Economic Outlook – 24 February 2019


  • The weakness in the US housing market felt through much of last year has extended into 2019. Existing home sales dropped 1.2% in January, as the lingering effects of rapid home price appreciation and higher mortgage rates in the second half of 2018 dampened sales for the third consecutive month. While overall sales have slumped, lower mortgage rates more recently make us optimistic that gradual improvements in home sales should be forthcoming.
  • A similar sentiment was expressed by homebuilders in the NAHB Housing Market Index, which posted its second consecutive monthly gain in February after dramatically falling in the final month of 2018. More builders feel confident about future market conditions given the lower rates, which bodes well for new residential construction headed into the spring. Mortgage applications also improved to start the year. The MBA Mortgage Applications Purchase Index rose 1.7% for the week ending 15 February. While extremely volatile on a weekly basis, the average index reading seven weeks into 2019 is 3.1% higher than the same period last year.
  • Durable goods orders rose in December. Overall orders increased 1.2% during the month, while shipments for core capital goods edged 0.5% higher. However, much of December’s gain was due to a 28.4% surge in nondefense aircraft orders. Core capital goods orders, which is an important barometer of future business investment, slipped for the second straight month and fell 0.7%. Business investment is still expected to rise and be supportive of overall GDP growth in Q4; however, the drop-in core orders makes the prospect of continued growth at its current pace unlikely.
  • The leading economic index (LEI) continues to point to generally favorable economic conditions in coming months. The 0.1% decline registered in January was weighed down by a drop in average consumer expectations, likely a fallout from the partial federal government shutdown and stock market volatility towards the end of 2018. The government closure also led to an uptick in jobless claims, which were also a drag on the topline index. More recent data, however, revealed that the spike in claims was temporary. Initial jobless claims fell 23,000 to 216,000 for the week ending 16 February, underscoring just how resilient the labor market is at present.
  • The topic of a strong labor market was also breached in the minutes for the most recent 29 January FOMC meeting released last week. While no change was made to the target federal funds rate during the meeting, the minutes revealed that participants generally agreed that patience should be exercised in the face of tighter financial conditions and moderating global economic growth.
  • The minutes of the January meeting of the US Federal Reserve’s Federal Open Market Committee meeting also confirmed that almost all the participants thought it desirable to announce before too long a plan to stop reducing the Fed’s asset holdings later this year. They stressed that they favored a patient approach to monetary policy that allows them to observe the effects of past rate hikes, saying soft inflation data allow the committee to be patient.
  • While progress has been reported toward a trade deal between the US and China, less headway has been made on issues involving US trade with the European Union. Last week President Trump threatened the EU with auto tariffs if Brussels is unable to reach a trade deal with Washington. European Commission president Juncker said earlier last week that while he had been assured by Trump that no auto tariffs are imminent, the EU would not feel obliged to stick to its promise to buy more US soybeans and liquefied natural gas if US tariffs are put in place.
  • Stocks moved modestly higher, helping the Dow Jones Industrial Average mark its longest streak of weekly gains in nearly a quarter of a century. Materials and utilities stocks led the gains within the S&P 500 Index, while health care shares trailed, held down in part by a disappointing 2019 earnings projection from CVS Health. Communication services stocks were also weak following disappointing results from video gaming companies. Volatility continued to moderate, with the CBOE Volatility Index (VIX) touching its lowest level in over four months, and trading volumes were generally subdued as earnings reporting season continued to wind down. Nearly 90.0% of S&P 500 companies were expected to have reported fourth-quarter results by the end of the week, according to Thomson Reuters. Markets were closed Monday in observance of Presidents’ Day.
  • Longer-term bond yields remained roughly steady for the week. The municipal market continued to see limited supply and cash inflows, resulting in relatively light trading in the primary market. Rich valuation ratios (muni yields relative to Treasury yields) have spurred investors determined to put cash to work into higher-yielding bonds, helping spur interest in new bonds backed by the Puerto Rico Urgent Interest Fund Corporation, known by its Spanish acronym, COFINA.
  • PCE core inflation numbers for December are due to be released on Friday. Based on the CPI, PCE numbers are expected to come in at 0.2% month-on-month (1.9% year-on-year), which is just below the Fed’s 2.0% target.
  • On Thursday, BEA is scheduled to release initial Q4 GDP, which will implicitly also give the PCE inflation data for December. GDP growth is expected to come in at around 2.0% quarter-on-quarter annualised (3.0% year-on-year).
  • On Friday, ISM manufacturing data for February will be released. The survey still indicates that the manufacturing sector is expanding in general. As consumption continues to strengthen, the ISM index is expected to stabilize around its current level.


  • With just over a month before the United Kingdom is scheduled to leave the European Union, British prime minister Theresa May traveled to Brussels for another round of negotiations with European Commission president Jean-Claude Juncker. The EU has long vowed not to reopen talks on the withdrawal treaty, but reports circulated late in the week that the EU is open to adding a legally binding codicil to the agreement allowing the UK to exit the Irish backstop (which guarantees that the Irish border will stay open) with 12-months’ written notice. Given May’s recent difficulties in parliament, it is thought that the EU wants to see if that option can pass the House of Commons before proceeding any further. Talk circulated late in the week that May could seek a three-month extension of the negotiating period.
  • British retailers plan the least investment in seven years ahead of the country’s departure from the European Union, and job cuts in the sector have gathered pace, a major survey showed on Friday. Although retailers were the most upbeat about the general business situation in over two years, Brexit and longer-term structural changes were casting a shadow, according to the quarterly survey from the Confederation of British Industry.
  • Britain posted its biggest budget surplus on record in January despite a slowing economy, putting finance minister Philip Hammond on course to announce the lowest annual borrowing since 2002 in a fiscal update due just before Brexit next month. Britain ran a surplus of £14.895 billion in January, official data showed, the highest since monthly records began in 1993 and above all economists’ forecasts in a Reuters poll. The budget deficit looks on track to drop to its lowest since 2001/2002 at just over 1 percent of national income this financial year, down from a towering 10 percent just after the global banking crisis in 2009/2010.
  • The British pound moved higher against the US dollar for much of the week even as Fitch put the UK’s AA credit rating on negative watch as uncertainty about Brexit mounts.
  • The main economic data release is the PMI manufacturing index due on Friday, which probably fell. It is to be noted that stockpiling due to Brexit preparations means the index is higher than the equivalent euro area index.


  • After five months of persistent declines in the eurozone Composite PMI index the index finally increased in February. The increase to 51.4 from previous 51.0 was a notch bigger than consensus estimates. Hence, it seems that the decline in sentiment has stopped for now probably helped by lessening worries about trade conflict and politics in Italy and France and not least due to the more dovish policy signals from global central banks which has supported stock markets. As expected the increase was due to improving service sentiment, while the Manufacturing PMI fell below the 50-threshold for the first time since 2013. While the increase was good news it is probably pre-emptive to expect real GDP growth to improve already in Q1. There might be nonetheless scope for a somewhat improving growth over the next couple of quarters.
  • The pan-European STOXX Europe 600 Index rose throughout the back half of the week amid investor optimism that US – China trade talks were progressing. The UK FTSE 100 Index lost ground, however, as the possibility of a no-deal Brexit grew.
  • The preliminary February HICP figures are due on Friday. These are an important piece of information for the ECB at its upcoming meeting on 7 March. In January, core inflation rose by 0.16pp to 1.09% year-on-year, while headline inflation decelerated to 1.4% year-on-year on the back of falling energy price inflation. With oil prices up some 30.0% since the trough in December, headline inflation is expected to rise slightly in February to 1.5%.


  • As another round of talks between officials from the United States and China unfolded last week, news emerged that the negotiators have made progress on a number of the most contentious structural issues, suggesting an agreement may be within reach. Memorandums of understanding are being drafted covering issues such as forced technology transfer and cyber theft, intellectual property rights, services, currency, agriculture and non-tariff barriers to trade. Additionally, the two sides are discussing enforcement mechanisms to ensure compliance with any deal, a major concern for the US. US president Donald Trump said that the 1 March deadline to reach an agreement is “not a magical date,” suggesting any hike in US tariffs on Chinese goods is unlikely so long as the two sides continue to make progress toward an agreement.
  • There are no market movers in China this week.

Sources: T. Rowe Price, Reuters, MFS Investment Management, Danske Bank, Handelsbanken.