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The Chief Economist's weekly update

The Chief Economist's weekly update

To help you navigate through the economic news, here is a summary of last week’s main events and what to look out for next week.

Last week’s key economic news (from 13 to 17 Jan.):

  • In the US, business surveys were mixed but the picture is looking more constructive, as two significant indices rebounded: the Philly Fed rebounded strongly on new orders, shipments, employment and prices, while the New York Empire manufacturing did so thanks to improving orders. In contrast, the NFIB index for small- and medium-sized firms weakened, but views on future activity increased slightly and sentiment on capex remained positive. The industrial production (December) has reverted after the strong month seen the prior month, falling by 0.3% m/m after 0.8% m/m/ rebound; large part of the change is devoted to the fall in the auto and energy sectors, while activity was a bit firmer in information, defense and construction supply. On the consumer side, retail sales (December) increased by 0.3% m/m despite weak auto sales; core sales were up by a strong 0.5% m/m due to holiday season shopping. Consumer confidence (Michigan) has marginally eroded from high level, on slightly lower expectations but rising sentiment on current situation. The willingness to buy large items have increased further as well as inflation expectations (2.5% at 1y and 5-10y). Housing starts and building permits (December) have sharply rebounded and regained to past 2007 levels. Permits non-started and houses under construction remained high, suggesting the sector should healthy in the next months. On the opposite, the NAHB index eroded slightly after last month’s surge, but sentiment on sales remained highly positive. Inflation (December) was still moderate (0.2% m/m expected) and core inflation was slightly lower than expected (0.1% m/m). The yearly trend picked up slightly from 2.1% y/y to 2.3% y/y and core inflation was stable at 2.3% y/y. A lot of recent shifts in inflation were mainly due to energy and food prices and they should moderate in Q1 20, leaving inflation stable or at a low level. PPIs showed a moderate monthly rise (0.1% m/m), but the yearly trend accelerated slightly (from 1.1% y/y to 1.3% y/y). The Fed’s Beige Book reported growth was on a moderate trend at year-end, and manufacturing activity was flat in several districts.
  • In the eurozone, industrial production recovered modestly (0.2% m/m), but large disparities across sectors appeared, pointing towards the fact that fragilities remain in the bottoming-out process. German GDP growth for the whole of 2019 came in at 0.6% y/y: consumption and public investment underpinned the economy, helping it stays into positive territory, while investment and net exports were a drag on growth, and industrial activity was in recession. Final inflation data (December) has confirmed the modest rebound seen in preliminary data (0.3% m/m; 1.3% y/y), while core inflation remained on a stable trend (1.3% y/y). Moderate food and oil prices in Q1 should bring some easing in headline inflation. The minutes of the latest ECB meeting revealed that some bankers are doubtful about the impact of the latest measures and the ECB has to watch on side effects, while the strategic review should focus on inflation targeting.
  • In Japan, core machine orders rebounded strongly into positive territory for the first time in many months, but data are traditionally volatile. The tertiary index has also strongly rebounded after depressed numbers the prior month. PPIs showed a rising annual trend (from 0.1% y/y to 0.9% y/y) despite a modest monthly change (0.1% m/m).
  • In the UK, retail sales (December) stayed depressed, except internet sales; it seemed that uncertainties related to general election weighted down on consumer confidence. Industrial production (November) decreased by more than expected (-1.2% m/m), showing a broad-based fall across all sectors except energy. In parallel, the service index and GDP proxy (November) both decreased further. Housing prices continued to show a progressive, improving trend. Inflation (December) stayed flat over the month, but its yearly trend eased by slightly more than expected (from 1.5% y/y to 1.3% y/y), fuelling speculation of a possible decrease in key rates at the next central bank meeting. The trend in PPIs (input and output prices) recovered slightly (0.9% y/y) despite flat or modest monthly changes in December.
  • In China, the trade balance surplus (December) rebounded strongly due to a sharp rise in exports (7.6% y/y). New yuan loans were sustained but below both expectations and last month’s data, while total aggregate financing rebounded strongly. Retail sales remained on a 8% y/y trend and industrial production has accelerated to 6.9% y/y. Fixed investment has modestly accelerated (5.4% y/y) but trend remained moderate. Q4 GDP was up by 6%, as expected, and growth seems to have stabilized thanks to a firmer domestic demand.
  • Central bank meetings: Turkey cut key rates from 12% to 11.25%. South Africa cut rates from 6.50% to 6.25%.
  • Sentiment indicators and industrial production indices in various countries painted a mostly constructive picture, but one in which the activity is still quite weak. This means a slow and steady recovery is to be expected while hoping that there are no external shocks to upset it. The signing of a trade agreement between the United States and China should generate returning visibility on global trade and enable order books to fill up in the medium term. However, the expected fall in US tariffs remains subject to China actually buying American goods. At the same time, China could reduce procurement from Brazil and Europe. For its part, Europe also has to start negotiating with the US, while negotiations with the United Kingdom are looming large and Angela Merkel is pushing for an agreement to be reached in a timely fashion.


Important for the scenario for next week:

  • In the US, after a busy week, economic data should be relatively light, and the focus should be on the flash PMIs; the manufacturing and services PMIs could both remain at least at a relative high level or continue to increase moderately; this should pave the way to a progressive and mild rebound in activity in the coming months. Separately, some regional business surveys will be published (Chicago Fed; Kansas City Fed) and a modest, ongoing improvement is expected. On housing, monthly prices (FHFA house price index) should accelerate slightly and existing home sales are expected to rebound and stay on a rising trend after the disappointing data seen in recent months.
  • In the eurozone, the first ECB meeting of the year should not see any changes in the current strategy, but comments on the overall situation in the eurozone should be welcomed by the markets. The ECB will also publish its quarterly report on bank lending. Economic data will be dominated by early estimates of the manufacturing and services PMIs. A modest rebound (or at least a stabilisation) in manufacturing is expected, while the services PMI is expected to remain solid and at a high level, leading to the composite PMI remaining stable or rising slightly. On the consumer side, the flash estimate for the eurozone consumer index should make up some ground from last month’s depressed level. In addition, business confidence numbers will be published in France, where some erosion could be seen due to strikes and the negative political climate. In Germany, the rise in expectations seen in last month’s ZEW index should be confirmed and, overall, the index should stay mildly positive.
  • In Japan, the BoJ meeting should not lead to any changes in the current strategy, notably in asset purchases and the JGB yield target; the bank will also present its growth and inflation forecasts for 2021 and 2022. On the economic front, final industrial production should confirm the sharp fall seen in December’s preliminary data, while first estimates for manufacturing and services PMIs should be slightly more constructive than last month (all indices below 50). Inflation is expected to regain slightly, but to still remain well below 1% y/y, notably on core inflation.
  • In the UK, the first estimates for the manufacturing and services PMI should show a modest improvement from low levels for manufacturing, while the services index should remain around 50; no noticeable improvement has been seen since the election. Separately, other business surveys will be published (CBI trend index) and these are expected to be less negative. Labour data should broadly remain on a healthy trend, with the unemployment rate still low and a moderate rise in employment; wage growth is expected to remain relatively sustained in a 3–3.5% y/y range. Indicators will also be published for house prices (Rightmove house prices).
  • Central bank meetings: Malaysia, Indonesia, Canada and Norway.




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