reporting season began in earnest during the week, with reports from 35 S&P 500 companies expected, according to Thomson Reuters. Analysts polled by both Reuters and FactSet have recently lowered their estimates and expect the earnings growth rate for the S&P 500, as a whole, to have declined by roughly half in the fourth quarter from its 25.0% year-over-year pace earlier in the year. Analysts generally expect earnings to grow only modestly in the first quarter of 2019, when the impact of the December 2017 corporate tax cut on year-over-year earnings comparisons rolls off.
  • Longer-term bond yields rose for the week, as favorable economic data and continued equity gains lured investors away from the perceived safe haven of Treasuries. The municipal market started the week subdued, with most of the week’s activity centered around a USD$5 billion new issuance calendar. Most investors seemed to be patient in waiting to invest their January coupons, according to the firm’s traders, and the low activity in the market seemed to be centered around short-term issues. General obligation bonds from the Commonwealth of Puerto Rico struggled after an announcement that the federal oversight board is seeking to void nearly $6 billion worth of bonds issued in 2012 and 2014. The board contends that the bonds were issued in violation of the Commonwealth’s constitutional debt limits.
  • The Markit PMIs are due this week and represent the most important releases given the focus on an economic slowdown, in particular in the manufacturing sector.
  • The Fed’s blackout period, where the FOMC members are no longer allowed to speak publicly, starts on Saturday and lasts until the FOMC meeting on 30 January.


  • It has long been a foregone conclusion that the treaty negotiated between the United Kingdom and the European Union governing the UK’s exit from the EU could not pass the UK parliament. But the scale of the deal’s defeat was truly breathtaking. The measure lost by 230 votes in the House of Commons, the largest margin in modern British history. Prime Minister Theresa May faced a confidence motion following the defeat but managed to survive. Now she must put forward a “Plan B” by Monday. In the wake of the vote, May noted that it is clear what the House of Commons does not support but still unclear what it does. With the clock ticking toward 29 March, in the absence of consensus the UK risks a no-deal Brexit, which most observers on both sides of the English Channel fear could be a disaster. The government aims to vote on whatever plan May unveils on Monday by 29 January.
  • British shoppers cut back on spending in the three months to December for the first time since last spring, adding to evidence of a consumer slowdown as Brexit approaches. Retail sales volumes fell 0.2% in the fourth quarter after a 0.2 % rise in the three months to November, the Office for National Statistics (ONS) said.
  • Lenders in Britain expect demand for mortgages and credit card lending to fall by the greatest extent in several years, a Bank of England survey showed on Thursday, adding to signs of an economic slowdown before Brexit. The Bank of England’s gauge of demand for mortgage lending over the next three months fell to -17.5 in the fourth quarter of 2018 from 0.2 in the third quarter, its lowest level since the end of 2010. Its measure of demand for credit card lending over the next three months fell to -20.7 from -7.2, the weakest reading since the quarterly Credit Conditions Survey started in 2007.
  • The most important event is on Monday, when Prime Minister Theresa May is set to put forward a motion on her Brexit plan B to the House of Commons. It is unknown what the motion will include but is amendable, meaning members of parliament have a chance to tie May’s hands by showing a credible alternative to the current withdrawal agreement.
  • The labour market report is due on Tuesday but the market reaction will probably be limited, as Brexit dominates everything and the Bank of England is on the sidelines until there will be further clarification and confirmation that the market turmoil was temporary and the global economy will rebound.


  • The German economy expanded at a slower-than-expected pace in 2018, growing 1.7%, the most sluggish rate since 2013. That’s down from 2017’s relatively robust 2.2% pace. German growth has faced headwinds over weaker demand from China, emerging markets and the ongoing emissions woes faced by German automakers. A Reuters poll shows that economists expect the European Central Bank to wait until this year’s fourth quarter to hike interest rates, having previously vowed to hold them steady through the summer. The same poll conveys that the median probability of a recession in the next two years has risen to 35.0% from 30.0%.
  • European stocks rose in line with global markets this week amid signs that the US and China could resolve trade tensions and an increased likelihood that Brexit will be delayed after UK Prime Minister Theresa May’s Brexit proposal was overwhelmingly defeated in Parliament.
  • After the recent ECB meeting where the Governing Council decided to end net asset purchases, new policy signals are not warranted at this week’s ECB meeting. The debated growth risk assessment is expected to take centre stage. At the last meeting, the ECB coined the growth risk assessment as broadly balanced but moving to the downside. Since then, there has been a string of disappointing data. This is also visible in the surprise indicator, which points to lows around the sovereign debt crisis.
  • On Tuesday, the Euro area and German ZEW figures will be released. In both the EUR area and Germany, the current situation index has been falling over the past three months and this trend is expected to continue in January, especially in light of the recent Brexit development.
  • On Thursday, both German and euro area PMI are due. Euro area service and manufacturing PMIs fell in December to their lowest levels since 2016, fanned by the headwinds from weak Q3 data and new political risks in France. Furthermore, as there is ongoing weakness in China, as well as weak external demand and fragile risk sentiments in financial markets, there could be downside risks for both euro area and German PMIs.


  • US equities jumped last Thursday afternoon on a Wall Street Journal report that US Treasury secretary Steven Mnuchin had proposed lifting some or all tariffs on China in order to calm markets and give Beijing the incentive to make deeper concessions to end the months-long trade conflict. However, the idea does not have the backing of US Trade Representative Robert Lighthizer, a trade hard-liner who is leading the negotiations with China, nor has it been approved by US president Donald Trump. Later on Thursday, the US Department of the Treasury played down reports that the US might hold out an olive branch to China. Against this backdrop, Chinese vice premier Liu He is scheduled to travel to Washington at the end of this month for another round of formal negotiations.
  • Last Monday, China reported that passenger car sales fell in 2018 from the prior year – the first annual decline since 1990 – as economic uncertainty curbed consumer spending. The drop in car sales was discouraging news for many US and European carmakers that had counted on China to drive many years of unbroken growth. This year, China reportedly plans to lower its official annual growth target to a range of 6.0% to 6.5%, down from roughly 6.5% in 2018, as it copes with weakening domestic demand and the impact of US tariffs.
  • In China this week focus will be on Q4 GDP and data for industrial production and retail sales for December. The numbers are expected to confirm the slowdown of the Chinese economy into the end of 2018 – as also indicated by the weak PMI data in recent months.

Sources: Wells Fargo, T. Rowe Price, Reuters, MFS Investment Management, Danske Bank.