The six-month stretch of consecutive monthly increases in the ISM manufacturing headline ended in March, as the index dipped slightly from 57.7 to 57.2. Still, the measure of factory activity is solidly in expansion territory. Current production was the main drag on the headline, falling 5.3 points to a still-solid 57.6.
The ISM survey measure of non-manufacturing activity cooled more abruptly in March, with the headline index falling 2.4 points to 55.2. Current activity and new orders dipped but remained in expansion territory at 58.9. The employment index signalled slower hiring, falling from 55.2 to 51.6 in March. The takeaway from both ISM surveys in March was that both sectors are firmly expanding but coming down from post-election highs.
The US trade balance narrowed more than expected in February. A drop in imported goods, specifically of autos and consumer products, was largely the cause of the narrowing on the month. Indicators of consumer demand have come in on the softer side thus far in 2017, and the weak Wards auto sales report for March suggested further downside risk to coming months. US exports rose slightly in February, but growth was subdued, likely due to currency strength weighing on demand for US made goods.
Robust job gains in January and February were followed by a 98,000 job gain in March, bringing the Q1 average down to 178,000 jobs. The household survey was significantly stronger, as the number of employed workers rose by 472,000 people, with fewer reporting underemployment.
March FOMC meeting minutes indicated that the Fed may begin shrinking its $4.5 trillion balance sheet later this year and “should be conducted in a passive and predictable manner”. Path of policy tightening will be gradual “to promote the Committee’s objectives of maximum employment and 2.00% inflation”.
In the US, the coming week brings CPI figures for March on Friday. Although headline inflation has been accelerating since last year, core inflation has remained relatively flat at 2.30%. CPI core likely increased 0.20% month-on-month, implying an increase of 2.30% year-on-year while the headline figure is likely to have increased 0.10% month-on-month, implying an increase of 2.80% year-on-year. Thus, the acceleration in inflation is likely to have turned into a deceleration.
Retail sales figures for March are due to be released on Friday. Since October 2016, consumer confidence has been very high, which could indicate tailwinds for private consumption.
On Tuesday, NFIB small business optimism for March is due out. Business optimism soared after the election of Donald Trump to 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 may start to fade.
Both UK industrial and construction output numbers disappointed market expectations for February. Total industrial production fell by 0.70% in February, after a fall of 0.30% in January (revised from -0.40%). The consensus expectation was for a rise of 0.20% in February. Output fell in all four main sectors, but electricity and gas provided the largest downward contribution due to unfavourable weather effects. Manufacturing production fell by 0.10% in February, after falling 1.00% in January (revised from -0.90%). The consensus expectation was for a rise in manufacturing output of 0.30%. The fall in manufacturing was led by the highly erratic pharmaceuticals sector, which pulled down manufacturing also in January.
The most important data release is the CPI inflation data for March due out on Tuesday. Total CPI likely rose 0.40% month-on-month in March, implying an unchanged inflation rate at 2.30% (CPI core 0.50% month-on-month and 1.9% year-on-year). While the timing of Easter last year (March) will tend to pull the inflation rate down due to base effects, the increasing food prices and higher import prices pull in the other direction.
On Wednesday, the labour market report for March is due. The unemployment rate (3M average) is likely to remain unchanged at 4.70% while the annual growth rate in average weekly earnings (3M average) likely declined to 2.00% year-on-year from 2.30% year-on-year. The combination of higher inflation and slower wage growth means real wage growth is turning negative, implying less scope for private consumption growth.
The ECB is getting a little uncomfortable with its accommodative stance. Although it is unlikely that they will change the €60 billion per month pace of asset purchases between now and December, it is becoming increasingly unlikely that they will extend the time frame again. Unless of course, the results of the upcoming elections forces a reconsideration. ECB President Draghi said that “outlook for the economy is gradually improving but there is yet insufficient evidence to materially alter our assessment of the inflation outlook”.
The Eurozone purchasing managers’ index in March rose to its highest level in nearly six years, reaching 56.2 from 55.4. That’s the highest since April of 2011. European retail sales rose solidly for the second month in a row in February, rising 0.70%.
In the Euro area, the Sentix investor confidence is due to be released on Monday. Sentix has climbed from 1.7 in July 2016 to 20.7 in March, which is the highest level since the financial crisis. As noted last month, political uncertainty has derailed financial sentiment while PMIs and other survey indicators consistently show strength.
On Tuesday, the Euro area industrial production figures for February are due out. January’s production increased by 0.90% month-on-month and a 1.00% monthly increase in February is likely after the very strong increase in German industrial production.
The pressure for a weakening of the CNY has abated during Q1 2017, and available statistics indicate that strong capital outflows have reversed to muted inflows. The main explanation is likely the halt of the CNY’s weakening versus the USD since early January. Expectations of the future path for USD/CNY seem to be formed primarily by the cur-rent direction. The authorities are trying to persuade domestic and foreign market participants to focus more on the effective, or trade-weighted, CNY and less on the USD/CNY cross itself. Beijing has repeatedly promised to keep the effective exchange rate “basically stable” and has also seemed, since this past summer, more committed than earlier to this pledge, with volatility in the index finally being smaller than in the USD/CNY.
Key market movers in China over the next two weeks will be inflation, industrial production, credit data and GDP. Inflation will be the most interesting number as it is likely to reveal a peak in PPI inflation (producer prices).
PPI has shot higher over the past year but is driven mainly by oil prices and other commodity prices. PPI inflation is expected to move lower over the next year as commodity prices stabilise. CPI inflation has been low (0.80% in February) due to weak food inflation and is likely to stay low in March as well.
Activity data on industrial production and GDP are not likely to reveal much of the real development. GDP for Q1 is expected to grow 6.80% year-on-year but the number may not be reliable. Industrial production has also been a bit detached from other indicators over the past years but the sub-component electricity generation and steel production have served as good indicators for activity in manufacturing and construction. Data on credit is expected to confirm lower growth of credit and thus support the case for a moderate slowdown this year.
The CPI softened to 0.30% year-on-year (January: +0.40% year-on-year) and core inflation rose 0.10% year-on-year last month (January: +0.20% year-on-year). Household spending dropped 3.80% year-on-year in February after a 1.20% year-on-year drop in January. The only bright spot was the surge in industrial output, which rose 2.00% month-on-month last month (January: -0.40% month-on-month).
Sources: Wells Fargo, Haendelsbank, Danske Bank, HongLeong Bank, MFS Investment Management.