Economic Outlook – 27 January 2019

US

  • President Trump agreed to reopen the federal government for three weeks while negotiations continued over how to secure the nation’s southwestern border, backing down after a month long standoff failed to force Democrats to give him billions of dollars for his long-promised wall. The president’s concession paved the way for the House and the Senate to both pass a stopgap spending bill by voice vote. Mr. Trump signed it on Friday night, restoring normal operations at a series of federal agencies until 15 February and opening the way to paying the 800,000 federal workers who have been furloughed or forced to work without pay for 35 days. The plan includes none of the money for the wall that Mr. Trump had demanded and was essentially the same approach that he rejected at the end of December and that Democrats have advocated since, meaning he won nothing concrete during the impasse.
  • While the Census Bureau was unable to provide data on new home sales, the National Association of Realtors (NAR) revealed that existing home sales faltered during December. Resales of single family homes and co-ops/condos fell 6.4% to a 4.99 million-unit pace, the slowest since November 2015. The magnitude of the drop exceeded expectations, but a slowdown in sales was largely anticipated. Pending home sales, which measure contract signings and lead closings by four to eight weeks, weakened considerably in the second half of the year alongside noticeably higher mortgage rates.
  • December’s report offered a few bright spots that point to housing market conditions improving in 2019. Inventories of homes on the market grew 6.2% year-on-year during December, the fifth consecutive increase. Extremely low inventory levels have been a driving force behind the rapid home price appreciation and an impediment to overall sales. As inventory levels improve, home prices should continue to ease. The NAR reported that the median existing single-family home price moderated 2.9% year-on-year, the slowest rise since 2012.
  • More modest home price appreciation amid higher mortgage rates should help support a gradual improvement in home sales moving forward. Rates on 30-year conventional loans fell in December, which led to a noticeable increase in mortgage applications in early January, further evidence that home buying activity is set to improve.
  • A solid labor market should also be supportive of housing and so far there has been little evidence of any weakening on the horizon. Initial unemployment claims for the week ending January 19 fell to 199,000, the lowest level since 1969. While initial claims had ticked slightly higher toward the end of 2018, claims have fallen in each week so far in January. Initial claims for federal civilian workers, which are reported separately and lag by one week, increased to 25,419 which was to be expected given the roughly 800,000 furloughed federal workers.
  • The LEI continues to point to generally favorable economic conditions. The 0.1% decline registered in December was mostly the result of financial market volatility, which dragged down the overall index. A note of caution about reading too much into this report: due to the lack of new data arising from the shutdown, manufacturers’ new orders and building permits also had to be estimated by the Conference Board.
  • When the US Federal Reserve began to shrink its balance sheet, allowing bonds purchased in the wake of the global financial crisis to mature, it was estimated by economists that the central bank’s holdings would shrink from around USD$ 4.5 trillion to somewhere between USD$ 2 trillion and USD$ 3 trillion when the runoff was completed. Lately, the Fed has been rethinking the terminal size of the balance sheet, and on Friday, the Wall Street Journal reported that the Fed is close to deciding on a balance-sheet-size target of about USD$ 3.5 trillion. Additionally, the Journal reported that the Fed may look to shorten the average weighted maturity of the portfolio
  • The US officially recognized Venezuelan opposition leader Juan Guaido as the interim president of that country. Guaido declared himself interim president on Wednesday. Joining the US were 12 other countries in the Americas, including Canada, Brazil, Argentina, Chile and Colombia. China, Russia and Cuba remain supportive of the government of Nicolas Maduro. The 35-year old Guaido is the head of the National Assembly and says Maduro is not a legitimate ruler. Maduro, after the US’ recognition of Guaido, suspended diplomatic relations with the US and gave it 72 hours to remove its diplomats from Venezuela. Tens of thousands of protestors took to the streets of Caracas on Wednesday to call for Maduro’s ouster.
  • After four consecutive weeks of solid gains, the major benchmarks ended flat for the holiday-shortened week. Technology shares performed best within the S&P 500 Index, while consumer staples and health care stocks lagged. Trading volumes were elevated as markets reopened Tuesday but fell back at midweek despite ongoing fourth-quarter earnings releases—Thomson Reuters expects 60 of the S&P 500 companies to have reported results during the week. Markets were closed Monday in observance of Martin Luther King Jr. Day. The trading week got off to a poor start on Tuesday, as investors confronted new data suggesting a slowdown in the global economy. The International Monetary Fund lowered its forecast for global growth in the coming year from 3.7% to 3.5%. Investors also had the first chance to react to data released over the weekend showing a deceleration in China.
  • Investment-grade corporate bonds held up well, with buyers mostly favoring shorter-term bonds and sellers seeming to focus on intermediate- and long-term credits. New issuance was well below expectations for much of the week, but the deals that came to the market were met with strong interest. The high yield market was mostly focused on new issuance, and investor sentiment was positive overall with buyers active in the market. A somewhat disappointing quarterly earnings report from Halliburton caused some weakness in more volatile energy sector issues. On the heels of a week with strong positive flows, below investment-grade bond and loan mutual funds reported outflows.
  • The job reports is due out on Friday and is the most important release. Average hourly earnings are expected to rise +0.25% month-on-month in January, which means a fall in the annual growth rate from 3.2% to 3.1% year-on-year. The unemployment rate is expected to come in higher due to the shutdown, as the household survey from which the unemployment rate is derived is likely to consider the furloughed workers as unemployed. For total payrolls, furloughed workers are counted as employed; however, due to the shutdown there might also be some noise in the total payroll number.
  • Friday also brings the FOMC meeting. Recently, there have been more dovish signals from the Fed supporting it being on hold for now and likely until the June meeting. From now on Jerome Powell will hold a press conference after each meeting and as the Fed has not updated its projections.

UK

  • British banks approved fewer mortgages last month than in November and the value of lending for home purchases rose by the smallest amount since 2016, an industry survey showed on Friday. Seasonally-adjusted data from the UK Finance industry body showed banks approved 38,779 mortgages last month. While up more than 6.0% on a year ago, this was down from 39,205 in November.
  • British employers have offered staff the biggest pay rises in 10 ten years in early 2019, a survey of companies suggested on Thursday, adding to signs that historically low unemployment is beginning to translate into faster wage growth. Annual wage deals agreed this month stood at a median 2.8%, compared with awards of 2.0% in December, according to preliminary figures collected by pay data firm XpertHR.
  • The most important event is on Tuesday when the House of Commons votes on Prime Minister Theresa May’s Brexit Plan B (and amendments). Many amendments have already been put forward (reflecting the many different views on Brexit among MPs) but it is the Speaker who decides which amendments to discuss and vote on. The vote is only indicative but if one, or more, of the amendments passes, it may force Prime Minister May to change her stance in one way or another. In particular, the amendment from Labour MP Yvette Cooper giving PM Theresa May until 26 February to put forward a new “meaningful vote” is interesting, as it has a fair chance of passing. The amendment would also force May to ask for an Article 50 extension if the vote fails again.

EU

  • The Euro PMI disappointed for another month as the Composite PMI decreased to 50.7 from previously 51.1. This is the fifth consecutive decline, and the improved situation in stock markets, combined with diminished global trade worries and political uncertainty in the eurozone, failed to turn the PMI around. There is little potential for the PMI to adopt a more stable development in coming months, probably slowly lessening recent worries that the slowdown in eurozone economy is happening much earlier and faster than previously expected. That said, the weaker growth over the turn of the year probably implies that GDP estimates for 2019 will be revised down.
  • The European Central Bank held rates steady at its January meeting, which took place this week, but said the balance of risks is now tilted to the downside. ECB president Mario Draghi said that while the risks are now pointed downward, the risk of recession in the near term is low since financial conditions remain accommodative, labor market dynamics strong, energy prices low and bank balance sheets stronger. He said softer external demand and country-specific factors contributed to the weakness.
  • On Thursday, the Q4 euro area flash GDP growth numbers will be released. In Q3, the euro area economy grew 0.2% quarter-on-quarter, the weakest growth rate since December 2014. Although temporary effects from German car sector bottlenecks explain some of the growth drag, the overall economic environment, with a Chinese slowdown, Brexit and fragile risk sentiment in financial markets, also weighs on growth prospects. In light of the latest months’ disappointing industrial production data and falling sentiment indicators, the euro area economy is unlikely to have picked up speed in the past quarter.
  • On Friday the January HICP inflation numbers come due. Headline inflation took a dive in December, falling from 1.9% year-on-year to 1.6% year-on-year, driven mainly by falling oil prices, as core inflation remained flat at 1.0% year-on-year, which is a level it has been fluctuating around for the past year. Energy prices are expected to continue the falling trend and, hence January’s headline print is likely to come in at 1.3% year-on-year.

China

  • Official Chinese GDP growth slowed as expected by consensus to 6.4% year-on-year in Q4 from 6.5% in Q3. This was the slowest pace since the global financial crisis. The monthly activity figures for December delivered a few positive surprises, but these are unlikely to be signs of stimuli already having stabilised overall economic growth. Industrial production growth increased to 5.7% year-on-year in December from 5.4% against expectations of a decline. The increase was driven by mining and not manufacturing. Retail sales growth also surprised by increasing, but car sales were still very weak. Growth of fixed investment was weaker than expected in December, as stimuli-driven infrastructure projects failed to counter weak fixed investments within manufacturing and property.
  • US commerce secretary Wilbur Ross downplayed talk of an imminent breakthrough in trade talks with China, saying the two countries are “miles and miles” from an agreement. The comments come ahead of high-level talks with senior Chinese negotiators in Washington early this week.
  • Chinese stocks edged higher amid hopes that the US and China will broker a trade deal by 1 March, when a temporary ceasefire in their months-long trade battle expires. The Shanghai Composite Index edged up 0.2%, and the large-cap CSI 300 Index, China’s blue chip benchmark, added 0.5%. A high-level delegation led by Chinese Vice Premier Liu He, the official in charge of Beijing’s trade talks with the US, is scheduled to arrive in Washington on 28 January, Bloomberg reported last Friday, citing unnamed sources.
  • The PMIs for January are due this week. Caixin PMI manufacturing is expected to fall further, as it has some catching up to do with other indicators that have shown more weakness. The official NBS PMI manufacturing has already fallen a lot, though, but there is still some downside risk in the short term before it reaches the bottom in Q1.

Sources: Wells Fargo, T. Rowe Price, Reuters, MFS Investment Management, Danske Bank, NY Times.

2019-01-27T19:02:00+00:00

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