US
Real GDP growth in the United States slowed to end of 2016, registering a 1.9% annualised growth rate in Q4. International trade weighed heavily on economic growth in Q4, largely as a result of some payback due to the unusual surge in soybean exports that boosted growth in Q3. Real final sales to domestic purchasers, which exclude trade and the volatile inventory component, actually accelerated in Q4 to a 2.5% pace. This measure of underlying domestic demand had slowed over the past year and a half or so, but recent data suggest some firming, which will continue in 2017.
Existing and new home sales for December were weaker than expected, with an especially sharp dip for new home sales. The new home sales report was the first chance to assess the effect of higher mortgage rates. Existing home sales measure closings and reflect mortgage rates from sales contracts signed a month or two earlier. Despite the 10.4% decline in new home sales in December, sales rose a solid 12.2% in full-year 2016 and continued their gradual improvement from the housing bust.
On Wednesday, there will be a FOMC meeting with accompanying policy announcement. The Fed is expected to maintain the fed funds target range of 0.50% to 0.75% in line with market pricing and consensus. This meeting will not be accompanied by updated projections. At the December meeting the Fed signalled that the economic outlook was “uncertain” due to Trumponomics but that “almost all” FOMC members thought there were upside risks to their growth forecasts (and hence the number of Fed hikes) due to the expectations of more expansionary fiscal policy. Yellen said the Fed would need to offset more expansionary fiscal policy, as the output gap is already almost closed.
The other main event of the week is the January jobs report (NFP) on Friday and job growth is expected to be at 160,000, still primarily driven by services. The annual growth rate in average hourly earnings rose to 2.9% year-on-year in December, but is likely to fall back to 2.7% year-on-year in January despite a monthly increase of 0.25% month-on-month. In general, wage growth is trending higher despite fluctuations and higher wage growth continues to be a trigger for the Fed this year. The unemployment rate is expected to be unchanged at 4.7%, but there is a risk that it might increase to 4.8% if the labour force participation rate moves slightly higher.
UK
According to the CBI Distributive Trades Survey, reported UK retail sales volumes fell in the year to January 2017 after growing robustly in Q4. Total sales volumes were considered to be broadly in line with the average for the time of year, having been above seasonal norms in Q4 2016. Looking ahead, firms expected sales volumes to grow in the year to February. Orders placed on suppliers were broadly unchanged over the year to January, and are expected to fall marginally next month. The moderate decline in retail sales volumes was driven by grocers, where sales fell at the fastest pace since August 2004. However, continued healthy growth was reported particularly among clothing retailers and department stores. Wholesaling reported the strongest volume growth since September 2007, and the survey suggests this was partly due to purchases brought forward ahead of expected future price rises.
The main event next week is the Bank of England (BoE) meeting on Thursday. This is one of the big meetings with an updated Inflation Report and a press conference so watch out for an overload of information. It is widely expected that the BoE will keep its monetary policy unchanged so focus is on the minutes, the economic projections and Carney’s press conference. BoE is expected to maintain its neutral bias by stating that interest rates could move “in either direction”, as the BoE seems to be reluctant to indicate rate hikes at a time of elevated political uncertainty.
UK PMIs for services, manufacturing and construction will be released next week. Services PMI has increased significantly since the sharp fall in July but it is not expected o grow higher as it is likely to stay around its current level of 56.2 for now. PMI manufacturing was 51.6 in December and is more or less at the same level as the equivalent index for the euro area so the UK manufacturing index is also expected to remain unchanged in January. Overall, the PMIs are strong but are expected them to slow, as UK growth will slow eventually this year due to weaker growth in private consumption and business investments.
EU
The flash Composite PMI in the Eurozone showed a marginal decline to 54.3 in January from 54.4 in December, not quite matching expectations of a small increase. This was the first decrease in four months and suggests that economic momentum slowed toward the end of last year. Meanwhile, the business survey still suggests that real GDP growth firmed at 0.5 % quarter-on-quarter in Q4 2016 and that growth started at a pretty healthy pace in 2017.
The HICP inflation figures for January will be released on Tuesday. Energy price inflation has maintained the upwards lift to headline inflation, which is expected to rise to 1.5% year-on-year in January, up from 1.1% year-on-year in December. However, there are no signs that core inflation is picking up, so it is expected to remain at its 0.9% level in January. Headline inflation is likely to increase further in February but core inflation is due to remain unchanged.
The Euro area unemployment rate for December will be released on Tuesday. There has been a declining trend throughout 2016 to the 9.8% level observed in November. The unemployment rate is expected to decline further to 9.7% in December driven by expectedly solid growth in Q4 16, in line with the expectations created from strong survey indicators throughout Q4.
China
China’s economy expanded by 6.7% for the whole year of 2016, as widely expected. The stabilisation of the economy was largely due to the rally in the property market, which has also triggered concerns of asset bubble. In the coming year, China will put more effort to balance the growth, financial risks and external challenges especially from Trump. The overall growth is expected to remain on a stable trajectory while CNY will continue to weaken.
Chinese manufacturing PMI for January is due next week, both the private Caixin index and the official index from NBS. A small decline in both indices is expected as there are increasing signs that the housing market is slowing down and that growth in infrastructure investments is softening. Overall, Chinese activity is likely to peak in Q1 and look for a moderate slowdown in growth during 2017 as the two main engines of the recovery last year (housing and infrastructure) are set to lose some steam in 2017. This is due to tightening of the housing market to keep prices in check and because the big fiscal boost ignited in Q1 2016 will not be repeated in 2017.
Sources: Wells Fargo, Haendelsbank, Danske Bank, TD Economics, Commerzbank.
