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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 3rd Dec. to 7th Dec.):

  • In the US, non-farm payroll came lower than expected (155,000 vs 198,000) and decreased from past month (237,000); despite that, the underlying trend remained positive as part of the volatility in some sectors could be attributed to negative effects of weather and fires. The unemployment ratio was stable at 3.7% and wage growth was moderate on a monthly basis, but the yearly trend (3% y/y) remained frimly in place. The ADP survey came in also lower than expected (179,000 vs. 195,000 previously). The manufacturing PMI eased slightly from last month, but the ISM manufacturing rebounded and is again close to its highest levels on the back of an upturn in sentiment on both orders and employment, and a decline in prices. In the service sector, PMI and ISM were both on the rise, with the ISM index being close to its highest level since 2008. These business sentiment indices are a long way from any recession signals. Q3 productivity was up by 2.3% q/q, as expected, and unit labour costs remained under control (+0.9% q/q). Factory orders contracted as expected, due to volatility on aircraft orders, and core orders stabilised after weak numbers in recent months. Consumer confidence was stable, and the willingness to buy large items was still high, even if some concerns have emerged on future employment. The US beige book has revealed steady, moderate growth, but it also mentioned tariffs, rising rates and a tight labour market as threats to activity. Jerome Powell and other Fed governors have all mentioned that the US economy is in good shape, running close to its full potential in terms of labour. This should lead to further rises in key rates, contrary to the no-hike thinking currently priced in by the money markets, but the Fed will be increasingly data-dependent as it enters 2019.
  • In the eurozone, the manufacturing and services PMI were both down on last month, but by slightly less than expected. In Italy, the two indices diverged as manufacturing sentiment fell further, whereas it gained ground in services. While the activity trend deteriorated, indices should be able to stabilise in certain countries over the coming months. Eurozone Q3 GDP growth has been confirmed up only by 0.2% q/q, and details by sector revealed that the large part of this quarterly change was coming from inventories building, while consumption was moderate and other components flat. Eurozone retail sales were slightly firmer than expected (0.3% m/m) after highly negative numbers last month (-0.5% m/m). Eurozone PPI remained on a strong trend due to energy prices (4.9% y/y) and was far higher than the inflation rate seen in the headline consumer prices. Industrial production in France and Germany was mixed: it has regained on autos in France but remained depressed in Germany. Factory orders in Germany were up slightly (0.3% m/m) but not by enough to reverse the year’s trend, which remained sharply negative (-2.7% y/y). In Spain, the PMI manufacturing and industrial production were both firmer than expected, showing better momentum than in other EU member states.
  • In Japan, the manufacturing PMI was up slightly, while PMI sentiment on services was stable. These two indicators remained in a 52–53 range, which looks positive for growth. Household labour cash was more positive than expected (1.5% y/y vs. 1%) but household spending disappointed, falling by 0.3% y/y.
  • In the UK, the manufacturing PMI recovered but it remains on a downward trend and the services PMI fell by more than expected, coming in at close to 50. BRC retail sales slipped by more than expected; downside risks on domestic activity are building at a time when the political situation is becoming increasingly uncertain and fragile as a consequence of Brexit.
  • In China, the manufacturing PMI (Caixin index) just stabilised above 50, but the services PMI saw a significant rebound (from 50.8 to 53.8), pointing to better momentum on activity in the future. In India and Brazil, the two sentiment indicators both rebounded from last month. In Russia, the manufacturing PMI was also up from last month’s lows. Overall, business sentiment was more positive in the US and emerging markets, while it continued to weaken in the Eurozone.
  • While fears about a trade war abated slightly with the truce between the US and China until 1 March, worries increased on the political front (not helped by legal issues surrounding Huawei) and due to the flattening of the US yield curve. Contrary to fears seen on bonds, the US and global activity both seem far from any recession, unless any major political shocks are hiding over the horizon.

Important for the scenario next week:

  • Next week will be a busy one for the US: retail sales should remain relatively sustained after strong numbers in October; inflation is expected to stay moderate with a flat monthly print and a decline in its trend (to 2.2% y/y), as well as a stable trend in core inflation (2.1% y/y). PPI data should moderate slightly (0.1% m/m from 0.5%). Preliminary data for business sentiment (manufacturing and services PMI, NFIB index) should moderate from last month, but are expected to remain at high levels. Industrial production should give some comfort with a monthly rebound expected (0.3% m/m). Last, the JOLTS survey should decrease slightly as shown by non-farm payroll data.
  • In the eurozone, the main event will be the ECB meeting. Downwards revisions to the growth and inflation outlooks are expected. Nevertheless, the ECB should confirm the end of its QE programme and no change is expected regarding the outlook on rates; more details should be given on the policy of reinvestment in government and corporate bonds. It is likely that the ECB will discuss potential new liquidity measures (TLTRO) in case there is pressure on banks and lending due to tighter liquidity. Eurozone industrial production should rebound slightly thanks to a recovery in the auto sector, and there are hopes for some stabilisation in business sentiment (manufacturing and services PMI). At country level, inflation is expected to stabilise or ease slightly in France, Germany and Italy. Industrial production, orders and sales in Italy should remain weak, as will business sentiment in France.
  • In Japan, Q3 GDP should be revised downwards in the second estimate (-0.5% q/q versus -0.3% previously) but industrial production, machine orders and the tertiary index should stabilise after negative numbers the previous month. The Tankan survey should also stabilise and could offer a more constructive outlook.
  • In China, a rebound is expected in total financing and new yuan loans. Firmer consumer spending is expected to be closer to 9% y/y, but industrial production and fixed-asset investments should remain below 6% on a yearly trend.
  • In the UK, growth (a monthly GDP proxy) should remain weak, and there is potential for weakness in investment. The labour market may show some slowdown in the level of job creations, while the trend in wage growth should remain steady. Some improvement could be seen in industrial production after a rebound in the latest business sentiment data (PMI).
  • No major news is expected in the US, just a confirmation of a sustained trend in consumption and that headline inflation remains moderate. Some signs of stability could appear in the eurozone and China. The ECB is expected to deliver more details on its strategy, while several central banks in emerging countries are due to meet during the week. A first vote on Brexit by the UK parliament was originally due by 11 December, but as no majority was expected and it has been postponed later on and another vote could be held before the end of the year. The European Council will also meet by 14 December, giving Theresa May an opportunity to tweak the withdrawal agreement if necessary.
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