Economic Outlook – 22 April 2018

US

• Retail sales were above consensus and increased 0.6% in March, reversing the recent three-month string of declines. Winter weather in the Northeast, which was widely expected to have a greater adverse effect, was limited. The improvement was driven by auto sales, health and personal care and non-store retailers’ sales. Control group sales, which are used to calculate GDP, were relatively strong at 0.4%. While consumption is still expected to be weak in Q1, the uptick in March retail sales should help the sector be less of an overall drag.
• Industrial production beat expectations and expanded 0.5% in March. The gain follows a 1.0% increase in February, bringing a 4.5% increase for the first quarter on an annualised basis. The bulk of March’s rise occurred from a bounce-back in utilities output. The winter weather is at play here, as the highly populated Northeast and South faced increased heating needs due to below average temperatures. Mining output continued to recover following the oil rout and grew 1.0%. Meanwhile, manufacturing output stalled after February’s substantial increase, rising just 0.1% for the month.
• In February, business inventories rose 0.6%, marking the third consecutive month of gains. Inventory growth expanded at a 7.3% annualised rate, the fastest clip in over five years. Sales were comparatively weak, growing 0.4% for the month. This is consistent with the slowdown in retail sales to start the year, and sales should align back with inventories as the consumer returns to the fold.
• Housing starts increased to a 1.32 million annual rate in March, a 1.9% gain. Volatile multifamily starts accounted for much of the gain, rising 14.4%, while single-family starts declined 3.7% for the month. Homebuilding in the West and South continued to soar, while winter weather effects were still evident in the Midwest and East. The report was also heavy with significant upward revisions to prior-month data, and it is now apparent that new home construction fared much better in the first quarter that had been previously indicated.
• The NAHB/Wells Fargo Housing Market Index dropped slightly; however, builder confidence remains at historically high levels. The Architecture Billings Index also moderated somewhat in March; however, it has been in expansion territory for the past six months, a good sign for nonresidential development in the coming quarters.
• The Leading Economic Index (LEI) continued its upward trajectory and increased 0.3% in March. The rise follows two strong readings in January and February, and provides further evidence that the economy is well poised to strengthen in 2018.
• The US Department of the Treasury is considering deploying a little-used law known as the International Emergency Economic Powers Act to potentially block transactions and seize assets if President Trump declares China’s violation of US intellectual property rights a national emergency. Beijing is not taking the threat lying down, dismissing any move as driven by protectionism, not national security.
• Last week’s many Fed speakers downplayed the need for faster rate hikes. New York Fed President William Dudley said that the case for “tightening policy more aggressively is not compelling”. Meanwhile, Federal Reserve Vice Chair Randal Quarles said that he didn’t view recent flattening of the yield curve as a signal of an imminent recession. This suggests that the Fed remains on track (but not in a hurry) for continued gradual interest rate normalisation.
• For much of the week, however, investors seemed to turn away from the economic and political backdrop and focus on corporate earnings. The week brought earnings reports from 69 of the constituents of the S&P 500 Index, along with several hundred reports from smaller firms. As always, these reports brought a range of upside and downside surprises, although their overall tone may have weakened a bit later in the week. According to data and analytics firm FactSet, 80% of the S&P 500 companies that have reported quarterly earnings to date have posted earnings per share results that topped consensus estimates.
• The Treasury yield curve steepened toward the end of the week, reversing course after a recent flattening trend, as longer-term Treasury bonds experienced selling pressure. The strong retail sales and housing starts data released during the week, combined with higher oil prices, likely contributed to fears of inflation, which erodes bond prices. On Friday, the 10-year Treasury note traded with a 2.94% yield, which was near the top of its recent range.
• The preliminary Q1 GDP growth estimate is due for release on Friday. There are signs that economic activity slowed in the first quarter, with growth in consumer spending coming out weaker than first expected and the investment indicator not as strong as previously. Atlanta Fed suggests GDP growth was 2.0% quarter-on-quarter AR while NY Fed’s GDP indicator says 2.8%.

UK

• Markit PMIs are due for release on Monday. Empire regional PMIs fell in March which points to a slowdown in manufacturing sector. The gap between ISM and Markit PMI manufacturing remains a mystery although ISM might have come in at a too high level.
• On Tuesday, capital goods orders figures for March are due to be released, which will provide an impression of whether investments will gain momentum after a few weak months. Investments are expected to drive US growth to a greater degree this year compared to the past couple of years.
• UK retail sales growth was weaker than expected in March. Total sales fell by 1.2% after growing 0.8% in February. The consensus expectation was -0.6%. Retail sales excluding auto fuel fell by 0.5% in March after growing 0.4% in February (revised from 0.6%). The annual growth rate in both total sales and retail sales excluding auto fuel fell to 1.1% in March. Retail sales were weighed down by a large fall in petrol sales, which, according to the ONS, was likely a consequence of the impact of bad weather on travel. Department stores was the only sector to show positive growth, with sales buoyed by online offers for Mothering Sunday and Easter.
• UK inflation numbers were on the weak side of expectations in March. CPI inflation fell to 2.5% YoY from 2.7% in February. The consensus expectation was for an unchanged reading. Core inflation also fell and came in at 2.3% YoY in March, down from 2.4% in February. The consensus expectation was for a small increase in core inflation to 2.5% in March. Producer price inflation in March indicates that cost pressure, while still elevated, continues to trend downward. PPI input inflation inched up to 4.2% in March from 3.8% in February, but was weaker than the consensus expectation of 4.3%. PPI output inflation fell to 2.4% in March, from 2.6% in February. Survey indicators such as the PMI composite input price measure also indicate that cost pressure is trending downward.
• Bank of England governor Mark Carney cast doubt on market expectations for a rate hike at the next meeting of the bank’s Monetary Policy Committee in May. Carney, speaking to the BBC from the IMF spring meeting in Washington, said mixed UK data in recent months, as well as uncertainty surrounding the Brexit process. He also said that while an interest rate rise this year is likely, he didn’t want to get too focused on the precise timing. After the remarks, the pound lost ground versus the dollar and euro, and short-term interest rate futures are now pricing in the less-than-50% probability of a rate hike on 10 May, down from 80% earlier in the week.
• The first estimate of GDP growth in Q1 is due out on Friday. According to indicators, GDP growth slowed in Q1 compared to Q4 17, the question is more by how much. While the PMIs suggest GDP growth is likely to have slowed to 0.3%, the NIESR GDP estimate is as low as 0.2%. GDP growth is expected to be 0.25%, implying an annual growth rate of 1.4% year-on-year, which is among the lowest in the advanced economies.

China

• Gross domestic product expanded 6.8% year over year in the first quarter of 2018, matching the previous quarter’s pace and exceeding the official 6.5% target. Consumption composed more than three-fourths of the quarter’s expansion as new growth engines such as online retail sales and investment in education rose sharply. By contrast, “old economy” growth drivers showed signs of slowing, evidence of the government’s efforts to cut debt at state-owned factories and local governments.
• The PBOC announced an unexpected cut to its reserve requirement ratio in a move to encourage lending to small businesses but fell short of broad monetary easing.
• There are no big market movers in China this week.

EU

• European equities ended the week modestly higher, as investors waded through a wave of corporate earnings reports and economic data. The week began with the market trading on thin volumes but remaining in positive territory. Markets were helped by an easing of geopolitical tensions as well as some renewed optimism about global trade after positive comments by US officials on the North American Free Trade Agreement (NAFTA) and China. Midweek, mining and basic resource stocks were notable out-performers. Financial stocks were also strong toward midweek, but consumer goods and oil and gas companies were marked under-performers by the end of the week.
• The pan-European STOXX 600 index logged another advance and climbed to a seven-week high on Thursday. By Friday, the index settled lower. Germany’s export-heavy DAX 30 index and France’s CAC 40 index also ended the week higher, rising on Tuesday to their highest closes since early February.
• Euro PMI figures due for release on Monday. Manufacturing PMI has declined throughout Q1 18, from 60.6 in December 17 to 56.6 in March 18. A further decline is possible for April. Several survey indicators have pointed to lower optimism, fear of a trade war and the euro appreciation last year is starting to show its impact on activity.
• On Tuesday, the German Ifo expectations are due for release. Similar to the PMIs, the Ifo expectations have been declining in recent months, reflecting the lower optimism on the future. The latest print showed 100.1 in March, compared to its peak at 103.9 in November 2017.
• On the monetary front, an ECB meeting is scheduled on Thursday.

Sources: Wells Fargo, T. Rowe Price, Handelsbanken Capital Markets, Danske Bank, MFS Investments, Reuters.