Economic Outlook – 5 May 2019


  • The Fed’s policy-setting committee decided to make no change to official short-term interest rates, as was widely expected. Investors appeared to react negatively to Fed Chairman Jerome Powell’s post-meeting press conference, which was widely characterized as more hawkish than anticipated. Powell stated that the recent pattern of below-target inflation may prove “transitory” and that policymakers saw no compelling case for a rate move in either direction, contradicting hopes for a rate cut later in the year.
  • Evidence that the Fed might have no need to lower rates and spur growth arrived Friday, when the Labor Department reported that employers had added 263,000 jobs in April, well above expectations. Wage growth also picked up. Futures jumped on the report’s release, and stocks built on their gains through much of the day.
  • US employers added a whopping 263,000 jobs in April, beating the consensus expectation of a 190,000 job gain. The unemployment rate fell to 3.6%, the lowest in almost 50 years. But, the underemployment rate, which includes those marginally attached to the labor force, held steady at 7.3%, and average hours worked nudged down to 34.4 hours. The drop in unemployment therefore stems entirely from the give-back in labor force participation.
  • The first look at the employment cost index in the first quarter suggested employment costs remained in line with the recent trend. With the labor market still tight, labor costs are expected to pick up a bit in coming quarters. Even such, the trend is likely to remain fairly tame, and not pose much threat to inflation, especially given the rebound in productivity. Indeed, productivity leaped 3.6% in the first quarter, which was the strongest gain since Q3 of 2014. Productivity is expected to moderate in coming quarters, but will prevent gains in unit labor costs from driving inflation above the FOMC’s target.
  • The (mostly) positive narrative on consumer-related industries at the start of spring was further bolstered by a 3.8% month-on-month surge in pending home sales in March and a pickup in consumer confidence in April. The former leads existing home sales by 1-2 months, and points to further stabilization in the housing market. However, vehicle sales were disappointing, falling 6.0% month-on-month in April to 16.4M units. Despite this, overall consumer spending is still tracking a 3.0% annualized pace in the second quarter, a sharp acceleration from the 1.2% clip in the first quarter. This will provide support to overall economic activity as other temporary factors that boosted growth in the first quarter fall off.
  • US president Donald Trump met with Democratic leaders of both houses of Congress this week to discuss increasing spending on replacing the decaying infrastructure of the US. The discussion resulted in the shared goal of a $2 trillion package, but there was no discussion of how to pay for it. Expectations are quite low for such a package to be passed into law amid budgetary concerns among congressional Republicans and with neither side willing to give the other a political win in the run-up to the 2020 elections.
  • The major indexes finished roughly flat for the week after a Friday rally erased earlier losses. After lagging in recent weeks, health care shares outperformed within the S&P 500 Index, helped by better-than-expected first-quarter earnings and revenues reported by Merck and CVS Health. Energy stocks lagged as oil prices fell in response to data showing increasing US production. Communication services stocks also struggled, due in large part to a sharp decline in heavyweight Alphabet (parent of Google) following its report of lower-than-expected revenues. The sector’s weakness, combined with the outperformance of health care stocks, contributed to slower-growing value stocks handily outperforming more highly valued growth shares. Volatility, as measured by the Cboe Volatility Index (VIX), spiked to its highest level in several weeks on Thursday before falling back on Friday.
  • Friday’s jobs report fostered a sharp rise in the yield on the benchmark 10-year Treasury note, which had declined for the much of the week. Municipal bonds continued to benefit from a strong technical backdrop, driven by light new issuance and robust demand. Widely held and riskier COFINA bonds (backed by the government of Puerto Rico) traded higher during the week.
  • In the US, this week is rather quiet in terms of data releases. CPI core is due out Friday and likely rose +0.2% month-on-month in April implying an unchanged annual inflation rate at 2.1% year-on-year.


  • British prime minister Theresa May remains in negotiations with the opposition Labour Party in an effort to forge a consensus on a way forward for Brexit. In order to reach agreement with Labour, May could offer to remain in the European Union’s customs union. That idea is extremely unpopular with many members of May’s Conservative Party, including high-ranking cabinet ministers, as it would prevent the United Kingdom from striking its own trade pacts on goods with other countries. The prime minister’s political standing continues to erode, as evidenced by the poor showing of the Conservatives in Thursday’s local elections.
  • The Monetary Policy Committee (MPC) of the Bank of England (BoE), as expected, kept its policy rate unchanged at 0.75%. The QE programme was also left unchanged. The votes were unanimous. Since the February report, market interest rate expectations have fallen, much due to global events, and hence the conditioning path for the BoE’s economic forecasts was some 15 basis points lower in May. The May conditioning path implies only one more rate rise by the end of 2021. Thereafter, the conditioning path implies a flat policy rate until the end of the forecast horizon in Q2 2020. Compared with the February report, the forecast for GDP growth was a little higher. The BoE now expects GDP growth to increase from 1.5% this year to 1.6% in 2020 and 2.1% in 2021.
  • Sales in British shops fell in April, a survey showed on Friday, even though warm weather and the Easter holidays should have encouraged shopping. Accountancy and business advisory firm BDO said its monthly High Street Sales Tracker found sales in UK shops fell 0.4% in April from April a year ago, when sales plunged 3.8%. It was the third monthly decline for in-store sales so far this year. However, it contradicted data published by the Confederation of British Industry last week, which said retail sales rose for the first time in five months in April.
  • In the UK, the release of the first estimate of GDP growth in Q1 (including subcomponents) is due on Friday. Q1 data have in general been distorted by Brexit, as many companies have stockpiled as part of their Brexit preparations. GDP growth is expected at +0.5% quarter-on-quarter in Q1 (versus 0.2% quarter-on-quarter in Q4 18) but growth looks like it is slowing again in Q2.


  • The eurozone economy grew more quickly than expected in the first quarter as gross domestic product expanded 1.2% year over year. Spain led the way, growing at a 2.4% pace, while Italy exited recession by eking out year-on-year growth of 0.1%. Additionally, unemployment fell to 7.7%, the lowest level since the global financial crisis.
  • Eurozone HICP inflation was higher than expected in April, where it jumped to 1.7% year-on-year from previously 1.4% year-on-year. The higher-than-expected outcome was probably not a big surprise as national figures already hinted at the outcome earlier last week. The increase in the headline inflation figure was bolstered by energy but especially the core components, as service inflation jumped to 1.9% YoY from previously 1.1% year-on-year. Hence, core inflation jumped to 1.2% year-on-year in April (previously 0.8 %), which is the highest inflation in six months. However, the primary driver was probably the Easter effect, particularly on package tours which lowered the March observation more than expected. Taking account of the redistribution effect between the two months, core HICP inflation thus averaged 1.0%, which is still in line with the level seen over the past year or so.
  • In the euro area, the EU commission will publish its Spring economic forecasts for the 27 member states on Tuesday. The updated fiscal forecasts for France and Italy is of particular interest. On the back of the ‘gran debate’ President Macron recently announced his plans for both tax cuts and higher pensions which will likely push the 2019 deficit above 3.0% of GDP. Markets will probably pay particularly close attention to the Italian forecasts. After the government eased fiscal policy significantly this year and in light of weaker growth, the projection is likely to confirm that a reduction in the GDP public debt burden remains an elusive goal. Another fiscal rebuke from the Commission could well bring back fears in the market of the Italian budget fight reigniting in the autumn.
  • In Germany, the March industrial production print is due on Wednesday, which will give the last piece of information on where German Q1 growth is heading. The German industrial sector has been at the epicentre of the euro area slowdown and PMIs still paint a dismal picture of the manufacturing sector. After tanking in H2 2018, industrial production has rebounded slightly over the last months and there could be scope for further stabilisation in the March print.


  • US treasury secretary Steven Mnuchin said that just-concluded talks this week in Beijing were the beginning of the final lap of trade negotiations between the US and China. China’s vice premier, Liu He, will travel to Washington this week for further talks amid hopes that negotiations will wrap up by next Friday. Final details to be worked out include the pace at which the US will roll back existing tariffs on Chinese goods and the details of the agreement’s enforcement mechanism.
  • In China, both manufacturing PMIs disappointed by declining somewhat in April, thereby reversing some but clearly not all of the jump in March. PMI from private Markit fell to 50.2 from 50.8 against consensus expectations of a slight increase to 50.9. The official PMI fell to 50.1 from 50.5 against expectations of an unchanged reading. Both PMIs thus remain above the 50 threshold, and despite the small declines, the April readings confirm that growth momentum improved from Q1 going into Q2 due to economic stimuli kicking in. Note that April is the first month that with certainty was not distorted by the Chinese New Year celebrations.
  • Chinese trade data are due this week. Export growth rebounded in March in line with other activity signals. The numbers are very volatile but looking through the noise export growth likely bottomed in Q1. CPI and PPI inflation are also released. The African Swine Fever is likely to push up CPI inflation from 2.3% to around 3.0%.

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