Economic Outlook – 9 February 2020


  • Employers added another 225,000 workers to their payrolls in January, an outcome that exceeded expectations. Owing partly to the fact that more people are entering the labor force, the unemployment rate edged higher to a still-low 3.6%. Another drop in initial claims for unemployment insurance attests to the fact that the labor market remains tight, but there were a few chinks in the armor of this otherwise solid jobs report. The manufacturing sector lost jobs for third time in four months, and there were no auto strikes to blame this time. Layoffs were not limited to the factory sector either as financial services went from slowing job growth to a slight decline in January. Retailers also posted net layoffs for the second time in three months.
  • The ISM manufacturing index came in at 50.9 in January after touching the lowest level since the recession in December. This key yardstick for the manufacturing sector had been in contraction territory for five straight months. The move to expansion from contraction is certainly welcome, but the trade war is far from over, and the potential effects of the coronavirus outbreak and what it means for supply chains are becoming clearer only now. The non-manufacturing ISM has been less vulnerable to some of the factors that have buffeted the factory sector like the trade war and the slowing in global growth, which perhaps explains why the service sector ISM has remained in expansion territory throughout 2019. In January, the non-manufacturing ISM edged higher to 55.5 with most subcomponents also in expansion territory.
  • The trade deficit widened for the first time in three months in December. In recent months there has been a slowing in both imports and exports, but trade picked up on both sides of the ledger in December. Exports increased a little over $USD1.5 billion, but imports shot up $USD6.8 billion. There were some signs of life for capital spending in the details; imports of industrial supplies shot up $USD4.0 billion, accounting for almost all of the surge in imports and partially reversing four straight monthly declines. The Phase I trade deal may boost trade activity this year, though it is too early to get excited about a resumption in normal trade. The improved sentiment seen in the ISM jump is the place where some affirmation that the manufacturing sector is encouraged by the de-escalation can be detected.
  • In the culmination of his impeachment trial, the US Senate voted largely along party lines to acquit President Donald Trump of abuse of power and obstruction of Congress. Ahead of the trial, the odds of removal were seen as remote, given that a two-thirds majority is required to convict and the Republicans control the Senate.
  • The beginning of the Democratic Party’s US presidential primary process was disrupted as administrative problems prevented party officials in Iowa from tabulating caucus votes in a timely manner. As of noon last Friday, Mayor Pete Buttigieg led Vermont Senator Bernie Sanders by a razor thin margin. Former Vice President Joe Biden, the frontrunner in national opinion polls, appears to have come in a disappointing fourth in the caucuses and trails Sanders by double digits in polls as Tuesday’s New Hampshire primary approaches.  
  • Stocks recorded solid gains on the back of encouraging economic data and hopes that the global economy would prove resilient in the face of the new coronavirus outbreak centered in China. The large-cap benchmarks and the technology-heavy Nasdaq Composite Index established record highs, with the S&P 500 Index notching its weekly best gain since June. Slower-growing value shares trailed their higher-valuation growth counterparts for the week. Reflecting the ongoing outperformance of technology stocks, the Russell 1000 Growth Index ended the week up 6.0% in terms of total return (including dividends) for the year to date, while the Russell 1000 Value Index was roughly flat.
  • Wall Street kept an especially close eye on China. News that the Chinese central bank had added extra stimulus to offset the impact of the virus outbreak helped US markets get off to a strong start on. Signs of progress in containing the virus also boosted confidence, as did reports that researchers were making progress on a vaccine. Some discouraging news Friday on the number of new infections in China, as well as an outbreak on a cruise ship anchored in Japan, may have fostered a pullback in stocks, however.
  • The moderation of coronavirus fears reduced demand for the perceived safe haven of US government securities, pushing the 10-year Treasury yield off its lowest level since October.
  • In terms of data release, the Small Business Optimism indicator for the month of January is due out on Tuesday while the print for US retail sales are due on Friday.


  • The January purchasing managers’ index (PMI) for UK services was revised up to 53.9 from 52.9 in the flash estimate; readings above 50 signal growth. The composite index, including manufacturing and construction, also pointed to a recovery, rising to 53.3 in January from 49.3 in December. It was above the 50 level for the first time since August last year.
  • British house prices rose at the fastest annual rate since February 2018 last month, increasing by 4.1% after a 4.0% rise in December, figures from mortgage lender Halifax showed. House prices increased by 0.4% on the month in January, above economists’ forecasts in a Reuters poll for them to stay unchanged after an unusually big 1.8% jump in December.
  • The IHS Markit/CIPS UK Services Purchasing Managers’ Index (PMI) rose to 53.9 January, a full point higher than a preliminary reading for the month and up from 50.0 in December. It was the strongest reading since September 2018 and higher than all forecasts in a Reuters poll of economists, which had pointed to a reading of 52.9.
  • Sterling rallied against the dollar and the euro after the survey and 10-year gilt yields rose to their highest in nearly two weeks, as markets decided the Bank of England was unlikely to cut interest rates in the first half of the year. Last week, the BoE said it saw signs of a post-election pick-up in growth as its policymakers voted against an immediate rate cut to help the economy, which slowed to a near-crawl in late 2019.
  • In terms of data release, UK monthly GDP for December is due out on Tuesday.


  • European Central Bank (ECB) President Christine Lagarde said in testimony to the European Parliament that eurozone economic growth remained modest and that ultra-easy monetary policy was still required. She also noted that moderate growth was delaying the pass-through from wage increases to prices and inflation developments remained subdued. She said that while domestic growth remained resilient, citing private consumption and low unemployment, global factors weighed on regional growth. She said the outbreak of the coronavirus in China was now the main risk to global growth, as trade war risks had receded. She defended ECB policies, saying they supported the real economy via better financing conditions, although care was needed to ensure financial stability.  
  • Industrial production in Germany and France plunged in December, as factories struggled amid a broad European slowdown and strikes in France. The monthly declines of 3.5% in Germany and 2.8% in France were much greater than forecast. The annual decline in Germany was 6.8%, the worst since 2009, and 3.0% in France. Separately, German manufacturing orders fell 2.1% in December, mainly due to a decrease in foreign orders.
  • Equities in Europe rebounded and reached record highs over the week after some strong earnings results and an advance in global markets triggered by China’s moves to halve some tariffs on US imports and to mitigate the impact of the coronavirus. The pan-European STOXX Europe 600 Index ended the week 3.2% higher, Germany’s DAX Index rose 4.1%, France’s CAC-40 Index climbed 3.7%
  • In Germany, shock-waves went through the ruling coalition after the CDU voted with the AFD to install a liberal FDP candidate as state premier in Thuringia.
  • In terms of data release, the Euro industrial production for December is due out on Wednesday while the German Q4 GDP print is out on Friday.


  • Statistics released by the Chinese government indicate that outside of the province of Hubei, the epicenter of the Coronavirus outbreak, the pace of new infections has slowed. The news comes amid reports that progress toward creating a vaccine to prevent the disease was being made and that a combination of two drugs may treat it. With a significant percentage of industrial production in China shut down in order to prevent the spread of the virus, ripple effects are being felt by global supply chains. One high-profile example was the move by Hyundai to shut down automobile production in South Korea due to a lack of parts usually sourced from China. In an effort to offset the economic drag from the outbreak, China’s central bank injected record amounts of liquidity into local money markets and cut repo rates by five basis points. A further cut to the benchmark loan prime rate is expected later in the month, as is a cut in the reserve requirement ratio after an official said the central bank has more room to support growth than other economies. Officials appear to be preparing fiscal stimulus to provide a cushion in any economic slowdown.
  • In related news, China reported that it would reduce tariffs on $USD75 billion of US imports by as much as 50.0% beginning mid-February. The move comes amid growing concerns about China’s ability to implement its responsibilities under the phase-one trade deal. The coronavirus outbreak currently underway has resulted in a near-standstill in economic activity in the country, making it more difficult for China to achieve the deal’s import targets ($USD200 billion over the next two years). The gesture may also aim to foster goodwill between the two countries as China hopes for flexibility in meeting its requirements under the deal.
  • The Chinese authorities announced a package of 30 financial measures intended to both support the economy and alleviate some of the financial pressures arising on account of the coronavirus. China’s central bank, the People’s Bank of China, promised to use its monetary policy toolkit to keep financial markets functioning normally and last Monday, injected RMB ¥1.2 trillion of liquidity into the banking sector. Most of the 30 measures are relatively modest steps. They are basically aimed at offsetting some of the short-term financial stress by ensuring ample liquidity in money and credit markets, as well as providing interest rate subsidies and loan forbearance for companies and mortgage holders in temporary financial difficulty. Development and policy banks, such as the Export-Import Bank and Agricultural Development Bank, will also increase their lending support to the economy.
  • China’s Markit PMI for manufacturing came in slightly better than consensus, but as the survey only covered the period up to January 20, it will largely exclude the effect of the coronavirus. Although it has softened recently, the PMI remains above the levels of early last year. The Caixin Services PMI eased further in January, suggesting that service sector activity was not particularly robust before the coronavirus outbreak. 
  • Equity markets reopened on February 3, having been shut since January 23 ahead of the Chinese Lunar New Year holidays. After their extended closure, A-shares fell heavily on Monday, with the Shanghai Composite Index dropping 7.7%. Over the remainder of the week, Chinese equities were able to first stabilise and then stage a partial recovery. By Friday, the fall in the Shanghai Composite from January 23 had been reduced to 3.4%. Over the same period, the CSI 300 Index of large-cap stocks fell 2.6%.
  • There are no market movers in China this week.

Sources: T. Rowe Price, Danske Bank, Wells Fargo, TD Economics, Reuters, M. Cassar Derjavets.