Economic Outlook – 28 April 2019


  • US real GDP grew at an annualised rate of 3.2% in Q1 of 2019. The first quarter headline rate of growth was stronger than most analysts had expected, and it represents a pick-up in growth relative to Q4. But underlying details of economic growth were not quite as strong as the headline growth rate suggests. First quarter growth was driven by a surge in inventories and a large contribution from net trade. Underlying consumption was weak, however, with final sales to private domestic purchases rising just 1.3%. That suggests at least some of the $128 billion build in inventories was unintentional. Inventory accumulation should fall back in coming quarters as a result, which would exert a headwind on the overall rate of GDP growth at that time. The one caveat here, however, is the plausible build from the Boeing’s 737 MAX aircraft, which while being produced but not delivered is expected to boost Q2 inventories.
  • Real personal consumption expenditures (PCE) slowed in the first quarter, rising only 1.2%. But, with the 1.6% surge in March retail sales and consumer sentiment data stabilizing consumption ended the first quarter on a solid note, which provides some momentum headed into Q2.
  • Fixed investment spending was up only 1.5% in the first quarter. Investment too may accelerate in coming quarters, as durable goods orders data for March suggest capital spending may be picking up.
  • Net exports provided a sizable boost, adding 1.0 percentage point to the overall rate of GDP growth in Q1, which is among the largest positive contributions this component has made this cycle. Exports grew a modest 3.7%, but imports fell 3.7%. As domestic demand strengthens, real imports are expected to rebound in coming quarters, but this will exert a drag on growth.
  • Last week’s data support the view that the Fed will refrain from raising rates for the foreseeable future. The underlying detail were not as strong as the headline rate of GDP growth suggests. Further, the core PCE deflator rose at an annualized rate of just 1.3% in the first quarter. With the Fed’s preferred measure of consumer price inflation remaining below its objective of 2.0%, it seems likely that the FOMC will be happy to remain on the sideline watching the incoming data.
  • The US government announced this week that it will no longer grant exemptions to US sanctions to nations importing oil from Iran. The current waivers expire 2 May and could reduce Iranian oil income by approximately $50 billion a year. Iran countered the move by threatening to close the Strait of Hormuz, a choke point in the Persian Gulf through which much of the Middle East’s oil must transit. Oil prices firmed on the news, with Brent crude reaching its highest level since October, just shy of $75 a barrel. Excess OPEC+ capacity is expected to make up any Iranian shortfall over the medium term.
  • US stocks generated modest gains for the week, with the technology-heavy Nasdaq Composite Index and smaller-cap benchmarks outperforming large-cap indexes. The S&P 500 Index hit record highs on Tuesday and, after losing some of its upward momentum, again on Friday. The S&P 500 has now climbed about 25% from its recent low on 24 December 2018. Trading volumes continued to be lackluster despite many major companies reporting quarterly earnings numbers. Technology stars like Microsoft posted strong quarterly earnings, pushing its market capitalization briefly above $1 trillion and boosting the Nasdaq Composite, while industrial conglomerate 3M’s shares plunged after it posted disappointed sales figures, weighing on the Dow Jones Industrial Average.
  • Treasury yields decreased, with the 10-year Treasury note’s yield reaching 2.5% on Friday. Municipal bonds extended their strong 2019, outperforming Treasuries. Strong demand and light new issuance continued to support the municipal debt market. Industrywide, municipal bond funds recorded their 16th consecutive week of inflows.
  • Crude oil prices were notably volatile. Oil jumped on Monday and Tuesday after the Trump administration confirmed that it will end waivers allowing certain countries to continue to buy Iranian crude. However, oil plummeted on Thursday and Friday after data showed that US crude oil inventories reached the highest levels since October 2017, erasing the commodity’s early-week gains and pushing prices lower for the week. Energy sector stocks suffered along with crude, and disappointing earnings from some major energy companies compounded the sector’s woes.
  • The most important event is the FOMC meeting on Wednesday. Fed has stated that they are on hold, so they are expected to keep the target range unchanged at 2.25% to 2.5%.
  • The job reports is due out on Friday. Overall, the labour market remains strong, but it is important to keep an eye on whether employment growth starts to decelerate. Average hourly earnings are expected to have risen +0.25% month-on-month in April, unchanged at 3.2% year-on-year.
  • ISM manufacturing will be due out on Wednesday. Manufacturing is expected to have peaked and move slightly lower before it stabilises (still above 50). Based on a weighted average of the regional PMIs, numbers are likely to come in at 55.0 (currently 55.3).


  • With Brexit looming, British factories stockpiled over the last three months at the fastest pace since records began in the 1950s, and they’re increasingly downbeat about their prospects, a survey showed on Friday. The Confederation of British Industry’s (CBI) quarterly survey added to signs that Brexit and a slowdown in the global economy has lumbered manufacturers, who account for 10.0% of the British economy, with a headache. Expectations for export orders in the next three months fell to their lowest level since mid-2009, when Britain was reeling from the global financial crisis.
  • British banks last month approved the greatest number of mortgages since June 2018, a tentative sign that the worst of the housing market’s slowdown ahead of Brexit may have passed, data showed on Friday. Seasonally-adjusted data from the UK Finance industry body showed banks approved 39,980 mortgages in March, up 6.0% on a year ago and compared with 39,207 in February. The survey added to some early signs that the housing market may be picking up a little after slowing markedly last year. Earlier this month the Royal Institution of Chartered Surveyors’ gauge of house prices picked up for the first time since July, although it said the uncertainty around Brexit was likely to keep weighing on the market.
  • With continued Brexit uncertainty and weak economic data out of both the UK and Europe, the Bank of England is not expected to change its policy at the upcoming meeting. It is one of the big meetings, so focus is on the inflation report and press conference. A rate hike is not likely in the foreseeable future.


  • In an effort to quell nearly six months of sometimes violent protests, French president Emmanuel Macron has proposed tax cuts for middle class French workers, increased pension benefits and greater efforts to combat illegal immigration. High taxes, high unemployment and stagnant wages are among the “Yellow Vest” protesters’ major complaints. Macron wants to ease rules to make referendums easier to call in the hopes that dissatisfied workers will air grievances at the ballot box rather than in the streets.
  • The trend toward an increasingly fractured European political landscape is expected to intensify after Sunday’s Spanish general election. Recent polling suggests no party will be able to command a majority and that the coalition-building process could be both difficult and time consuming. Given the lack of euroscepticism in Spain, markets are not unduly concerned over the election’s outcome.
  • European purchasing managers’ indexes (PMIs) have given the impression that the economies of the region continue to weaken. While there was hope that a recovery in China would help the eurozone to some extent, that trend has yet to show up in the recent survey data, he said. While data continue to fall short of consensus forecasts, they are still above the lows seen in December and January. He said that there is also a notable divergence between the “hard,” or actual, data and “soft,” or survey-based, data such as PMIs. The January and February hard data have been better than the corresponding PMIs, so PMIs may not be as good of an indicator of actual industrial production (IP) as they once were. Thus, he will be watching March IP data to get a better indication of whether the eurozone is as weak as indicated by the PMIs.
  • Germany’s Ifo Institute reported this week that its business climate indicator in April fell for the seventh month in the last eight, highlighting the difficulties that the trade-dependent German economy is facing as global growth slows, political worries mount, and confidence declines. The news came one week after the German government slashed its 2019 growth forecast to 0.5% from an earlier 1.0%.
  • On Tuesday, the Q1 19 GDP estimate will be released. The first quarter showed both weak manufacturing PMIs and industrial production, which has likely remained a drag on growth. However, rebounding service PMIs indicate that domestic demand has picked up further momentum in Q1. Although the euro area economy is still not of the woods, a slight acceleration is to be expected in the Q1 growth rate to 0.3% quarter-on-quarter.
  • On Friday, the euro area inflation prints are due. Last month, seasonal effects from the timing of Easter were the main drivers behind the fall in headline and core inflation to 1.4% year-on-year and 0.8% year-on-year, respectively. Seasonal effects will continue to blur the Q2 prints, but core inflation is expected to rise back to 1.2% year-on-year and headline to 1.8% year-on-year in April, supported by the Easter effect and rising energy prices.
  • GDP growth was stable at 6.4% year-on-year in Q1 compared to Q4. The consensus had expected slower growth. The monthly activity indicators showed increased momentum in March with growth of retail sales, fixed investments and industrial production. The latter jumped to the highest level since 2014, which seems odd and might reflect some data distortions. Still, the big picture clearly is that growth is now rebounding due to the many economic policy stimulus measures implemented recently. There has already been a rather clear sign of the rebound from the jump in both manufacturing PMIs in March.


  • Stabilising growth in the first quarter of 2019 has prompted the Chinese government to shift its focus from targeted stimulus to structural reforms, Chinese media reported after a meeting of the politburo late last week. Local equity markets fared poorly last week as some view the shift in focus as premature given the disparity in Chinese domestic economy indicators and indicators from neighbouring countries that make up the bulk of China’s supply chain, such as Taiwan and South Korea. Data in those countries do not reflect the firmer recent tone from China.
  • Mainland Chinese stocks posted their biggest weekly decline since October 2018 amid fears that Beijing would dial back policy support after China’s economy grew more than expected in the first quarter. For the week, the Shanghai Composite Index and the large-cap CSI 300 Index, China’s blue chip benchmark, each shed 5.6%. It was the biggest drop for both indexes since 12October 2018, according to Reuters. The latest week’s declines pared the outsized gains Chinese stocks have racked up this year, driven by hopes for an impending US trade deal, MSCI’s plans to include more domestic Chinese shares in its global indexes, and a raft of supportive policy measures.
  • Fueling the weekly drop was a statement from the Politburo, China’s top policymaking body, mentioning the words “structural deleveraging” that were omitted from official statements last year and including lines related to curbing real estate speculation. Traders viewed the statement as a sign that China’s leaders would pare back support for the economy and instead focus on averting potential asset bubbles. The Politburo’s statement came a week after China reported that its GDP grew at a stronger-than-expected 6.4% pace in the first quarter as the government stepped up measures to bolster the economy.
  • US trade negotiators, led by Secretary of the Treasury Steven Mnuchin and US Trade Representative Robert Lighthizer, are scheduled to return to Beijing next week for another round of trade negotiations. While an agreement is said to be close, further talks are scheduled to take place in Washington beginning on 8 May. Comments from President Xi Jinping on Friday at a summit on China’s Belt and Road initiative suggested that his country will address many of the issues most important to the US, such as opening China’s markets to more foreign competition, enhancing intellectual property protections, banning forced technology transfers, boosting imports and refraining from currency devaluations.
  • The key data in China next week is PMI manufacturing from both Caixin (private) and NBS (official). The Caixin version rose sharply for the second month in a row to 50.8 in March and consensus looks for a further rise to 51.0. However, while most believe the worst is behind us in China, there could be some downside risks to the April number. First, it is not unusual to see a decline after two months of such a big increase. Second, the strong March number could be distorted by the Chinese New Year. Hence, there could be a small decline to 50.5. The NBS version has increased less in the past months and there could be some scope for a small increase here. The bottom line, though, is there could be some downside risk to April numbers in general due to New Year distortions.

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