Economic Outlook – 5 March 2017


Speeches by Federal Reserve officials continued to prep the markets for an increase in interest rates “relatively soon.” Market expectations have responded, with the Fed fund futures pricing in a 96% probability that the Fed will raise rates at the March 15 meeting.

The ISM manufacturing composite rose to 57.7 in February, which is the highest since 2014. All of the sub-indices either rose further into expansionary territory or, in the case of order backlog, turned positive after months in the red. The survey’s measure of prices also continued to signal inflation pressures on a broad range of inputs beyond just oil prices. The new orders component of the survey surged to a three-year high, pointing to a much-improved outlook for the sector than this time last year.

Advance estimates of durable goods orders in January were softer, as core goods orders fell 0.4% to start the year, though December’s reading was revised upward. January’s stall in goods orders may be just temporary and, given the broad strength in the survey data, continued firming in 2017 is expected.

The second release of Q4 GDP reiterated that the consumer drives the economy. The headline 1.9% growth was unchanged, but personal consumption contributed more than first reported while government and private investment added less. The post-election bump in consumer confidence held up in February, according to the Conference Board. Consumers were more confident about both the present situation and conditions going forward. Consumers’ assessment of the present situation now stands at its cycle high, as fewer people reported that current conditions were “bad” or that jobs were “hard to get”.

The PCE deflator, the Fed’s preferred measure of price growth, is honing in on the 2% target, with headline PCE up 1.9% over the year and core PCE up 1.7% in January.

The February jobs report is due out on Friday. Given recent speculation about the prospect of a Fed hike in March, this report will be scrutinised intensely by the market. The January report showed a strong print of 227,000 new jobs month-on-month but the average hourly earnings disappointed somewhat, increasing by only 0.1% month-on-month. The service sector has (by far) been the most important factor driving job growth since the crisis and this is expected to continue going forward. However, recently both ISM and Markit PMI manufacturing pointed toward progress in the manufacturing sector and over the past two months, 16,000 jobs have been created in the sector.

On Monday, the final capital goods (CapEx) orders for January are due out. The preliminary numbers showed a small decline but the monthly figures are very volatile and the general picture is that business investment could begin to contribute more positively to GDP growth.


The Services PMI fell to 53.3 in February from 54.5 in January, below the consensus expectation of 54.1. The PMI composite was 53.8 in February, down from 55.4 in January (revised from 55.5). The consensus was 55.6. According to the services survey business, activity in February expanded at the slowest pace since September last year. The slowdown mainly reflected a softer pace of new business growth, which some respondents linked to more cautious spending among consumers.

Industrial production and construction output in January are both due to be released on Friday. The NIESR GDP estimate for February is due to be released on Friday. This estimate is interesting as it has been quite a good estimator of actual GDP growth.


According to a flash estimate, annual HICP inflation rose to 2% in February (previously at 1.8%). This was a notch more than expected, but market expectations were likely elevated following the higher national CPI data from Germany among others. Thus, inflation is back in line with the ECB goal of close to but below 2% for the first time in almost four years, although this result may not be sustainable, as the annual base effect from lower energy prices a year ago is about to reverse in the coming months.

Together with surprisingly strong momentum in the economy, according to recent sentiment surveys, the numbers feed the question of whether the ECB should turn more hawkish at its upcoming policy meeting next week. The ECB is expected to revise its inflation estimate upward. Thus, there is reason for the ECB to adopt a more balanced view here, which could be either in the balance of risks concerning the growth outlook or a change to the forward guidance, where the ECB could remove signals about the possibility of lower key rates over an extended period of time. However, it remains uncertain whether the ECB sees a risk that this would send a signal about a policy turnaround that is too hawkish; especially since the underlying inflation picture did not change much.

The Sentix investor confidence is due to be released on Monday. After a strong development in H2 of 2016, Sentix reached 18.2 in January 2017 but in February it dropped marginally to 17.4. An increase is likely in March as European equity indices have proved resistant to considerable rising political uncertainty in the recent year and economic data remains strong. Over the coming months, renewed uncertainty regarding the upcoming French election and Brexit negotiations are unlikely to derail financial sentiment.

The second ECB meeting of 2017 is due to be held on Thursday. The ECB has acknowledged that “there are no signs yet of a convincing upward trend in underlying inflation” at the last meeting in January. Even as headline inflation reached 2.0% in February, the ECB is not expected to deviate from this stance. Mario Draghi has outlined four objectives for monetary policy, including that inflation convergence should: (a) affect the medium term, (b) be durable, (c) be self-sustained (i.e. prevail when monetary easing ceases) and (d) be region wide. Inflation figures do not satisfy the four objectives, particularly the core inflation staying below 1.0%.


Both PMI manufacturing confidence indicators came out better than expected in February. Manufacturing PMI from Markit increased to 51.7 from 51.0 in January against expectations of a decline to 50.8, thereby almost fully reversing the decline in January from December’s four-year high. The official manufacturing PMI increased to 51.6 from 51.3 against expectations of a small decline to 51.2.

The annual National People’s Congress, FX reserves and inflation data are coming up. The National People’s Congress this weekend will reveal the new economic targets for growth and inflation for this year, which it is expected to be 6.5% for GDP and 3% for inflation.


Sources: Haendelsbank, Danske Bank, Wells Fargo.

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