Economic Outlook – 22 December 2019


  • President Trump became the third president in US history to be impeached, after the House voted 230-197 and 229-198 along strictly partisan lines to charge him with abuse of power and obstruction of Congress. Despite the historic nature of the vote, there was negligible reaction from financial markets. Trump joins Bill Clinton (1998) and Andrew Johnson (1868) as impeached presidents, but, like both of them, he will most likely not be removed from office, as the Republican-controlled Senate has shown no signs of breaking rank. The economic impact should thus be small to none.
  • US Secretary of the Treasury Steven Mnuchin said that work continues on the details of the preliminary phase one trade deal struck between the US and China a week ago. The secretary said he expects the pact to be signed in early January. The agreement is presently undergoing a technical and legal review, he said. While the imminent passage of the USMCA and the China trade deal has eased trade jitters, US Trade Representative Robert Lighthizer last week turned his attention to the European Union, saying the US-EU trade relationship is very unbalanced and that there are trade barriers within the EU that need to be addressed.
  • Last week was busy on Capitol Hill in Washington as the House of Representatives and the Senate scrambled to pass a pair of spending bills in order to avoid a government shutdown at midnight Friday. Additionally, the House passed the US-Mexico-Canada agreement by a large majority, sending the bill to the Senate, where it is expected to be passed early next year. Included in the just-passed spending legislation was the SECURE Act, a measure designed to make it easier for people to save for retirement. The act, assuming it is passed, will allow small employers to band together to offer their employees retirement plans, give employers safe harbor to offer annuities within retirement plans, and raised to 72 the age at which savers must begin taking requires minimum distributions from their retirement plans.
  • Boeing announced last Monday it would halt production of the 737 MAX, which it was currently producing at a rate of 42 per month but not shipping. It has been estimated the suspension of production will reduce Q1 GDP growth by as much as 0.5%, with hits to manufacturing output, inventories building and eventually to payrolls up and down the supply chain.
  • Industrial production data showed a 1.1% jump in November, the highest since October 2017. This was due almost entirely to the 12.4% surge in motor vehicles and parts output, as striking GM employees returned to work during the month. With troubles at two of America’s manufacturing giants injecting idiosyncrasies into the month-to-month data, it can be easy to lose the forest for the trees. Stepping back, however, what’s clear is the factory sector has moved sideways this past year (output is down 0.7%) under the cloud of trade uncertainty.
  • The housing sector is picking up, benefiting from the sizable move down in interest rates this past year. The NAHB index soared five points to 76, the highest since 1999, and housing starts followed suit, climbing 3.2% in November. Existing home sales disappointed with a 1.7% drop, but surging builder optimism, sustained low rates and solid consumer fundamentals (personal income rose 0.5% in November, while personal spending rose 0.4%), should drive housing higher in 2020.
  • The S&P 500 Index recorded a solid weekly gain as investors appeared to continue celebrating the announcement of a “phase one” trade deal between the US and China. The gains helped push the S&P MidCap 400 Index above its 2018 peak and join the large-cap indexes and the technology-heavy Nasdaq Composite Index in record territory; the small-cap Russell 2000 Index remained roughly 4% below its 2018 all-time high. Within the S&P 500 Index, communication services shares outperformed, helped by a surge in Netflix following the company’s report of strong gains in international subscriptions. The small utilities and real estate sectors also performed well. Industrial shares lagged, weighed down by a decline in FedEx following its report of a sharp drop in quarterly profits and another reduction in its full-year outlook. Financials were also weak.
  • The encouraging economic data and trade hopes combined to push the yield on the benchmark 10-year Treasury note to its highest level in over a month.
  • In the US, the most interesting release before the new year is the preliminary core capex data for November due out on Monday 23 December to check whether investments in capital goods remain subdued.
  • For the same reason, the ISM manufacturing index for December, which is due out on Friday 3 January looks interesting. ISM manufacturing has been lower than the equivalent IHS Markit PMI index, probably because of ISM’s bias towards larger companies, which have greater exposure to global developments.


  • The Eurozone Flash Composite PMI remained unchanged at 50.6 in December compared to the previous month. Meanwhile, Manufacturing PMI was 45.9 compared to 46.9 the month before, below expectations, and Services PMI was 52.4 compared to 51.9 the month before, above expectations. The latest release thus reflects little change in underlying trends, as manufacturing and services continue to push business activity in opposite directions. The final quarter of 2019 thus marked the worst performance since 2013 and employment growth decreased to a five-year low even as price pressures weakened further. The service sector and the French economy continue to hold up the eurozone’s aggregate values, as the manufacturing recession in Germany remains the largest negative contributor.
  • Sweden’s Riksbank raised its main repo rate by 25 basis points to 0%, ending five years of negative rates, and indicated that it would maintain this level for years to come. The Riksbank repeated its October warning that if negative rates were to continue for too long “the behavior of economic agents may change and negative effects may arise.” Two deputy governors opposed the decision. The bank has been criticized for raising rates when the economy is weakening. It countered that the economy is slowing after several years of solid growth and a strong labor market, which means that the Swedish economy is going from a stronger-than-normal cycle to a more normal situation.
  • European stocks rose after UK Prime Minister Boris Johnson’s emphatic general election victory and the US and China agreed to an interim limited trade deal. The pan-European STOXX Europe 600 Index ended the week 1.55% higher, while the Germany’s exporter-heavy DAX index gained 0.27%. 
  • In the euro area, preliminary HICP figures for December are due for release on Tuesday 7 January. In November, core inflation registered a marked rise to 1.3% and even the ECB acknowledged a ‘mild increase in underlying inflation pressures’ at the December meeting.
  • The German industrial production figures for November out on 9 January should give more clues to how the manufacturing sector has performed in Q4. Despite signs a trough is forming in leading indicators such as PMI and Ifo, production continued to fall by 5.3% year-on-year in October, weighed down by the still struggling car sector. Improving order book levels still leave a glimmer of hope for an easing of the industrial recession in Q4.


  • The House of Commons ended years of legislative gridlock today by passing the Brexit withdrawal agreement, paving the way for the United Kingdom to exit the European Union at the end of January. In February, a transition period will begin wherein the UK will remain a member of the EU customs union and the common market until the end of 2020.
  • The UK pound gave up its postelection gains against the euro and the US dollar after Johnson revived fears of a no-deal Brexit. Johnson signaled that he would amend the Brexit bill to prevent any extension of the transition period for a new trading relationship with the European Union beyond the end of 2020, the current deadline. A failure of the negotiations would mean the economic relationship would default to World Trade Organization terms, with the likelihood of tariffs on imports and exports.
  • The Bank of England (BoE) left the key repo rate unchanged at 0.75%, but two of the nine policymakers dissented with the majority and voted for a rate cut for the second consecutive month. It also maintained its quantitative easing program. The central bank reiterated its message that rates could move in either direction when it becomes clearer how companies and consumers are responding to the latest developments regarding Brexit. The bank expects the economy to rise “only marginally” in the fourth quarter of 2019, which is consistent with its November forecasts that predicted growth will pick up in the spring, assuming “combined support from lower uncertainty, easier fiscal policy, and somewhat stronger global growth.”
  • In terms of economic data releases, the most interesting reading is the monthly GDP estimate for November due out on Friday 10 January. In October, the monthly estimates showed no growth over the past three months and, on an annual basis, GDP growth is now at the weakest level since the European debt crisis in 2011-13. The PMIs are still below 50 suggesting continued subdued growth at best and uncertainty remains a drag on the economy.


  • All three major monthly activity indicators surprised on the upside in November by increasing. Industrial production and retail sales increased by more than consensus expected (from 4.7% year-on-year to 6.2%; and 7.2% to 8.0% respectively). Growth in fixed investments is reported as a year-to-date annual growth rate, which was unchanged from October to November at the lowest pace since at least 1998. But that masks a rebound in the ordinary annual growth rate from a trough of 3.7% year-on-year in October to 5.2% in November. This all suggests that China’s economic growth rebounded even before the phase-one trade deal with the US was agreed upon.
  • Chinese stocks rose for the third straight week, as a partial trade deal between the US and China offered a temporary respite in trade tensions. For the week, the benchmark Shanghai Composite Index rose 1.23%, and the large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, added 1.2%. The weekly gains came one week after the US and China announced that they had reached an agreement on a “phase one” trade deal that would lower some US tariffs levied during the dispute and suspend planned duties that were scheduled to kick in on 15 December.
  • There are no market overs in China this week.

Sources: T. Rowe Price, MFS Investment Management, Handelsbanken Capital Market, Danske Bank, Wells Fargo.