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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 2 Dec. to 6 Dec.):

  • In the US, the ISM manufacturing disappointed by falling to 48.1. The details painted a mixed picture, with an improving outlook on production but weakening new orders and export orders. In contrast, the manufacturing PMI increased by more than expected (52.6) with rising production and new orders. The ISM non-manufacturing also disappointed, declining to 53.9 on lower activity; however, the data offered some hope thanks to a rise in new orders. The services PMI confirmed the rise seen in early estimates thanks to firmer new activity. Factory orders rebounded as expected (0.3% m/m) and core orders increased strongly (1.1% m/m). Non-farm payrolls have strongly rebounded (266,000 after 156,000 and past month were revised up; thus the 3-month average has increased to 205,000. Job creations have rebounded in manufacturing and increased sharply in the service sector (206,000), thanks to business services, education-health and leisure sectors. Wage growth was slightly firmer than expected (0.25% m/m and up by 3.1% y/y. Labor data were largely above expectations and more positive than the ADP survey: the ADP survey showed a very low, below-expectation rise in employment (67,000 from 125,000 the previous month) and the slowdown was seen in all sectors except health care. On the consumer side, the preliminary estimates for the Michigan consumer confidence index has strongly rebounded, particularly on current conditions, with improving financial conditions and future economic situation. Construction spending contracted by 0.8% m/m, contrary to expectations, and last month’s data were revised down.
  • In the eurozone, the rebound in the manufacturing PMI was firmer than in early estimates and sentiment increased in all major countries except Italy. The final data for the services PMI confirmed a modest easing from last month due to weaker sentiment in France and Italy. Retail sales (October) surprised on the downside, showing a sharp fall (-0.6% m/m) and there were specific weaknesses in certain Nordic countries and Germany. In Germany, factory orders (October) plunged (-0.4% m/m) but last month’s data were revised up (1.5% m/m); the fall in orders was particularly focussed on domestic activity, with foreign orders staying on a positive trend. Industrial production (October) has fallen by more than expected due to contraction in capital goods and in construction, while trend remained mildly positive for consumer goods.
  • In Japan, the final manufacturing PMI showed a moderate increase from last month, but it remained below 50, while the services PMI eased marginally from last month (to 50.3). On the consumer side, labour cash earnings remained positive even on moderate growth (0.5% y/y), while household spending (October) has sharply contracted (-5.1% y/y) due to the negative impact following the VAT rise.
  • In the UK, the manufacturing PMI was a bit firmer than expected, but nonetheless below 50 (at 48.9). The services PMI rebounded by more than expected but it also remained below 50 (at 49.3).
  • In China, contrary to expectations, the manufacturing PMI increased slightly and the services PMI rose by more than expected (53.5).
  • Industry sentiment indicators are confirming that activity should rebound in the coming months but it will nonetheless remain very fragile; depending on the source, sentiment indicators in industry in the United States are showing a mixed picture, while in Europe the upturn is fragmented across countries. While sentiment is improving in the manufacturing sector, the service sector is still generally fragile and is still being affected by the previous slowdown. Production and retail sales data remain depressed across several countries. Good news is that US labor market and consumer confidence are both close to their highs, underpinning the growth trend.

Important for the scenario next week:

  • In the US, the major event will be the two-day Fed meeting, which is the last one of the year. No change is expected in key rates and official statements should reiterate that US growth is on a moderate uptrend but that the Fed is ready to act if necessary, as some downside risks remain in place; only a few changes are expected to the forecasts on growth and inflation outlooks. Inflation is expected to continue rising steadily on a monthly basis (0.2% m/m) and its yearly trend should accelerate slightly (at 2% y/y); core inflation is expected to stay on a stable trend (2.3% y/y). PPIs are also expected to show a steady monthly rise (0.2% m/m expected) and the yearly trend could accelerate slightly (1.2% y/y on headline and 1.7% y/y on core prices). On the consumer side, retail sales (November) are expected to be steady (0.4% m/m and 0.3% m/m for core sales). On the supply side, business sentiment for small firms (the NFIB index) is expected to rebound from the moderate levels seen in the last three months.
  • In the eurozone, the main event will be the ECB meeting, which is the first one for its new president, Christine Lagarde. No change to its current strategy is expected but questions will be asked about the state of the consensus within the ECB and on the forward guidance policy. The ECB could state its readiness to act if necessary, but without mentioning any specific monetary tools; it seems too early to reach any conclusions about the review of the ECB’s strategy. On the macro front, only moderate changes could be made to growth and inflation forecasts, as growth is set to be weak and inflation to be low in the medium term. On the macro front, industrial production is expected to contract further after moderate data in September. In Germany, exports are expected to continue to put in negative performances (October data), but the ZEW survey should improve moderately from still depressed levels. In France, industrial production is expected to stay on a steady upward trend (0.3% m/m). In Italy, industrial production and orders are both expected to remain generally weak, even after the fall seen last month.
  • In Japan, final Q3 GDP estimates should show some upward revisions thanks to firmer capex. The Tankan survey is expected to show some moderate growth, as well as that sentiment at large manufacturers is eroding further. Core machine orders should remain volatile and the yearly trend in PPIs is expected to go back up to 0% after being in negative territory.
  • In the UK, industrial production is expected to rebound after a sharp decrease the previous month and the monthly GDP estimate is also expected to make modest progress after falling in September. House price sentiment (RICS price balance) should continue to improve slightly after being depressed in recent quarters.
  • In China, inflation is expected to increase further (4.2% y/y) on rising food prices and PPIs are expected to come in on a marginally less negative trend (-1.5% y/y). Monetary aggregates and credit data will be published during the week.
  • Central bank meetings: Philippines, Brazil, Peru, Turkey, Russia and Switzerland
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