Economic Outlook – 21 February 2016


Risk assets were in demand again this week after several weeks of being shunned. Global markets will close up this week and US Treasuries sold off although low yields still signal market unease. Oil is holding on to last week’s rally as the dollar weakened marginally against its major trading partners.

The FOMC minutes from its January meeting confirms that global growth concerns and financial market turmoil will likely act to slow the pace of rate normalisation. Having said that, the US economy remains on a solid expansionary path, and the Fed is expected to deliver two more quarter-point hikes later this year.

US data for this holiday week did not materially change the outlook. If anything, the inflation report this morning reaffirms the FOMC’s intent to commence its tightening cycle later this year.

Industrial production rebounded 0.9% in January. More than half of the increase can be traced to utilities, but manufacturing production rose 0.5% and the decline in mining took a pause. Inflation measured by both the Consumer Price Index and Producer Price Index was stronger than expected in January and show a clear pickup in core inflation. The Leading Economic Index for January edged down 0.2%, but some of the biggest headwinds last month— stock prices and jobless claims – looked better this week.


In the euro area the week starts with PMI figures for February, where the concern is whether the large decrease in January continues.

In general the decline is expected to continue, although at a slower pace and with regional differences. For the manufacturing PMIs, we look for the largest decline as the stronger euro is a headwind to exports. In this regard, the new orders component must be monitored and to see whether the large drop in January continues.

Euro area M3 money supply and bank lending figures are released on Thursday. Growth in M3 has in the past months started to slow a bit, which could indicate that economic growth will slow in the last part of H2 16. The bank lending figures could also attract some attention in light of the current focus on bank credit.


The rate of inflation, CPI rose by 0.3% in January, compared with a 0.2% rise in December 2015. This is the third consecutive month of small increases, with the rate in January being the same as it was in January last year. The main contributors to the rise in the rate were motor fuels, and to a lesser extent food, alcoholic beverages and clothing.

Labour market statistics for October to December last year continue to show robust figures. During the period, the number of people in work was 521,000 more than for the same period 2014. The employment rate (the proportion of people aged from 16 to 64 who were in work) was 74.1%, the highest since comparable records began in 1971.

Strong retail sales in January showed that consumers continue to be the main driver of the economy. Year-on-year estimates of the quantity bought in the retail industry showed growth for the thirty-third consecutive month, increasing by 5.2% compared with January last year boosted by a higher demand for clothing and computers.

In January, the UK posted the largest budget surplus for any January since 2008, but Chancellor of the Exchequer, George Osborne may still struggle to meet his full-year fiscal forecast. Revenue rose 3.4% and spending grew 2.8%. In the first 10 months of 2015-16, the shortfall was GBP 66.5 billion. It means the deficit will need to come in at GBP 7 billion or below in the final two months to avoid over-shooting the full-year target of GBP 73.5 billion.


The governor of the People’s Bank of China gave an interview with some comforting news, so the re-opening of markets after the Lunar New Year went smoothly, which supported sentiment across the globe.


There was the agreement between Russia and Saudi Arabia to limit oil production at the January level. The oil market liked the news but some cautiousness, not to say scepticism is warranted.


Sources: Danske Bank, TD Economics, BNP Paribas, Handelsbanken, Wells Fargo.