Economic Outlook – 3 March 2019


  • The weakness in the US housing market felt through much of last year has extended into 2019. Existing home sales dropped 1.2% in January, as the lingering effects of rapid home price appreciation and higher mortgage rates in the second half of 2018 dampened sales for the third consecutive month. While overall sales have slumped, lower mortgage rates more recently make us optimistic that gradual improvements in home sales should be forthcoming.
  • The partial US government shutdown, which began in December and lasted well into January, had continued to delay important data releases, clouding analysts’ assessments of the economy’s performance. Data on Q4-GDP, and housing starts and personal income and spending data now available through December.
  • The US Commerce Department released data on Thursday which showed that real GDP grew at an annualized rate of 2.6% in the fourth quarter. While this pace of growth still represents a step down from the strong growth rates experienced earlier last year, at 2.6% growth was above the market expectation of 2.2%.
  • Real personal consumption expenditures (PCE), grew only 2.8% in the fourth quarter, leading much of the deceleration in GDP growth. The weakness can be traced to the weak spending environment in December, with both personal spending and retail sales experiencing their largest declines since the recession year of 2009. Real PCE was in part boosted earlier last year by personal tax cuts, but these real income-boosting effects will likely fade this year. Personal income rose 1.0% in December, but fell 0.1% in January. Income growth should regain some strength this year, due to the robust labor market.
  • Consumer confidence data for February suggested consumers have regained some optimism. The present-situation component of the index improved to a cycle-high of 173.5, while the expectations component jumped 14 points. Expectations of job prospects and improvements in income have propelled the outlook, but fewer purchasing plans of autos, homes and major appliances weighed on overall optimism. Taking this anecdotal indication with recent hard data on durable goods orders suggests that growth in capital spending will likely be anemic in the first half of 2019.
  • After a slow pace of growth in the third quarter, business fixed investment (BFI) spending rebounded at a rate of 6.4% in the fourth quarter. But, the construction components of BFI remained weak. Non-residential construction fell 4.2%, while the residential side declined for the fourth consecutive quarter.
  • Less hopeful is the underwhelming manufacturing data from this morning that suggests that the global manufacturing rout is not easing. The US ISM manufacturing index declined in February, falling to the lowest level in more than a year, but remaining firmly in expansionary territory.
  • US housing starts plunged 11.2% in December. Mortgage rates were up to a near 5% last year, which threatened to worsen the affordability crisis that has been dragging home sales and new home construction lower since March of last year. Rising home prices had only exacerbated weakness in residential construction last year. But, with mortgage rates now lower and building permits having risen in January, there may be some upside pressure to housing starts in 2019.
  • US Federal Reserve Board chairman Jerome Powell delivered his semiannual monetary policy report to Congress this week and indicated that while the country’s economic outlook is favorable, crosscurrents and conflicting signals have become evident. Powell said that with policy rates near neutral and inflation pressures muted, now is a good time for the central bank to be patient and to watch, wait and see how the economic situation evolves. Slowing global growth is the predominant risk to the US outlook, Powell said.
  • The major US indexes were mixed for the week. The technology-heavy Nasdaq Composite Index performed best, while the smaller-cap benchmarks lagged. The S&P 500 Index seemed to be bumping up against a resistance level of around 2,800 due, in part, to the strength of recent gains. Early in the week, over 90.0% of the stocks in the index were trading above their 50-day moving average. Volatility, as measured by the Cboe Volatility Index (VIX), picked up a bit from its multi-month lows the previous week, and trading volumes were also somewhat elevated. Within the S&P 500 Index, utilities stocks outperformed, while materials shares lagged.
  • President Trump walked away from denuclearization negotiations with North Korean leader Kim Jong Un last week in Hanoi. Competing narratives were offered by the two sides, with Trump saying North Korea wanted all sanctions lifted in return for the decommissioning of the Yongbyon nuclear complex and North Korean foreign minister Ri Yong Ho countering that his country would have accepted a partial lifting of sanctions and was willing to halt nuclear and ballistic missile tests. Trump said he is hopeful that talks will continue. Ri said that the North’s position won’t change. Some analysts viewed Trump’s willingness to leave Hanoi without a deal as sending a message to Beijing, with which the US is engaged in trade talks, that in negotiations the US is willing to accept no deal if the only alternative is a bad one.
  • Longer-term US Treasury yields moved higher for the week, with the yield on the benchmark 10-year note touching its highest level in a month. Municipal bonds continued to see light new issuance, and strong cash inflows into the asset class helped generate positive performance during the week. New issues had mixed success in obtaining funding, however, with many buyers continuing to wait patiently for higher rates. Valuation ratios for short-term issues remained relatively rich, while longer-maturity ratios stayed more in line with historical norms.
  • The jobs report is the most important release which is due out on Friday. Average hourly earnings are expected to rise +0.25% month-on-month in February, which means an increase in the annual growth rate to 3.3% year-on-year, up from 3.2%, while the change in nonfarm payrolls is expected to come in at 190k. Regarding nonfarm payrolls, it seems employment growth has reached its high and has stabilised around its current level of 1.7% year-on-year.
  • The US housing market data is due this week, new home sales have been on a declining trend since December 2017, however, data for November came in stronger than expected.


  • In the EU, the flash annual consumer price inflation rose a notch to 1.5% in February from 1.4% in January, as widely expected. But the rise was primarily driven by higher food and energy price inflation, while service inflation in fact decreased to 1.3% from the previous 1.6%, implying that core inflation unexpectedly fell to 1.0% from the previous 1.1%. Hence the tightening of the labour market and signs of increasing wage growth still fail to spill over to core inflation, which has remained more or less flat in the past two years.
  • Unemployment figures for January were also released, which were unexpectedly lower at 7.8% of the labour force after a downward revision of the December figures. The number of unemployed continued its long-lasting continuous monthly decline into January, and thus the recent softer tones from labour market indicators (PMI and ECFIN) still do not translate into rising unemployment.
  • The pan-European STOXX Europe 600 Index rose despite escalating geopolitical tensions between nuclear powers Pakistan and India and the abrupt end to the US-North Korea summit. Renewed hopes for a US-China trade agreement and better Chinese manufacturing data buoyed stocks.
  • Data showed manufacturing activity under pressure throughout the eurozone. The overall eurozone final manufacturing purchasing managers’ index (PMI) for February fell for the seventh-consecutive month and, for the first time since June 2013, fell below the 50 level that separates growth from contraction, according to IHS Markit. Separate reports in Germany, France, and Spain showed similar patterns of slowing growth. Spain’s PMI showed that confidence among Spanish manufacturers slid to its lowest level in five years. In Italy, confidence hit its lowest level since 2013.
  • In the euro area, the final Q4 GDP estimates are due on Thursday, where for the first-time detailed information about the growth drivers of the fourth quarter will be issued. The Q4 flash estimates showed growth at 1.2% year-on-year and 0.2% quarter-on-quarter. No revisions to the estimates are expected, but the component breakdown is of particular interest since falling exports drove much of the slowdown in Q3 and it will be interesting to see whether this continued in Q4.


  • British prime minister Theresa May has scheduled 12 March parliamentary vote on the Brexit withdrawal agreement she has negotiated with the European Union. If that measures fails to pass, a vote to leave the EU without a deal is scheduled for 13 March. If a no-deal Brexit goes down to defeat, a third vote is scheduled for 14 March, which would necessitate a short delay in the termination of the Article 50 period, now scheduled for 29 March. Slowing down the process is made more difficult by the timing of the European Parliamentary elections scheduled for late May, a chamber of which the UK no longer wants to be a member. If the UK is still an EU member at that time, it will be expected to hold elections to that body. One bit of Brexit progress was seen last week: US and UK regulators said that they are working together to ensure that derivatives contracts won’t be disrupted in any Brexit scenario.
  • Adding to the uncertainty, for the first time since Britons voted in June 2016 to leave the EU, one of the two major political parties is backing a fresh referendum that would allow voters to change their mind ahead of the March 29 deadline. One day after Prime Minster Theresa May said that she hopes to bring a revised Brexit deal before parliament by March 12, Jeremy Corbyn, the leader of the UK’s opposition Labour Party, said that his party will back a new Brexit referendum alongside a British parliamentary election.
  • British households took out more mortgages and increased their borrowing in January, adding to signs that consumers are less worried about Brexit than many businesses, Bank of England data showed. The number of mortgages approved for house purchase was higher than any forecast in a Reuters poll of economists, hitting 66,766 in January, a jump from 64,468 in December. At the same time, consumer borrowing picked up by nearly 1.1 billion pounds, also beating all forecasts in the Reuters poll.
  • British factories are cutting jobs and bracing for Brexit by stockpiling goods at a record pace, but consumers seem less worried, suggesting their spending might help to shore up the economy, data showed on Friday. A measure of manufacturing – the IHS Markit/CIPS Purchasing Managers’ Index – hit a four-month low in February, and the fall would have been worse if factories had not rushed to build up inventories to see them through any Brexit border chaos.
  • In terms of economic data releases, the most important one will be the PMI Services on Tuesday. The index dropped to 50.1 in January and it won’t be surprising if it has dropped below the 50 mark in February due to Brexit uncertainties. The service confidence indicator suggests the PMI service index may have fallen to as low as 48.0, which would be the lowest level since the referendum.
  • MSCI, the provider of global equity indices, announced this week that it will increase the weight of Chinese A shares in its indices by increasing the inclusion factor from 5.0% to 20.0% in three steps, beginning in May.  At the end of the process, China A shares will constitute 3.3% of the MSCI EM Index and 0.4% of the MSCI ACWI Index.


  • Testifying on Capitol Hill last week, United States Trade Representative Robert Lighthizer laid out several areas in which the US and China have made progress toward a trade agreement. Chief among them is a tentative agreement between the two sides on an enforcement mechanism. According to the Wall Street Journal, complaints of violations of the accord would be discussed in a series of consultations between the two countries, occurring every month at the staff level, every quarter at the vice-ministerial level and twice yearly at the ministerial level. Additionally, a tentative framework has been agreed to regarding China’s currency management. Lighthizer said that the US has dropped the threat of a hike to 25.0% in the tariff rate imposed on China’s exports to the US. Late in the week, US Treasury secretary Steven Mnuchin said the two countries are working on a 150-page document, while White House economic adviser Larry Kudlow said the two countries are on the verge of agreeing on a historic pact. A summit to finalise the deal could take place in Florida between US president Donald Trump and China’s president Xi Jinping by the middle of this month.
  • The Manufacturing PMI from Markit rebounded to much better than expected, to 49.9 in February from 48.3 in January. The index thereby reversed the plunge in January and is now almost back above the 50 threshold between expansion and contraction. However, the index is still below the level that prevailed during the first half of last year before economic growth started to slow. The official Manufacturing PMI fell somewhat from 49.5 to 49.2. Since the official index contrary to Markit’s is usually poorly adjusted for the New Year disturbance, but the decline might simply be due to the factory closings in February.
  • The trade data for February will be issued this week. January exports were quite strong but likely distorted by the timing of the Chinese New Year in early February. Export growth is expected to fall back sharply in February, adding to the picture of mixed data.

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