US
US Fed policy makers agreed to raise the target range for Fed funds rate to 0.50% – 0.75% in their last meeting “in light of considerable progress that had been made toward the Committee’s objective of maximum employment and that inflation would rise to 2.00% in the medium term.” The minutes suggested that “upside risks to members economic growth had increased as a result of prospects for more expansionary fiscal policies in coming years”, paving grounds for a steeper policy tightening path this year.
The ISM manufacturing index continued to show a factory sector on an upward trajectory, which is a stark contrast from a year ago when manufacturers were facing plummeting commodity prices, weak global demand and the rising dollar weighing on exports. The ISM manufacturing composite index was half way through a five-month stretch of outright contraction a year ago. Improvement came in fits and starts through the second half of 2016, but by December, evidence points to a rebound in factory activity.
The ISM non-manufacturing index was also upbeat in December. The headline reading held at a solid 57.2 in the past two months after wavering during the months preceding the election. The new orders index was solid for service firms as well in December, which adds to optimism for business conditions in the beginning of 2017.
New orders of durable goods ex-transportation in the US was up a solid 0.6% in November which supports the notion that broad firming in the factory sector is taking place. Capital goods shipments, which are inputs into GDP calculations, were flat on the month and October’s decline was revised downward, which is not a great start for Q4 equipment spending. Orders of capital goods, however, were up a solid 0.9% which is an encouraging sign for capital expenditure in coming months.
Many US retailers struggled this holiday season as sales continued to migrate to the Internet. Two notable cases were Macy’s and Sears, traditional anchor tenants of US shopping malls, which each announced the closure of more than 100 stores. Additionally, Sears announced the sale of its iconic Craftsman tool brand to Stanley Black & Decker for US$900 million.
US job growth tempered towards the end of 2016 as the economy increasingly resembles full employment. The final jobs report showed the economy adding 156,000 jobs in December after an upwardly revised 204,000 job gain in November. Employers added an average of 180,000 jobs per month in 2016. The unemployment rate was 4.7% at the end of the year, with 67.2% of the population participating in the labor market. There were notable wage gains in December, as average hourly earnings rose 0.4% bringing year-to-year growth to 2.9 % (the strongest of the current expansion).
On Friday, figures for the preliminary consumer confidence index from University of Michigan for January are due out. Consumer confidence has been high throughout 2016. In December, there was a further increase to 98.2, henceforth a slight increase to 98.5 can be expected. However, given the very high level, a downward correction would not be surprising.
Retail sales data in December, are also due out this coming Friday. Although there was almost no growth in the retail sales control group in November, this may simply be due to volatility. Private consumption growth is expected to continue to be one of the key drivers of growth going forward, hence the control group is expected to rise 0.4% month-on-month in December.
UK
According to Markit/CIPS, the services sector expanded sharply in December, rounding off the strongest quarter of the year. The services PMI increased to 56.2 in December, from 55.2 in November, beating the consensus of 54.7. December data signalled a boost to new business growth and the overall increase was the strongest since July 2015, pulled up by stronger growth in new work. Also, outstanding work rose for the fourth time in five months. There were reports of export business buoyed by the weak pound, while domestic demand remained strong.
Employment rose at the same rate as in November, which was then at a seven-month high. Expectations for the coming 12 months also strengthened but continued uncertainty regarding Brexit and ongoing elections in Europe leave sentiment weaker than the long-run average. According to the survey, inflationary pressures remained substantial, with prices charged rising at the strongest rate since April 2011.
Industrial production and construction output data for November is due out this Wednesday will give us more insight into Q4 GDP growth. Based on the strong PMIs in Q4 across sectors, growth continued to be quite resilient to Brexit uncertainties. Also, the NIESR GDP estimate for December is due out on Wednesday.
Other important events are the Supreme Court ruling (on whether the government or parliament has the power to invoke Article 50) and Prime Minister Theresa May’s Brexit speech, which is likely to be held after the Supreme Court ruling. May will be more specific about what the UK wants to achieve in the upcoming exit negotiations. While the UK wants access to the single market, May also wants to limit free movement of labour, which has a higher priority.
EU
On Monday the Sentix investor confidence is due for release and we expect it to increase a bit again in January after declining in December. The higher investor sentiment should follow as stocks have been rising partly on the back of data revealing that we have the strongest synchronised economic recovery since 2009.
Also on Monday, the Euro area unemployment rate is due for release. In November, the rate was down at 9.8% from 10.4% when entering 2016 and thus continues to close in on the structural unemployment rate. That said there is still some way to go before the unemployment gap is closed as the European Commission has revised its estimate of the structural unemployment rate down to 9.0% in 2018.
China
China’s services PMI climbed 0.2 point to 53.4 in December and marked its highest reading since July 2015. Despite the slight pull back in official manufacturing PMI (51.4 vs 51.7) and non-manufacturing PMI (54.5 vs 54.7), the recent batch of economic data indicated that the country is on track to expand between 6.50% and 7.00% in 2016.
Main release in China this week will be inflation. CPI inflation is expected to be broadly flat around the current level of 2.2%. This is still far below the 3% target. Hence, there is no immediate pressure for tightening policy. However, de facto monetary policy is already tightened as three-month money market rates keep increasing and have increased 50bp over the past three months. While CPI inflation is subdued, PPI inflation has increased significantly and is likely to have risen further in the December reading.
Sources: Haendelsbank, HansLeong, Wells Fargo, Danske Bank, MFS Institutional Advisors.