US
In a speech this week, Fed Chair Yellen said: “Now, it’s fair to say, the economy is near maximum employment and inflation is moving toward our goal.” The economic progress made in getting to this point was the justification for last month’s rate hike. Looking ahead, not only is economic progress expected to continue but being so “close” to the goals of maximum employment and price stability, a quicker rate hike cadence is warranted. Yellen said “as of last month, I and most of my colleagues… were expecting to increase our federal funds rate target a few times a year”.
Industrial production grew 0.80% month-on-month in December due to the jump in utility output, compensating for the 0.70% month-on-month decline in November which was the worst decline in eight months. Purchase of auto vehicles drove retail sales growth to 0.60% month-on-month and consumer sentiments hovered near a 12 year high in January. The bigger than expected rebound in business inventories suggests businesses are building up inventories in anticipation of higher demand even though sales were flattish in November, pushing up the inventories-sales ratio by 0.01 point to 1.38 during the month.
US home building continued to make progress as 2016 drew to a close. Permits for single-family homes rose in December, suggesting homebuilding has upward momentum in the months ahead. While the recent jump up in mortgage rates presents a headwind for the sector, demand should prove resilient, underpinned by rising wages, and a rebound in household formation.
Preliminary Markit PMIs for January will be released on Tuesday. The manufacturing PMI rose again in December reaching 54.3 up from 54.1 in November, the highest level in almost two years. It seems as if the manufacturing sector ended 2016 on a strong footing and the current trend is expected to continue into 2017, although ‘hard data’ are needed to confirm this.
Markit manufacturing PMI index is expected to stay more or less unchanged at around 54.3 in January, while the service PMI index (which is due on Thursday) has declined for the last two months and was 53.9 in December down from 54.8 in October. The current level is too low and the index is expected to increase slightly to 54.5 in January.
The first estimate of Q4 16 GDP growth will be released on Friday. The estimate for Q4 GDP growth is 2.3% q/q AR mainly driven by private consumption. Business investments seem to have bottomed out when looking at core capex orders and it is likely they contributed positively to growth in Q4. Net exports probably dragged growth down in Q4.
UK
The three-month average ILO unemployment rate stayed unchanged at 4.8%, as expected, but the more timely jobless claims number fell by 10.1k in December (consensus: +5.0k) after increasing by 1.3k in November (revised down from +2.4k). Average weekly earnings growth increased to 2.8% year-on-year in December, from 2.6% in November (revised up from 2.5%). The unemployment rate stayed unchanged in November, as employment and the labour force moved in tandem.
However, employment growth was still somewhat better than expected, with the three-month-on-three-month change at -9k against the consensus expectation of -35k. Employment in the UK has been fairly flat since last summer. Going into Q4, the trend in jobless claims suggested the unemployment rate should soon pick up. However, during Q4, the performance of claims was much better than expected and employment indicators such as the PMI survey, for instance, suggest that employment growth could pick up again.
This week, several banks announced plans to move staff out of London in the wake of Brexit, including HSBC and UBS. Meanwhile, Germany’s Handelsblatt reported that Goldman Sachs may relocate half of its London staff of 6,500. Some jobs will move to New York, while approximately 1,000 could move to Frankfurt, the paper reported.
UK prime minister Theresa May this week outlined her plan to put Brexit to a vote in Parliament before triggering Article 50. She said she expects the United Kingdom to leave both the European Union’s single market and its customs union.
The main event next week is the Supreme Court ruling on Tuesday. According to a previous story in The Guardian (11 January 2017) the UK government expects to lose the appeal. Based on Theresa May’s speech, it seems as if she has accepted that parliament needs to be involved in the negotiation process, as she mentioned the final deal will be put to a vote in both Houses of Parliament.
The first estimate of Q4 GDP growth will be released on Thursday. Q4 economic indicators such as the PMI’s have been solid in Q4 and the NIESR GDP estimate suggests GDP grew by 0.5% quarter-on-quarter in Q4. That said, a downward correction of the large increase in inventories in Q3 is a downside risk. Although the economy was remarkably resilient to Brexit uncertainties in H2 2016, growth is likely to slow this year due to slower growth in both private consumption and business investments.
EU
In its monetary policy meeting, ECB kept main refinancing rate at zero, marginal lending rate at 0.25% and deposit rate at -0.40% while reaffirming its December decision that asset purchases will be slashed by 20 billion euros to 60 billion euros starting end April 2017.
The consumer confidence figure for January is released on Monday. Consumer confidence has improved since August 2016 despite political turmoil regarding Brexit and Donald Trump and remains at a high level. Consumer confidence may thus still prove resilient even as Theresa May signals a ‘Hard Brexit’ and Trump lingers on specifying the economic plans for his administration. A modest increase is expected for January as the labour market still shows strength.
The PMI figures are released on Tuesday. The PMIs have improved significantly over the last few months in both manufacturing and services. However, the leading PMI indicators show more mixed signals. In line with other survey indicators the manufacturing PMIs is expected to increase, but less than previous months. With regards to leading service PMIs, future business expectations increased significantly in December while the new business indicator remained stable. Thus, service PMIs is likely to see a further increase in January.
China
China’s economy expanded 6.70% as expected in 2016, affirming that the world’s second largest economy remains on the path of stabilisation. December’s data was mixed as the softness in IPI figure was offset by quicker retail sales growth. Fixed assets investment was a tad disappointing but was close to the average in the previous five months. Exports tumbled 6.10% year-on-year to 209.42 USD billion in December, extending the streak of declines after a revised 1.60% year-on-year drop in November.
Among the documents leaked by Manning in 2010, there was a note about China and its economy. Li Keqiang, China’s Prime Minister, is alleged to have said that if he really wants the pulse of the economy, he looks at three variables: electricity consumption, rail cargo volume, and bank lending since these economic indicators cannot be easily massaged by government statisticians. “By looking at these three figures,” the cable said, “Li Keqiang said he can measure with relative accuracy the speed of economic growth. All other figures, especially GDP statistics, are ‘for reference only,’ he said smiling”.
Chinese industrial profits will be released on Thursday. Another robust reading of around 15-20% year-on-year is expected. Profits are currently being lifted by higher activity as well as higher prices. During 2017 some moderation is likely in profit growth as housing and infrastructure growth slows. But for now the profit picture is looking good.
Sources: BMO Capital, Haendelsbank, HansLeong, Danske Bank, TD Economics.