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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 weeks’ key economic news (from 10th Dec. to 14th Dec.):

  • In the US, retail sales were firmer than expected and core sales have strongly rebounded in several sectors; lower oil prices has boosted purchasing power and favour consumption; a still firm consumption could be expected over Q4. The JOLTS survey increased slightly after downward revisions from recent months, showing a still positive trend in job creations; it was also more upbeat than the latest non-farm payroll figures (+155,000). Inflation moderated (2.2% y/y from 2.5% the previous month) thanks to lower energy prices but core inflation increased slightly (2.2% y/y) on firmer rents and services. PPIs have also moderated from 2.9% y/y to 2.5% y/y thanks to energy prices, but core PPIs were firmer than expected over the month. On the supply side, preliminary data for business sentiment (manufacturing and services PMI, NFIB index) have moderated as expected, but remained higher than in the Eurozone. Industrial production has rebounded (0.6% m/m) on firmer activity in energy, while manufacturing production was flat over the month.
  • In the eurozone, at its most recent meeting, the ECB confirmed the end of its QE programme and the start reinvestment process that will follow, although no end date for this was set. The forward guidance on rates was unchanged (with a potential rise on Q3), but Draghi insisted that the balance of risks could deteriorate further if temporary headwinds become permanent. Liquidity remains key and new measures were mentioned by some governors during the meeting. The growth scenario was revised down to 1.7% for the next two years and inflation is expected to ease further in 2019 (1.6% y/y) before recovering to 1.8% y/y in 2021. Draghi has also mentioned that the labour market looks tight and wages are on the rise, putting core inflation on a rising trend. The eurozone industrial production rebounded more than expected (0.2% m/m) thanks to the auto sector. In Germany, the ZEW index gained ground but stayed in negative territory. Nevertheless, manufacturing and services PMI have decreased further (first estimate), particularly in France after social unrests. These indices point to further downside risks on growth while a stabilisation was expected. In Italy, industrial production recovered slightly (0.1% m/m from -0.1% m/m) and Q3 18 unemployment eased back from 10.7% to 10.2%, but Italian industrial orders and sales have shown modest contraction from both domestic and foreign sectors.
  • In Japan, Q3 GDP was revised down by more than expected (-0.6% q/q) with a large fall in investment. Core machine orders and the tertiary index both rebounded after printing negative numbers in previous months. The rebound in industrial production by 4.9% y/y after various negative events has been confirmed and the manufacturing PMI was also slightly up (52.4). The Tankan survey has stabilized for large firms in the manufacturing sector.
  • In China, total financing and new yuan loans both rebounded to high levels. The trade balance still showed a large surplus (USD 44.7 bn) but export performances weakened. Contrary to expectations, retail sales have eased (from 8.6% y/y to 8.1% y/y) and industrial production was also weaker than expected bringing back fears on the domestic activity. Fiscal stimulus has helped fixed assets investment to be slightly better firmer, up by 5.9% y/y after 5.7% y/y the prior month. Inflation eased from 2.5% y/y to 2.2% y/y, as did PPIs (from 3.3% y/y to 2.7% y/y).
  • In India, inflation eased further from 3.4% y/y to 2.3% y/y, while industrial production rebounded from 4.5% y/y to 8.5% y/y.
  • In UK labour market, unemployment was stable at a low of 4.1% but job creation slowed and wage growth remained on a rising trend (3.3% y/y). Contrary to expectations, industrial production contracted (-0.6% m/m), with a severe fall in non-durable consumer and investment goods. Views on housing prices also deteriorated sharply in November.
  • Central bank of Russia has increased its key rates from 7.50% to 7.75%, and said it could hike further with upside risks on inflation remaining in place.
  • Negotiations between the US and China made progress, with new concessions from China (such as on tariffs on autos and on postponing some strategic plans on technology). In the US, dynamic consumption could support further growth, while industrial sector appears to be on a softer trend. In the UK, Prime Minister May managed to cling on to power but will now have to face a vote on Brexit in parliament. France eased its fiscal policy following the ‘yellow vests’ protests, raising its deficit to a 3%–3.5% of GDP range, while Italy is negotiating a new 2.04% fiscal deficit with the European Commission. The ECB has ended its QE programme but remains cautious.

Important for the scenario next week:

  • In the US, next week will be dominated by the Fed’s two-day FOMC meeting: a 25 bps rate hike is widely expected, while communications could shift to a more dovish stance, given rising political and economic risks in several regions, including less-than-booming growth in the US. Several regional business surveys will be published (New York Empire, Philly Fed and Kansas Fed): they have generally pointed to moderate growth over the past few months with volatility across regions and this situation should continue. The latest revisions to Q3 GDP growth should not reveal any change (3.5% q/q). While personal income and spending should also show some moderation (0.3% m/m from 0.5% m/m), core PCE inflation may rise slightly (from 1.8% y/y the previous month) given the current trend seen in other price indices. Several indicators will be published on housing (NAHB index, housing starts, and existing home sales) and a stabilisation is expected after regular disappointments and a slowdown.
  • In the eurozone, inflation for November should be confirmed as being up by 2.2% y/y and core inflation should rise to 1.1% y/y. Consumer confidence, already at low levels, may ease further in this difficult political environment. Several national indicators will be published: in Germany, the IFO is expected to stabilise after having been on a regular weakening trend, as should business confidence in Italy; in France, downside risks exist on business confidence and consumer spending due to the deteriorating economic climate already in place before the recent protests broke out.
  • In Japan, the main event will be the BoJ meeting. The bank is not set to change its accommodative stance; rather it will probably expect a firmer economic environment after the disruption related to adverse weather conditions. Risks outside Japan could justify maintaining a relaxed monetary environment.
  • In the UK, the BoE meeting should not produce any change in the current strategy, and the bank could adopt a wait-and-see stance, due to the murky political environment, even if upside pressures on wages remain in place. A bias towards further rate hikes should persist. Inflation should moderate slightly from 2.4% y/y, but upside risks could return via rising PPI (input prices up by 10% y/y) related to renewed GBP weakness. Retail sales could disappoint after already bad figures in October (-0.4% m/m) and various business sentiment indices (CBI trend) may also weaken further.
  • In Russia, monthly indicators will be published on retail sales, investment and unemployment, but the consensus only expects a modest improvement from last month.
  • Central bank meetings: Mexico, Colombia, Hungary, the Czech Republic, Thailand, Indonesia, Taiwan and the Swedish Riksbank.
  • The European Council summit should deliver more detail on the Brexit agreement and we will probably see ongoing debates regarding the French and Italian budget situations. The US Federal Reserve’s decision should pave the way for further rate hikes in Q1 19, which does not seem to be correctly priced in by the money markets.
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