Economic Outlook – 23 April 2017


Housing market data released last week were generally mixed but continued to improve on trend. The NAHB / Wells Fargo Housing Market Index fell three points in April from its cycle-high in March. Despite the pullback, confidence remains relatively high. The present sales index has trended above 70 for five consecutive months, signalling strong demand for new homes. Housing starts also dipped, falling 6.80% in March, but this decline came on the heels of an unusually strong February reading that was likely boosted by unseasonably warm weather. On balance, the spring construction season got off to a strong start to the year, as starts are up 8.10% through the first three months of the year compared to 2016.

The industrial production data for March suggested the factory sector’s recovery took a breather last month. On the surface, the strong 0.50% gain in industrial production suggests a continued acceleration in activity. However, the largest surge in utilities output on record played an outsized role in the gain. After the second-warmest February on record led to a 5.80% decline utilities production, temperatures in the lower 48 returned to more seasonal norms in March. At about 11.00% of the total index, utilities alone boosted the headline by 0.90 percentage points.

Mining production rose 0.10% over the month, with output for oil and gas extraction leading the way with a nearly 8.00% gain. Although far from recovered, the mining sector is headed in the right direction after the steep decline that began in late 2014. Manufacturing output, which comprises about three-fourths of the total index, fell 0.40%.

Fed speaks continued to echo earlier stance for three rate hikes this year and that the Fed should begin tapering its balance sheet in a gradual manner soon. Fed Kaplan commented two more interest rate hikes remained possible this year although the Fed has the flexibility to manoeuvre and that it is appropriate to trim the balance sheet size this year. In a separate event, Fed Fischer said tapering plans will not materially impact financial markets as in the 2013 taper tantrum and should not have impact on monetary policy. Fed Rosengren also said the Fed should begin reducing its balance sheet soon in a gradual manner so that it has little impact on the Fed rate hike path.

The Fed Beige Book maintained that the US economy continued to grow at a modest to moderate pace, recent data ranging from retail sales to housing starts and leading index have all turned weaker, raising concerns growth momentum in the US economy is turning south.

This week, GDP figures for Q1 are due on Friday. Private consumption has for a long time been the main growth driver, while business investments have pulled down overall growth. However, investments are now contributing positively to growth again and this continued in Q1 given the very high level of manufacturing confidence and that core CAPEX investments are increasing. Private consumption has been helped on the way by growth in real wages and high consumer confidence. Although real wage growth has recently turned negative, the high level of consumer confidence should be indicative of continued progress in private consumption.

Private consumption expenditure core inflation for Q1 is also due. If the current trend in monthly increases continues (implying increases of around 0.10% month-on-month), private consumption expenditure core inflation would come in at 2.20% quarter-on-quarter AR. However, due to very weak CPI figures for March, consensus points to slightly negative growth in March, which would imply that private consumption expenditure inflation should come in at 2.00% quarter-on-quarter AR.



British Prime Minister Theresa May last week called for an early general election in the United Kingdom in an attempt to strengthen her hand in upcoming Brexit negotiations. May’s Conservative Party holds a 20.00% lead in most opinion polls, which suggests that the Tories will build on their slim 17-seat majority. May was elected leader of her party after former prime minister David Cameron stood down subsequent to leading the unsuccessful Remain campaign in last spring’s referendum. May has not yet faced voters as prime minister. The pound rallied to a six-month high in the wake of the 8 June election call.

The flash composite PMI once again surprised on the upside when it increased to 56.7 in April from 56.4 in March. As a result, the PMI reached a six-year high and sent a robust signal of economic growth for the beginning of Q2. This is of course positive even though actual GDP growth will not coincide with the optimistic sentiment surveys in Q1, as hard data (especially industrial production and retail sales) so far have suggested a slowdown. However, it increases the chance of the hard data converging more with business barometers in Q2 and thus prospects of growth are gaining strength here.

The first estimate of UK GDP growth in Q1 is due on Friday. As most indicators have weakened in Q1, GDP growth likely slowed from 0.70% quarter-on-quarter in Q4 16 to 0.40% quarter-on-quarter in Q1 17. In particular, the sharp increase in inflation seems to have hit consumption, as it means real wage growth is negative, leaving less scope for higher private consumption. It will also be interesting to see whether Brexit uncertainties have hit business investments.



German ifo expectations are published on Monday. The figure is at a high level, pointing to strong GDP growth in Germany. The latest move higher reflects primarily better expectations for the manufacturing sector after a couple of years where these expectations moved broadly sideways. Looking ahead, the overall expectations are likely to move lower.

On Tuesday, the ECB’s Bank Lending Survey is due for release. The latest report from January showed that loan growth continued to be supported by increasing demand across all loan categories, while credit standards (i.e. banks’ internal guidelines or loan approval criteria) for loans to enterprises tightened somewhat in net terms due to banks’ lower willingness to tolerate risk.

ECB meeting on Thursday. Following the latest ECB meeting in early March, market participants have speculated about the sequencing of the ECB’s exit strategy and some weeks ago, the market priced in a 10bp deposit rate hike from the ECB at the end of this year. Since then, the communication from prominent ECB members has signalled a more dovish stance and in the most recent speech from Mario Draghi he concluded “a reassessment of the current monetary policy stance is not warranted at this stage”. The ECB is expected to send the same dovish message at the coming meeting.



China’s economic growth rate accelerated to 6.90% in the first quarter, the fastest pace in six quarters. Additionally, retail sales rose 10.90% year over year in March, handily beating estimates, as did industrial output, which rose 7.60% in March. Analysts had expected fiscal and monetary stimulus to wane in 2017, but so far it has not.

Industrial production and fixed assets investment growth accelerated more than expected to grow 7.60% and 9.20% year-on-year respectively in March while retail sales sustained a 10.90% year-on-year increase in March. Supply side reforms will continue to address China’s overcapacity woes and barring unforeseen and catastrophic downside risks, the country is well poised to achieve its growth target of around 6.50% this year.

It is reported that the People’s Bank of China has eased some capital control measures since last Wednesday. After the policy relaxation, commercial banks can conduct CNY cross border business more freely. This is the first policy relaxation in capital control measures over the past two years. This does not seem to be a turning point of the capital control policy, but reflects the effort to boost confidence among foreign investors. However, more trial policies can be expected in the future.

There are no market movers due this coming week in China.


Sources: Wells Fargo, Commerzbank, HongLeong Bank, Danske Bank, MFS Investment Management, Handelsbanken.

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