Economic Outlook – 26 March 2017


After January’s cycle-high pace of existing US home sales, contract closings dipped in February to a 5.48-million unit pace. This was somewhat expected as pending home sales, which are counted when a contract is signed and are a leading indicator for existing home sales, declined in January. Low inventory of homes for sale and higher mortgage rates were likely restraining resale activity. On the bright side, February’s dip in resales allowed inventories to rebound slightly, but they remain 6.4% lower than the same time last year. There is now a 3.8 month supply of existing homes for sale, much lower than a balanced market, which would have around a 5.5 month supply.

Now is a good time for US home builders. Coinciding with the recent upswing in the NAHB/Wells Fargo Housing Market Index, a measure of builder sentiment, new home sales were up solidly in February. Besting consensus estimates, new home sales rose 6.1% in February to a 592,000-unit pace. The month ended with 266,000 new homes available for sale, a 5.4 month supply, which is down from January. Mild weather likely favoured activity in the month, pulling the spring selling season forward into February. A correction is likely in coming months. Expectations of rising mortgage rates may have also played a role in the unseasonably strong showing in February.

Recent readings from the ISM manufacturing and regional Fed surveys of manufacturing activity have jumped much higher since the election. To be sure, factory data have firmed considerably from the weak patch that stretched from about mid-2014 to mid-2016 as manufacturers struggled with soft global demand, the strong dollar and a downturn in the energy sector. Much of those headwinds are largely fading and incoming data have reflected that.

US Durable goods orders for February bested expectations with a headline increase of 1.7%, but the underlying details were unimpressive. Orders of capital goods excluding defence and aircraft, which reflects demand for business investment in goods such as computers and machinery, declined 0.1% on the month, surprising forecasters who anticipated a 0.5% increase.

US PCE core inflation for February is due on Friday. While headline inflation has been increasing rapidly and is almost at the Fed’s 2% target, PCE core inflation has remained stuck around 1.7%. The development of PCE core inflation is expected to attract special interest in coming months given the comments at the last FOMC meeting that the Fed has a ‘symmetric inflation target’, which could be interpreted as the Fed will be willing to let inflation slightly overshoot the 2% target. Hence, it implies a more dovish tone. However, what it actually means it remains to be seen. Last time PCE inflation was at 2% was at the beginning of 2012.

On Tuesday, Conference Board Consumer Confidence for March will be published. The preliminary numbers from the University of Michigan for March indicate that consumer confidence remained at a very high level in March and the Conference Board figures are expected to confirm this impression. Hence, the March Conference Board figure is likely to be in the ballpark of 114.

Friday also brings personal spending numbers for February. The January numbers came out on the weak side and retail sales showed almost no growth in February, which indicates that it will be another weak figure. However, the overall picture is still that there are tail winds for private consumption from a high level of consumer confidence and continued progress in the labour market.


UK retail sales increased by more than expected in February after two dismal months. Total retail sales rose by 1.4% in February, after falling by 0.5% in January (revised down from -0.3%) and by 2.1% in December. The consensus estimate for February was +0.4%. The growth in retail sales in February was broad-based, but the increase was not enough to make up for the weakness in December and January. According to the ONS, rising petrol prices in particular had a negative effect on the overall quantity of goods bought over the past three months.

Consumer confidence in the UK has been sliding since September last year and sentiment among retailers has also weakened over that period. Consumer confidence and retail sentiment both suggest that momentum is weakening. The year-on-year growth rate in retail sales increased to 3.7% in February, from 1.1% in January. According to economic sentiment, there is little upside to growth rates ahead. Private consumption growth is expected to decelerate through the year as increasing inflation eats into households’ real incomes.

Next week, the GfK consumer confidence and Lloyds Business Barometer for March will be published on the night between Thursday and Friday. While business confidence has recovered, consumer confidence is still lower than before the EU vote (although significantly above the level prevailing throughout the European debt crisis).

The UK government has announced in a letter to the EU that Prime Minister Theresa May will trigger Article 50 on Wednesday 29 March. Donald Tusk has tweeted that he will publish the draft Brexit guidelines ‘within 48 hours of the UK triggering Article 50’. Commentators expect EU leaders to discuss the draft at an extraordinary EU council meeting four to six weeks after this, possibly after the second round of the French presidential election on 7 May.


The EU composite PMI once again surprised on the upside in the flash March estimate when it increased to 56.7 from previously 56.0. This brought optimism up to a new high since 2011. This was especially a surprise since the PMI already looked on the high side after the surprise increase in February relative to other sentiment surveys and as the hard data still seems to lack the improved sentiment both when looking at retail sales and manufacturing activity in the past couple of readings. Hence it seems that optimism is taking a cue from financial markets where stock prices have been lifted and the yield curve has steepened further. The PMI suggests that real GDP growth will accelerate to 0.8% quarter-on-quarter in Q1 from 0.4% in Q4, but actual growth is not expected to increase this much, as suggested by the weaker hard data so far. This said, the high PMI readings increase the possibility of GDP growth staying robust into Q2 to the extent that actual activity lags the sentiment surveys.

Eurozone banks took up more super-cheap loans than expected from the European Central Bank’s Targeted Longer-Term Refinancing Operation (TLTRO) this week. A total of €223.5 billion of the zero % four-year loans were placed, far in excess of the €125 billion economists had expected. In a sign of policy normalization, the ECB announced last month that this would be its last TLTRO operation.

In the euro area, the February figures for loan growth and M3 money supply growth will be out on Monday. Loan growth increased for three consecutive months, from 1.8% yearly growth in October 2016 to 2.2% in January 2017. It is expected to increase further to 2.4% in February, reflecting higher demand for loans, as the ECB noted in the January Bank Lending Survey.

German IFO expectations are also due to be released on Monday. IFO expectations saw a fall in January to 103.2, from 105.5 in December 2016, but increased to 104.0 again in February. IFO is likely to increase a bit further to 104.3 in March. Other survey indicators still indicate optimism in the business economy but German consumer confidence has started to trend lower and in coming months the same correction in the strong business sentiment remains a possibility.


Tightening liquidity conditions in China’s banking system are raising concerns that economic growth could be negatively impacted as the year progresses. Recently, China has been taking steps to rein in its shadow banking system amid fears that the property market could overheat. Chinese iron ore futures tumbled 19%, the largest weekly decline on record, as the People’s Bank of China introduced fresh borrowing curbs on home lending.

In China, official NBS PMI data are due to be released early CET on Friday morning. A small decline from 51.6 to 51.3 is to be expected. After a sharp increase in 2016, China looks to be set for a moderate slowdown in 2017, as the housing market is likely to cool and believe the significant infrastructure boost is set to fade. China has moved its foot from the gas to the brake and aims to rein in the brewing housing bubble and lean against inflationary pressure.


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

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