Economic Outlook – 3 April 2016


The US economy added 215000 jobs in March and average hourly earnings ticked up 0.3%. In addition, labor force participation continued to rebound, advancing to 63%. Data out of the factory sector were also encouraging, as the ISM manufacturing index snapped its streak of five consecutive months in contraction territory with a reading of 51.8 in March.

Chair Yellen’s speech on Wednesday, while containing many of the recent “Fedspeak” elements, struck a dovish tone, emphasising global risks, policy asymmetry, and unease over low inflation expectations. Upside risks were mentioned but did not appear as burning concerns.

In her speech, the words “gradual”, “slow”, “global”, and “uncertain” were used about ten times apiece, while “risk” had twice as many mentions.

Yellen expressed some concern about inflation expectations, and talked about “policy attenuation”. This suggests greater gradualism in an environment of increased uncertainty when rates are very low. This only served to reinforce the market’s skepticism of the Fed’s plans for 2016 hikes.

Next week will be light in terms of new data. The most important release is the ISM non-manufacturing index for March due on Tuesday. The index has declined for four consecutive months reflecting the slowdown in the economy which began by the end of 2015. While the ISM non-manufacturing index may have been a bit too high previously, the consensus is the current level is actually too low compared to other economic indicators. Thus the expectation is for the ISM non-manufacturing index to rebound to 54.1 in March as key figures such as consumer confidence and regional activity indices have painted a different picture lately.


The final estimate of Q4 GDP last year was reported higher than the first two estimates. The Office for National Statistics released the final reading of GDP in Q4 and was reported at 0.6%, up from earlier estimated 0.5% when compared to Q3 last year. This is the 12th consecutive quarter of positive growth since Q1 2013.

The UK PMI for the manufacturing sector in March was reported more or less at the same level as in February. Continued weakness within the export order index is most likely due to the earlier GBP appreciation since there is a long lag between the currency and the export impact. But looking forward, the depreciation of the GBP should boost foreign demand slightly.


In the euro area, the week starts off with release of the Sentix investor confidence for April on Monday. After declining three months in a row, the index is expected to have bottomed for now and look for a small increase due to the improved market sentiment.

The euro area unemployment rate, which has been on a downward trend since mid- 2013, is also released Monday and the expectation is for the figure to remain unchanged at 10.3% in February.

Although this is a high level of unemployment, it is not that far from the European Commission’s estimate of the structural unemployment rate of 9.8%. When the unemployment rate reaches this level, the upward pressure on wages should start to pick up.


There has been a deterioration in Japan’s Tankan survey. Large manufacturers registered a softer outlook sentiment in March and sentiment fell to its weakest in just under three years.

This generally reaffirms the weakness in industrial output readings that were previously digested by markets but the outlook sentiment suggests this may not turn around soon. Yen strengthening this year is not helping manufacturing sentiment.


China’s manufacturing and service sectors both picked up by more than expected last month according to purchasing managers’ indices. The state’s manufacturing PMI climbed from a mildly contractionary 49.0 reading in February to 50.2 in March.

That was the best reading since June of last year and the improvement was fairly broadly based across the components. The private manufacturing PMI also improved from 48 to 49.7 (consensus was 48.3) and so this measure that is more weighted toward smaller producers versus state owned enterprises also came in substantially better than expected.

In fact, the private manufacturing PMI was the strongest since February of last year. The state’s services PMI also accelerated from 52.7 to 53.8 to notch an acceleration in growth to the quickest pace since December. The PMI improvements indicate that the collapse of China’s economy that many have feared is not imminent.

The authorities have eased monetary as well as fiscal policies and have facilitated local governments’ infrastructure projects. Furthermore, the housing market recovery is on track with increasing property prices and sales and construction activity taking off. The authorities’ apparent success in stabilising growth via stimuli is positive in the short run. It does, however, pose risk of for instance bubbles bursting in the longer run.


Sources: Danske Bank, TD Economics, BNP Paribas, Handelsbanken, Wells Fargo, Scotiabank.