Economic Outlook – 24 April 2016


Housing data dominated the somewhat light US economic calendar this week, delivering a mixed bag of news. Housing starts disappointed, down 105k in March, while home builders’ confidence held firm. On a brighter note, existing home sales rose ahead of expectations.

The US labour market continued to improve consistently. After an already healthy reading last week, weekly jobless claims declined even further, falling to 247k. This marks their lowest level since 1973 and bodes well for the April NFP report later this month.

The Federal Reserve is expected to stay put next week as it awaits confirmation that the US economy is accelerating following the first quarter slowdown. While no policy change is expected, investors will nonetheless be parsing the statement for clues as to the probability of a June rate hike. Economists largely expect the Fed to increase rates in June, but futures markets have all but priced out such an event.


In the UK, everything continues to be driven by the upcoming EU in/out referendum. On Thursday, Chancellor of the Exchequer George Osborne is questioned by the House of Commons Treasury Committee about the cost/benefit of EU membership. In a report released recently, Osborne and the Treasury argued that UK GDP could be between 3.5% and 7% lower after 15 years, if UK leaves the EU.

During the period November 2016 to February 2016, UK employment slowed. It is too soon to blame the EU referendum uncertainty as the slowdown was broad based. However, labour market is likely to slow down due to both global and domestic factors. The number of unemployed people increased during the period but less than the number of employed people and that took the unemployment rate to the same rate as the previous period, 5.1%.

UK retail sales surprised on the downside in March, falling by 1.3% compared to February but still 2.7% higher than March last year. All store types except textile, clothing and footwear stores showed increases in the quantity bought compared with March 2015, but there were decreases in food stores, non-food stores, textile, clothing and footwear stores and fuel stores in the amount spent com-pared with March 2015. The fall, in combination with falling industrial production and weaker trade suggesting a slowdown of economic activity, is most likely due to higher uncertainty before the EU referendum in two month time.


The ECB remains in a wait-and see mode. It kept the stance of monetary policy unchanged this week as it implements the ambitious monetary measures announced in March and awaits affirmation that these measures are bearing fruit.

ECB President Draghi stated that “broad financing conditions in the euro area have improved” since March, but risks to the growth outlook “remain tilted to the downside”. As a result, according to Draghi the monetary policy in the euro area will continue to diverge from that of other jurisdictions, “better placed in the recovery cycle”, with the US being a prime example.

In the Euro area, the week starts with the release of the German IFO expectations for April on Monday, which is likely to stay at the current low levels in line with expectations for the PMI figures. However, financial sentiment has improved lately as indicated by the increase in the ZEW expectations, which could have a spill-over to economic survey and hence support a small increase in the figures.

Euro area HICP inflation for April is due for release and negative print of -0.1% year-on-year is expected, slightly lower than in March when it was 0.0%. Core inflation should go down to 0.8% from 1.0% in March, when it was supported by the early timing of Easter this year. The low core inflation also reflects headwind from the stronger euro, a lagged indirect impact from the low oil price and very subdued wage pressure. Energy price inflation should have a less negative impact on headline inflation as it is directly affected by the recent increase in the oil price.


The main release in China will be industrial profit growth for March. Profits have been under pressure from the hard landing in the industrial sector.

However, as the industrial sector recovers during 2016, profit growth is expected to return to positive territory. Given the sharp increase in PMI and other indicators, this could already have taken place in March. If so, this would give support to Chinese equities.


In Japan, the focus will be on the Bank of Japan’s (BoJ) monetary policy meeting on 27 and 28 April. Pressure on the BoJ to ease monetary policy is mounting as USD/JPY has declined more than 10% since the beginning of the year, while the nominal effective JPY exchange rate has increased to 2013 levels.

2016 is proving to be a very challenging year for the BoJ, as the JPY has been carried forward in recent months by what could be viewed as a perfect storm for the currency. Besides the recent strengthening of the JPY which is putting further downward pressure on inflation and inflation expectations and erodes confidence in the bank, a weaker economic outlook implied by both the PMI and Tankan surveys and a likely technical recession in Q1-Q4 are also supporting the case for additional easing.

Sources: Danske Bank, TD Economics, Handelsbanken, Scotiabank, BMO Capital.