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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 4 to 8 Feb.):

  • In the US, the week was quiet in terms of economic data. The small fall in the ISM non-manufacturing index in January (56.7 from 58.0 in December) was worse than it looked, since it was driven by a sharp decline in the forward-looking new orders component (down 5 points to 57.7). However, some firms responded to the ISM non-manufacturing survey before the end of the government shutdown and the associated statement made several references to the impact of the shutdown, which argues for a potential rebound in future months. In the manufacturing sector, factory orders contracted (against expectations of a small increase) but this data is quite old as it refers to November. The trade deficit narrowed by more than expected in November. This decrease was driven by a sharp decline in imports, which fell to a five-month low and probably reflected some reversal of previous months’ trade pull-forward following US tariffs on imports from China.
  • In the eurozone, the final Markit PMIs on services came in slightly higher than the flash estimate. The breakdown by country revealed particularly weak confidence in Italy. In contrast, the composite PMI for Spain actually increased (to 54.5), providing more evidence that its economy has continued to shrug off the eurozone slowdown. Eurozone retail sales figures for December were in line with expectations (-1.6% m/m) and upward revisions to the data for October and November show that sales actually rose by 0.6% in Q4 as a whole. The decline in German industrial production in December (-0.4% m/m vs +0.8% expected) adds to the evidence that the Europe’s largest economy was struggling in Q4. However, today’s solid rise in December imports and exports provided a rare positive note. The stronger-than-expected rebound in the French industrial production (+0.8% m/m) was encouraging as well. In contrast, its decline was sharp (-0.8%) and broad-based across sectors in Italy.

The publication of macroeconomic forecasts by the European Commission generally goes unnoticed by financial markets. However, the extent of the downward revisions to its GDP forecasts seemed to take the financial markets by surprise when they were published on Thursday. The size of the downward revision was clearly more severe than usual: the EC cut its euro-zone GDP growth forecast for 2019 from 1.9% in November to 1.3%, with Italy (from 1.2% to 0.2%) and Germany (from 1.8% to 1.1%) suffering from the biggest cuts.

  • In the UK, the services PMI weakened by more than expected (50.1 vs. 51.0 expected) after some improvement in December. Unsurprisingly, the BoE kept its monetary policy unchanged but it slashed its GDP growth forecast for this year to 1.2% from the 1.7% it was expecting as recently as November. This is justified by the uncertainty surrounding Brexit as well as weaker global growth, including in Europe. The BoE estimates that more certainty on Brexit could boost growth to as much as 1.6%, while a failure to strike a deal with the EU or an increase in uncertainty would depress growth to just half that level. In this context, a rate hike only looks possible late this year.
  • In Japan, the services PMI rebounded slightly (to 51.6 from 51.0) after having deteriorated in Q4.


UBP Market Insight

Important for the scenario next week:

  • In the US, next week’s key data releases will be the CPI, retail sales, industrial production, and University of Michigan consumer sentiment. Annual inflation is expected to fall to 1.5% from 1.9% in December and core CPI is set to be down a touch to 2.1% y/y from 2.2% y/y. Retail sales are expected to be up 0.1% m/m in December. January industrial production should be up slightly (+0.1% m/m), while consumer sentiment is forecast to show a rebound.
  • In the eurozone, the second release of data on GDP growth should confirm the flash estimate of 0.2% q/q and industrial production is expected to have fallen by 0.6% m/m in December. And we will finally learn whether Germany managed to avoid a recession last year.
  • In the UK, a range of important economic data is set to come out. Q4 GDP growth should have fallen from 0.6% to 0.3% q/q. Industrial production should rise by 0.1% m/m for December. The consensus expects CPI inflation to fall from 2.1% to 1.9% in January and core inflation to fall from 1.9% to 1.8%. Retail sales should be slightly up in January.

The focus will, of course, be on the parliamentary vote on Brexit. If, as is most likely, Theresa May does not manage to get a new Brexit deal with the EU next week, she will probably table a motion in parliament on 13 February, which MPs could then amend on 14 February. During this debate, amendments could be passed which could avoid a no-deal scenario and/or give parliament more say in the Brexit process.

  • In Japan, Q4 real GDP growth is expected to be up 1.4% q/q (annualised) after a 2.5% contraction in Q3.
  • In China, the focus will be on money supply and credit and trade data for January.
  • Central bank meetings: New Zealand and Sweden, with both expected to keep rates on hold.



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Market insight 15.02.2019

US: weak industrial production and mixed empire manufacturing

US: Industrial production (Jan): -0.6% m/m vs 0.1% expected (prior: 0.1% revised from 0.3%)

  • The decline in IP was driven by a 0.9% drop in manufacturing output, which was largely driven by an 8.8% m/m plunge in motor vehicle output, which reversed a 4.3% surge in December. But there were also signs of weakness in other sectors, which machinery and electronics production both declining.
  • With the latest retail sales data, this provides further reason to think that the Fed won't be raising rates any time soon.


US: Empire manufacturing (Feb): 8.8 vs 7 expected (prior: 3.9)

  • While the index rose in Feb, the composition was mixed as the new orders index increased, but the shipments and employment components both declined. The prices paid measure decreased and the 6 months-ahead business conditions index rebounded sharply by 14.5pt to +32.3.


US: Consumer confidence (Michigan) (Feb P): 95.5 vs 93.7 expected (prior: 91.2)

  • Sentiment has rebounded more than expected; sentiment on current situation has increased lower than expected, while expectations rose higher than expected.


US: Import price index (Jan): -0.5% m/m vs -0.2% expected (prior: -1%)

  • The decline reflected a drop in the fuel category (-3.2% m/m).
  • Overall, the report was soft as consumer goods import prices fell at their fastest pace in 7 months and auto prices fell by 0.2% m/m.


UK: Retail sales (Jan): 1.2% m/m vs 0.2% expected (prior: -1% revised from -1.3%)

  • Sales ex fuel were up by 1.2% m/m vs 0.2% m/m expected (-1% the prior month); Internet sales have rebounded by 3.7% m/m and represent 18.8% of total sales (prior: 19.8%).
  • Overall, retail sales rebounded as clothing discounts attracted shoppers but downside risks could continue to weigh on consumption as political scenario remains unclear.


Spain: CPI (Jan F): -1.7% m/m as expected (prior: -0.5%)

  • On a y/y basis: 1% as expected (prior: 1.2%).
  • Clothing and footwear have driven trend in headline prices lower (-15.4% m/m), while transportation rose by 0.3% m/m.