Economic Outlook – 7 May 2017

US

The ISM manufacturing index showed factory sector activity had cooled a bit in April. The reading of 54.8 was the third consecutive decline and was lower than consensus. At 54.8, however, the index remains firmly in expansion territory and signals a clear improvement relative to the past couple years.

The ISM’s service sector counterpart topped expectations, rebounding to 57.8. The new orders index climbed 4.3 points to post its current cycle-high of 63.2. Demand was boosted by better global economic conditions, as new export orders jumped 3 points to 65.5, just a half point below the all-time high for the series. Taken together, the underlying trend for these two indicators suggest that the slowdown in economic growth in Q1 was transitory and a rebound in Q2 is in the offing.

Last Friday’s US employment report was fairly upbeat, with 211,000 added to payrolls in April versus a downwardly revised 79,000 in March. The unemployment rate fell to a 4.4%, a 10-year low, though average hourly earnings were restrained, rising a less-than-expected 2.5%. The report paves the way for likely rate hikes from the US Federal Reserve at its June meeting.

Labor productivity data were also released last week. Non-farm productivity declined at a 0.6% annualised rate in Q1. The year-over-year pace remained steady at 1.1%. Amid slow productivity growth and an ageing population, achieving sustainable economic growth faster than 2.0% to 2.5% a year will be challenging.

In line with investors expectation, the Fed left fed funds target range unchanged at 0.75% to 1.0% after a two day FOMC meeting. After the meeting, futures prices suggest that investors put a 65% chance of a 25 bps hike in June as the accompanying monetary policy statement shrugged off recent slew of weak economic data. Earlier release showed that the US economy grew 0.7% Quarter-on-Quarter last quarter and headline inflation stood at 1.8%, still below the Fed’s 2.0% goal. Despite sluggish economic data, the central bank is still on track to tighten monetary policy further this year. Markets will closely monitor Janet Yellen’s speech tomorrow for policy guidance and insights on the Fed’s plan to unwind its $4.5 trillion balance sheet.

The coming week brings CPI figures for April on Friday. As expected, both headline and core inflation fell sharply in March, driven partly by the timing of Easter and partly by lower energy prices. Therefore, the April figures are expected to show some reversal of this. CPI core is expected to rise 0.2% month-on-month, implying an increase of 2.0% year-on-year. Headline inflation is likely to have risen by 0.3% month-on-month, implying an increase of 2.3% year-on-year. Note that even though this would mean headline inflation has fallen from 2.8% to 2.3% in just two months, a large part of this fall is due to the base effects of oil prices.

After months of Republican infighting, a bill to repeal and replace Obamacare emerged from the US House of Representatives this week. The bill will likely face a stiff challenge in the Senate, where lawmakers will attempt to fashion a bill under the so-called reconciliation rule that won’t require 60 votes for consideration. A Senate vote on the measure is expected to be some months away.

Retail sales figures for April are due for release on Friday. Since October last year, consumer confidence has been very high, indicating tailwinds for private consumption. However, consumer confidence has likely run ahead of actual developments and will come down rather than retail sales accelerating. The weak GDP growth in Q1 was driven largely by weak private consumption. Hence, if GDP growth is to pick up in Q2, there is the need for a strong print in the retail sales control group for April.

On Tuesday, NFIB small business optimism for April will be released. Business optimism soared after the election of Donald Trump as President. However, given the increased uncertainty about how much of his politics President Trump will actually be able to carry out in practice, business optimism seems to have peaked and is likely to fall further given the fall observed in, for example, ISM and PMI. However, this should not be seen as a sign that a significant turn for the worse is likely in the overall economy. Soft indicators increased sufficiently in the aftermath of the presidential election and that this is a correction more in line with the actual economic development.

China

China’s Caixin services PMI slipped from 52.2 in March to 51.5 in April, tracking the decline in official non-manufacturing PMI number. The index dropped to an eleven month low, signalling that economic momentum may soften from a robust first quarter growth. The Chinese economy expanded 6.9% year-on-year in Q1 after growing 6.7% in 2016.

The focus turns to inflation data and trade balance. CPI inflation is not a big issue as it has been low in recent months and has likely risen only slightly from 0.9% in March to 1.1% in April, due partly to low food prices. PPI inflation (producer prices) has been quite high at the beginning of 2017 on the back of big increases in commodity prices in 2016. However, it is likely the year-on-year rate peaked in February at 7.8%, falling to 7.6% in March, and a further fall to 7.0% in April is possible. Trade data in China are very volatile and unreliable. Export and import growth has been strong lately but a moderate decline for the rest of the year is possible. Imports are also expected to fade from weaker domestic demand growth and exports to fade on a peak in the US manufacturing cycle.

UK

The UK services PMI increased to 55.8 in April, from 55.0 in March, beating the consensus expectation of 54.5. Sentiment was pulled up by a further improvement in incoming new business and business activity in general. April data signalled that new business growth gained further momentum, with the pace of expansion at the strongest so far this year and the second-fastest since the summer of 2015. According to the survey, respondents suggested that greater business-to-business sales had helped to offset subdued discretionary consumer spending. Higher levels of incoming new work placed additional pressure on operating capacity across the service economy in April. As a result, backlogs of work were accumulated for the second month in a row, although at only a marginal pace. Service providers sought to boost their staffing numbers during April. The increase in employment was only modest, but it was still one of the fastest rates of expansion seen over the past 12 months. UK service providers indicated a strong rise in input costs during April, despite the rate of inflation easing to a seven-month low. Still, the survey data suggests that consumer price inflation has further to rise from its current 2.3%.

Despite the improvement in incoming new business, the future business expectations fell from March and thereby moderated for the third month running. Currently, the index measuring future business expectations is below the December reading and well below its historical average. Some firms linked that to concerns about the impact of higher inflation on household budgets.

EU

Media reports this week documenting a meeting on 26 April between Prime Minister Theresa May and European Commission president Jean-Claude Juncker show just how far apart the two sides are before Brexit negotiations begin in earnest. While the United Kingdom hopes to negotiate the terms of its divorce from the European Union and its future trade relations in parallel, the EU has made clear that exit terms must be well on their way to being ironed out before it will entertain trade talks. Also in dispute is how large a bill the UK will have to foot to exit the EU.

The most important event next week is the Bank of England (BoE) meeting on Thursday, which is one of the big meetings including the policy announcement, minutes, the Inflation Report and a press conference, an overload of information is to be expected. The BoE is not expected to make any policy changes so what is interesting is the policy stance. At the latest meeting in March, it maintained its neutral stance but included a hawkish twist, as some members noted that it would take relatively little further upside news…for them to consider that a more immediate reduction in policy support might be warranted’ and Kristin Forbes (an hawk) voted for a hike. As growth slowed to 0.3% quarter-on-quarter (against the BoE’s now cast at 0.6% quarter-on-quarter at the latest meeting), the BoE is likely to remove its hawkish twist again – note also that Kristin Forbes is leaving the BoE on 30 June this year. Overall, BoE is expected to remain on hold for the next 12 months.

In the Euro area, according to the first estimate, real GDP growth was stable at 0.5% quarter-on-quarter in the first quarter. This was in line with expectations, confirming the expected discrepancy between sentiment barometers and actual activity. However, the robust sentiment among businesses and households is likely to increase the chance of improving growth in the second quarter. Although not all data is available, national data from France suggests that the stable growth was primarily due to lower personal consumption growth. This could very well be attributed to the increasing headline inflation subtracting from household purchasing power. Additionally, net exports worsened in France in the first quarter, but euro zone trade figures for January and March so far suggest a more stable development here. Meanwhile, fixed investments seem to have contributed slightly more positively, and more in line with the improvement in business barometers.

The first data release of interest is Sentix investor confidence on Monday. Sentix is likely to climb further from 23.9 in March to 24.8 in April, as markets seem relieved from the outcome of the first round of the French election, where Macron may win the presidency in May. Further, economic survey indicators keep projecting optimism and economic data remains solid.

On Friday, the Euro area industrial production figure for March will be released. An increase of 0.2% month-on-month is expected following the 0.3% decrease in February. Note that the German industrial production figure is due for release on Tuesday and should give an indication of the strength of the euro area figure.

Sources: Wells Fargo, Danske Bank, MFS Investment Management, Handelsbanken, HongLeong Bank.
2017-05-07T21:53:50+00:00

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