Economic Outlook – 5 February 2017


The Federal Reserve held rates steady this week, as widely expected. It reiterated the strengthening US domestic outlook would warrant gradual policy tightening over the medium term. No clues were given on the timing of the next move, likely because uncertainty surrounds the unfolding of the new administration’s policy, and the Fed can afford to wait for clarity because inflation remains tame.

US personal income and spending in December was solid, up 0.3% and 0.5%, respectively. Following two months of soft readings, personal consumption expenditures ended the year on better footing. Real personal spending was up a more muted 0.3% in December, as inflation cut into purchasing power. Still, Americans spent a larger share of income, lowering the savings rate to 5.4% from 5.6% in November, providing some hard data to corroborate optimism in the various consumer sentiment surveys since the election.

Sentiment among manufacturers continues to improve, according to the ISM survey. This rose for the fifth consecutive month, to 56.0 in January, as broad-based gains across indices pointed to steady optimism among respondents. The employment component stood out most in the upbeat report, rising 3.3 points to 56.1. Pressure from soft global growth and the energy-related investment downturn has largely faded, though manufacturers still have to face headwinds from the stronger greenback weighing on exports. Inflationary pressures were also apparent in the report, with the prices paid component rising in 15 manufacturing industries, while none reported paying lower prices for inputs.

January’s jobs report surprised to the upside as employers added 227,000 jobs on the month, much stronger than the consensus estimate. The job market also pulled more Americans in from the sidelines; as the labor force participation rate rose 0.2 percentage points to 62.9%, giving the slight uptick in unemployment to 4.8% some positive light. Average hourly wage growth was softer than expected, particularly if the labor market is at full employment.

The only interesting release next week is the preliminary consumer confidence data from the University of Michigan. Consumer confidence has risen significantly since Donald Trump’s election victory but it is likely to decline slightly from 98.5 to 97.5. However, this is still a high level, supporting the view that private consumption continues to be the main growth engine in the US.


The Markit/CIP’s UK Services PMI fell to 54.5 in January from 56.2 in December. The consensus expectation was 55.8. According to the survey, the pace of growth in total business activity moderated for the first time in four months. New business and employment also increased at slower rates, while outstanding work actually fell. Inflationary pressures were reported to be intense, with input price growth accelerating to the highest pace since March 2011, pulled up by increasing fuel prices, salaries, freight charges and imports. Output prices also increased in January, at a rate equal to December’s. Nevertheless, business expectations improved to the strongest level since May last year, and the upbeat expectations were linked to business pipelines, low interest rates, diversification into new markets, greater political stability and clarity around Brexit, to mention a few factors.

The Bank of England (BOE) left its base rate at 0.25% and maintained its asset purchase and corporate bond buying goal at £ 435 billion and £ 10 billion. The revised economic forecast anticipates quicker GDP growth but slower inflation growth in the next two years. Inflation expectation is 2.60% in 2018 (previous: 2.70%) and 2.40% in 2019 (previous: 2.50%). Separately, manufacturing expanded at one of its quickest pace in more than two years in January.

The main event next week in the UK is the House of Commons vote on the Article 50 bill and each of the possible amendments on Wednesday. The House of Commons is expected to approve the bill and it to pass on to the House of Lords. There is no programme detailing how much time the House of Lords intends to spend discussing the bill but the Government hopes the House of Lords will pass the bill by 7 March. Prime Minister Theresa May is expected to trigger Article 50 on 9 March.

In terms of data release, the Industrial production and construction data for December will be released and should reveal whether revisions to the first estimate of Q4 GDP growth of 0.6% quarter-on-quarter are to be considered. The NIESR GDP estimate for January is interesting, as it has been a quite good indicator for actual GDP growth.


Real GDP growth increased to 0.5% quarter-on-quarter in Q3 2016, as expected. Annual growth was a bit higher than expected, at 1.8%, due to upward revisions to earlier quarters. That implied growth was at a robust 1.7% in 2016, although still fall from 2.0% in 2015. The numbers did not come with sub-components, but the increase is expected to be largely driven by domestic demand (private consumption and fixed investment).

Annual headline HICP inflation jumped (again) by more than expected to 1.8% in January, from 1.1% previously, as expected. Inflation reached its highest level since mid-2013, helped by a significant positive base effect stemming from lower energy prices a year ago. This effect should only support inflation marginally in February before reversing its course thereafter. As expected, the surge in inflation was mainly due to increased goods inflation. Core HICP inflation stayed at 0.9% and service inflation actually decreased a notch, to 1.2%.

The main release of interest is Sentix investor confidence. Sentix trended upwards in H2 2016 and reached 18.2 in January 2017, its highest level since August 2015. The current situation and expectations components have both risen to historically high levels but there has been a loss of momentum in ZEW expectations, which could be a drag on Sentix expectations.

On Tuesday, German industrial production for December will be released. Industrial production was solid throughout October and November, with 0.5% and 0.4% monthly increases, respectively. However, factory orders saw a monthly decline in November, following October’s strong increase, which indicates declining industrial production in December.


Manufacturing and services PMIs from China were at expansionary levels, reflecting healthy economic growth at the start of the first quarter. Looking at data of other Asian countries, Japan’s consumer confidence index rose to more than a three year high in January, adding to upbeat Nikkei services PMI reading.

The Chinese central bank hiked the interest rate on some of its reverse repo agreements by 10bp. The offered reverse repo rate can be thought of as a floor for the money market rate, the repo rate. The central bank also hiked the interest rate on its standing lending facility. The attempt to guide money market rates higher is probably meant to dampen the still rapidly growing overall debt level and especially the vast shadow banking credit. As such, the interest rate hikes are a sign that the tide has turned and that the authorities are now tightening rather than easing monetary policy. That in turn implies that the authorities should be a little less keen on keeping economic growth high at any cost. The policy shift is, however, not a sign that monetary policy will be tightened dramatically ahead.

Next week, trade balance and FX reserves data will be released in China. China’s trade figures tend to be very volatile and distorted and, as such, must be taken lightly. However, FX reserves for January are likely to attract attention, as big moves occurred in the Chinese currency. There were clear signs of intervention in the offshore market, where liquidity was drained to push up money-market rates. It will be interesting to see how much this has affected currency reserves.


Sources: Wells Fargo, Haendelsbank, Danske Bank, Hong-Leong Bank.