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There were no exact matches for " People's Bank of China" but the following items were returned as close matches:
It seems pretty clear from press reports that the White House budget, which reportedly will be released March 14, will propose substantial increases in defense spending, deep cuts to discretionary non- defense spending, and no substantive changes to entitlement programs. None of this will come as a surprise.
Money supply dynamics in the Eurozone continue to signal a solid outlook for the economy. Headline M3 growth eased marginally to 4.9% year-over-year in January, from 5.0% in December; the dip was due to slowing narrow money growth, falling to 8.4% from 8.8% the month before. The details of the M1 data, however, showed that the headline chiefly was hit by slowing growth in deposits by insurance and pension funds.
The Colombian economy was relatively resilient at the end of last year, but economic reports released during the last few weeks indicate that growth is still fragile, and that downside risks have increased. Real GDP rose 1.0% quarter-on-quarter in Q4, pushing the year-over-year rate up to 1.6% from 1.2% in Q3.
The E.C.'s Economic Sentiment Indicator for the U.K., released yesterday, painted an upbeat picture of the economy's recent performance. The ESI picked up to 109.4 in February from 107.1 in January; its average level since 1990 is 100. February's reading was the highest since December 2015, and it slightly exceeded the E.U.'s average of 108.9.
Yesterday's advance CPI data in Germany and Spain suggest that inflation in the Eurozone as a whole dipped slightly in February.
Data and events have gone against the idea of further BoK policy normalisation since the November hike.
Retail sales in Mexico plunged at the end of Q4, but we think households' spending will continue to contribute to GDP growth in the first quarter.
Fed Chair Powell sounded a lot like Janet Yellen yesterday, at least in terms of substance.
Multiple factors have shaken LatAm financial markets this week. China's market turmoil, commodity price oscillations, currency volatility, and political mayhem in every corner of the region, have all conspired against markets. But market chaos has also driven some central banks to rethink their monetary policy plans. For EM, in particular for LatAm, the stance of the Federal Reserve is key, given the region's close ties to the U.S., and the dollar.
We argued yesterday that the August payroll number is unlikely to be a blockbuster, thanks to a combination of problems with the birth/death model and the strong tendency for this month's jobs number to be initially under-reported and then revised substantially higher. But these arguments don't apply to the unemployment rate, which is derived from the separate household survey.
China's finance minister Liu Kun provided his report on China's current fiscal situation to the legislature last Friday.
Whatever number the BEA publishes this morning for first quarter GDP growth -- we expect zero -- you probably should add about one percentage point to correct for the persistent seasonal adjustment problem which has plagued the data for many years. Reported first quarter growth has been weaker than the average for the preceding three quarters in 21 of the 31 years since 1985 -- and in eight of the past 10 years.
Yesterday's ECB meeting painted a picture of a central bank in wait-and-see mode. The main refinancing and deposit rates were kept at 0.00% and -0.4% respectively, and the marginal lending facility rate also was unchanged at 0.25%.
Data last week confirmed that Peru's economic growth slowed sharply in the first half of the year, due to the damaging effects of the global trade war hitting exports.
Net foreign trade made a positive contribution of 0.2 percentage points to GDP growth in the second quarter, matching the Q1 performance.
Yesterday's money supply report provided further relief for investors doubtful over the cyclical recovery following the market turmoil. Broad money growth, M3, accelerated to 5.3% year-over-year in July, up from 4.9% in June, and within touching distance of a new post-crisis high. Narrow money continued to surge too, rising 12.1% year-over-year, up from 11.1% in June, sending a bullish message on the Eurozone economy.
The Mexican economy shrank by 0.2% quarter- on-quarter in Q2, according to the final GDP report, a tenth worse than the preliminary reading.
Friday's detailed GDP data in Germany confirm that the euro area's largest economy performed strongly in the second quarter.
Sterling's depreciation, which began over two years ago, has inflicted pain on consumers but fostered a negligible improvement in net trade.
Yesterday's January EZ money supply data offered support for investors betting on a further dovish shift by the ECB at next month's meeting.
Judging by the survey data, German business sentiment remained depressed at the start of the year.
The end of the government shutdown--for three weeks, at least-- means that the data backlog will start to clear this week.
Last week the Chinese authorities issued a series of new measures to help with bank recapitalisation, and, we think, to supplement interbank liquidity.
Korean real GDP growth slumped in Q2 to 0.6% quarter-on-quarter, from 1.1% in Q1, as both the main drivers--construction and exports--ran out of steam simultaneously. Construction investment grew by 1.0%, sharply slower than the 6.8% in Q1 and contributing just 0.2% to GDP growth in Q2, a turnaround from the 1.1 percentage point contribution in the first quarter.
This is the final report before your scribe disappears into the Scottish Highlands for a few weeks, and we are leaving you with a Eurozone economy in fine form. The calendar will be relatively light in our absence and will tell us what we already know; namely that the euro area economy maintained its strong momentum in Q2.
Mr. Draghi's speech yesterday in Portugal, at the ECB forum on Central Banking, pushed the euro and EZ government bond yields higher. The markets' hawkish interpretation was linked to the president's comment that "The threat of deflation is gone and reflationary forces are at play."
The headline in yesterday's EZ money supply report gave the illusion that monetary conditions are stable, but the details tell a different story. M3 growth accelerated marginally to 5.0% year-over-year in June, from 4.9%, but momentum in narrow money fell further. M1 growth slowed to 8.5% year-over-year, from 9.0% in May due to a fall in overnight deposits and currency in circulation.
Money supply data continue to send a bullish message on the euro area economy. Broad money growth was unchanged at 5.0% year-over-year in June, but M1 growth surged to 11.8%, from 11.2% in May. Combined with low inflation, real M1--the best leading indicator in the Eurozone--indicates a surge in GDP growth on par with previous record business cycle upturns in 1999, 2005-06 and 2009-10.
Mexican economic data was surprisingly benign last week.
At first glance, the U.K. consumer price data show a perplexing absence of domestically generated inflation.
We have no choice but to revise down our forecast for GDP growth in Q2, now that the threat of a no-deal Brexit likely will hang over the economy beyond March, probably for three more months.
We expect to learn today that the economy expanded at a 2.1% annualized rate in the fourth quarter, slowing from 3.4% in the third.
China's government overshot its deficit target last year, and probably will overshoot it by at least as much this year
Mexico's central bank, Banxico, will hold its first monetary policy meeting of this year tomorrow. It will break with tradition, holding the meeting on Thursday at 1:00 p.m, local time, instead of the previous 9:00 a.m slot.
The ECB will receive most of the credit for the recent gain in stock markets, but the main leading indicator for the stock market, excess liquidity, was already turning up late last year. With the MSCI EU ex-UK up 21%, in euro terms, since October, a lot is already priced in, but in the medium term the outlook is upbeat, and we look for further gains this year.
Reports yesterday indicated that a deal has finally been struck between the European Commission and the Italian government to start dealing with bad loans in the banking system. The initial details suggest the government will be allowed to guarantee senior tranches on non-performing loans, supposedly making them easier to sell to private investors. In order to avoid burdening government finances as part of the sales--not allowed under the new banking union rules--the idea is to price the guarantees based on the credit risk of similar loans.
We are pretty confident that the reported 3.4% drop in durable goods orders in December, which so spooked the markets yesterday, didn't actually happen.
The preliminary estimate of Q1 GDP looks set to show that the economy started 2017 on a weak footing. We share the consensus view that quarter-on-quarter GDP growth slowed to 0.4%, from 0.7% in Q4.
Brazil's recovery has been steady in recent months, and Q1 likely will mark the end of the recession. The gradual recovery of the industrial and agricultural sectors has been the highlight, thanks to improving external demand, the lagged effect of the more competitive BRL, and the more stable political situation, which has boosted sentiment.
The durable goods numbers were among the first short-term indicators to warn clearly of the hit to manufacturing from the rollover in oil sector capex, which began last fall. The trend in core capital goods orders was rising strongly before oil firms began to cut back, with the year-over-year rate peaking at 11.9% in September. Leading capex indicators in the small business sector remained quite robust, but just nine months later, core capex orders were down 6.4% year-over-year, following annualized declines of more than 14% in both the fourth quarter of 2014 and the first quarter of this year.
House prices look set for another growth spurt, pushing the house price-to-earnings ratio--the most widely used measure of valuation sustainability--close to levels seen shortly before the late-2000s crash. But we don't place much store by the price-to-earnings ratio. Better, more reliable indicators suggest that a higher level of house prices will prove sustainable.
Last week's detailed Q3 GDP data in Germany verified that GDP fell 0.2% quarter-on-quarter, down from a 0.5% rise in Q2, a number which all but confirms the key story for the economy over the year as a whole.
Economic sentiment in the Eurozone's largest economy stayed solid at the start of the fourth quarter, despite subdued manufacturing and poor investor sentiment. The headline IFO business climate index fell slightly to 108.2 in October from 108.5 in September, due to a fall in the current assessment index. The expectations index rose, though, to 103.8 from 103.5 last month pointing to a resilient outlook for businesses and solid GDP growth in coming quarters.
The ECB broadly conformed to markets' expectations today. The central bank maintained its key refinancing and deposit rates at 0.00% and -0.4% respectively, and delivered the consensus package on QE.
Yesterday's consumer confidence report in Germany was soft, in contrast to surging business sentiment data earlier in the week.
The Annual Survey of Hours and Earnings, which contains granular detail on wages and provides a useful cross-check on the regular average weekly wage earnings--AWE--data, was published yesterday.
We expect today's first estimate of third quarter GDP growth to show that the economy expanded at a 2.4% annualized rate over the summer.
Mortgage approvals by the main high street banks rose to a four-month high of 39.7K in October, from 38.7K in September, according to trade body U.K. Finance.
Japan's flash Nikkei manufacturing PMI report for November was abysmal, putting the chances of a recovery this quarter into serious doubt.
The BRL remains under severe stress, despite renewed signals of a sustained economic recovery and strengthening expectations that the end of the monetary easing cycle is near.
Japan's retail sales data--due out on Thursday-- have been badly affected by the October tax hike.
Political uncertainty is starting to dampen housing market activity again.
Since the Party Congress last month, China has made a number of bold moves in multiple policy fields, with a regularity that almost implies the authorities are working through a list.
We have argued for some time that the revival in nonoil capex represents clear upside risk for GDP growth next year, but it's now time to make this our base case.
The last time oil prices fell sharply, from mid-2014, when WTI peaked at $107, through early 2016, when the price reached just $26, the U.S. economy slowed dramatically.
Improving fundamentals have supported private spending in Mexico during the current cycle.
Money supply data are sending an increasingly contrarian, and bullish, signal for the euro area economy.
Banxico cut its policy rate by 25bp to 7.75% yesterday, as was widely expected, following August's 25bp easing.
Brazil's external accounts have recovered dramatically this year, and we expect a further improvement--albeit at a much slower pace--in the fourth quarter. The steep depreciation of the BRL last year, and the improving terms of trade due to the gradual recovery in commodity prices, drove the decline in the current account deficit in the first half.
Today is a busy day in the Eurozone economic calendar, but we suspect that markets mainly will focus on the details of Italy's 2019 budget.
August's mortgage lending data from the trade body U.K. Finance provided more evidence that the pick-up in housing market activity in Q2 simply reflected a shift from Q1 due to the disruptive weather, rather than the emergence of a sustainable upward trend.
In contrast to surveys of manufacturing activity and sentiment, the Conference Board's measure of consumer confidence rose sharply in August, hitting an 11-month high. People were more upbeat about both the current state of the economy and the outlook, with the improving job market key to their optimism. The proportion of respondent believing that jobs are "plentiful" rose to 26%, the highest level in nine years.
The expectations components of both the Michigan and Conference Board measures of consumers' confidence have risen sharply since gasoline prices rolled over.
The disappearance from the FOMC statement of any reference to global risks, which first appeared back in September, was both surprising and, in the context of this cautious Fed, quite bold. After all, one bad month in global markets or a reversal of the jump in the latest Chinese PMI surveys presumably would force the Fed quickly to reinstate the global get-out clause. So, why drop it now?
Monetary dynamics in the Eurozone were virtually unchanged last month. M3 growth rose trivially to 5.0% year-over-year in March from a revised 4.9% in February. It was lifted by stronger growth in medium-term deposits and issuance of short-term debt.
QE and a gradually strengthening economy will remain positive catalysts for equities in the euro area this year. But with the MSCI EU ex -UK up almost 24% in the first quarter, the best quarterly performance since Q4 1999, the question is whether the good news has already been priced in.
The Fed is on course to hike again in December, with 12 of the 16 FOMC forecasters expecting rates to end the year 25bp higher than the current 2-to-21⁄4%; back in June, just eight expected four or more hikes for the year.
In yesterday's Monitor, we laid out how conditions last year were conducive to Chinese deleveraging, and how the debt ratio fell for the first time since the financial crisis.
We're revising down our forecast for quarteron-quarter GDP growth in Q3 to 0.3%, from 0.4%, in response to signs that the rebound in industrial production is shaping up to b e smaller than we had anticipated.
In the financial crisis, a squeeze in short-term dollar markets forced banks to sell assets, which were then exposed as soured.
All eyes today will be on the core PCE deflator for August, which we think probably rose by a solid 0.2%.
The further decline in mortgage approvals in August shows that housing market activity remains very subdued. The recent fall in mortgage rates likely will prop up demand soon, but the poor outlook for households' real incomes suggests that both activity and prices will revive only modestly over the next year.
Yesterday's IFO survey in Germany was a big relief for markets, in light of recent soft data. The main business climate index jumped to 109.5 in September, from 106.3 in August, the biggest month-to-month increase since 2010.
Venezuelan bond markets have been on a rollercoaster ride this year, with yields rising significantly in response to heightened political uncertainty and then declining when the government pays its obligations or when protests ease.
French business sentiment cooled marginally at the end of Q3. The headline manufacturing confidence index dipped to 110 in September, from 111 in August, though the overall business sentiment gauge was unchanged at 110.
Chinese industrial profits growth rose to 16.7% year-on-year in May, from 14.0% in April. But this headline is highly misleading. Profits growth data are about as cyclical as they come so taking one point in the year and looking back 12 months is very arbitrary. Moreover, the data are very volatile over short periods.
The April international trade numbers were startlingly, and surprisingly, horrible. The deficit in trade in goods leaped by $6.2B -- the biggest one-month jump in two years -- to $67.1B, though the headline damage was limited by a sharp narrowing in the oil deficit, thanks to lower prices, and a rebound in the aircraft surplus.
Mr. Draghi used his introductory statement at the ECON--EU Economic and Monetary Affairs Committee-- hearing last week to assure investors that the central bank is vigilant to downside risks. The president noted the governing council "would not hesitate to act" if it deems growth and inflation to be undershooting expectations. Market volatility has increased the ECB's worries, but economic data continue to tell a story of a firm business cycle upturn.
Former Treasury Secretary and thwarted would-be Fed Chair Larry Summers has been arguing for some time that the Fed should not raise rates "...until it sees the whites of inflation's eyes". As part of his campaign to persuade actual Fed Chair Yellen of the error of her intended ways, he argued at the World Economic Forum in September that the strong dollar has played no role in depressing inflation. Never one to miss an opportunity to diss the competition, he wrote that Stanley Fischer's view that the dollar has indeed restrained inflation is "substantially weakened" by the hard evidence. Dr. Summers' view is that inflation is being held down by other, longer-lasting factors, principally the slack in the lab or market, rather than the "transitory" influences favored by the Fed.
BanRep surprised everyone late Friday, moving ahead of the curve by starting a tightening cycle that had been expected to begin later in the year or in Q1. But the seven-board member succumbed in the face of persistent inflationary pressures, and voted unanimously to hike the main interest rate by 25bp to 4.75%, the first move since April 2014.
Our forecast that CPI inflation will shoot up to about 3% in the second half of 2017, from 0.6% last month, assumes that pass-through from the exchange rate to consumer goods prices will be as swift and complete as in the past. Our first chart shows that this relationship has held firm recently, with core goods prices falling at the rate implied by sterling's appreciation in 2014 and 2015.
Yesterday's money supply data in the Eurozone were solid across the board. Growth in headline M3 rose to 5.1% year-over-year in August, up from a 4.9% increase in July. A rebound in narrow money growth was the key driver of the gain, with seasonally- and calendar-adjusted M1 rising 8.9% year-over-year, up from July's 8.4%.
China's Party Congress is now less than one month away. Most commentators habitually add the words "all-important" before any reference to the event.
Money supply growth in the Eurozone firmed last month. Broad money--M3--rose 5.0% year-overyear in August, after a tepid 4.5% rise in July.
The risk posed by consumer borrowing was once again the focus of the Financial Policy Committee's discussion last week.
Two entirely separate factors point to significant upside risk to the first estimate of third quarter GDP growth, due today. First, we think it likely that farm inventories will not fall far enough to offset the unprecedented surge in exports of soybeans, which will add some 0.9 percentage points to headline GDP growth.
Markets responded to yesterday's disappointing GDP figures by pushing back expectations for the first rise in official interest rates even further into 2017. The first rate hike is now expected--by the overnight index swap market--in April 2017, two months later than anticipated before the GDP release. The figures certainly look weak--particularly when you scratch below the surface--and we expect growth to slow further over the coming quarters. But we don't agree they imply an even longer period of inaction on the Monetary Policy Committee.
MPs will be asked today to approve the PM's motion, proposed in accordance with the Fixed-term Parliaments Act--FTPA--to hold a general election on December 12.
China's official real GDP growth slowed to 6.0% year-over-year in Q3, from 6.2% in Q2 and 6.4% in Q1. Consecutive 0.2 percentage points declines are significant in China.
The second estimate of Q3 GDP last week confirmed that the Brexit vote didn't immediately drain momentum from the economic recovery. But it is extremely difficult to see how growth will remain robust next year, when high inflation will cripple consumers and the impact of the decline in investment intentions will be felt.
Recent export performance has been poor, but the export orders index in the ISM manufacturing survey-- the most reliable short-term leading indicator--strongly suggests that it will be terrible in the fourth quarter.
Monetary conditions in the Eurozone continue to send a bullish message on GDP growth, and indicate an ongoing, but slow, improvement in credit growth. Broad money growth--M3--was unchanged at 4.9% year-over-year in September, after a trivial 0.1% upward revision of last month's data. The increase continues to be driven by surging narrow money rising 11.7% in September from 11.5% in August, boosted by overnight deposit growth offsetting a slight decline in currency in circulation.
The Mexican economy is recovering gradually, despite many external headwinds. This week, the IGAE economic activity index--a monthly proxy for GDP--rose a solid 2.6% year-over-year in August, up from 2.0% in July. In the first half the economy grew on average 2.4%. The report showed increases in all three sectors, most notably agriculture, up 8.2% year-over-year, followed by services, 3.3%, and industrial activities, with a 1.0% gain.
The two-year budget deal agreed between the administration and the Republican leadership in Congress will avert a federal debt default and appears to constitute a modest near-term easing of fiscal policy. The debt ceiling will not be raised, but the law imposing the limit will be suspended through March 2017, leaving the Treasury free to borrow as much as necessary to cover the deficit. As a result, the presidential election next year will not be fought against a backdrop of fiscal crisis.
The persistence of no-deal Brexit risk has taken a toll on confidence across the economy over the last month.
The PBoC doesn't publicly schedule its meetings, but in recent years has tended to make moves after Fed decisions.
The EZ economic survey data for April were disappointing in our absence.
Inflation in Mexico remains relatively sticky, limiting Banxico's capacity to adopt a more dovish approach, despite the subpar economic recovery.
The definition of "yesbutism": Noun, meaning the practice of dismissing or seeking to diminish the importance of data on the grounds that the next iteration will tell the opposite story.
Concern over individual freedoms was the spark for Hong Kong's recent demonstrations and troubles, and protesters' demands continue to be political in nature.
Yesterday's money supply data in the Eurozone were solid across the board.
Britain still has nothing to show for sterling's depreciation, even though nearly two years have passed since markets started to price-in Brexit risk, driving the currency lower.
The terrible scenes from Texas will play out in the economic data over the next few weeks.
Net foreign trade was a drag on GDP growth in the second quarter, subtracting 0.7 percentage points from the headline number.
The BoJ until last week had been in wait-and-see mode over China's slowdown, but they finally folded with Thursday's decision.
Housing market data yesterday fostered the view that prices are vulnerable to a fall following April's increase in stamp duty--a transactions tax-- and before the E.U. referendum in June. Political uncertainty, however, has rarely had a pervasive or sustained impact on prices in the past.
Momentum in EZ money supply slipped marginally in September. Headline M3 growth slowed to 5.0%, from 5.1%, mainly due to a slowdown in narrow money. Overnight deposit growth slowed to 9.4%, from 9.9% in August, offsetting a slight rise in growth of currency in circulation.
The Argentinian government and the IMF have finally reached a new agreement to "strengthen the 36-month Stand-By Program approved on June 20".
It seems reasonable to think that manufacturing should be doing better in the U.S. than other major economies.
The first estimate of Q1 growth will show that the economy struggled in the face of the severe winter and, to a lesser extent, the rollover in capital spending in the oil sector. But the weather hit appears to have been much smaller than last year, when the economy shrank at a 2.1% rate in the first quarter; this time, we think the economy expanded at an annualized rate of 1.1%.
Household sentiment in France continues to improve, consistent with tailwinds from low energy prices and accommodative monetary policy. INSEE's measure of consumer confidence rose to 94 in April, up from 93 in March, the highest since November 2010.
The astonishing 86% annualized plunge in capital spending in mining structures--mostly oil wells--alone subtracted 0.6 percentage points from headline GDP growth in the first quarter. The collapse was bigger than we expected, based on the falling rig count, but the key point is that it will not be repeated in the second quarter.
Brazil's macroeconomic scenario is becoming easier to navigate for the central bank. Both actual inflation and expectations are slowing rapidly, as shown in our first chart. And since the March BCB monetary policy meeting, the BRL has appreciated about 10% against the USD, while commodity prices and EM sentiment have also improved markedly.
We have been asked how we can justify raising our growth forecasts but at the same time arguing that the housing market is set to weaken quite dramatically, thanks to the clear downshift in mortgage applications in recent months. Applications peaked back in June, so this is not just a story about the post-election rise in mortgage rates.
Today brings a ton of data, as well as an appearance by Fed Chair Powell at the Economic Club of New York, in which we assume he will address the current state of the economy and the Fed's approach to policy.
Business surveys coming out of the Eurozone have been remarkably strong recently. The composite PMI for the Eurozone jumped to 56.7 in March--its highest level since April 2011--from 56.1 in February. Germany's IFO business climate index leaped to a 67-month high in March.
The Chancellor indicated yesterday that the current fiscal plans--which set out a 1% of GDP reduction in the structural budget deficit this year--will remain in place until a new Prime Minister is chosen by September 2. So for now, the burden of leaning against the imminent downturn is on the MPC's shoulders.
Difficult though it is to tear ourselves away from Britain's political and economic train-wreck, morbid fascination is no substitute for economic analysis. The key point here is that our case for stronger growth in the U.S. over the next year is not much changed by events in Europe.
Momentum in the euro area's money supply slowed last month. M3 growth dipped to 4.7% year-over-year in February, from a downwardly-revised 4.8% in January. The headline was mainly constrained by the broad money components. The stock of repurchase agreements slumped 24.3% year-over-year and growth in money market fund shares also slowed sharply.
Markets often greet the monthly international trade numbers with a shrug.
Data released last week confirm that the Argentinian economy ended 2017 strongly.
Data to be released this Friday should show that Japan's labour market remains tight, though the unemployment rate likely ticked back up in February, to 2.6%, after the erratic drop to 2.4% in January.
Wage growth will be crucial in determining how quickly the MPC raises interest rates this year. So far, it hasn't recovered meaningfully.
Japan's May retail sales rebound was underwhelming at a mere 0.3% month-on-month, after a 0.1% fall in April.
The downshift in core PCE inflation this year has unnerved the Fed, along with the intensification of the trade war and slower global growth.
Industrial profits growth is closely watched by the Chinese authorities, even more so now that deleveraging is a prime policy aim.
The minutes of the MPC's meeting in June indicated that several members' patience for tolerating for above-target inflation is wearing thin.
The upturn in Mexico's trade balance in recent months stalled in May, but the underlying trend is still improving. Data yesterday showed that the seasonally adjusted deficit rose to USD700M in May, after a USD15M gap in April. Imports rose 2.9% month-to-month, offsetting a mere 0.7% increase in exports.
Money supply growth in the Eurozone rebounded slightly last month, reversing some of the weakness at the start of the year.
The decline in headline durable goods orders in May, reported yesterday, doesn't matter.
The latest E.C. survey shows the gap between firms' and households' confidence levels has remained substantial.
The MPC will be looking for the Q1 national accounts and April's index of services data, both released on Friday, to support its view that the economy hasn't lost momentum this year.
China's industrial profits tanked in January/ February, falling 14.0% year-to-date year-over-year, after a 1.9% drop year-over-year in December.
Fourth quarter GDP growth is likely to be revised down today.
The resilience of the banking system will be in focus today when the results of this year's Bank of England stress test are published alongside its Financial Stability Report.
Media reports suggest that the underlying trends in retailing--rising online sales, declining store sales and mall visits--continued unabated over the Thanksgiving weekend.
Chinese industrial profits growth officially edged down to 25.1% year-over-year in October, from 27.7% in September. This is still very rapid but we think the official data are overstating the true rate of growth.
This year has been a story of two halves for EZ equities. The MSCI EU ex-UK jumped 11% in the first five months of 2017, but has since struggled to push higher.
Argentina's near-term economic outlook remains murky, as recent data has highlighted, hit by tighter financial conditions.
The latest profits data out of China were grim, as we had expected.
Our hopes that tax cuts and lower energy inflation would lift French household consumption in Q4 were badly dented by yesterday's consumer sentiment report.
Some analysts argue that sterling won't recover materially even if MPs wave through Brexit legislation, because the threat of a Labour government worries investors more than a messy departure from the EU.
French consumers remained in great spirits midway through the fourth quarter. The headline INSEE consumer confidence index jumped to a 28-month high in November, from 104 in October, extending its v-shaped recovery from last year's plunge on the back of the yellow vest protests.
The deadline for registering to vote in the general election passed on Tuesday, with a record 660K people registering on the final day.
The Prime Minister's resignation and the stillborn launch of the Withdrawal Agreement Bill last week has forced us to revise our Brexit base case, from a soft E.U. departure on October 31 to continued paralysis.
Brazil's economic prospects continue to deteriorate rapidly, due to a combination of rising political uncertainty, the failure of the new government to advance on reforms, and ongoing external threats.
Gilt yields have tumbled, with the 10-year sliding to just 1.0%, from 1.2% a week ago.
CPI inflation last Friday gave Japanese policymakers a break from the run of bad data, jumping to 0.9% in April, from 0.5% in March.
The trade war with China is a macroeconomic event, whose implications for economic growth and inflation can be estimated and measured using straightforward standard macroeconomic tools and data.
We argued in the Monitor yesterday that the very low and declining level of jobless claims is a good indicator that businesses were not much bothered by the slowdown in the pace of economic growth in the first quarter. The numbers also help illustrate another key point when thinking about the current state of the economy and, in particular, the rollover in the oil business.
We will be paying special attention today to the EC sentiment survey for Italy, where the headline index has climbed steadily so far this year. It was unchanged at an eight-year high of 106.1 in April, and even if it fell slightly in May--we expect a dip to 105.0--it still points to an upturn in economic growth.
The second estimate of Q1 GDP confirmed that the recovery has lost momentum and revealed that growth would have ground to a halt without consumers. GDP growth likely will slow further in Q2, as Brexit risk undermines business investment.
We think today's consumer sentiment survey in France will show that the headline index was unchanged at 94 in May. The survey's forward looking components have weakened modestly in recent months, due to declines in households' outlook for their financial situation and standard of living in the coming 12 months.
The Bank of England will be dragged into the political arena on Thursday, when it sends the Treasury Committee its analysis of the economic impact of the Withdrawal Agreement and the Political Declaration, as well as a no-deal, no- transition outcome.
Friday's economic reports delivered more sobering news for the euro area economy.
The Chancellor used the Autumn Statement to shift the composition of the fiscal consolidation slightly away from spending cuts and towards tax hikes. But in overall macroeconomic terms, he changed little. The fiscal stance is still set to be extremely tight in 2016 and 2017, ensuring that the economic recovery will lose more momentum.
Mexico's economic picture remains positive, although the outlook for 2019 is growing cloudy as the economy likely will lose momentum if AMLO's populist approach continues next year.
It is becomingly increasingly clear that the trade war with China is hurting manufacturers in both countries.
Markets currently judge that U.K. interest rates will rise about six months after the first Fed hike. But the Bank of England seldom lagged this far behind in the past. Admittedly, the slowdown in the domestic economy that we expect will require the Monetary Policy Committee to be cautious. But wage and exchange rate pressures are likely to mean six months is the maximum period the MPC can wait before following the Fed's lead.
The tumultuous political and economic crises in Brazil continue to feed off each other, grabbing most of the LatAm headlines. Sentiment will remain depressed, and volatility and uncertainty will persist, hampering any real signs of stabilization in the near-term. The Pacific Alliance countries, by contrast, managed to grow at relatively solid rates during the first half of this year, after absorbing the hit from falling commodity prices.
The past year has been difficult for Asian economies, with trade wars, natural disasters, and misguided policies, to name a few, putting a dampener on growth.
The Conservatives have continued to gain ground over the last week, with support averaging 43% across the 13 opinion polls conducted last week, up from 41% in the previous week.
The November IFO report suggests that the headline indices are on track for a tepid recovery in Q4 as a whole, but the central message is still one of downside risks to growth
After four straight above-trend increases in the core CPI, you could be forgiven for thinking that something is afoot. It's still too soon, though to rush to judgment. The data show three previous streaks of 0.2%-or-bigger over four-month periods since the crash of 2008, and none of them were sustained.
Brazil's central bank is desperately trying to get a grip on inflation. It has raised the Selic rate by 225bp, to 13.25%, in just the last six months, and real rates now stand at a hefty 5.0%. And, at last, we are seeing tentative signs that policymakers and the government, after hiking rates and adjusting regulated prices, are making some headway.
The euro has so far defied the most bearish forecasters' predictions that it is on track for parity with the dollar. Currencies can disregard long-run parity conditions, however, for longer than most investors can hold positions.
Short-term interest rates in the Eurozone continue to imply that the ECB will lower rates further this year. Two-year yields have been stuck in a very tight range around -0.5% since March, indicating that investors expect the central bank again to reduce its deposit rate from its current level of -0.4%. This is not our base case, though, and we think that investors focused on deflation and a dovish ECB will be caught out by higher inflation.
Another day, another couple of April reports likely to reverse March "weakness", triggered by the early Easter. We look for robust core durable goods and pending home sales reports, with the odds favoring consensus-beating numbers. In both cases, though, the noise-to-signal ratio is quite high, and we can't be certain the Easter seasonal unwind will be the dominant force in the April data.
Mexico's final estimate of third quarter GDP, released yesterday, confirmed that the economy is still struggling in the face of domestic and external headwinds.
This morning's second estimate of Q1 GDP likely will restate the preliminary estimate of a 0.4% quarter-on-quarter rise, confirming that the economic recovery has lost momentum since last year. Meanwhile, the new expenditure breakdown is set to show that growth remained extremely dependent on households and will bring more evidence that businesses held back from investing, ostensibly due to Brexit concerns.
Friday's PMIs gave the first hint of Q4 growth in the Eurozone, and continue to tell a story of a stable cyclical recovery. The composite PMI in the Eurozone rose 54.0 in October from 53.6 in September, mainly due to a rise in the services index, to 54.2 from 53.7. Assuming the PMI remains unchanged over the remainder of the quarter, the survey indicates solid GDP growth of 0.4%-to-0.5% quarter-on-quarter in Q4.
A rate hike from the Fed this week would be a gigantic surprise, and Yellen Fed has not, so far, been in the surprise business. It would be more accurate to describe the Fed's modus operandi as one of extreme caution, and raising rates when the fed funds future puts the odds of action at close to zero just does not fit the bill.
Friday's PMI data in the Eurozone added to the evidence that GDP growth is slowing, after a cyclical peak last year. The composite PMI in the euro area slipped to a 21-month low of 52.6 in September, from 52.9 in August.
Households' disposable incomes have been supported over the last eight years by a steady stream of compensation payments for Payment Protection Insurance--PPI--policies that were missold in the 1990s and 2000s.
After the disruption in repo markets last week, theories are flying as to what's going on.
New York Fed president Dudley toed the Yellen line yesterday, arguing that the effects of "...a number of temporary, idiosyncratic factors" will fade, so "...inflation will rise and stabilize around the FOMC's 2 percent objective over the medium term.
Markets will be hyper-sensitive to U.K. data releases following the MPC's warning that it is on the verge of raising interest rates.
The rise in oil prices to a four-year high of $82 will slow the pace at which inflation falls back over the next year only modestly.
The Brazilian labour market is slowly healing following the severe recession of 2015-16. The latest employment data, released last week, showed that the economy added 35K net jobs in August, compared to a 34K loss in August 2016.
Mr. Abe yesterday called a snap general election, to be held on October 22nd; more on this in tomorrow's Monitor. For now, note that the election comes at a reasonably good stage of the economic cycle, hot on the heels of very rapid GDP growth in Q2, while the PMIs indicate that the economy remained healthy in Q3.
Economic news in the Eurozone, and virtually everywhere else, has been mostly downbeat in the past few months, but French consumers are doing great.
Today's September international trade report will be the third to be distorted by hugely elevated soybean exports. The surge began in July, when soybean exports jumped by $3.6B--that's a 220% month-to-month increase--to $5.2B.
We have tweaked our third quarter GDP forecast in the wake of the September advance international trade and inventory data; we now expect today's first estimate to show that the economy expanded at a 4.0% annualized rate.
After three straight 1.3% month-to-month increases in core capital goods orders, we are becoming increasingly confident that the upturn in business investment signalled by the NFIB survey is now materializing.
The pick-up in GDP growth in Q3 means that we now expect a majority of MPC members to vote to raise interest rates next week.
The ECB kept its cool yesterday, at the headline level, amid crashing stock markets, volatile BTPs and souring economic data.
Korea's GDP growth in Q3 was a miss. Quarter- on-quarter growth was unchanged at 0.6%, below the consensus for a 0.8% rise.
Yesterday's IFO survey confirmed that the private business sector in Germany was off to a flying start in Q4. The headline business climate index rose to 110.5 in October, from 109.5 in September, lifted mainly by a rise in the expectations index to a 30-month high of 106.5.
Expectations that the MPC will raise Bank Rate again soon have taken a big knock over the last two weeks.
Consumers' spending in Mexico was relatively resilient at the end of Q1, but we think it will slow in the second quarter. Data released this week showed that retail sales rose a strong-looking 6.1% year-over-year in March, well above market expectations, and up from 3.6% in February.
We didn't believe the first estimate of Q1 GDP growth, 0.7%, and we won't believe today's second estimate, either. The data are riddled with distortions, most notably the long-standing problem of residual seasonality, which depressed the number by about one percentage point.
We're braced for a hefty downside surprise in today's durable goods orders numbers, thanks to a technicality.
Today's preliminary estimate of GDP likely will show that the economy continued to struggle in response to high inflation, further fiscal austerity and Brexit uncertainty.
Over the next 18 months we expect to see interest rates break out further on the upside. Initially, we expect developed market growth to be resilient to that.
House purchase mortgage approvals by the main high street banks continued to recover in June, rising to a nine-month high of 40.5K, from 39.5K in May. June approvals, however, merely matched their postreferendum average, and the chances of a more substantial recovery are slim.
Last month, the ECB set the scene for the majority of its key policy decisions over the next 12 months.
The German statistical office will supply a confidential estimate to Eurostat for this week's advance euro area Q2 GDP data. Our analysis suggests this number will be grim, and weigh on the aggregate EZ estimate. Our GDP model, which includes data for retail sales, industrial production and net exports, forecasts that real GDP in Germany contracted 0.1% quarter-on-quarter in the second quarter, after a 0.7% jump in Q1.
We're nudging down our estimate of Q2 GDP growth, due today, by 0.3 percentage points to 1.8%, in the wake of yesterday's array of data.
We remain negative about the medium-term growth prospects of the Mexican economy.
Mortgage approvals by the main high street banks collapsed to 36.1K in December--the lowest level since April 2013--from 39.0K in November, according to trade body U.K. Finance.
As expected, the ECB made no changes to its policy stance today. The refi and deposit rates were left at 0.00% and -0.4%, respectively, and the pace of purchases under QE was maintained at €30B per month.
Today's preliminary estimate of Q4 GDP likely will show that the Brexit vote has not caused the economy to slow yet. But growth at the end of last year appears to have relied excessively on household spending, which has been increasingly financed by debt. GDP growth likely will slow decisively in Q1 as the squeeze on households' real incomes intensifies.
The response of U.K. producers and consumers to lower oil prices could not have been more different to those on the other side of the Atlantic. Counter-intuitively, U.K. oil production has grown strongly over the last year, while investment hasn't collapsed to the same extent as in the U.S., yet. Meanwhile, U.K. households have thrown caution to the wind and already have spent the windfall from the previous drop in oil prices, unlike their more prudent--so far--U.S. counterparts. With the costs still to come but most of the benefits already enjoyed, lower oil prices will be neutral for 2016 U.K. GDP growth, at best.
Yesterday's IFO report reinforced the message from the PMIs that the Eurozone economy stumbled slightly at the beginning of the first quarter. The headline business climate index fell to an 11-month low of 107.3 in January, from a revised 108.6 in December, hit mainly by a drop in the expectations component. Intensified market volatility and worries over further weakness in the Chinese economy likely were the main drivers. Last week's dovish message from Mr. Draghi, however, came after the survey's cut-off date, leaving us cautiously optimistic for a rebound next month.
The trend of consensus-beating EZ economic data was brought to a halt yesterday. The IFO business climate index in Germany slipped to a five-month low of 109.8 in January, from 111.0 in December, mainly due to a fall in the expectations index. But we are not alarmed. The dip in the headline comes after a run of strong data, and the IFO remains consistent with GDP growth of about 1.6% year-over-year.
Three of today's economic reports, all for December, could move the needle on fourth quarter GDP growth. Ahead of the data, we're looking for growth of 1.8%, a bit below the consensus, 2.2%, and significantly weaker than the Atlanta Fed's GDPNow model, which projects 2.8%.
Mexico's inflation is heading down. Wednesday's advance CPI report showed that inflation pressures are finally fading, following temporary shocks in recent months, and the end of the "gasolinazo" effect.
Korean GDP unexpectedly declined in Q4, for the first time since the financial crisis, falling 0.2% quarter-on-quarter after a 1.5% jump in Q3.
The Eurozone PMIs stumbled at the end of Q2. The composite index slipped to a five-month low of 55.7 in June, from 56.8 in May, constrained by a fall in the services index. This offset a marginal rise in the manufacturing index to a new cyclical high. The dip in the headline does not alter the survey's upbeat short- term outlook for the economy.
Japanese data continue to come in strongly for the second quarter. The manufacturing PMI points to continued sturdy growth, despite the headline index dipping to 52.0 in June from 53.1 in May. The average for Q2 overall was 52.6, almost unchanged from Q1's 52.8, signalling that manufacturing output growth has maintained its recent rate of growth.
In a week of important global events, local factors remained in the spotlight in Brazil, with a more benign data flow and the central bank statement reducing the likelihood of an imminent end to the easing cycle.
The IFO survey released yesterday provides further evidence that the cyclical recovery in Germany's economy continued in the current quarter. The headline business climate index rose to 107.9 in March from 106.8 in February, lifted by increases in both the current assessments and expectations index.
The rollover in core capital goods orders in recent months has been startling. In the three months to February, compared to the previous three months, orders for non-defense capital goods fell at a 7.6% annualized rate.
The MPC held back last week from decisively signalling that interest rates would rise when it meets next, in May.
President Trump made official his plan to impose tariffs on up to $60B of annual imports from China, as well as limitations on Chinese investments in the U.S.
When Fed Chair Powell said last week that the "surprise" weakness in the official retail sales numbers is "inconsistent with a significant amount of other data", we're guessing that he had in mind a couple of reports which will be updated today.
Data released in recent days are confirming the story of a struggling economy and falling inflation pressures in Mexico, strengthening our base case of interest rate cuts over the second half of the year.
Yesterday's IFO offered a rare upside surprise in the German survey data.
The impasse between Greece and its creditors has roiled Eurozone bond markets, but the ECB is likely ready to restore calm, if necessary. We think a further widening of short-term interest rate spreads would especially worry the central bank, as it would represent a challenge to forward guidance. For now, spreads remain well below the average since the birth of the Eurozone, even after the latest increase.
the past few observations make clear. Real spending jumped by 0.5% in March, rebounding after its weather-induced softness in February, before stalling again in April. Then, in May, the s urge in new auto sales to a nine-year high lifted total spending again, driving a 0.6% real increase.
Today brings more housing market data, in the form of the Case-Shiller home price report for April.
Data released last week confirm that the Argentinian economy was resilient at the start of the year, but downside risks to growth have increased.
The core economic narrative in U.S. markets right now seems to run something like this: The pace of growth slowed in Q1, depressing the rate of payroll growth in the spring. As a result, the headline plunge in the unemployment rate is unlikely to persist and, even if it does, the wage pressures aren't a threat to the inflation outlook.
The verdict from the German business surveys is in; economic growth probably slowed further in Q2.
This was supposed to be the year that wage growth finally would pick up and signal clearly to the MPC that the economy needs higher interest rates.
The underlying state of the Mexican economy is still positive, despite recent signs of a modest slowdown. The IGAE economic activity index--a monthly proxy for GDP--rose 2.1% year-over-year in April, a relatively solid pace, but down from 2.8% in March, and 2.6% in Q1.
The INSEE's manufacturing sentiment data in France are slightly confusing at the moment.
After years of rapid increase, China appears finally to have stabilised its ratio of private non-financial to GDP ratio.
Yesterday's barrage of French business sentiment data was mixed.
In yesterday's Monitor, we laid out the prime causes of China's weekend announcement, cutting the reserve requirement ratio.
Economic activity in Mexico during the past few months has been relatively resilient, as external and domestic threats appear to have diminished.
Japanese services price inflation edged down in May as the twin upside drivers of commodity price inflation and yen weakness began to lose steam. We expect wage costs to begin edging up in the second half but this will provide only a partial counterbalance.
Judging by the media coverage of the Europe's "migrant crisis", you would think that the number of North African asylum seekers arriving at EU's southern borders is soaring.
A tentative revival in mortgage lending is underway, following the lull in the four months after the MPC hiked interest rates in November.
Yesterday's raft of data had no net impact on our forecast for second quarter GDP growth, which we still think will be about 21⁄4%.
Data from trade body U.K. Finance show that mortgage lending has remained unyielding in the face of heightened economic and political uncertainty.
Mexico's private spending stumbled at the start of the second quarter.
Speculation has grown that the Bank of England will announce measures today to calm the recent strong growth in consumer credit, when it publishes its bi-annual Financial Stability Report.
Global economic growth continues to fall short of expectations, and the call for aggressive fiscal stimulus is growing in many countries. This is partly a function of the realisation that monetary policy has been stretched to a breaking point. But it is also because of record low interest rates, which offer governments a golden and cheap opportunity to kickstart the economy. One of the main arguments for stronger fiscal stimulus is based on classic Keynesian macroeconomic theory.
U.S. President Trump on Wednesday signed an executive order aimed at delivering on his campaign pledge to build a wall on the U.S.-Mexico border. The executive order also includes measures to boost border patrol forces and increase the number of immigration enforcement officers. As previous U.S. presidents have discovered, however, signing an executive order is one thing and fulfilling it is something else. President Obama, for instance, signed an executive order to close the Guantanamo detention facility on his second day in office.
The preliminary estimate of GDP showed that the economy finished 2016 on a strong note. Output increased by 0.6% quarter-on-quarter, the same rate as in the previous two quarters. The year-over-year growth rate of GDP in 2016 as a whole--2.0%--was low by pre-crisis standards, but it likely puts the U.K. at the top of the G7 growth leaderboard. We cannot tell how well the economy would have performed had the U.K. not voted to leave the EU in June, but clearly the threat of Brexit has not loomed large over the economy.
We expect to learn today that the economy expanded at a 1.7% rate in the fourth quarter. At least, that's our forecast, based on incomplete data, and revisions over time could easily push growth significantly away from this estimate. The inherent unreliability of the GDP numbers, which can be revised forever--literally--explains why the Fed puts so much more emphasis on the labor market data, which are volatile month-to-month but more trustworthy over longer periods and subject to much smaller revisions.
The uncertainty over the new U.S. administration's economic policies new is clouding the outlook for the Eurozone economy. The combination of loose fiscal policy and tight monetary policy in the U.S. should be positive for the euro area economy, in theory. It points to accelerating U.S. growth--at least in the near term--wider interest rate differentials and a stronger dollar. In a " traditional" global macroeconomic model, this policy mix would lead to a wider U.S. trade deficit, boosting Eurozone exports.
In yesterday's Monitor, we outlined how the government's plans to allow more migrants to register in cities could help counterbalance the effects of aging and put a floor under medium-term property prices.
The July Eurozone PMI survey echoed the message from consumer sentiment earlier of a mild dip in momentum going into Q3. The composite PMI in the euro area fell to 53.7, from 54.2 in June due mainly to a fall in the services index. Companies' own expectations for future business fell in the core, but the survey was conducted soon after the Greek referendum. Markit claims this didn't depress the data, but we are on alert for revisions to the headline and expectations next week, or a rebound next month.
GDP rose by 0.3% quarter-on-quarter in Q2, according to the ONS' preliminary estimate, confirming that the economy has fundamentally slowed since the Brexit vote. The modest growth has reduced further the already-small risk that the MPC will raise interest rates at its next meeting on August 3.
By the close on Friday, the initial reaction in U.S. markets to the U.K. Brexit vote could be characterized as a bad day at the office, but nothing worse. Not a meltdown, not a catastrophe, no exposure of suddenly dangerous fault lines.That's not to say all danger has passed, but the first hurdle has been overcome.
The U.K.'s unexpected decision to vote to leave the E.U. will have serious ramifications for the global economy, and LatAm economies are unlikely to emerge unscathed. It is very difficult to quantify the short-term effects due to the intricacies of the financial transmission channels into the real economy.
The Fed wants price stability--currently defined as 2% inflation--and maximum sustainable employment.
German retail and consumer sentiment data for March have been mixed this week, but broadly support our call that growth in consumption should pick up soon.
Yesterday's figures from trade body U.K. Finance showed that January's pick-up in mortgage approvals was just a blip.
The COPOM meeting minutes, released yesterday, brought a balanced message aimed at curbing market pricing of further rate cuts, in our view.
The mortgage market still is defying gravity. U.K. Finance initially reported yesterday that house purchase mortgage approvals by the main high street banks collapsed to 35.3K in February, from 39.6K in January.
The news that the seasonal adjustments in the GDP numbers are even less reliable than previously thought means the Fed likely will put even greater emphasis on the labor market when pondering when to begin raising rates. A cost-push view of the inflation process necessarily centers on the labor data, but every FOMC statement begins with an assessment of the overall pace of growth.
Mexico's external accounts remain solid, despite adverse global conditions over the past year. The current account decreased to USD9.5B, or 3.2% of GDP, in the first quarter, just down from 3.3% a year earlier. Shortfalls of USD10.3B in the income account and USD4.7B in goods and services--mostly the latter--were again the key driver of the overall deficit.
Data today will likely show that consumer sentiment in the Eurozone remains firm. In Germany, we expect a slight dip in the advance headline GFK confidence index to 9.8 in June, from an all-time high of 10.1 in May.
Guo Shuqing, head of the newly formed China Banking and Insurance Regulatory Commission, has been named as Party Secretary for the PBoC.
Whichever way you choose to slice the numbers, consumers' spending is growing much more slowly than is implied by an array of confidence surveys.
We argued in the Monitor yesterday that the plunge in capital spending on equipment in the oil sector could cost about 300K jobs over the course of this year. Adding in the potential hit from falling spending on structures, which likely will occur over a longer period, given the lead times in the construction process, the payroll hit this year could easily be 500K, or just over 40K per month.
Money supply data continue to support the continuation of cyclical recovery in the Eurozone. M3 growth accelerated to 4.0% year-over-year in February from a revised 3.7% in January. Revisions, however, mean that momentum in the beginning of the year was not as solid as we thought.
This week's economic data for the Mexican economy have been encouraging, especially for Banxico, which left its main interest rate unchanged yesterday at 3.0%. Inflation remained on target for the second consecutive month in the first half of February, and the closely-watched IGAE economic activity index--a monthly proxy for GDP--continued to grow at a relatively solid pace, despite the big hit from lower oil prices.
It has been difficult to be an optimist about U.S. international trade performance in recent years. The year-over-year growth rate of real exports of goods and services hasn't breached 2% in a single quarter for two years.
Friday's advance Eurozone PMI reports capped a fine quarter for the survey. The composite PMI jumped to a 80-month high of 56.7 in March, from 56.1 in February, rising to a cyclical high over Q1 as a whole.
Recent upbeat economic reports have mitigated the downside risks we had been flagging to our growth forecast for Mexico for the current quarter.
The balance of risks to activity in Mexico this year is still tilted to the downside, even though recent data have been mixed. Key indicators show that the manufacturing sector is gathering strength on the back of lagged effect of the MXN's sell-off last year, and the improving U.S. economy.
Mexico's economy continues to bring good news, despite the tough external environment for all EM economies. According to the economic activity index, a monthly proxy for GDP, growth gained further momentum in Q4. Activity rose 2.7% year-over-year in November, supported by stronger services activities, which expanded 0.3% month-to-month. The services sector has been the main driver of the current cycle, growing 3.8% year-over-year in November, bolstering our optimism about the domestic economy in the near-term.
Eurozone investors continue to look to the ECB as the main reason to justify a constructive stance on the equity market. Last week, the central bank all but promised additional easing in March, but the soothing words by Mr. Draghi have, so far, given only a limited lift to equities. Easy monetary policy has partly been offset by external risks, in the form of fears over slow growth in China, and the risk of low oil prices sparking a wave of corporate defaults. But uncertainty over earnings is another story we frequently hear from disappointed equity investors. We continue to think that QE and ZIRP offer powerful support for equity valuations in the Eurozone, but weak earnings are a key missing link in the story.
India's GDP report for the second quarter, due on Friday, is likely to show a decent rebound in growth from the first quarter.
This week's Mexican retail sales report for February offered more support to our view that domestic conditions improved at the end of Q1.
Yesterday's ECB meeting was comfortably uneventful for markets.
Mexican GDP was unchanged quarter-on-quarter in Q2, according to the final report, a tenth worse than the preliminary reading.
It's pretty clear now that the President is not a reliable guide to what's actually happening in the China trade war, or what will happen in the future.
The biggest single problem for the stock market is the president.
ECB board member Peter Praet fired the first shot across the markets' bow yesterday following this week's turmoil. Speaking to journalists in Germany, Mr. Praet noted "increased downside risk of achieving a sustainable inflation path towards 2%," and assured investors the current QE program is fully flexible, and can be readily adjusted in response to an adverse development in inflation expectations. We don't think, though, this is a pre -cursor for additional easing at next week's ECB meeting.
It's hard to imagine that Fed Vice-Chair Dudley would choose to say yesterday that he finds the case for a September rate hike "less compelling than it was a few weeks ago" without having had a chat beforehand with Chair Yellen. Mr. Dudley pointed out that the case "could become more compelling by the time of the meeting", depending on the data and the markets, but he also argued that developments in markets and overseas economies can "impinge" on the U.S., and that there "...still appears to be excess slack in the labor market". These ideas, especially on the labor market but also on the impact of events overseas, are not shared by the hawks, but we can't imagine Mr. Dudley disagreeing in public with Dr. Yellen. We have to assume these are her views too.
The first point to make about today's Q1 GDP growth number is that whatever the BEA publishes, you probably should add 0.9 percentage points.
Korean real GDP growth rebounded to 1.1% quarter-on-quarter in Q1, after GDP fell 0.2% in Q4. Growth in Q4 was hit by distortions, thanks to a long holiday in October, which normally falls in September.
We're still no nearer to a definitive answer to the question of what went wrong in the manufacturing sector over the summer, when we expected to see things improving on the back of the rebound in activity in the mining sector, rising export orders and an end to the domestic inventory correction. Instead, the August surveys dropped, and September reports so far are, if anything, a bit worse.
Mexican consumers started the third quarter strongly, supporting our relatively upbeat view for the economy in the near term. Private consumption represents about 70% of Mexico's GDP, one of the consumption shares in the EM world, so the strength of spending is hugely important.
It would be astonishing if the Fed doesn't raise rates today, and Chair Powell is not in the astonishment business; they will hike by 25bp.
We have argued for some time that the hourly earnings data, which take no account of changes in the mix of employment by industry or occupation, have been depressed over the past year by the relatively rapid growth of low-paid jobs.
Monitoring bond markets in the Eurozone has been like watching paint dry this year. Yields across fixed income markets in the euro area were already low going into QE, but they have been absolutely crushed as asset purchases began in February.
The squeeze on real wages has just ended and GfK's consumer confidence index hit a 11-month high in March.
Mexico's National Institute of Statistics--INEGI-- will release preliminary GDP data for Q1 on Friday. We are expecting good news, despite the tough external and domestic environment. According to the economic activity index--a monthly proxy for GDP-- growth gained further momentum in Q1, based on data up to February.
Federal Reserve Chair Janet Yellen's testimony this week reinforced our view that the first U.S. rate hike will be in June. The transition to higher U.S. rates will require an unpleasant adjustment in asset prices in some LatAm countries.
Economic data in the Eurozone are sending an increasingly upbeat message on the economy. Yesterday saw a barrage of numbers, but the most startling of them was the continued acceleration in the money supply.
Fed Chair Powell's semi-annual Monetary Policy Testimony yesterday broke no new ground, largely repeating the message of the January 30 press conference.
Yesterday's consumer sentiment data in the two major euro area economies were mixed, but they still support our view that a rebound in EZ consumption growth is underway.
Brazil's external accounts are well under control, despite the wider deficit in January, mainly driven by seasonal deterioration on the trade account.
Sterling has appreciated sharply over the last two weeks and yesterday briefly touched its highest level against the euro since May 2017.
China's annual "two sessions" conference is due to start on Sunday, with the economic targets for this year set to be made official over the course of the meetings.
The fall in the cost of new secured credit has played a key role in reinvigorating the economy over the last couple of years. Mortgage interest payments were 3.7% lower in Q3 than in the same quarter a year previously, even though the stock of secured debt was 2% larger. As a result, the percentage of household disposable incomes taken up by mortgage interest payments fell to 4.8% in the third quarter of 2015--the lowest proportion since records began in 1987--from 5.2% a year before.
We would like to be able to argue with confidence that today's December durable goods orders report will show core capital goods orders rebounding after three straight declines, totalling 3.4%.
The landslide victory by anti-austerity party Syriza in Greece this weekend will increase uncertainty in coming months. The coalition between Syriza and the Independent Greeks will prove a tough negotiating partner for the EU as both parties are strongly in favor of pushing the Troika to significant concessions on any future bailout terms this year.
House purchase mortgage approvals by the main street banks jumped to 40.1K in January, from 36.1K in December, fully reversing the 4K fall of the previous two months, according to trade body U.K. Finance.
The closer we look at the startling surge in imports in the fourth quarter, the more convinced we become that it was due in large part to a burst of inventory replacement following the late summer hurricanes.
Last week's GDP figures illustrated that the economy is extremely vulnerable to a slowdown in households' spending. Our chart of the week, on page three, shows that consumers were alone in making a significant positive contribution to GDP growth last year.
Orders for non-defense capital goods, excluding aircraft, have risen in six of the past seven months. In the fourth quarter, orders rose at a 4.7% annualized rate, in contrast to the 5.3% year-over-year plunge in the first half of the year.
The solid 0.2% increase in January's core CPI, coupled with the small upward revision to December, ought to offer a degree of comfort to anyone worried about European-style deflation pressures in the U.S.
This remains a tumultuous time for EZ bond investors. The twists and turns of the French presidential election campaign continue to shove markets around. Marine Le Pen's steady rise in thepolls has pushed French yields higher this year.
Mexico's policymakers are battling two opposing forces. First, inflation pressures are rising, on the back of the one-time increase in petrol prices and the lagged effect of the MXN's sell-off in Q4. These factors are pushing short-term inflation expectations higher, even though the MXN has remained relatively stable since President Trump took office and has risen by about 6% against the USD year-to-date.
Eurozone bond traders of a bearish persuasion are finding it difficult to make their mark ahead of Italy's parliamentary elections next weekend.
Brazil's inflation rate remained well under control over the first half of February. We see no threats in the near term, indicating that more stimulus will be forthcoming from the BCB.
Mr. Draghi snubbed investors looking for hints on policy and the euro in his Jackson Hole address--see here--on Friday.
Brazil's economic outlook is gradually improving following a challenging Q2, which was hit by political risk, putting business and consumer confidence under pressure.
The deterioration of global risk appetite and, in particular, domestic politics have put the Brazilian real under severe pressure in recent weeks.
The BoJ kept policy unchanged last week, but made a significant change to its communication, dropping its previous explicit statement on the timing for hitting the inflation target.
Survey and money supply data remain consistent with an improving Eurozone economy. Yesterday's EC sentiment index fell to 103.7 in April, from 103.9 in March, due to weakness in France and Germany, but it is consistent with GDP growth of about 0.4% quarter-on-quarter in Q2.
We already have a pretty good idea of what happened to consumers' spending in March, following Friday's GDP release, so the single most important number in today's monthly personal income and spending report, in our view, is the hospital services component of the deflator.
Friday's advance GDP data provided the first solid evidence of a Q1 slowdown in the euro area economy.
Argentina's financial markets and embattled currency have been under severe pressure in recent weeks, with the ARS hitting a new record low against the USD and government bonds sinking to distress levels.
Yesterday's economic numbers in the Eurozone were mixed, but we are inclined to see them through rose-tinted glasses.
Last week's preliminary estimate of Q1 GDP has extinguished any lingering chance that the MPC might raise interest rates at its next meeting on May 10.
The FOMC delivered no big surprises yesterday, but seemed keen to make it clear that policymakers are sticking to their core views, despite the slowdown in growth in the first quarter. Unlike the March statement, yesterday's note pointed out that the slowdown came in the winter months, though it did not directly blame the weather for the sluggishness in growth.
We are all for ambitious economic targets, but the ECB's pledge to drive EZ core inflation in the Eurozone up to "below, but close to" 2% is particularly fanciful.
Data released on Friday show that the Chilean economy had a weak start to the second half of the year.
Yesterday's final EZ manufacturing PMIs for August provided little in the way of relief for the beleaguered industrial sector.
After a week--yes, a whole week!--with no significant new developments in the trade war with China--it's worth stepping back and asking a couple of fundamental questions, which might give us some clues as to what will happen over the months ahead.
China's PMIs show no sign of a recovery yet, but the authorities are sticking to the playbook; they've done the bulk of the stimulus and are waiting for the effects to kick in, but are recognising that they need to make some adjustments.
Today's ECB meeting will be accompanied by an update of the staff projections, where the inflation outlook will be in the spotlight. The June forecasts predicted an average inflation rate of 0.3% year-over-year this year, currently requiring a rather steep increase in inflation towards 1.1% at the end of the year. We think this is achievable, but we doubt the ECB is willing to be as bold, and it is reasonable to assume this year's forecast will be revised down a notch.
China's official PMIs were little changed in August, with the manufacturing gauge up trivially to 51.3, from 51.2 in July and the non-manufacturing gauge up to 54.2, from 54.0.
The Brazilian economy enjoyed a decent Q2, with GDP rising 0.2% quarter-on-quarter, despite the disruptions caused by the truck drivers' strike, after a 0.1% decline in Q1.
The July trade deficit likely fell significantly further than the consensus forecast for a dip to $42.2B from $43.8B in June, despite the sharp drop in the ISM manufacturing export orders index. Our optimism is not just wishful thinking on our p art; our forecast is based on the BEA's new advance trade report. These data passed unnoticed in the markets and the media. The July report, released August 28, wasn't even listed on Bloomberg's U.S. calendar, which does manage to find space for such useless indicators as the Challenger job cut survey and Kansas City Fed manufacturing index. Baffling.
News that the U.K.'s departure from the E.U. has been delayed by six months, unless MPs ratify the existing deal sooner, appears to have done little to revive confidence among businesses.
The Brazilian economy managed to avert a technical recession over the first half of the year.
In the wake of the robust July data and the upward revisions to June, real personal consumption--which accounts for 69% of GDP--appears set to rise by at least 3% in the third quarter, and 3.5% is within reach. To reach 4%, though, spending would have to rise by 0.3% in both August and September, and that will be a real struggle given July's already-elevated auto sales and, especially, overstretched spending on utility energy.
Over the sleepy August holidays, a view has gained traction in the media that the U.K. economy is showing little damage from the Brexit vote. Optimists argue that the size and composition of the 0.6% quarter-on-quarter rise in Q2 GDP, the 1.4% month-to-month jump in retail sales volumes in July, and the slight dip in the unemployment claimant count demonstrate that the recovery is in good shape.
Money supply data in the euro point to a cyclical peak in GDP growth this year. Headline M3 growth fell to 4.8% year-over-year in July, from 5.0% in June, chiefly due to a slowdown in narrow money. M1 growth declined to 8.4%, from 8.7%, as a result of weaker momentum in overnight deposits and currency in circulation.
We are nervous about the first estimate of fourth quarter GDP growth, due today. The consensus forecast is a decent 3.1%, but we are struggling mightily to get anywhere near that.
Money supply data in the euro area are sending an increasingly upbeat signal on the economy. The increase in narrow money growth is the key variable here, now pointing to a noticeable acceleration in GDP growth later this year. Allowing for the usual lags between upturns in M1 and the economy, we should start to see this in the second and third quarter.
Mexico's trade balance shrank slightly last year, to USD13B, from USD14.6B in 2015. An improvement in the non-energy deficit was the main driver, while the energy gap worsened.
We were nervous ahead of the GDP numbers on Friday, wondering if our forecast of a 1.5 percentage point hit from foreign trade was too aggressive. In the event, though, the trade hit was a huge 1.7pp, so domestic demand rose at a 3.5% pace.
Chile's economy is showing the first reliable signs of improvement, at last. December retail sales rose 1.9% year-over-year, up from 0.4% in November, indicating that household expenditure is starting to revive, in line with a pick-up in consumer confidence and the improving labor market.
The minutes from Banxico's August 11 monetary policy meeting--in which Board members unanimously voted to keep rates on hold at 4.25%--confirmed that the bank's policy guidance remains broadly neutral. Subdued economic activity, favourable inflation and gradual fiscal consolidation explain policymakers' position.
Yesterday's data in the French economy provided the final confirmation that growth remained sluggish in Q2, and showed that households had a slow start to the third quarter.
The recent spate of manufacturing business survey indices from Korea show that sentiment is deteriorating in the wake of its trade spat with Japan and the re-intensification of U.S.-China tensions.
Yesterday's economic news in the French economy was solid.
Markets remain convinced that the U.S. faces no meaningful inflation risk for the foreseeable future.
We're expecting a hefty increase in private payrolls in today's August ADP employment report. ADP's number is generated by a model which incorporates macroeconomic statistics and lagged official payroll data, as well as information collected from firms which use ADP's payroll processing services.
Recently data from Argentina continue to signal a firming cyclical recovery. According to INDEC's EMAE economic activity index, a monthly proxy for GDP, the economy grew 4.0% year-over-year in June, up from an already-solid 3.4% in May.
While we were enjoying a rare sunny bank holiday in the U.K., data showed that Eurozone money supply growth slowed at the start of Q3. Broad money growth--M3--fell to a 10-month low of 4.5% year-over- year in July, from 5.0% in August.
Six developments over the summer have increased the likelihood that the government will make concessions required to preserve unfettered access to the single market after formally leaving the EU in March 2019.
The fall in the Markit/CIPS manufacturing PMI to 47.4 in August--its lowest level since July 2012--from 48.0 in July suggests that pre-Brexit stockpiling isn't countering the hit to demand from Brexit uncertainty and the global industrial slowdown.
We're fully expecting to see a hit to September payrolls from Hurricane Florence, which struck during the employment survey week.
The Fed likely will do nothing today, both in terms of interest rates and substantive changes to the statement. We'd be very surprised to hear anything new on the Fed's plans for its balance sheet.
Survey data point to a very strong headline, 0.6%-to-0.7% quarter-on-quarter, in today's Q1 advance Eurozone GDP report. But the hard data have been less ebullient than the surveys. A GDP regression using retail sales, industrial production and construction points to a more modest 0.4% increase, implying a slowdown from the upwardly-revised 0.5% gain in Q4.
Colombia's sluggish growth and near-term economic outlook resembles that of most other LatAm economies. Domestic demand is weak, credit conditions are tight, and confidence is depressed. The medium term outlook, however, is perking up, slowly.
Yesterday's advance Q1 GDP data in the EZ confirmed that growth slowed at the start of the year.
The pressure on Theresa May from Brexiteers within her own party intensified yesterday, when 60 Conservative MPs signed a letter arguing that they could not back a proposal for a "customs partnership".
Inflation and growth paths remain diverse across LatAm, but in the Andes, the broad picture is one of modest inflationary pressures and gradual economic recovery.
The Fed pretty clearly wanted to tell markets yesterday that inflation is likely to nudge above the target over the next few months, but that this will not prompt any sort of knee-jerk policy response beyond the continued "gradual" tightening.
The forward-looking indices of China's Caixin manufacturing PMI for April attracted more attention than the headline, which was a bit of a non-event; it rose trivially 51.1, from 51.0 in March.
The Markit/CIPS manufacturing PMI shot up to a three-year high of 57.3 in April, from 54.2 in March, bringing an end to the run of downbeat news on the economy. The performance of the U.K. manufacturing sector, however, remains underwhelming, given the magnitude of sterling's depreciation.
The CPIH--the controversial, modified version of the existing CPI that includes a measure of owner occupied housing, or OOH, costs--will become the headline measure of consumer price inflation when February's data are published on March 21.
In yesterday's Monitor, we laid out the macroeconomic case for moderately higher inflation in the second half of the year. But subdued market based inflation expectations indicate that the ECB will retain its dovish bias for now. The central bank's preferred measure, 5-year/5-year forward inflation expectations, have only increased modestly in response to QE, and have even declined recently on the back of higher market volatility.
Brazil industrial production continues to edge lower, falling 1.2% month-to-month in April, a 7.6% year-over-year drop. In March, output was down only 3.4% year-over-year, but the data are volatile in the short-term. The trend is about -7%, down from -3.8% in the second half of last year.
We were a bit surprised to see our forecast for the April trade deficit is in line with the consensus, $44B, down from $51.4B in March, because the uncertainty is so great. The March deficit was boosted by a huge surge in non-oil imports following the resolution of the West Coast port dispute, while exports rose only slightly. As far as we can tell, ports unloaded ships waiting in harbours and at the docks, lifting the import numbers before reloading those ships.
Brazil's recession eased considerably in the first quarter, due mainly to a slowing decline in gross fixed capital formation, a strong contribution from net exports, and a sharp, albeit temporary, rebound in government spending. Real GDP fell 0.3% quarter-on-quarter, much less bad than the revised 1.3% contraction in Q4.
Barring some sort of miracle, or substantial upward revision to prior data--it happens--first quarter consumption spending growth is unlikely to reach 3%, despite the robust 0.3% gain reported yesterday for January. Part of the problem is a basis effect.
Inflation pressures in the Eurozone are building rapidly, setting up an "interesting" ECB meeting next week. Yesterday's advance CPI report showed that inflation edged up further in February to 2.0%, from 1.8% in January. The headline rate is now in line with the ECB's target, and up sharply from the average of 0.2% last year.
Industrial companies in the Eurozone are still struggling with low growth, but the outlook is stabilising following the near-recession late last year. The Eurozone manufacturing PMI was unchanged at 51.0 in February, trivially lower than the initial estimate of 51.1.
A robust April payroll number today is a good bet, but a gain in line with the 275K ADP reading probably is out of reach.
Manufacturers in the Eurozone are still suffering, but yesterday's final PMI data for April offered a few bright spots.
Manufacturing in the Eurozone remained a strong driver of GDP growth in the third quarter. The headline EZ manufacturing PMI rose to 58.1 in September, from 57.4 in August, only a tenth below the initial estimate 58.2.
This week's main economic data from Korea--the last batch before the BoK meets on the 16th--missed consensus expectations, further fuelling speculation that it will cut rates for a second time, after pausing in August.
ADP's report that September private payrolls rose by 135K was slightly better than we expected, but not by enough to change our 150K forecast for tomorrow's official report.
U.K. manufacturers are benefiting from rapid growth in the Eurozone, but increasingly they are being held back by weak domestic demand.
Producer price inflation in the euro area almost surely peaked over the summer.
Brazil's industrial production surprised to the downside in August, suggesting that manufacturing is struggling to gather momentum over the second half of the year.
One of the more disheartening aspects of the Q2 national accounts, released last week, was the downward revision to business investment. Quarteron-quarter growth was revised to -0.7%, from +0.5% previously.
Korean industrial production surprised to the upside in August, according to data released yesterday.
The Fed left rates on hold yesterday, as expected, repeating its long-held core view that inflation will rise to 2% in the medium-term, requiring gradual increases in the fed funds rate.
Survey data signal that Eurozone manufacturing retained momentum at the start of Q4. Yesterday's final PMI reports showed that the EZ manufacturing index rose to 58.5 in October from 58.1 in September, trivially below the first estimate.
Last week's advance EZ GDP data for the first quarter suggest the economy shrugged off the volatility in financial markets. Eurostat's first estimate indicates that real GDP in the euro area rose 0.6% quarter-on-quarter in Q1, up from 0.3% in Q4, and above the consensus, 0.4%.
Policymakers in Colombia last Friday took aim at inflation by hiking interest rates by 50 basis points to 7.0%. The consensus expectation was for a 25bp increase. BanRep's bold move, which came on the heels of six consecutive 25bp increases since November, took Colombia's main interest rate to its highest level since March 2009.
Modern Money Theory has come up at two consecutive BoJ press conferences.
Mixed comments last week by members of the governing council raised doubts over the ECB's resolve to add further stimulus next month. But the message from senior figures and Mr. Draghi remains that the Central Bank intends to "re-assess" its monetary policy tools in December. Our main reading of last month's meeting is that Mr. Draghi effectively pre-committed to further easing. This raises downside risks in the event of no action, but the President normally doesn't disappoint the market in these instances.
The sharp and unexpected improvement in the Markit/CIPS manufacturing survey in October released on Monday raised hopes that the recession in the industrial sector might be over. A cool look at the evidence, however, suggests that this probably is just wishful thinking.
Brazil's industrial sector continued to support the economy in Q3. The underlying tr end in output is rising and leading indicators point to further growth in the near term.
Most of the time, markets view auto sales as a bellwether indicator of the state of the consumer. Vehicles are the biggest-ticket item for most households, after housing, and most people buy cars and trucks with credit. Auto purchase decisions, therefore, tend not to be taken lightly, and so are a good guide to peoples' underlying confidence and cashflow. We appreciate that things were different at the peak of the boom, when anyone could get a loan and homeowners could tap the rising values of their properties, but that's not the situation today.
The business cycle upturn in the Eurozone likely will remain resilient in the first half of 2017. Friday's money supply data showed that headline M3 growth increased to 5.0% in December, from 4.9% in November.
Markets' expectations for official interest rates have shifted up over the last fortnight, and the consensus view now is that the MPC will hike rates before the end of this year. As our first chart shows, the implied probability of interest rates breaching 0.25% in December 2017 now slightly exceeds 50%.
Business investment has punched above its weight in the economic recovery from the crash of 2008; annual real growth in capex has averaged 5% over the last five years, greatly exceeding GDP growth of 2%. This recovery is unlikely to grind to a halt soon, since profit margins are still high and borrowing costs will remain low. But corporate balance sheets are not quite as robust as they seem, while capex in the investment-intensive oil sector still has a lot further to fall.
The key message of the minutes of the Copom meeting, released yesterday, is that policymakers remain worried about the inflation outlook and, in particular, about uncertainties surrounding fiscal tightening. But the Committee reinforced the signal that the Selic rate is likely to remain at the current level, 14.25%, for a "sufficiently prolonged period". The economy is in a severe recession and the rebalancing process has been longer and more painful than the Central Bank anticipated.
The stage is set for the Fed to ease by 25bp today, but to signal that further reductions in the funds rate would require a meaningful deterioration in the outlook for growth or unexpected downward pressure on inflation.
Advance data from Germany and Spain indicate that Eurozone inflation rebounded in October. We think inflation rose to 0.2% year-over-year from -0.2%, and German data suggest the main boost will come from both core and food inflation. Inflation in Germany rose to 0.3% year-over-year from 0.0% in September, lifted by an increase in inflation of leisure and entertainment, hotels and durable goods. Food inflation also rose to 1.6% from 1.1% in September, due to surging prices for fresh fruit and vegetables.
We have been asked by a few readers how much confidence we have in our forecast of a 1% rebound in the third quarter employment costs index, well above the 0.6% consensus and the mere 0.2% second quarter gain. The answer, unfortunately, is not much, though we do think that the balance of risks to the consensus is to the upside.
Chinese industrial profits continue to surge, rising 27.7% year-over-year in September, up from 24.0% in August.
While we were out, Brazil's central bank delivered a widely-expected 75bp easing, cutting the benchmark rate to 7.5% in an unanimous vote.
Cast your mind forward to late October 2018. The Fed is preparing to meet next week. What will the economy look like? The key number is three.
October's money data show that households and firms have regained the appetite for borrowing that they lost immediately after the referendum. But the recent rise in swap rates and the deterioration in consumers' confidence likely will cut short the revival in consumer lending, while persistent Brexit uncertainty likely will continue to subdue firms' investment intentions.
Yesterday's advance inflation data in Germany fell short of forecasts--ours and the consensus--for a further increase. Inflation was unchanged at 0.8% year-over-year in November, but we think this pause will be temporary.
Further political wrangling yesterday distracted from data showing that the risk of no -deal Brexit is placing increasing strain on the economy.
Neither the strength in October consumption nor the softness of core PCE inflation, reported yesterday, are sustainable.
Yesterday's November inflation reports from Germany and Spain suggest that today's data for the Eurozone as a whole will undershoot the consensus.
Japan's retail sales values jumped 1.2% month-on-month in October, after the upwardly-revised 0.1% increase in September.
We have witnessed a dramatic shift in just a few weeks in perceptions of Mexico as an investment destination.
Political volatility is a recurrent theme in Brazil. Six members of President Michel Temer's cabinet resigned last Friday due to allegations of conflict of interest on a construction deal. Rumours that President Temer was involved in the affair stirred up market volatility and revived political risk concerns
The November ADP employment report today likely will show private payrolls rose by about 180K. We have no reason to think that the trend in payroll growth has changed much in recent months, though the official data do appear to be biased to the upside in the fourth quarter, probably as a result of seasonal adjustment problems triggered by the crash of 2008. We can't detect any clear seasonal fourth quarter bias in the ADP numbers.
The MPC likely will raise interest rates on Thursday, for the first time since July 2007, in response to the uptick in GDP growth and the upside inflation surprise in Q3.
The modest overshoot to consensus in September's core PCE deflator won't trouble any lists of great economic surprises, but it did serve to demonstrate that the PCE can diverge from the CPI, in both the short and medium-term.
Yesterday's relatively good news--we discuss the implications of the August trade data below--will be followed by rather more mixed reports today. We hope to see a partial rebound, at least, in the September Chicago PMI, but we fully expect soft August consumer spending data.
Today's advance CPI data will show that EZ inflation pressures rose further at the end of Q3. The headline number likely will exceed the consensus. We think inflation rose to 0.5% year-over-year in September from 0.2% in August, slightly higher than the 0.4% consensus.
Advance inflation data from Germany and Spain yesterday indicate that the Eurozone slipped back into deflation in September. German inflation fell to 0.0% in September from 0.2% in August, and deflation intensified in Spain as inflation fell to -0.9% from -0.4% last month. This likely pushed the advance Eurozone estimate--released today--below zero. We think inflation fell to -0.1% in September, down from +0.1% in August. The fall will be due mainly to falling energy prices, and we continue to think that the underlying trend in inflation is stabilising, or even turning up.
The summer usually is a quiet time for business, but seemingly not for CFOs this year. Yesterday's money and credit figures from the Bank of England showed that borrowing by private non-financial corporations has rocketed. Net finance raised by PNFC's from all sources increased by £8.9B in July, compared to an average increase of just £2.5B in the previous 12 months.
Inflation pressures in the Eurozone probably firmed slightly in August. Data yesterday showed that inflation in Germany and Spain rose by 0.1 percentage points to 1.8% and 1.6% year-over-year respectively, and we are also pencilling-in an increase in French inflation today, ahead of the aggregate EZ report.
Yesterday's advance CPI data in Germany suggest that inflation fell slightly in August.
Data released yesterday show that the Chilean economy had a weak start to the second half of the year.
Today's wave of economic reports are all likely to be strong. The most important single number is the increase in real consumers' spending in July, the first month of the third quarter.
Barely a day passes now without an email asking about "evidence" that the U.S. economy is slowing or even heading into recession. The usual factors cited are the elevated headline inventory-to-sales ratio, weak manufacturing activity, slowing earnings growth and the hit from weaker growth in China. We addressed these specific issues in the Monitor last week, on the 23rd--you can download it from our website--but the alternative approach to the end-of-the-world-is-nigh view is via the labor market.
Mexico's data over the last few weeks have confirmed our view that private consumption remains the key driver of the current economic cycle. Solid economic fundamentals, thanks to stimulative monetary policy and structural reforms, have supported the domestic economy in recent quarters. Falling inflation has also been a key driver, slowing to 2.5% by mid-September, a record low, from an average of 4% during 2014.
The big news in the EZ yesterday was the announcement by German chancellor Angela Merkel that she will step down as party leader for CDU later this year, and that she will hand over the chancellorship when her term ends in 2021.
This Budget will be remembered as the moment when the Government finally threw in the towel on plans to run sustainable public finances.
Chinese headline industrial profits data show that growth slowed to just 4.1% year-over-year in September, from 9.2% in August.
Inflation pressures remain under control in most LatAm economies, allowing central banks to keep interest rates on hold, despite the challenging external environment.
A dovish speech by external MPC member Michael Saunders was the primary catalyst for a renewed fall in interest rate expectations last week.
China's industrial profits data for August were a mixed bag.
Economic data released last week underscored that Brazil's economic recovery is continuing; the effect of recent bold rate cuts and improving domestic fundamentals will further support the gradual recovery of the labour market.
October's money and credit report indicates that the economy had little momentum at the start of the fourth quarter.
Today's data likely will show that inflation in the Eurozone rebounded in November.
The MPC will take a step forward on Thursday when it publishes an estimate of the medium term equilibrium interest rate--the rate which would anchor real GDP growth at its trend and keep inflation stable--in the Inflation Report.
Economic data in Mexico continue to come in strong.
The biggest single surprise in the second quarter GDP report was the unexpected $28B real-terms drop in inventories.
Volatile commodity prices make this week's inflation data in Germany and the Eurozone a wild card. Crude oil in euro terms is down about 20% month-to-month in July, which will weigh on energy prices. In Germany, though, we think higher core inflation offset the hit from oil, pushing inflation slightly higher to 0.4% year-over-year in July from 0.3% in June.
In the yesterday's Monitor, we presented an exagerated upper-bound for China's bad debt problem, at 61% of GDP. The limitations of the data meant that we double-counted a significant portion of non-financial corporate--NFC--debt with financial corporations and government.
Eurozone politicians are likely scrambling for a last gasp return to negotiations before the Greek bailout program ends at the end of today. But progress will likely be limited until we have the result of the planned Greek referendum on Sunday. Voters will be asked essentially on whether they agree with the proposal presented by the institutions. The government will campaign for a "no," but a "yes" looks more likely, based on polls that Greeks want to stay in the Eurozone.
Advance country data indicate that headline EZ inflation fell slightly in June; we think the rate dipped to 1.3% year-over-year, from 1.4% in May.
We have argued recently that the year-over-year rates of core CPI and core PCE inflation could cross over the next year, with core PCE rising more quickly for the first time since 2010.
Tokyo inflation surprised us on Friday, rising to 0.9% in July, from 0.6% in June.
Today's FOMC meeting will be the first non-forecast meeting to be followed by a press conference.
Mexico's trade balance shrank slightly last year, to USD11B, from USD13B in 2016. The main driver was a big swing in the non- energy balance, to a record USD8.0B surplus, following a USD0.4B deficit in 2016.
Sterling has begun this year on the front foot, rising last week to its highest level against the U.S. dollar since June 2016.
The 0.18% increase in the core PCE deflator in December was at the lower end of the range implied by the core CPI. It left the year-over-year rate at just 1.5%.
China's official PMIs for January, due out tomorrow, will give the first indications of how the economy started the year.
Recently released data in Colombia signal that the economy ended last year quite strongly.
Some closely-watched composite leading indicators for the U.K. economy, and for many others, are flashing red.
Today's barrage of data kicks off a couple of busy days in the Eurozone economic calendar.
The seasonal adjustment problems which tend to drive up the national ISM manufacturing survey in late spring and summer are more or less absent from the Chicago PMI, which will be released today. As far as we can tell, the biggest short-term influence on the Chicago number is variations in the order flow for Boeing aircraft; the company moved its headquarters to the city from Seattle in 2001.
Perhaps the biggest single reason for the Fed's reluctance, so far, to move away from monetary policy designed to cope with catastrophe is that no-one knows for sure how much of the damage has been repaired, and how close the economy is to normalizing.
Reporting on the German labour market has been like watching paint dry in this expansion, but yesterday's data were a stark exception to this rule.
China's official manufacturing PMI for May, out tomorrow, will give the first indication of the coming hit from the resumption of its tariff war with the U.S.
The risk of a snap general election has jumped following Theresa May's resignation and the widespread opposition within the Conservative party to the compromises she proposed last week, which might have paved the way to a soft Brexit.
Bullish money supply data last week added to the evidence that the Eurozone's business cycle is strengthening. Broad money growth--M3--rose to 5.3% year-over-year in October from 4.9% in September. Most of the increase came from a surge in short-term debt issuance, rising 8.4% year-over-year, following an inexplicable 1.4% fall in September.
Capex data by industry are available only on an annual basis, with a very long lag, so we can't directly observe the impact the collapse in the oil sector has had on total equipment spending. But we can make the simple observation that orders for non-defense capital goods were rising strongly and quite steadily-- allowing for the considerable noise in the data--from mid-2013 through mid-2014, before crashing by 9% between their September peak and the February low. It cannot be a coincidence that this followed a 55% plunge in oil prices.
The rate of growth of third quarter consumers' spending was revised up by 0.3 percentage point to 3.3% in the national accounts released yesterday.
The resilience of the U.K. financial system will be in focus this week. On Tuesday, the Bank of England's Prudential Regulation Authority, the PRA, will publish the results of stress tests of the U.K.'s seven largest banks. Concurrently, the Bank's Financial Policy Committee, the FPC, will publish its semi-annual Financial Stability Report and announce whether it will deploy any of its macroprudential tools.
Colombia's peso has been one of the most battered currencies in LatAm this year, due mainly to the sharp fall in oil prices, the country's primary export. The COP has dropped about 23% this year against the USD. At the same time, other temporary factors, most notably the impact of El Niño on food prices, have done a great deal of inflation damage too. October's food prices increased 1.4% month-to-month, pushing the year-over-year rate up to 8.8% from an average of 6.6% in the first half of the year. Overall inflation has jumped to 5.9% in October from 3.8% in January, forcing BanRep's board to act aggressively.
Japan's domestic demand has underperformed in the last three quarters, while exports were strong last year but weakened--due to temporary factors--in Q1.
Price action in Italian bonds went from hairy to scary yesterday as two-year yields jumped to just under 3.0%.
February's money and credit figures supported recent labour market and retail sales data suggesting that consumers are increasingly financially strained. Households' broad money holdings increased by just 0.2% month-to-month in February, half the average pace of the previous six months.
Leading indicators for consumers' spending in France are sending conflicting signals. Survey data suggest that households are in a spendthrift mood. Data yesterday showed that the headline consumer sentiment index was unchanged in March at 100, the cycle high.
Mexico's central bank left its main interest rate unchanged last week, citing the need for cautious monetary policy as the economy has lost some momentum during the first months of the year, despite the risk of inflation pass-though effects from the weaker MXN.
The Conservatives' opinion poll rating has fallen dramatically over the last 10 days or so, pushing sterling down and forcing investors to confront the possibility that Theresa May might not increase her majority much from the current paltry 17 MPs.
The models which generate the ADP measure of private payrolls will benefit in May from the strength of the headline industrial production, business sales and jobless claims numbers.
Investors have concluded that Italy's political crisis will compel the U.K. MPC to increase interest rates even more gradually than they thought previously.
Hard data released in Argentina over recent weeks showed that the economy was resilient in Q1 and early Q2.
The chance of a self-inflicted, unnecessary weakening in the economy this year, and perhaps even a recession, has increased markedly in the wake of the president's announcement on Friday that tariffs will be applied to all imports from Mexico, from June 10.
President Trump's volatile diplomatic style is one of the biggest risks facing the Mexican economy in the near term, as we have discussed in previous Monitors.
Headline money supply growth in the Eurozone accelerated further at the start of Q2.
Last week's second estimate of GDP reaffirmed that quarter-on-quarter growth declined to 0.1% in Q1--the lowest rate since Q4 2012--from 0.4% in Q4.
A long period of extremely accommodative U.S. monetary policy generated sizable capital inflows and asset price appreciation in EM countries.
While businesses--and farmers--fret over the damage already wrought by the trade war with China and the further pain to come, consumers are remarkably happy.
Brazil's current account deficit rose to USD6.9B in April, from USD5.8B in March. The deficit totaled USD100.2B, or 4.5% of GDP on a 12-month rolling basis, marginally better than 4.6% in March; the underlying trend is flat. The services and income accounts improved slightly compared to April last year.
Retail sales values in Japan plunged by 14.4% month-on-month in October, reversing September's 7.2% spike twice over.
Money supply data today should provide further confirmation of a moderate upturn in the Eurozone credit cycle. We think broad money growth, M3, accelerated to 5.0% year-over-year in April, up from 4.6% in March.
The biggest single driver of the downward revision to first quarter GDP growth, due this morning, will be the foreign trade component. Headline GDP growth likely will be pushed down by a full percentage point, to -0.8% from +0.2%, with trade accounting for about 0.7 percentage points of the revision.
Tokyo CPI inflation edged down to 0.4% in May, from 0.5% in April.
The newly-revised data on capital goods orders, released on Friday, support our view that sustained strength in business capex remains a good bet for this year.
If we're right with our forecast that real consumers' spending rose by just 0.1% month-to-month in February -- enough only to reverse January's decline -- then it would be reasonable to expect consumption across the first quarter as a whole to climb at a mere 1.2% annualized rate.
The picture for Korean quarterly real GDP growth in Q4 was unchanged in the final reading, published yesterday, showing a contraction of 0.2%, after the 1.4% jump in Q3.
The national accounts, released today, likely will restate that quarter-on-quarter GDP growth held steady at 0.4% in Q4.
Our base case forecast has core PCE inflation at 1.9% from November 2018 through July this year.
Banxico yesterday left its policy rate unchanged at 3%, the highest level in a decade.
We have to hand it to Italy's politicians. In an economy with a current account surplus of 3% of GDP, a nearly balanced net foreign asset position and with the majority of government debt held by domestic investors, the leading parties have managed to prompt markets to flatten the yield curve via a jump in shortterm interest rates.
Data yesterday revealed that headline inflation in Germany was unchanged in March at 1.5%, thanks mainly to higher energy inflation, which offset a dip in food inflation.
Headline money supply growth in the Eurozone has averaged 5% year-over-year since the beginning of 2015; yesterday's October data did not change that story.
All seven of Britain's major banks passed the Bank of England's stress test this year, in the first clean sweep since the annual test began in 2014.
The defeat in the House of Lords of the Government's plans to cut spending on tax credits by £4.4B next year is not a barrier to their implementation. But it has prompted speculation that the Chancellor will reduce the size of the fiscal consolidation planned for next year. The plans may be tweaked in the Autumn Statement on 25 November, but we think the economy will still endure a major fiscal tightening next year.
Consumer sentiment data yesterday from the major economies were mixed, signalling that support to Eurozone GDP growth from surging German household consumption is waning. The key "business outlook" index--which correlates best with spending--plunged to a 30-month low in October, while the advance GfK sentiment index dipped to 9.4 in November from 9.6 in October. We see little signs in retail sales data of slowing momentum, and also think consumers' spending rebounded in Q3. But our first chart shows that the fall in the GfK index implies clear downside risks in coming quarters.
The Fed yesterday toned down its warnings on the potential impact on the U.S. of "global economic and financial developments", and upgraded its view on the domestic economy, pointing out that consumption and fixed investment "have been increasing at solid rates in recent months". In September, they were merely growing "moderately". Policymakers are still "monitoring" global and market developments, but the urgency and fear of September has gone. The statement acknowledged the slower payroll gains of recent months--without offering an explanation--but pointed out, as usual, that "underutilization of labor resources has diminished since early this year" and that it will be appropriate to begin raising rates "some further improvement in the labor market".
Recent polls suggest that Jair Bolsonaro has comfortably beaten Fernando Haddad, to become Brazil's president.
Later today, the Chancellor likely will take the first step towards abandoning plans for further fiscal tightening. In
Friday's consumer sentiment data in the two main Eurozone economies were mixed.
We want to revisit remarks from Fed Vice-Chair Clarida last week.
Tokyo CPI inflation jumped to 1.5% in October, from 1.2% in September. That
While we were out, data released in Mexico added to our downbeat view of the economy in the near term, supporting our base case for interest rate cuts in the near future.
We aren't convinced by the idea that consumers' confidence will be depressed as a direct result of the rollover in most of the regular surveys of business sentiment and activity.
Predictably, the Bank of England's estimate that GDP would plunge by 8% in the first year after a disorderly no-deal, no transition Brexit and that interest rates would need to rise to 5.5% to contain inflation grabbed the headlines yesterday.
The stock market loved Fed Chair Powell's remarks on the economy yesterday, specifically, his comment that rates are now "just below" neutral.
It doesn'tt matter if third quarter GDP growth is revised up a couple of tenths in today's third estimate of the data, in line with the consensus forecast.
Money supply growth in the Eurozone quickened last month, by 0.3 percentage points to 3.9% year- over-year, but the details were less upbeat.
The Monetary Policy Board of the Bank of Korea will tomorrow hold its final meeting for the year.
Our analysis of the Q3 activity and GDP data in yesterday's Monitor strongly suggests that China's authorities will soon ready further stimulus.
Yesterday's EZ money supply data confirmed that liquidity conditions in the private sector improved in Q3, despite the dip in the headline.
LatAm currencies have risen against the USD so far this year, easing the upward pressure on imported good prices and allowing most central banks to cut interest rates. The first direct effects of stronger currencies should be felt by firms which import high-turnover intermediate or final goods.
Sterling found its feet yesterday, rising to $1.33 from Monday's 31-year low of 1.32, but it would be the height of folly to rule out a further short-term decline. By the end of this year, however, we think that sterling likely will have appreciated to around $1.38.
We learned last week that the U.S. no longer has a coherent dollar policy.
Japan's CPI inflation jumped to 1.0% in December from 0.6% in November, driven by food prices.
Brazil's external accounts were a bright spot last year, again.
Money supply data in the EZ continue to suggest that headline GDP growth will slow soon.
The preliminary estimate of Q4 GDP was unambiguously strong and has forced us to modify our view of the likely timing of the next interest rate increase.
In the last few weeks markets have been treated to the news that euro area industrial production crashed towards the end of Q4, warning that GDP growth failed to rebound at the end of 2018 from an already weak Q3.
China's industrial profits data for December showed continued weakness in the sector, with no clear signs that a turnaround is in the offing.
Brazil's external accounts were a relatively bright spot last year, once again.
German data yesterday indicate that inflation pressures have, so far, been resilient in the face of the recent collapse in oil prices. Inflation rose to 0.5% year-over-year in January from 0.3% in December, partly due to base effects pushing up the year-over-year rate in energy prices, but core inflation rose too. The detailed state data indicate that almost all key components of the core index contributed positively, lead by leisure and recreation and healthcare.
Another month, another bleak Brazilian labor market report. The seasonally adjusted unemployment rate increased marginally to 8.3% in December, up from 8.2% in November, much worse than the 5.1% recorded in December 2014.
When we argue that the Fed will have to respond to accelerating wages and core prices by raising rates faster than markets expect, a frequent retort is that the Fed has signalled a greater tolerance than in the past for inflation overshoots.
Mexico's risk profile and financial metrics have improved in recent days, following news of a preliminary bilateral trade deal with the U.S. on Monday.
In recent Monitors--see here and here--we have made a case for decent growth in the EZ's largest economies in the second half of the year, though we remain confident that full-year growth will be a good deal slower, about 2.0%, than the 2.5% in 2017.
Mexico's inflation has started to edge higher due mainly to an unfavorable base effect and pressures on food prices. The bi-weekly headline CPI for the first half of February edged up to 2.9% year-over-year and up from 2.7% in January and the record low of 2.3% in December.
Advance inflation data on Friday added to the gloom on the Eurozone economy. Reports from Germany, France, and Spain all surprised to the downside, indicating the euro area as a whole slipped back into deflation in February. Inflation in Germany dipped to 0.0% year-over-year in February, from 0.5% in January, and France slid back into deflation as the CPI index fell 0.2%, down from a 0.2 increase last month.
Last week's QE announcement has made Eurozone inflation prints less important for investors, but the market will still be watching for signs of a turning point in benchmark bond yields. The data are unlikely to challenge bond holders in the short run, however, as the Eurozone probably slipped deeper into deflation in January.
The Fed left in place the three key elements of its statement yesterday, repeating that the extent of labor market under-utilization is "diminishing"; that the inflation drop as a result of falling oil prices will be "transitory" and that the Fed can be "patient" before starting to raise rates.
The advance international trade data for December were due for publication today, but the report probably won't appear.
China's Q2 real GDP growth officially slowed to 6.2% year-over-year, from 6.4% in Q1, which already matched the trough in the financial crisis.
Surveys released yesterday failed to support the MPC's view that the economy has bounced back in Q2.
We are going to print two days before the July 1 presidential election in Mexico.
Yesterday's inflation data in the major euro area economies force us to mark down slightly our prediction for today's headline EZ number.
In previous Monitors, we have outlined our base case that the direct impact of tariffs on Chinese GDP will be minimal this year.
The Eurozone is on the brink of its first exit this week after the ECB refused to offer incremental emergency liquidity to Greek banks, forcing the start of bank holiday through July 7--two days after next weekend's referendum--and beginning today. We have no doubt that if the banks were to open, they would soon be bust; bank runs have a habit of accelerating beyond the point of no return very quickly.
The Atlanta Fed's GDP Now estimate for second quarter GDP growth will be revised today, in light of the data released over the past few days. We aren't expecting a big change from the June 24 estimate, 2.6%, because most of the recent data don't capture the most volatile components of growth, including inventories and government spending. The key driver of quarterly swings in the government component is state and local construction, but at this point we have data only for April; those numbers were weak.
Mexico's economy hit a sticky patch in the first quarter, with confidence slipping, employment growth slowing and the downward trend in unemployment stalling. Indeed, the headline unemployment rate rose to 4.5% in May from 4.3% in April. The seasonally adjusted rate, though, was little changed at 4.4%, with a stable participation rate.
Negotiations between Greece and its creditors collapsed over the weekend, greatly increasing the risk of a Grexit. The decision by Syriza to call a referendum on the bailout proposal next weekend, initially advocating rejection, forced the Eurogroup to abandon negotiations and focus on "damage control." Hope of a final retreat from the brink rests with the Greek parliament deciding not to hold the referendum, and accepting the proposal presented on Friday.
Our base-case forecast for the May core PCE deflator, due today, is a 0.17% increase, lifting the year-over-year rate by a tenth to 1.9%.
Money supply dynamics in the Eurozone were broadly stable last month. M3 rose 5.0% year-over-year in May, accelerating slightly from a 4.9% increase in April, in line with the trend since the middle of 2015.
Today's Eurozone data schedule is very hectic, but attention likely will focus on advance Q2 GDP data. France, Austria and Spain will report advance data separately ahead of the EZ aggregate estimate, which is released 11.00 CET. This report will include a confidential number from Germany.
Volatility in commodities and emerging markets has intensified since the beginning of July, with the stock market drama in China taking centre stage. The bubble in Chinese equities inflated without much ado elsewhere, and can probably deflate in isolation too. But the accelerating economic slowdown in EM is becoming an issue for policy makers in the Eurozone.
Brazil's external accounts remain solid, despite the recent modest deterioration, making it easier for the country to withstand external and domestic risks.
Households' saving decisions will play a key role in determining whether the economy slips into recession over the next year. Indeed, all of the last three recessions coincided with sharp rises in the household saving rate, as our first chart shows. Will households save more in response to greater economic uncertainty?
The MPC's hawks are framing the interest rate increase they want as a "withdrawal of part of the stimulus that the Committee had injected in August last year", arguing that monetary policy still would be "very supportive" if rates rose to 0.5%, from 0.25%.
The third estimate of first quarter GDP growth, due today, will not be the final word on the subject. Indeed, there never will be a final word, because the numbers are revised indefinitely into the future.
China's total debt stock is high for a country at its stage of development, relative to GDP, but it is sustainable for country with excess savings. China was never going to be a typical EM, where external debtors can trigger a crisis by demanding payment.
Eurozone September CPI data this week will show that inflation pressures remain weak, appearing to support the ECB's focus on downside risks. We think Eurozone inflation--data released Wednesday-- rose slightly to 0.2% year-over-year in September from 0.1% in August, as core inflation edged higher, offsetting weak energy prices. Looking ahead, structural inflation pressures will keep inflation well below the central bank's 2% target for a considerable period.
Today's Case-Shiller report on existing home prices will likely show that August prices were little changed, month-to-month, for the fourth straight month. The slowdown in the pace of price gains since the first quarter, when price gains averaged 1.0% per month, has been startling. In all probability, though, the apparent stalling is a reflection of the quality of the data rather than the underlying reality in the housing market.
While we were out, the data showed that consumers' confidence has risen very sharply since the election, hitting 15-year highs, but actual spending has been less impressive and housing market activity appears poised for a marked slowdown.
The data in LatAm have been all over the map in recent weeks. Brazil's cyclical stabilization continues, while Mexican numbers confirm that the economy has come under pressure in recent months.
The first economic report of 2020 confirmed the main story in the euro area last year; namely a recession in manufacturing.
The U.K. economy retained its momentum last year, despite the seismic shock of the vote to leave the EU. Quarter-on-quarter GDP growth averaged 0.5% in the first three quarters of 2016, matching 2015's rate and the average pace of growth across the Atlantic.
A bullish EZ money supply report was the key highlight while we were away over the holidays. M3 growth in the euro area accelerated to 4.8% year-over-year in November from 4.4% in October.
The manufacturing sector appears to have finished 2017 on a strong note. The Markit/CIPS manufacturing PMI fell to 56.3 in December from 58.2 in November, but it remained above its 12-month average, 55.9.
The Eurozone manufacturing sector finished 2017 on a strong note. The headline PMI increased to a cyclical high of 60.6 in December, from 60.1 in November, in line with the initial estimate.
The Caixin manufacturing PMI picked up to 51.5 in December from 50.8 in November. But the jump looks erratic and we expect it to correct in January.
The substantial gap between the key manufacturing surveys for the U.S. and China, relative to their long-term relationship, likely narrowed a bit in December.
The data in LatAm were all over the map while we were out.
Brazil's Q4 industrial production report, released Wednesday, confirmed that the recovery remained sluggish at the end of last year. December's print alone was relatively strong, though, and the cyclical correction in inventories--on the back of improving demand--lower interest rates, and the better external outlook, all suggest that the industrial economy will do much better this year.
In our Monitor on January 27 we speculated that the new U.S. administration would see Germany's booming trade surplus as a bone of contention. We were right. Earlier this week, Peter Navarro, the head of Mr. Trump's new National Trade Council, fired a broadside against Germany, accusing Berlin for using the weak euro to gain an unfair trade advantage visa-vis the U.S.
One of the questions we have been asked recently is when inflation in the euro area will trough this year. This is difficult to answer without a look at the structural drivers of price pressures in Europe.
The absence of hawkish undertones in the minutes of the MPC's meeting or in the Inflation Report forecasts took markets by surprise yesterday. The dominant view on the Committee remains that the economy will slow over the next couple of years, preventing wage growth from reaching a pace which would put inflation on trac k permanently to exceed the 2% target.
Our payroll model relies heavily on lagged indicators of the pace of hiring, most of which have improved in recent months after a sustained, though modest, softening which began last spring. That's why we expected an above-consensus reading from ADP on Wednesday and from the BLS today.
Korean trade ended the year strongly, salvaging what was shaping up as a dull fourth quarter for the economy.
CPI inflation looks set to remain below the 2% target this year, driven by sterling's recent appreciation and lower energy prices.
Data released in recent weeks have confirmed that the Andean economies retained a degree of momentum in Q4, with inflation well under con trol.
China's Caixin manufacturing PMI doused hopes of turning over a January new leaf; it dropped to 49.7 in November, from 50.2 in December.
German retail sales always have to be taken with a pinch of salt, given their monthly volatility and often substantial revisions, but the preliminary Q2 data don't look pretty.
Japan's Q2 Tankan survey wasn't all bad news, but the positives won't last long. The large manufacturers index dropped to 7 in Q2, after the decline to 12 in Q1.
Data released this week in Brazil underscored the effect of weaker external conditions. This adds to the poor domestic demand picture, which has been hit by high, albeit easing, political uncertainty.
The second quarter is over but it is too early to give a reliable forecast of the pace of Brazilian GDP growth. However, an array of leading and coincident indicators points to a steep contraction in Q2 and a bleak second half of the year. Unemployment is leaping higher, along with inflation and household debt, and the ongoing monetary and fiscal tightening will further hurt the real economy ahead.
Rumours of Greece stepping back from the brink and accepting its creditors' demands, have taunted markets this week. But the response from the EU, so far, is that talks will not resume before this weekend's referendum. Our base case is a "yes" to the question of whether Greece should accept the proposal from the EU and IMF.
Last week's May CPI data in the major EZ economies all but confirmed the story for this week's advance estimate for the euro area as a whole.
Gilts continued to rally last week, with 10-year yields dropping to their lowest since October 2016, and the gap between two-year and 10-year yields narrowing to the smallest margin since September 2008.
The sharp fall in China's manufacturing PMI in May makes clear that its recovery is nowhere near secured.
Last week's EU summit was an exercise in political pragmatism rather than the bold step forward on reforms that investors had been hoping for.
The startling jump in supplier delivery times in the June ISM manufacturing survey, to a 14-year high, was due--according to the ISM press release--to disruptions to steel and aluminum supplies, transportation problems and "supplier labor issues".
We expect China's quarterly real GDP growth in the second quarter to edge down from Q1, but only because Q1 growth was unsustainable. The official data shows real GDP growth at 1.3% quarter-onquarter in Q1.
Yesterday's sole economic report in the Eurozone confirmed that the economy slowed further at the end of 2018.
We have focussed on the role of the trade war in depressing U.S. stock prices in recent months, arguing that the concomitant uncertainty, disruptions to supply chains, increases in input costs and, more recently, the drop in Chinese demand for U.S. imports, are the key factor driving investors to the exits.
Friday's euro area inflation reported capped a difficult week for EZ bondholders, although most of the damage was done beforehand by the advance German data.
Last week's national accounts confirmed that the economy lost momentum abruptly in Q1, with net trade and investment failing to offset weaker growth in households' spending.
Last week's balance of payments showed that the U.K. has made significant progress in reducing its reliance on overseas finance.
Argentina's economic data released last week confirm that the economy is improving. Our core view, for now, is that the economy will continue to defy rising political uncertainty, both domestic and external.
We are not bothered by either the drop in real December consumption, all of which was due to a weather-induced plunge in utility spending, or the drop in the ISM manufacturing index, which is mostly a story about hopeless seasonal adjustments.
The Bank of Korea finally pulled the trigger, raising its base rate to 1.75% at its meeting on Friday. After a year of will-they-or-won't-they, five of the Monetary Policy Board's seven members voted to add another 25 basis points to their previous hike twelve months ago.
The economic data in the Eurozone were mixed while we were away.
The national accounts for the fourth quarter showed that the economy relied on households slashing their saving rate to a record low in order to spend more. Now, growth in consumer spending will have to fall back in line with real incomes, which will increasingly be impaired by rising inflation.
We fear that private spending in the EZ slowed in Q1, despite rocketing survey data. This fits our view that household consumption will slow in 2017 after sustained above-trend growth in the beginning of this business cycle.
Japan's unemployment rate edged back up to 2.5% in February after the drop in January to 2.4%.
Brazil's February industrial production numbers, labour market data, and sentiment indicators are gradually providing clarity on the underlying pace of activity growth, pointing to some red flags.
We see only a small risk today of the MPC raising interest rates or sending a strong signal that a hike is imminent, for the reasons we set out in our preview of the meeting. The MPC, however, also must decide today whether to wind up the Term Funding Scheme-- TFS--launched a year ago as part of its post-Brexit stimulus measures.
Don't expect a pretty picture when Korea's Q1 GDP report appears in the last week of April.
It is fair to say that the economic debate on fiscal policy has shifted dramatically in the last 12-to-18 months.
We'd be very surprised to see a material weakening in today's March ISM manufacturing survey. The regional reports released in recent weeks point to another reading in the high 50s, with a further advance from February's 57.7 a real possibility.
Economic data released on Friday underscored our view that bolder rate cuts in Brazil are looming. The BCB's latest BCB's inflation report, released on Thursday, showed that policymakers now see conditions in place to increase the pace of easing "moderately" .
China is set to ease reserve requirements for banks lending to small businesses. In a statement after the State Council meeting yesterday, Premier Li Keqiang said that commercial banks would receive a cut in their RRR , from 17% currently, based on how much they lend to businesses run by individuals.
The estimate of services output for the first month of the current quarter usually gets lost among the deluge of national accounts and balance of payments data released for the previous quarter.
Survey data in the Eurozone were mixed yesterday. In Germany, the advance GfK consumer sentiment index slipped to 10.0 in October, from 10.2 in September, marginally below consensus forecasts. The details, reported for September, also were soft.
Brazil's current account deficit is stabilizing following an substantial narrowing since early 2015, thanks to the deep recession.
With almost two thirds of the nominal data for the third quarter now available, we can make a stab at the contribution of inventories to real GDP growth.
Today is all about beans. Specifically, soybeans, and more specifically, just how many of them were exported in August. This really matters, because if soybean exports in August and September remained close to their hugely elevated July level, the surge in exports relative to the second quarter will contribute about one percentage point to headline GDP growth.
The picture of the economy's recent performance will be redrawn today, when the national accounts are published.
China will have to issue a lot of government debt in the next few years. The government will need to continue migrating to its balance sheet, all the debt that should have been registered there in the first place. This will mean a rapid expansion of liabilities, but if handled correctly, the government will also gain valuable assets in the process.
The Brazilian Central Bank's policy board--the Copom--met expectations on Wednesday, voting unanimously to keep the Selic rate on hold at 6.50%.
Households' inflation expectations have fallen again over the last few months, but we doubt they will constrain the forthcoming rebound in actual inflation. Past experience shows that inflation expectations are more of a coincident than a leading indicator of inflation. In addition, inflation is weakest right now in sectors where demand is relatively insensitive to price changes, so, when retailers' costs rise, they won't pay much heed to households' expectations.
Even Charles Dickens could not have written a more dramatic prologue to today's ECB meeting. Elevated expectations ahead of major policy events always leave room for major disappointment, but we think the central bank will deliver. Advance data yesterday indicated inflation was unchanged at 0.1% year-over-year in November, below the consensus 0.2%, and providing all the ammunition the doves need to push ahead. We expect the central bank to cut the deposit rate by 20bp to -0.4%, to increase the pace of bond purchases by €10B to €70B a month, and to extend QE to March 2017.
Retail sales data later today will give us the first hard data from the fourth quarter, and the story should be altogether more positive than the still downbeat message from the manufacturing sector.
Short of saying "We're going to hike rates in two weeks' time", Dr. Yellen's view of the immediate economic and policy outlook, set out in her speech yesterday, could hardly have been clearer. Yes, she threw in the usual caveats: "...we take account of both the upside and downside risks around our projections when judging the appropriate stance of monetary policy", and saying the FOMC will have to evaluate the data due ahead of this month's meeting, but her underlying message was straightforward.
Data released last week confirm that Brazil's recovery has continued over the second half of the year, supported by steady household consumption and rebounding capex.
The agreement between Presidents Trump and Xi at the G20 is a deferment of disaster rather than a fundamental rebuilding of the trading relationship between the U.S. and China.
Friday's inflation and labour market data in the Eurozone were dovish.
Both the E.U. and the U.K. government have been keen to emphasise, since the Withdrawal Agreement was provisionally signed off, that March 29 is a hard deadline for Brexit.
Colombia's central bank--Banrep--decided last Friday to leave its benchmark interest rate at 4.5% for the third consecutive month, concerned by the slowdown in oil prices, which is affecting economic activity in the fastest growing economy in the region.
Since its October 2012 revamp, the ADP measure of private employment--the November survey will be released this morning--has tended to be little more than a lagging indicator of the official number.That's because ADP incorporates official data, lagged by one month, into the regression which generates its employment measure.
The MPC made a concerted effort yesterday with its forecasts to signal that it is committed to raising Bank Rate at a faster rate than markets currently expect.
We look for a 210K increase in July payrolls. That would be consistent with the message from an array of private sector surveys, as well as the recent trend.
Why should Japan, the U.S., the Euro Area, the U.K. and Japan all have the same inflation target?
Debt issuance by Eurozone non-financial firms is soaring, consistent with the ECB's hope that adding private debt to QE would boost supply. Our first chart shows that the three-month sum of net debt sold in the euro area jumped to a new record of €60.3B in May. A short-term decline in issuance is a good bet after the initial euphoria in firms' treasury departments.
Many investors are betting that the MPC will announce a bold package of easing measures on Thursday. For a start, overnight index swap markets are pricing-in a 98% probability that the MPC will cut Bank Rate to 0.25%, and a 30% chance that interest rates will fall to, or below, zero by the end of the year.
China's manufacturing PMIs put in a better performance in November, with the official gauge ticking up to 50.2 in November, from 49.3 in October, and the Caixin measure little changed, at 51.8, up from 51.7.
Yesterday's final manufacturing PMIs confirmed that the headline index in the euro area rebounded further last month.
The first exit poll published at 18.00 CET on Sunday evening points to a landslide victory for Syriza, and the real possibility that the party could form a majority government. Counter-intuitively, the prospects for Syriza here depend upon how the smaller parties do.
Mexican inflation fell sharply in the first two weeks of January, dipping by 0.2% from two weeks earlier, thanks to lower energy prices and a reduction in long-distance phone tariffs. Telecom reform explains about 15bp of the headline reduction.
The euro area's record-high external surplus has prompted commentators to suggest that the zone has room to loosen fiscal policy to support growth, or at least relax the deficit reduction rules.
Japan's all-industry activity index fell 0.5% month-on- month in September after a 0.2% rise in August. Construction activity continued to plummet, with the subindex dropping 2.3%, after a 2.2% fall in August.
Yesterday's barrage of survey data in France suggests that business sentiment in the industrial sector remained soft mid-way through Q4, but the numbers are more uncertain than usual this month.
Korea's trade figures for the first 20 days of November, published yesterday, gave the first real glimpse in a long time of how its exporters are truly performing.
October's surprise jump in public borrowing is not a material setback for the Chancellor, who will stick to his new Budget plans for modest fiscal stimulus next year.
November data for most of the major EZ business and consumer surveys arrive this week. We doubt the reports will change our view that EZ GDP growth likely will remain steady at about 1.6% year-over-year in Q4. But appearances matter, and risks are tilted to the downside in some of the main surveys, after jumps in October.
Colombia's trade deficit continued to narrow in Q3; a postive development now that EM are back in the firing line. Assuming no revisions, the marginal year-over-year dip in the September trade deficit means that the third quarter deficit was USD3.1B, down from US4.6B a year ago.
The EU Commission and Italy's government remain at loggerheads over the country's fiscal plans next year.
The PBoC's quarterly monetary policy report seemed relatively sanguine on the question of PPI deflation, attributing it mainly to base effects--not entirely fairly--and suggesting that inflation will soon return.
The composite PMI in the Eurozone continues to edge slightly lower, falling to 53.4 in May from 53.9 in April. A fall in the services index to 53.3, from 54.1 last month offset a modest increase in manufacturing to 52.3 from 52.0 in April.
The Spanish economy has been living a quiet life recently, amid markets' focus on political risks in Italy and manufacturing slowdowns in Germany and France.
Japan's trade surplus rebounded to ¥522B in April, on our adjustment, from ¥390B in March, around the same level as the official version, though from a higher base.
April's retail sales figures, due Thursday, likely will show that spending recovered from snow-induced weakness in March.
The latest trade data from Korea underscore the unfortunate timing of the resumption of the U.S.-China tit-for-tat tariff war.
Data released on Monday showed that Chile's external accounts remained under pressure at the start of the year, and trade tensions mean that it will be harder to finance the gap.
Core inflation has risen, albeit modestly, in the past two months. The uptick, to 1.8% in March from 1.6% in January, has come as something of a surprise. The narrative in the media and markets remains, as far as we can tell, one of downward pressure on inflation and, still, fear of possible deflation.
Mexico's economy stuttered at the start of the year. Real GDP rose 0.4% quarter-on-quarter in the first quarter, after a solid 0.7% in the fourth quarter. Q1 activity was supported by the services sector, rising 0.5%, offsetting the 0.2% contraction in industrial activity.
We still don't have the complete picture of what happened to EZ consumers' spending in Q1, but the initial details suggest that growth acceleretated slightly at the start of the year.
After the strong Philly Fed survey was released last week, we argued that the regional economy likely was outperforming because of its relatively low dependence on exports, making it less vulnerable to the trade war.
Sterling briefly touched $1.30 yesterday, in response to signs that a very small majority in the Commons stands ready to vote for an unamended version of the Withdrawal Agreement Bill--WAB-- on Tuesday.
Public borrowing was below consensus expectations in August, fuelling speculation that the Chancellor might pare back the remaining fiscal tightening in the Autumn Budget on November 22.
We tend to keep a close eye on monetary policy initiatives in Japan, as the BOJ's fight to spur inflation in a rapidly ageing economy resembles the challenge faced by the ECB.
The rate of growth of chain store sales has levelled off in recent months, after slowing dramatically in the first four months of this year, almost certainly in response to falling prices for dollar-sensitive goods like household electronics. In the fourth quarter of last year, the Redbook recorded same-store sales growth averaging 4.3%, but that has slowed to a 1-to-2% range since April.
Before this week's earthquake, the resilience of Mexico's economy in the face of a volatile and challenging global backdrop owed much to the strength of domestic demand, especially private consumption.
The hawks clearly tried hard to persuade their more nervous colleagues to raise rates yesterday. In the end, though, they had to make do with shifting the language of the FOMC statement, which did not read like it had come after a run of weaker data.
For now, we're happy with our base-case forecast that growth will be nearer 3% than 2% this year, and that most of the rise in core inflation this year will come as a result of unfavorable base effects, rather than a serious increase in the month-to-month trend.
New home sales performed better during the winter than any other indicator of economic activity. At least, we think they did. The mar gin of error in the monthly numbers is enormous, typically more than +/-15%.
The preliminary April PMIs due today will provide the first economic sentiment data for Q2, and likely will point to a continuation of the cyclical recovery. We think the composite PMI was unchanged at 54.0 in April, driven by a small gain in manufacturing offset by a slight decline in services.
Mr. Draghi's pledge in 2012 to do "whatever it takes to preserve the euro," and QE have stymied sovereign debt risk in the euro area. At the same time, the EU's relaxed position over debt sustainability was highlighted earlier this year by the Commission's decision to give France two more years to get its deficit below 3% of GDP. But Moody's downgrade of the French government bond rating last week to Aa2 from Aa1 serves as a gentle reminder to investors of the underlying fundamentals.
The Eurozone's external surplus rebounded over the summer, reversing its sharp decline at the start of Q3.
Investors looking for more QE and rate cuts will be disappointed by ECB inaction today. We think the Central Bank will keep its main interest rates unchanged, and also maintain the pace of asset purchases at €60B a month. We do, however, look for a slight change in language, hinting that QE is likely to continue beyond September next year.
The headline payroll number each month is the difference between the flow of gross hirings and the flow of gross firings. The JOLTS report provides both numbers, with a lag, but we can track the firing side of the equation via the jobless claims numbers. Claims are volatile week-to-week, thanks to the impossibility of ironing out every seasonal fluctuation in such short-term data, but the underlying trend is an accurate measure. The claims data are based on an actual count of all the people making claims, not a sample survey like most other data. That means you'll never be blindsided by outrageous revisions, turning the story upside-down.
The slowdown in the EZ economy is well publicised.
Discussion about whether the U.K. would be better off voting to leave the European Union in the forthcoming referendum is rarely out of the press, raising the question of whether simply holding the national vote could damage the economy even if the U.K. votes for the status quo in the end.
The Chancellor probably can't believe his luck. Public borrowing has continued to fall this year at a much faster rate than anticipated by the OBR, despite the sluggish economy.
The failure of labor market participation to increase as the economy has gathered pace, pushing unemployment down from its 10.0% peak to just 3.7%in September, is one of the biggest macro mysteries in recent years.
China's real GDP growth officially slowed to 6.5% year-over-year in Q3, from 6.7% in Q2.
President Nicolás Maduro has "won' another six-year term, as expected, even as millions of Venezuelans boycotted the election.
We have been pleasantly surprised by the recent Redbook chainstore sales numbers.
Brazil's central bank kept the SELIC rate on hold on Wednesday at 14.25% for the eight consecutive meeting. The decision, which was widely expected, was unanimous, but the post-meeting statement was more detailed and informative than the central bank's June communiqué. We think the shift was intentional; the central bank's new board, headed by Mr. Ilan Goldfajn, is eager to strengthen the institution's credibility and transparency.
We have to pinch ourselves when looking at economic data in Spain at the moment. Real GDP rose a dizzying 0.9% quarter-on-quarter in Q1, driven by solid gains of 0.7% and 1.1% in consumer's spending and investment respectively. Retail sales and industrial production data indicate GDP growth remained strong in Q2, even if survey data lost some momentum towards the end of the quarter. We will be looking for signs of further moderation in Q3, but surging private deposit growth indicate the cyclical recovery will continue.
The downshift in the rate of growth of retail sales, which has caused a degree of consternation among investors, likely has further to run. The Redbook chain store sales survey clearly warned at the turn of the year that a slowdown was coming, but forecasters didn't want hear the warning: Five of the seven non-auto retail sales numbers released this year have undershot consensus.
Soon after last week's vote to keep Bank Rate at 0.50%, the MPC's doves were quick to assert that monetary easing is still imminent. A speech by Andy Haldane, published on July 15, called for "... a package of mutually complementary monetary policy easing measures" that should be "delivered promptly and muscularly". Meanwhile, Gertjan Vlieghe, who was alone in voting for a rate cut in July, wrote in The Financial Times last week that he also favours "a package of additional measures" in August.
Korea's preliminary export numbers rebounded quite spectacularly in June, with growth at 24.4% year-on-year, compared with just 3.4% in May. This reading is important as it comes early in the monthly data cycle. Korea's position close to the beginning of the global supply chain, moreover, means its exports often lead shifts in global trade.
Korean trade activity is slowing.
Brazil's central bank looked through the recent dip in the BRL and left interest rates at 6.50% at Wednesday's Copom meeting, in line with the consensus.
The renewed slide in oil prices in recent weeks will crimp capital spending, at the margin, but it is not a macroeconomic threat on the scale of the 2014-to-16 hit.
Recent economic weakness in Brazil, particularly in the labor market, has strengthened our view that the central bank is close to the end of its painful, but necessary, tightening cycle. We expect the BCB to increase its policy rate by 50bp to 14.25% at next week's monetary policy meeting, and then leave the rate on hold for the foreseeable future.
On the face of it, the latest public finance data suggest that the economy has lost momentum.
Chinese GDP numbers always require a great deal of detective work, and yesterday's needed more than the norm; multiple rounds of revisions needed decoding.
The China Daily ran an article entitled "Beijing, nation get breath of fresh air" on the day Chinese GDP figures were published last week, underlining where the authorities' priorities now lie.
As we reach our Sunday afternoon deadline, no deal has been reached to re-open the federal government.
Recent global developments lead us to intensify our focus on trade in LatAm.
The chance of a zero GDP print for the first quarter diminished--but did not die--last week when the president signed a bill granting full back pay to about 300K government workers currently furloughed.
Chile's central bank kept rates unchanged last Thursday at 2.50% with a dovish bias, following an unexpected 50bp rate cut at the June meeting.
Yesterday's sole economic report in the Eurozone showed that German producer price inflation edged lower at the end of 2018.
A round of recent conversations with investors suggests to us that markets remain quite skeptical of the idea that the recent upturn in capital spending will be sustained.
Yesterday's barrage of French business sentiment data suggest that confidence in the industrial sector was a little stronger than expected in Q2.
The most striking feature of the Fed's new forecasts is the projected overshoot in core PCE inflation at end-2019 and end-2020, which fits our definition of "persistent".
So much has changed in China over the last six months that we are taking the opportunity in this Monitor to step back and gain an overview of where the economy is going in the long term.
February's consumer price figures provided hard evidence that the import price shock, caused by sterling's depreciation last year, is filtering through faster than the MPC expected. We expect CPI inflation to continue to exceed the forecast set out in February's Inflation Report.
Today's economic calendar in the Eurozone is filled to the rafters.
Slack in the labour market no longer is being absorbed and wage growth still is struggling for momentum, placing little pressure on the MPC to rush the next rate rise.
The Eurozone's current account surplus remained close to record highs at the end of Q1, despite dipping slightly to €34.1B in March, from a revised €37.8B in February. A further increase in the services surplus was the key story.
Existing home sales peaked last February, and the news since then has been almost unremittingly gloomy.
China's growth can be decomposed into the structural story and the mini-cycle, which is policy- driven.
Growth in South America disappointed last year, but prospects are gradually improving on the back of rising commodity prices and the global manufacturing rebound. These factors will help to ease the region's external and fiscal vulnerabilities, particularly over the second half of the year. On the domestic front, though, the first quarter has proved challenging for some countries, hit by temporary supply factors such as a mine strikes, floods, and wildfires.
Financial markets and economic survey data have been sending a downbeat message on the Eurozone economy so far this year. The composite PMI has declined to a 12-month low, consumer sentiment has weakened, and national business surveys have also been poor.
In recent weeks Brazilian central bank officials have reinforced their message that they will continue fighting inflation with "determination and perseverance". CPI inflation is failing to subside, at least at the headline level, where the latest readings are very disappointing, and expectations have remained stubbornly high. And the BRL has fallen 13% year-to-date, posing further inflation threats ahead. All these factors mean that the BCB will increase its main interest rate yet again in July.
Discussions between Greece and its creditors drifted further into limbo last week, but we are cautiously optimistic that the Euro Summit meeting later today will yield a deal. The acrimony between Syriza and the main EU and IMF negotiators means, though, that a grand bargain is virtually impossible. We think an extension of the current bail-out until year-end is the most likely outcome.
The MPC was more hawkish than we and most investors expected yesterday. The vote to keep Bank Rate at 0.50% was split 6-3, f ollowing Andy Haldane's decision to join the existing hawks, Ian McCafferty and Michael Saunders.
The closer we look at the Fed's new forecasts, the stranger they seem. The FOMC cut its GDP estimate for this year and now expects the economy to grow by 1.9%--the mid-point of its forecast range--in the year to the fourth quarter. Growth is then expected to pick up to 2.6% next year, before slowing a bit to 2.3% in 2017. Unemployment, however, is expected to fall much less quickly than in the recent past.
Brazil's mid-June inflation reading surprised to the downside, falling to 9.0% from 9.6% in May. The reading essentially confirmed that May's rebound was a pause in the downward trend rather than a resurgence of inflationary pressures. A 1.3% increase in housing prices, including services, was the main driver of mid-June's modest unadjusted 0.4% month-to-month rise in the IPCA-15.
We pointed out in yesterday's Monitor that Fed Chair Yellen appears to be putting a good deal of faith in the idea that the recent upturn in core inflation is temporary. She argued that "some" of the increase reflects "unusually high readings in categories that tend to be quite volatile without very much significance for inflation over time".
Yesterday's ZEW investor sentiment in Germany shows showed no signs that uncertainty over the U.K. referendum is taking its toll on EZ investors. The expectations index surged to 19.2 in June, from 6.4 in May, the biggest month-to-month jump since January last year, when investors were eagerly expecting the ECB's QE announcement.
Friday's economic data suggest that the downtrend in German PPI inflation is reversing.
Japan's headline CPI inflation is set to edge down in coming months, thanks to non-core prices.
The public finances continue to heal rapidly, suggesting that the Chancellor should have scope to soften his fiscal plans substantially in the Autumn Budget.
We expect the Mexican economy to continue growing close to 2% year-over-year in 2019, driven mainly by consumption, but constrained by weak investment, due to prolonged uncertainty related to trade.
November's labour market data were the last before the MPC's February meeting, when it will conduct its annual assessment of the supply side of the economy.
Back on May 14, we argued--see here--that the stars were aligned to generate very strong second quarter GDP growth, perhaps even reaching 5%.
Friday's inflation data in Brazil confirmed that the ripples from the truckers' strike in May were still being felt at the start of the third quarter.
The MXN remains the best performer in LatAm year-to-date, despite some ugly periods of high volatility driven by external and domestic threats.
The Eurozone's current account surplus extended its decline in May, falling to a nine-month low of €22.4B, from €29.6B in April.
Japan's CPI inflation was unchanged in June, at 0.7%, despite strong upward pressure from energy inflation.
The weekly mortgage applications numbers have been wild recently, but our first chart shows that the trend underneath the noise is solid.
German 10-year yields have been trading according to a simple rule of thumb since 2017, namely, anything around 0.6% has been a buy, and 0.2%, or below, has been a sell.
Today's data likely will show that EZ households' sentiment remained close to a record high at the start of the year.
Korean 20-day exports are volatile and often miss the mark with respect to the full-month print. But these data offer the month's first look at Asian trade, and we often find value in these early signs.
Both the Prime Minister and Chancellor last week threatened to cut business taxes aggressively to persuade multinationals to remain in Britain in the event of hard Brexit. But these threats lack credibility, given the likely lingering weakness of the public finances by the time of the U.K.'s departure from the EU and the scale of demographic pressures set to weigh on public spending over the next decade.
We see considerable downside risk to the consensus forecast that GDP increased by 0.4% quarter-on-quarter in Q4, the same as in Q3.
High inflation and interest rates, coupled with increasing uncertainty, both economic and political, put Mexican consumption under strain last year.
Korea's preliminary Q4 GDP report was stronger than nearly all forecasters, including ourselves, expected.
In April last year, something odd happened in the FX market.
As we reach our deadline--4pm eastern time--media reports indicate that a debt ceiling agreement is close.
If the recovery in existing homes hadn't been interrupted by the taper tantrum, in the spring of 2013, sales by now would likely be running at an annualized rate in excess of 6M. The rising trend in sales from late 2010 through early 2013 was strong and stable, as our first chart shows, but the decline was steep after the Fed signalled it would soon slow the pace of QE, and it was made temporarily worse by the severe late fall and early winter weather.
Political turmoil in Brazil continues to undermine President Dilma Rousseff's leverage over the economy. On Friday, the Lower House of Congress voted to start impeachment proceeding against Ms. Rousseff. She has until early April to present her defense against charges that she doctored government accounts and used graft proceeds to fund the 2014 electoral campaign.
Further evidence emerged yesterday in support of our view that mortgage lending conditions are easing. The monthly mortgage origination report from Ellie Mae, Inc., a private mortgage processing firm, shows average credit scores for both successful and unsuccessful loan applications continue to trend downwards--though the latter rose marginally in February--while loans are closing much more quickly than in the recent past.
If we are right in our view that the lag between shifts in gasoline prices and the response from consumers is about six months--longer than markets seem to think--then the next few months should see spending surge.
Economic sentiment data, which rebounded in March, continue to suggest slight downside risk to EZ GDP growth in Q1. The composite Eurozone PMI in March rose modestly to 53.7 from 53.0 in February, only partially erasing the weakness in recent months. The PMI dipped slightly over the quarter as a whole, although not enough to change the EZ GDP forecast in a statistically meaningful way.
CPI inflation remained at 0.3% in February, below the consensus, 0.4%, and our own expectation, 0.5%. All the unexpected weakness, however, was in food and core goods prices, and past movements in commodity and import prices suggest that this will be fleeting
New home sales are much more susceptible to weather effects -- in both directions -- than existing home sales. We have lifted our forecast for today's February numbers above the 575K pace implied by the mortgage applications data in recognition of the likely boost from the much warmer-than-usual temperatures.
The Eurozone's total external surplus hit the skids at the start of the year. Yesterday's report showed that the seasonally adjusted current account surplus plunged to a two-year low of €24.1B in January, from a revised €30.8B in December.
Under normal circumstances, we would expect today's retail sales figures to reveal that volumes rebounded in February, following the 2.7% fall over the previous three months. But the continued weakness of spending surveys suggests that we should brace for another soft report.
The Eurozone economy is becoming increasingly service-oriented. The private services sector has contributed just over 50% of gross value added-- GVA -- in the past three years, up from 44% in the seven years before the crash of 2008.
The bad news just keeps coming for Brazil's economy. The mid-month CPI, the IPCA-15 index, rose 1.2% month-to-month in March. Soaring energy prices remain the key contributor to the inflation story in Brazil, pushing up the housing component by 2.8% in March, after a 2.2% increase in February.
A couple of Fed speakers this week have described the economy as being at "full employment". Looking at the headline unemployment rate, it's easy to see why they would reach that conclusion.
Financial markets in Brazil and Argentina have been under pressure this week, following negative news, both domestic and external. In Brazil, the Ibovespa index tumbled nearly 1.8% on Tuesday after a Senate Committee rejected the Government's labour reform bill.
The manufacturing industry in France is recovering slowly, but surely. The headline INSEE index rose to 102 in July from 101 in June, close to a post-crisis high, pointing to steady improvement for manufacturers. Our first chart shows the main leading components of the survey, indicating a modest, but positive, trend in output. The increase in sentiment in July was driven by firming new orders--especially in the export sector--pushing the new orders-to-inventory ratio to an 18-month high.
The June batch of the French statistical office's business surveys continues to signal a firming cyclical recovery. The aggregate business index rose to cyclical high of 106 in June from a revised 105 in May, continuing an uptrend that began in the middle of 2016.
We sympathize greatly with investors' frustration over endless postponements and new "deadlines" in the negotiations between Greece and its creditors. Syriza delivered a proposal for reforms to the EU and the IMF on Monday morning, welcome d as a "positive step in the right direction" by Eurogroup president Dijsselbloem and Economic and Financial Affairs commissioner Moscovici.
People across Europe are growing wary over the failure of governments to foster economic security since the 2008 crisis. Their conclusion increasingly is that the EU is to blame, so their support for EU-sceptic, and even right-wing nationalist, parties has increased accordingly.
We are intrigued by the idea that the rollover in oil firms' capital spending on equipment might already be over, even as spending on new well-drilling--captured by the still-falling weekly operating rigs data--continues to decline. The evidence to suggest equipment spending has fallen far enough is straightforward.
Full employment is a deceptively simple-sounding concept. If everyone who wants a job has one, the economy is at full employment, right? Anything less tends to raise eyebrows among non-economists, whether the people who want a job are formally inside the labor force, or have dropped out but would come back if they thought they could find work.
The Eurozone has come under the spotlight for its growing external surplus, but domestic households have been doing the heavy lifting for GDP growth in this business cycle. During the last four quarters, consumers' spending has boosted year-over-year GDP growth by an average of 1.0 percentage points, in contrast to a 0.4pp drag from net exports.
The S&P 500 index chalked up a new record on Wednesday by going 3,453 days without a 20% drawdown, making it the longest equity bull-run in U.S. history.
The beginning of the electoral campaign last week in Brazil bodes uncertain results and a very close competition for the presidential elections on October 7.
The story in EZ capital markets this year has been downbeat.
Today's market attention will be focused on the advance August PMI data in the major EZ economies. We think the composite PMI in the euro area was unchanged at 53.2 in August, consistent with stable GDP growth of 0.3%-to-0.4% quarter-on-quarter in Q3. The signal of "stability" in the Eurozone business cycle has been consistently relayed by the PMI since the beginning of the year.
The Mexican economy shrank by 0.2% quarter-on-quarter in Q2, according to the final GDP report, a tenth better than the preliminary reading. The year-over-year rate rose marginally to 2.5% from 2.4% in Q1. But the year-over-year data are not seasonally adjusted, understating the slowdown in the first half of the year, as shown in our first chart.
The Eurogroup finally agreed on a four-month financing extension for Greece late Friday evening, conditional on Syriza presenting a satisfactory list of reforms later today. At the press conference, Eurogroup President Dijsselboem emphasized that commitments always come before money.
Whether the economy enters recession will hinge more on corporate behaviour than on consumers. Household spending accounts for about two thirds of GDP, but it is a relatively stable component of demand. By contrast, business investment and inventories--which are often overlooked--are prone to wild swings.
This week brings home sales data for July, which we expect will be mixed. New home sales likely rose a bit, but we are pretty confident that existing home sales will be reported down, following four straight gains. We're still expecting a clear positive contribution to GDP growth from housing construction in the third quarter, but from the Fed's perspective the more immediate threat comes from the rate of increase of housing rents, rather than the pace of home sales.
The level of new home sales is likely to hit new cycle highs over the next few months, with a decent chance that today's July report will show sales at their highest level since late 2007.
Yesterday's detailed Mexican GDP report confirmed that growth was relatively resilient in Q2, despite the lagged effect of external and domestic headwinds.
The economic data in Brazil were poor while we were away.
Inflation in Brazil remained subdued at the start of the second quarter, strengthening the odds for an additional interest rate cut next month, and opening the door for further stimulus in June.
The Governor's comments late last week successfully recalibrated markets, which had concluded that a May rate hike was virtually certain, despite the MPC's deliberately vague guidance.
Yesterday's August PMI data in the euro area ran counter to the otherwise gloomy signals from the ZEW and Sentix investor sentiment indices.
Inflation pressures in Brazil and Mexico are well under control, with the August mid-month readings falling more than expected, strengthening the case for the BCB and Banxico to cut interest rates in the near term.
Yesterday's public finance figures showed that the public sector, excluding public sector banks, ran a surplus of £0.2B in July, a modest improvement on borrowing of £0.4B a year ago.
The performance of Italy's economy in the first half of 2017 proves that the strengthening euro area recovery is a tide lifting all the r egion's boats.
Punished by the global economic slowdown depressing commodity prices, the Mexican economy is now making a gradual comeback, thanks to the continuing strength of its main trading partner, increasing public expenditure on key infrastructure projects, and accommodative monetary policy.
A thought, ahead of Chair Yellen's Testimony tomorrow. Conventional wisdom has it that the terminal Fed funds rate in this cycle will b e much lower than in the past--the Fed thinks 3¾%, compared to 5.25% in 2007, and 6.5% in 2000--reflecting the long-lasting legacy of the crash, particularly in household balance sheets.
Further evidence that the general election has transformed business confidence emerged yesterday, in the form of January's CBI Industrial Trends survey.
The Conference Board's index of leading economic indicators appears to signal that the U.S. economy is plunging headlong into recession.
GDP growth in Korea surprised to the upside in the fourth quarter, with the economy expanding by 1.2% quarter-on-quarter, three times as fast as in Q3, and the biggest increase in nine quarters.
Barring a meteor strike, the ECB will leave its main refinancing and deposit rates unchanged today, at 0.00% and -0.5% respectively.
Brazil's central bank is finally decisively facing its demon, persistently high inflation. The eight-member policy board, known as Copom, decided unanimously on Wednesday to increase the Selic rate by 50bp to 12.25%, the highest level in more than three years, in line with the consensus.
Chile's central bank cut the country's main interest rate by 25bp to 3.25% last Thursday. The easing was expected, as the board adopted a dovish bias last month, after keeping a neutral stance for most of 2016. Last week's move, coupled with the tone of the communiqué, suggests that further easing is coming, as growth continues to disappoint and inflation pressures are easing.
The ECB sent a strong signal yesterday that it is ready to fight deflation with a full range of unconventional monetary policy tools. Asset purchases, including sovereigns, to the tune of €60B per month will begin in March, and will run until end-September 2016, but Mr. Draghi noted that purchases could continue if the ECB is not satisfied with the trajectory of inflation.
The ECB's decision to go all-in and buy sovereign debt has three key consequences for U.S. markets. First, Treasuries will no longer benefit from safe-haven flows, because shorting Eurozone government debt has just become a fantastically risky proposition.
Venezuela's beleaguered government announced on Tuesday that it had begun the pre-sale of 82.4M coins of a virtual currency, called the "petro", backed by the nation's vast petroleum reserves.
The PBoC managed to keep interest rates well- anchored around the Chinese New Year holiday, when volatility is often elevated.
Taken at face value, the GDP data continue to suggest that the Brexit vote has had no adverse consequences for the economy. The official estimate of quarter-on-quarter GDP growth in Q4 was revised up yesterday to 0.7%, from 0.6%. The revision had been flagged earlier this month by stronger industrial production and construction output figures.
The White House budget proposals, which Roll Call says will be released in limited form on March 14, will include forecasts of sustained real GDP growth in a 3-to-3.5% range, according to an array of recent press reports.
Advance PMI data yesterday supported our suspicion that Q1 economic survey data will paint a picture of slowing growth in the Eurozone economy. The composite PMI in the Eurozone fell to a 13-month low of 52.7 in February from 53.6 in January, driven by declines in both the French and German advance data.
Yesterday's German IFO survey broadly confirmed the bullish message from the PMIs earlier this week. The headline business climate index rose to 111.0 in February from a revised 109.9 in January, boosted by increases in both the current assessment and the expectations index.
The knee-jerk reaction of the stock market to the unexpectedly high hourly earnings growth number for January was predicated on two connected ideas.
Yesterday's national surveys in the EZ confirmed the downbeat message from the PMIs and consumer sentiment data earlier this week.
U.K. activity data have consistently surprised to the downside over the last month.
The data tell an increasingly convincing story that the Eurozone's external surplus rose further in the second half of last year.
Recent global developments lead us to intensify our focus on trade in LatAm.
We previewed the FOMC meeting in detail yesterday -- see here -- but to recap briefly, we expect a 25bp rate hike, with no significant changes in the statement, and a repeat of the median forecasts of three rate hikes this year.
February's consumer price figures give the MPC reason to doubt the case for raising interest rates again as soon as May.
Global current account imbalances are back on the agenda. In the U.S., economic policies threaten to blow out the twin deficit, while external surpluses in the euro area and Asia are rising.
The Brazilian BRL has remained relatively stable year-to-date, following a strong rebound in January. But downward pressures have re-emerged over the last two months, as shown in our first chart.
February's consumer price figures, released yesterday, put more pressure on the MPC to stick to its plans for an "ongoing" tightening of monetary policy, despite the uncertainty created by the Brexit chaos.
Mexico's central bank last week left its policy rate at 7.0%, the highest level since early 2009.
For countries with developed non-banking funding channels, narrow money isn't necessarily a good predictor of GDP growth.
The perfect world for equities is one in which earnings and valuations are rising at the same time, but in the Eurozone it seems as if investors have to make do with one or the other.
Premier Li Keqiang rounded out the National People's Congress with his press conference yesterday.
Speculators who have sold sterling over the last six months have been frustrated. Investors have been overwhelmingly net short sterling, but the pound has hovered between $1.20 and $1.25, as our first chart shows. Undeterred, investors increased their net short positions last week to 107K contracts-- the most since records began in 1992--from 81K a week earlier.
Producer prices in Germany rose 0.4% month-to-month in May, stronger than the consensus expectation of a 0.3% gain, and we think further upside surprises are likely in coming months. The headline was boosted by a 0.7% jump in energy prices, but food and manufacturing goods prices also rose.
The Brazilian Central Bank's policy board, COPOM, left the Selic rate at 6.50% on Wednesday, as widely expected.
The MPC's unanimous decision to keep Bank Rate at 0.75% and the minutes of its meeting left little impression on markets, which still see a higher chance of the MPC cutting Bank Rate within the next 12 months than raising it.
Fed Chair Yellen made it clear in last week's press conference that she is not convinced the increase in core inflation will persist: "I want to warn that there may be some transitory factors that are influencing [the rise in core inflation]... I see some of that is having to do with unusually high inflation readings in categories that tend to be quite volatile without very much significance for inflation over time.
Labour costs growth accelerated modestly last year in the Eurozone. Data on Friday showed that Q4 nominal labour costs in the Eurozone rose 1.3% year-over-year, slightly higher than the 1.1% increase in Q3. The modest acceleration was mainly due to a rise in "non-business" labour costs, which rose 1.6% year-over-year, up from a 0.9% increase in Q3.
One of the key characteristics of this euro area business cycle has been near-zero inflation due to structurally weak domestic demand and depressed prices for globally traded goods and commodities. This has supported real incomes, despite sluggish nominal wage growth.
February's consumer price figures, released tomorrow, are likely to show that CPI inflation has picked up again, perhaps to 0.5%--the highest rate since December 2014--from 0.3% in January. This will give the Monetary Policy Committee more confidence in its judgement that CPI inflation will be back at the 2% target in two years' time.
China reportedly has offered President Trump a $200B reduction in its annual trade surplus with the U.S., engineered by increasing imports of American products, among other steps.
Oil prices have risen by about $20 per barrel since last fall.
The French economy has suffered from weakness in manufacturing this year, alongside the other major EZ economies.
It's much too soon to have a very firm view on fourth quarter GDP growth, not least because almost half the quarter hasn't happened yet.
Japan's official adjusted surplus rose in October but we think the September figure was an understatement. On our adjustment, the surplus was little unchanged at ¥360B in October.
Expectations for a March rate hike have dipped since Fed Vice-Chair Clarida's CNBC interview last Friday.
The sharp downtrend in commodity prices in recent months is alarming from a LatAm perspective.
Last week, the Atlanta Fed updated its median hourly earnings series with new October data, showing wage growth accelerating to an eight-year high of 3.9%. That's a full percentage point higher than the increase in this measure of wages in the year to October 2015, and it follows a spring and summer during which wage growth appeared to be topping-out at just under 3½%.
October's retail sales figures, published last Thursday, extended the month-long run of near consistent downside data surprises.
PPI inflation in Korea slowed sharply in October, to a five-month low of 2.2%, from 2.7% in September.
Political uncertainty in the Eurozone is the story that won't die. Coalition talks in Germany collapsed yesterday when the centre-right FDP walked out of the negotiations.
Reforms to Stamp Duty Land Tax paid by first-time buyers likely will take centre stage in the Budget. At the Conservatives' party conference, Theresa May pledged another £10B to expand the Help to Buy Scheme, which helps first-time buyers obtain a mortgage which just a 5% deposit.
Chile's Q1 GDP report, released yesterday, confirmed that the economy weakened sharply at the beginning of the year, due mainly to temporary shocks, including adverse weather conditions.
April's consumer price figures, due on Wednesday, are set to show that CPI inflation has fallen, primarily due to the earlier timing of Easter this year than last. We
In our Monitor May 15 we described the initial government program in Italy, drafted by the leadership of the Five-Star Movement and the League parties, as a "macroeconomic fairytale."
On the face of it, Japanese GDP came thumping home in Q1, rising 0.5% quarter-on-quarter, after the 0.4% increase in Q4.
We have been asked recently why we rarely talk about the signal from the U.S. money supply numbers, in contrast to the emphasis we give to real M1 growth in our forecasts for economic growth in both the Eurozone and China.
Incoming data confirm our view that the Chilean economy to rebound steadily in the second half of the year, with real GDP increasing 1.5% quarter-on-quarter in Q3, after a relatively modest 0.9% increase in Q2 and a meagre 0.1% in Q1.
The day of reckoning in Greece has been continuously postponed in the past three months, but government officials told national TV yesterday that the country cannot meet its IMF payment of €300M June 5th, without a deal with the EU. The urgency was echoed by the joint statement earlier this week by German Chancellor Merkel and French President Hollande that Greece has until the end of this month to reach a deal.
Swoons in EZ investor sentiment are not always reliable leading indicators for the economic surveys, but it is fair to say that risks for today's advance PMIs are tilted to the downside, following the dreadful Sentix and ZEW headlines earlier this month.
We've had pushback from readers over our take on the likelihood of a trade deal with China in the near future.
Politics are once again encroaching on the economic story in the Eurozone. At the ECB, this week has so far been a tumultuous one.
December's labour market report, released today, won't be a game-changer for the near-term outlook for interest rates; January data will be released before the MPC meets in March, and February data will be available at its key meeting in May.
Today's housing market data likely will look soft, but will probably not be representative of the underlying story, which remains quite positive.
With a no-deal Brexit still a potential outcome and just over five weeks to go until the U.K. is scheduled to leave, it's about time we put some numbers on how high inflation could get in this worst-case scenario.
Today's data dump will deliver the advance PMIs and the French INSEE business sentiment indices for February, all of which will be examined closely for signs of stabilisation in the wake of recent evidence that EZ growth is slowing quicker than markets and the ECB have been expecting.
Just as we turned more positive on the labor market, following three straight months of payroll gains outstripping the message from an array of surveys, the Labor Department's JOLTS report shows that the number of job openings plunged in November.
Data released on Friday confirmed that Colombian activity lost momentum in Q4, following an impressive performance in late Q2 and Q3. Retail sales rose 4.4% in November, down from 7.4% in October and 8.3% in Q3.
Economists refer to two different types of forward rate guidance by central banks: Delphic and Odyssean. The former describes a "normal" situation, in which the central bank follows a transparent rate-setting rule allowing markets to forecast what it will do, based on the flow of economic data.
Argentina's latest hard data suggest that activity is softening, but we don't see the start of a renewed downtrend.
Fed Chair Yellen said something which sounded odd, at first, in her Q&A at the Senate Banking Committee last Tuesday. It is "not clear" she argued, that the rate of growth of wages has a "direct impact on inflation".
The minutes of this week's MPC meeting indicate that it won't waste any time to raise interest rates after MPs finally have signed off a Brexit deal.
Yesterday's report on October private spending in Mexico was downbeat, suggesting that consumption started the fourth quarter on a weak footing.
The national accounts, released on Friday, likely will restate that quarter-on-quarter GDP growth picked up to 0.4% in Q3, from 0.3% in Q2.
This is the final report before we dial down for our Christmas break, and we are happy to report that the economic calendar will be almost empty in our absence.
We think this week's main economic surveys in the Eurozone will take a step back following a steady rise since the end of Q3. Today's composite PMI in the Eurozone likely slipped to 54.0 in February, from 54.4 in January, mainly due to a dip in the manufacturing component. Even if we're right about slightly weaker survey data in February, though, it is unlikely to change the story of a stable and solid cyclical expansion in the EZ.
January's public finance data, released today, take on particular importance because they are the last to be published before the Chancellor delivers his first Budget on March 8. The public finances nearly always swing into surplus in January, primarily because the deadline for individuals to submit self-assessment--SA--tax returns for the previous fiscal year is at the end of the month. Firms also pay their third of four payments of corporation tax for their profits in the current fiscal year.
Brazil's current account data last week provided further evidence of stabilisation in the economy, despite the modest headline deterioration. The unadjusted current account deficit increased marginally to USD5.1B in January, from USD4.8B in January 2016, but the underlying trend remains stable, at about 1.3% of GDP. Our first two charts show that the overall deficit began to stabilize in mid-2016, as the rate of improvement in the trade balance slowed, reflecting the easing of the domestic recession.
As we write, markets see a 70% chance that the MPC will cut Bank Rate on January 30.
China's Loan Prime Rate was unchanged this month, at 4.15%, with consensus once again expecting a reduction to 4.10%.
A very light week for U.S. data concludes today with four economic reports, which likely will be mixed, relative to the consensus forecasts. The recent run of clear upside surprises and robust-looking headline numbers is likely over, for the most part.
The Eurozone's current account surplus plunged to €18.0B in May from €24.0B, the biggest monthly fall since July 2013, but an upward revision to the April data makes the headline look worse than it is. These numbers are volatile, even after seasonal adjustments, and revisions have been larger than normal this year, so we need to smooth the data to get the true story.
If the only things that mattered for the housing markets were the obvious factors--the strength of the labor market, and low mortgage rates--the sector would be booming. Activity is picking up, with new and existing home sales up by 23% and 9% year-over-year respectively in the three months to May, but the level of transactions volumes remains hugely depressed. At the peak, new home sales were sustained at an annualized rate of about 1½M, but May sales stood at only 546K. Adjusting for population growth, the long-run data suggests sales ought to be running at close to 1M.
Abenomics has had its successes in changing the structure of Japan. Notably, large numbers of women have gone back to work and corporations have started paying dividends. These are by no means small victories. But overall, the macroeconomy is essentially the same as when Shinzo Abe became prime minister.
As promised, Mr. Trump retaliated earlier this week against China's weekend retaliation, after his refusal to back down on the initial tariffs on $50B-worth of imports of Chinese goods, on top of the steel and aluminium tariffs first announced back in March.
Last week's ECB meeting--see here--made it clear that the central bank does not intend to jump the gun on rate hikes next year, even as QE is scheduled to end in Q4 2018.
It is looking increasingly likely that core inflation, which already has fallen to 2.1% in May, from a peak of 2.7% last year, will slip below 2% next year.
The startling jump in the Philly Fed index in May, when it rose 11.2 points to a 12-month high, seemed at first sight to be a response to fading tensions over global trade.
Chair Yellen remains as committed as ever to the idea that the tightening labor market will eventually push up inflation, but the unexpectedly weak core CPI readings for the past four months have complicated the picture in the near-term.
The risk of political change in Venezuela is coming to a boil, following President Maduro's plans for a new constituent assembly that has the power to rewrite the constitution and scrap the existing National Assembly.
Investor sentiment in the Eurozone showed further signs of recovery yesterday. The ZEW expectations index rose strongly to 48.4 in January from 34.9 in December, and the leap since the trough in October ranks among the strongest rebounds ever recorded in the index.
Colombia is one of the few larger economies in Latin America to have enjoyed solid, positive economic growth over the past two years. But lower commodity prices and last year's central bank tightening, to curb high inflation generated by strong growth, have started to become visible in the main economic data.
So far, the surge in retail spending promised by the plunge in gasoline prices has not materialized. The latest Redbook chain store sales numbers dipped below the gently rising trend last week, perhaps because of severe weather, but the point is that the holiday season burst of spending has not been maintained.
By any yardstick, progress in reducing public sector borrowing so far this fiscal year has been poor. While the borrowing trend should improve in the final four months of this year--including December's figures, published Friday--the Chancellor has only a slim chance of meeting the forecasts set out in the Autumn Statement.
Data released on Friday confirmed that Colombian activity remained strong in Q4.
Signs that the government is softening its Brexit plans, in response to its substantial defeat in the Commons last week, has enabled sterling to recover most of the ground lost against the dollar and euro in the fourth quarter of last year.
Forecasting BoJ policy for this year is trickier than it has been in a long time.
Chile's central bank left rates unchanged at 3.5% last Thursday, as expected, and maintained its neutral tone. Inflation pressures are easing, economic activity remains sluggish and global risks have increased.
The Eurozone's external surplus recovered a bit of ground mid-way through the third quarter.
Colombia's central bank, BanRep, increased the monetary policy rate by 25bp to 6.25% on Friday, as expected, and also announced budget cuts and a new FX strategy to try to protect the COP. These measures are similar to those taken by Banxico on Wednesday. The press release, and the tone of the conference after the decision, suggest that more hikes are coming.
The Chancellor can go on his Christmas vacation content that the public finances have weathered the economy's slowdown relatively well this year.
This is the final U.S. Economic Monitor of 2017, a year which has seen the economy strengthen, the labor market tighten substantially, and the Fed raise rates three times, with zero deleterious effect on growth.
Economic survey data this week will give the first clear evidence on whether recent market volatility has dented Eurozone confidence. The key business and consumer surveys dipped in January, and we now expect further declines, starting with today's PMI data. We think the composite index fell slightly to 53.0 in February from 53.6 in January.
Here's something we didn't expect to write: The CPI measure of goods prices, excluding food and energy, rose in the three months to January, compared to the previous three months. OK, the increase was marginal, a mere 0.3%, but conventional wisdom has assumed for some time that the strong dollar would push goods prices down indefinitely.
Our view that EZ survey data would take a step back in February was severely challenged by yesterday's PMI reports. The composite index in the Eurozone rose to 56.0 in February, from 54.4 in January, lifted by a jump in the services index and a small rise in the manufacturing index.
With the MXN up more than 7% since the low of 21.9 against the dollar in January, investors are pondering just how high the Mexican currency can go. We believe that the MXN will continue to hover around its recent range, 20.1-to-20.5, in the near term, but will come under pressure again as protectionist policies in the U.S. take real shape in the spring or summer.
Whatever today's report tells us about existing home sales in January, the underlying state of housing demand right now is unclear. The sales numbers lag mortgage applications by a few months, as our first chart shows, so they're usually the best place to start if you're pondering the near-term outlook for sales. But the applications data right now are suffering from two separate distortions, one pushing the numbers up and the other pushing them down. Both distortions should fade by the late spring, but in they meantime we'd hesitate to say we have a good idea what's really happening to demand.
Sentiment in the French business sector ended this year on a high. The headline manufacturing index fell slightly to 112 in December, from an upwardly-revised 113 in November, but the aggregate sentiment gauge edged higher to a new cycle high of 112.
The BoJ left policy unchanged yesterday, but we noted some significant additions and modifications in the statement and the press conference.
The political drama in Greece will continue to attract attention this week despite the advent of the holiday season. Prime Minister Samaras will try again tomorrow to secure a majority for his candidate for president, requiring a super majority of 200 votes. If it fails, the last attempt will be on December 29th, where the hurdle for the Prime Minister drops to 180 votes.
The sharp drop in commodity prices, especially oil prices, has dampened the growth prospects for most countries in Latin America. But the most damage, so far, is in the currencies, which have dropped sharply.
Fed Chair Yellen said in her press conference last week that she has "...been surprised that housing hasn't recovered more robustly than it has. In part I think it reflects very tight credit--continuing tight credit conditions for any borrower that doesn't have really pristine credit... my hope is that that situation will ease over time".
Long term benchmark yields in the Eurozone almost fell to zero towards the end of the first quarter as investors were carried away in their celebration of QE. The counter-reaction to this move, though, was violent with 10-year yields surging from 0.2% to 0.9% in the space of two months from April to June, and we think a similar tantrum could be waiting in the wings for investors. We are particularly wary that upside surprises in inflation data--mainly in Germany--could push yields up sharply in the next few months.
The national accounts for the third quarter, released on Wednesday, are likely to show that households are saving a very small proportion of their incomes. Low unemployment, subdued inflation and the healthier condition of households' balance sheets suggests that very low saving is more sustainable than in the past. Nonetheless, the low rate underlines that household spending can't grow at a faster rate than incomes for a sustained period again.
Mexican retail sales jumped 1.0% month-to-month in October, the biggest gain since February, following a poor performance in Q3.
Brazil's recent political and economics news has shifted the near-term outlook from bad to worse. President Rousseff on Friday replaced hawkish Finance Minister Joaquim Levy, appointed just over a year ago, with a close partner, Planning Minister Nelson Barbosa. Mr. Levy resigned after continued conflicts with the government, including frustration by the Congress of his attempts to rein in the fiscal mess. Mr. Barbosa is known to be less market friendly, and will likely defend countercyclical measures, delaying any rapid fiscal consolidation. The appointment will deteriorate investors' confidence even further, placing the markets under enormous strain.
We expect the official estimate of quarter-on-quarter GDP growth in Q4 to be revised up to 0.7% today, from last month's preliminary estimate of 0.6%. The consensus forecast is for no revision, so the data likely will boost interest rate expectations and sterling, if we're right.
We have learned over the years not to become too excited in the face of swings in the jobless claims numbers, even when the movement appears to persist for a month or two.
Investors will get what they want today from the ECB: additional easing in the form of government bond purchases. The central bank is likely to announce or pre-commit to sovereign QE and corporate bond purchases in a new program that will last at least two years.
Investor sentiment data still indicate that EZ PMIs are set for a significant rebound at start of the year.
November's labour market report provided timely reassurance, after last week's downside data surprises, that the economy did not grind to a halt at the end of last year.
The flattening of the curve in recent months has been substantial, but in our view it is telling us little, if anything, about the outlook for growth. More than anything else, investors in longer Treasuries care about inflation, and the likely path of headline inflation clearly has been lowered by the plunge in oil prices.
Brazil's decision to keep interest rates at 14.25% on Wednesday was a surprise. The consensus forecast immediately before the meeting was for a 25bp increase. As recently as Tuesday, though, most forecasters expected a 50bp increase, following hawkish comments from Board members since the last meeting in November, and rising inflation expectations. But the day before the meeting, the IMF revised its forecast for 2016 GDP to -3.5%, much worse than the 1% drop it predicted in October.
The intensity of the pressure on households' finances was highlighted last week by December's retail sales report, which showed that volumes fell by 1.5% month-to-month, the most since June 2016.
Yesterday's ECB meeting provided no immediate relief to nervous investors. The central bank kept its main interest rates unchanged, and maintained the pace of QE purchases at €60B per month. Mr. Draghi compensated for the lack of action, however, by hinting heavily at further easing at its next meeting. The president emphasized that the ECB's policies will be "reviewed and reconsidered" in light of the March update to the staff projections. Mr. Draghi also admitted that inflation has been "weaker than expected" since the last meeting, and that downside risks have increased further. The central bank does not pre-commit, but we think it is a good bet that the ECB will do more in March.
The consensus forecast of a mere 0.3% month-to-month decline in retail sales volumes in December, following the 1.7% surge in November, looks far too timid. We anticipate a much bigger decline, about 1%, bringing volumes back in line with their underlying trend. We can't rule out a bigger fall.
The weather-driven surge in December housing starts, reported last week, is unlikely to be replicated in today's existing home sales numbers for the same month.
The BoJ kept its main policy settings unchanged yesterday, in another 7-to-2 split.
Brazil's inflation rate remained well under control over the first half of February.
The stand-out news yesterday was the increase in the headline, three-month average, unemployment rate to 4.4% in December, from 4.3% in September.
Yesterday's data presented Eurozone investors with an unfamiliar sight; a big downside surprise in the survey data.
After a disappointing run of monthly data, the huge surplus on the main "PSNB ex ." measure of borrowing in January must have been greeted with relief at the Treasury.
Yesterday's Japanese activity data were grim.
High interest rates and inflation, coupled with increasing uncertainty, put Mexican consumption under strain last year.
Yesterday's February PMI data sent a clear message to markets.
The period of surprisingly low inflation following sterling's plunge when the UK left the Exchange Rate Mechanism in September 1992 appears to challenge our view that inflation will overshoot the MPC's 2% target over the next couple of years. As our first chart shows, CPI inflation averaged just 2.5% in 1993 and 2% in 1994, even though trade-weighted sterling plunged by 15% and import prices surged.
Brazil's economic performance has improved marginally in recent months, with inflation falling and economic activity and sentiment data stabilizing, or even increasing modestly. The latest regional economic activity report, for instance, showed that although overall output declined again on a sequential basis in March-to-May, three of the five regions expanded.
Retail sales increased by 1.0% month-to-month in August, exceeding our no-change forecast and spurring markets to price-in a 65% chance that the MPC will raise interest rates at its next meeting on November 2, up from 60% beforehand.
The Fed deferred, but did not cancel, the start of its rate normalization last week. As a consequence, December is now the most likely meeting for the first hike. The Fed's core view of the U.S. economy remains the same, but policymakers want a bit more time to see how global developments affect the U.S. Our Chief Economist, Ian Shepherdson, expects the strength of the employment data, better Chinese numbers and calm financial markets to prevent any further postponement beyond Q4.
ECB growth bears looking for the Fed to move in order to take the sting out of the euro's recent strength were disappointed last week. The FOMC refrained from a hike, referring to the risk that slowing growth in China and emerging markets could "restrain economic activity" and put "downward pressure on inflation in the near term." In doing so, the Fed had an eye on the same global risks as the ECB, highlighting increased fears of deflation risks in China, despite a rosier domestic outlook.
German producer price inflation rebounded last month. The headline PPI index rose 2.6% year-over-year in August, up from a 2.3% increase in July, driven almost exclusively by a jump in energy inflation.
Exports rebounded sharply in Q3 so far, after the Q2 weakness. This will be a useful boost to GDP growth in Q3, as domestic demand likely will soften.
China's once much-talked-about "Belt and Road Initiative" has gradually disappeared from the headlines over the past twelve months.
Brazil's domestic economic outlook has not changed much recently.
The FOMC's view of the economic outlook and the likely required policy response, set out in yesterday's statement and Chair Yellen's press conference, could not be clearer.
The economy is bifurcating. Manufacturing is weak, and likely will remain so for some time, though talk of recession in the sector is overdone. Even more overdone is the idea that the softness of the industrial sector will somehow drag down the rest of the economy, which is more than seven times bigger.
Brazil's monetary policy committee, the Copom, cut the Selic rate by 25bp to 14.0% in a unanimous decision, without bias, on Wednesday. This marks the start of the first easing cycle since 2012, and it arrives after 15 months with rates held at 14.25%.
Colombia's industrial and retail sectors surprised to the upside in August, suggesting that the domestic economy has been resilient during most of the third quarter, despite the hit from an array of external headwinds. Industrial production increased by a solid 2.6% year-over-year in August, up from an upwardly revised 0.6% expansion in July, and above its recent trend. In the first half of the year, industrial activity fell on average by 1.1%, the worst performance since 2013, due mainly to the oil hit and ex tended works at Reficar, the country's second biggest oil refinery. But Colombia's manufacturers appear to have shrugged off part of the oil pain in recent months.
One of the possible explanations for the slowdown in payroll in growth in recent months is that the pool of labor has shrunk to the point where employers can't find the people they want to hire. That's certainly one interpretation of our first chart, which shows that the NFIB survey's measure of jobs-hard-to-fill has risen to near-record levels even as payroll growth has slowed.
The government now has a 50:50 chance of getting the Withdrawal Agreement Bill--WAB--through parliament in the coming weeks, despite Letwin's successful amendment and the extension request.
The Eurozone's external surplus remains solid, despite hitting a wall in August. The seasonally adjusted current account surplus fell to €17.7B in August from €25.6B in July, due to a €7B fall in the goods component. A 5.2% month-to-month collapse in German exports -- the biggest fall since 2009 -- was the key driver, but we expect a rebound next month. The 12-month trend in the Eurozone's external surplus continues to edge higher, rising to 3% of GDP up from 2.1% in August last year.
The conventional wisdom that the U.K. economy will comfortably weather the coming fiscal squeeze is misplaced. The planned adjustment is large, designed to minimise its political, not economic, impact, and based on overly optimistic assumptions. What's more, the economy is in many respects less well-placed to cope with the tightening than when the previous government applied the fiscal brakes. And when the recovery slows, the Chancellor is less likely to change tack and ease the squeeze this time.
It has become pretty clear over the past couple of weeks that Hillary Clinton will be the next president, so it's now worth thinking about how fiscal policy will evolve over the next couple of years.
The ECB held fire yesterday. The central bank kept its main refinancing rate unchanged at 0.0%, and also maintained the deposit and marginal lending facility rates at -0.4% and 0.25% respectively.
The New York Fed tweeted yesterday that "Housing market fundamentals appear strong.
August's retail sales figures create a misleading impression that consumers can be relied upon to pull the economy through the next six months of heightened Brexit uncertainty unscathed.
Last week's attacks in Barcelona--one of Spain's most popular tourist spots--struck at the heart of one of the economy's main growth engines.
Consumption and investment spending by state and local government accounts for just over 10% of the U.S. economy, making it more important than exports or consumers' spending on durable goods, and roughly equal to all business investment in equipment and intellectual property.
LatAm's economies are gradually rebounding, boosted by easier monetary policy in most countries, falling inflation, and a relatively calm external backdrop.
The latest public finance figures continue to imply that the Chancellor will be able to change course later this year in the Autumn Budget so that fiscal policy doesn't drag on GDP growth next year.
To imagine an unstoppable macroeconomic policy disaster and desperate improvisation, just think of Venezuela.
The rate of increase of the financial services and insurance component of the PCE deflator has slowed from a recent peak of 5.8% in May 2014 to 3.3% in June this year. This matters, because it accounts for 8.4% of the core deflator, a much bigger weight than in the core CPI.
While we were out, the key economic news in the Eurozone was mostly positive. The main upside surprise came from the advance Q2 German GDP report, which showed that real GDP rose 0.4% quarter-on-quarter, slowing from the 0.7% jump in the first quarter.
Economic growth in France has been the key downside surprise in the Eurozone this year.
Sterling's renewed depreciation to just €1.10--just below last year's nadir--has fuelled speculation that it could reach parity against the euro within the next year.
Yesterday's partial trade data for Korea showed that the downturn in exports softened to -13.3% year-over-year in August from -13.8% in July, based on the 20-day gauge.
A classic indicator of impending recession is the emergence of excessive levels of inventory across the economy. The pace of businesses inventory accumulation typically lags sales growth, so when activity slows, usually in response to higher interest rates, firms are left with unsold goods.
Brazil's recession stretched into the start of the third quarter, but its intensity has eased. The IBC-Br economic activity index--a monthly proxy for GDP--fell 0.1% month-to-month seasonally adjusted in July, following a 0.4% gain in June. The unadjusted year-over-year rate fell to -5.2%, from an upwardly revised -2.9%.
Consumer sentiment in the euro area has slipped this year, though the headline indices remain robust overall.
Advance April consumer survey data will likely confirm that households remain the standout driver of the cyclical recovery in the euro area. We think the headline EC consumer sentiment index rose to -1.0 in April from -3.7 in March.
Brazil's mid-April inflation report delivered more evidence that inflation is decelerating; it fell to 9.3% from 10.0% in March, reaching the slowest pace since July 2015. The unadjusted month-to-month increase surprised marginally to the upside, but the key story is of a declining year-over-year trend. Core inflation, which is a lagging indicator of the business cycle, slowed again, in line with the decline in services and market prices inflation.
The trend in public borrowing has improved significantly over recent months, but it is far too soon to conclude that the Chancellor is on track to meet his goal of running a budget surplus by the end of this decade. The recent economic slowdown has not impacted the public borrowing numbers, yet.
Looking back at the numbers over the past few weeks, it is pretty clear that the gap between the strong payroll reports and the activity data widened to a chasm in the first quarter. We now expect GDP growth of about zero--the latest Atlanta Fed estimate is +0.3% and the New York Fed's new model points to 0.8%--but payrolls rose at an annualized 1.9% rate.
The COPOM meeting was the centre of attention in Brazil this week. The committee cut the main rate by 25 basis points to a new historical low of 6.50%, in line with market expectations.
Yesterday's barrage of economic data in the Eurozone added to the evidence that economic momentum is slowing.
The Monetary Policy Board of the Bank of Korea yesterday left its benchmark base rate unchanged, at 1.75%, at its first meeting of the year.
MPs look set to take a decisive step next Tuesday towards removing the risk of a calamitous no-deal Brexit at the end of March.
Neither of the major economic reports due today will be published on schedule.
The ECB made no major policy changes yesterday.
After strong real GDP growth in Q1, China commentators called the peak, claiming that growth would slow for the rest of 2017.
New home sales surprised to the upside in May, rising 6.7% to 689K, a six-month high.
The PBoC and Ministry of Finance have been locked in a relatively public debate recently over which body should shoulder the burden of stimulating the economy as growth slows and trade tensions take their toll.
Yesterday's PMIs kicked off a busy week for Eurozone data on a downbeat note. The composite EZ PMI fell to a five-month low of 55.8 in July, from 56.3 in June; it was constrained by a 0.6 point dip in the manufacturing index to 56.8.
Data released this week in Brazil, coupled with the message from President Bolsonaro at the World Economic Forum, vowing to meet the country's fiscal targets and reduce distortions, support our benign inflation view and monetary policy forecasts for this year.
Yesterday's labour market data brought further signs that wage growth is recovering from its early 2017 dip.
Brazil's external accounts were the bright spot last year, once again, but the ne ws will soon take a turn for the worse. The current account deficit fell to just USD24B last year, or 1.3% of GDP, from USD59B in 2015. The improvement was driven by the trade surplus, which rose to USD48B, the highest since 1992, when the comparable data series begins. A 20% plunge in imports, coupled with a mere 3% dip in exports, explain the rising trade surplus.
We've seen some alarming estimates of the potential impact on inflation of the House Republicans' plans for corporate tax reform, with some forecasts suggesting the CPI would be pushed up as much as 5%. We think the impact will be much smaller, more like 1-to-11⁄2% at most, and it could be much less, depending on what happens to the dollar. But the timing would be terrible, given the Fed's fears over the inflation risk posed by the tightness of the labor market.
Data this week look set to emphasise that heat is returning to the housing market, again. The Financial Policy Committee--FPC--still has additional tools it could deploy to cool housing demand. But the root cause of surging house prices remains very cheap debt. Alongside the inflation risk posed by the labour market, the case for the MPC to begin to raise interest rates to prevent a widespread debt problem is becoming compelling.
The Eurozone economy is in fine shape, according to the latest PMI data. The composite EZ PMI fell trivially to 54.3 in January, but remains strong. A marginal dip in the services index offset a small increase in the manufacturing PMI to a cyclical high of 55.1. These data tell a story of a strong private sector that continues to support GDP growth.
December's public finance figures suggest that borrowing is on track to come in a bit below the forecasts set out in the Autumn Statement in November. But we caution against expecting the Chancellor to unveil a material reduction in the scale of the fiscal consolidation set to hit the economy in his Budget on 8th March.
Chinese New Year effects were very visible in Japan's December trade data. Export growth slowed sharply to 9.3% year-over-year in December, from 16.2% in November.
Today's advance inventory and international trade data for December could change our Q4 GDP forecast significantly.
The ECB won't make any changes to its policy settings today.
Yesterday's first batch of Q3 survey data in the Eurozone suggest that economic growth eased further, albeit it slightly, at the start of the quarter.
The CBI's Industrial Trends Survey, for July and Q3, supplied encouraging evidence yesterday that the manufacturing upswing still has momentum.
The chaos in Greece was identified as the main culprit for yesterday's soft IFO report. The headline business climate index fell to 107.4 in July, down from 108.1 in May, driven by declines in respondents' views on the current economy and their expectations for the future. We expected a dip in the he adline IFO, but we were surprised by the fall in the manufacturing sub-index, given the firmer PMI earlier this week.
The IFO continues to tell a story of a German economy on the ropes.
Financial markets' inflation expectations have risen sharply since the spring. Our first chart shows that the two-year forward rate derived from RPI inflation swaps has picked up to 3.8%, from 3.5% at the end of April.
The high and rising proportion of small businesses reporting difficulty in filling job openings is perhaps the biggest reason to worry that the pace of wage increases could accelerate quickly. If they pick up too far, the Fed's intention to raise rates at a "gradual" pace will be upended. The NFIB survey of small businesses--mostly very small--shows employers are having as much trouble recruiting staff as at the peak of the boom in 2006.
We have argued over the past couple of years that if you want to know what's likely to happen to U.S. manufacturing over the next few months, you should look at China's PMI, rather than the domestic ISM survey, which is beset by huge seasonal adjustment problems.
Argentina's Q4 GDP report, released last week, underscored the severity of the recession, due to the currency crisis and the subsequent tighter fiscal and monetary policies.
Evidence is mounting that the cyclical recovery in the Eurozone accelerated further in the first quarter. The Composite PMI in the euro area rose to 54.1 in March, up from 53.3 in February, taking the quarterly average to 53.3, its highest level since the second quarter of 2011. Combined with latest available retail sales and industrial production data, this is consistent with real GDP growth in the euro area accelerating to about 0.4-to-0.5% quarter-on quarter in the first quarter, from 0.3% in Q4.
The Colombian economy--the star of the previous economic cycle in LatAm--is now slowing significantly, due mostly to strong external headwinds. Exports plunged by 40% year-over-year in January, down from -29% in December, with all of the main categories contracting in the worst performance since 1980.
Data released yesterday in Mexico strengthened the case for interest rate cuts this year.
Last week's debt-relief agreement between Greece and its European creditors goes somewhat further than previous instances when the EU has kicked the can down the road.
The June durable goods, trade and inventory reports today, could make a material difference to forecasts for the first estimate of second quarter GDP growth, due tomorrow.
Broadly speaking, yesterday's headline EZ survey data recounted the same story they've told all year; namely that manufacturing is suffering amid resilience in services.
The recent pick-up in mortgage approvals is another sign that households are unperturbed by the risk of a no-deal Brexit.
Mexican policymakers voted unanimously last Thursday to hike the main rate by 25bp to 7.75%, the highest since early 2009.
Japan's headline inflation will be volatile for the rest of the year, thanks to movements in the noncore elements.
The latest data from container ports around the country are consistent with our view that imports are still correcting after the surge late last year, triggered by the hurricanes.
The MPC's meeting last week was notable not just for its glass half-full interpretation of the latest data, but also for its updated guidance on when it likely will begin to shrink its bloated balance sheet.
Advance PMI data indicate a slow start to the first quarter for the Eurozone economy. The composite index fell to 53.5 in January from 54.3 in December, due to weakness in both services and manufacturing. The correlation between month-to-month changes in the PMI and MSCI EU ex-UK is a decent 0.4, and we can't rule out the ide a that the horrible equity market performance has dented sentiment. The sudden swoon in markets, however, has also led to fears of an imminent recession. But it would be a major overreaction to extrapolate three weeks' worth of price action in equities to the real economy.
The bad news on economic activity keeps coming for Brazil. The formal payroll employment report-- CAGED--for December was very weak, with 120K net jobs eliminated, compared to a 40K net destruction in December 2014, according to our seasonal adjustment. The severe downturn has translated into huge job losses. The economy eliminated 1.5 million jobs last year, compared to 152K gains in 2014. Last year's job destruction was the worst since the data series started in 1992. The payroll losses have been broad-based, but manufacturing has been hit very hard, with 606K jobs eliminated, followed by civil construction and services. Since the end of 2014, the crisis has hit one sector after another.
In Brazil, last week's formal payroll employment report for March was decent, with employment increasing by 56K, well above the consensus expectation for a 48K gain.
Economic activity in Mexico during the past few months has been stronger than most observers expected. Growth has certainly moderated from the relatively strong pace recorded during the second half of last year, but data for January and February show that it is still quite strong.
The preliminary estimate of first quarter GDP likely will confirm that the economic recovery lost considerable pace in early 2016. Bedlam in financial markets in January and business fears over the E.U. referendum are partly responsible for the slowdown. The deceleration, however, also reflects tighter fiscal policy, uncompetitive exports, and the economy running into supply-side constraints.
Today brings new housing market data, in the form of the weekly applications numbers from the MBA. The weekly data are seasonally adjusted but are still very volatile, especially in the spring.
The April IFO business sentiment survey increased the degree of uncertainty over the German economy, following stabilisation in the PMIs earlier this week.
The run of better-than-expected public borrowing figures ended abruptly with the publication of March data yesterday.
Public borrowing has continued to fall more rapidly than anticipated in the latest official plans.
Korean real GDP growth--to be published on Thursday--should bounce back in Q1 to 1.0% quarter-on-quarter, after the 0.2% drop in Q4.
Last week's advance PMI data suggest that economic activity in the Eurozone was stable at the beginning of Q2. The composite EZ PMI fell trivially to 53.0 in April, from 53.1 in March, because a dip in manufacturing offset a small rise in the services index.
We are revising our forecast for Fed action this year, taking out two of the four hikes we had previously expected. We now look for the Fed to hike by 25bp in September and December, so the funds rate ends the year at 0.875%. The Fed's current forecast is also 0.875%, but the fed funds future shows 0.6%.
Japan's CPI inflation jumped to 1.3% in August, from 0.9% in July.
EU negotiations tend to go down to the wire; and last week's summit in Salzburg, and Theresa May's statement on Friday, suggest that the Brexit negotiations will do just that.
PMI data yesterday provided some relief to anxious investors, despite a modest drop in the headline. The composite PMI in the Eurozone fell to 53.9 in September from 54.3 in August, driven by slight falls in both manufacturing and services. Assuming no major changes to the advance September reading--usually a fair bet--the PMI rose marginally in Q3, pointing to a continuation of the cyclical recovery.
Broad-based inflation pressures in Brazil remain tame despite the sharp BRL depreciation this year, totalling about 7% in the last three months alone.
The big difference between economic cycles in developed and emerging markets is that recessions in the former tend to be driven by the unwinding of imbalances only in the private sector, usually in the wake of a tightening of monetary policy.
Financial market performance and economic survey data on the Brazilian economy have been better than many investors and commentators feared this year. The composite PMI has improved gradually since November last year, consumer sentiment has stabilized, and national business surveys have been less bleak.
Theresa May doubled down on her Brexit stance last week, despite European Council President Donald Tusk stating clearly that her proposed framework for economic cooperation "will not work" because it risks undermining the single market.
Mexico's inflation has been LatAm's odd one out over the last few years. In the decade through 2014, Mexico's inflation rate was broadly in sync with those of its regional fellows, as shown in our first chart.
Yesterday's barrage of French business surveys contains hundreds of indicators, but its central story is comfortably simple.
Today's headline durable goods orders number for January is likely to blast through the consensus forecast, +2.7%. We expect a 6.5% jump, comfortably reversing December's 5.0% drop.
A downbeat French INSEE consumer sentiment report yesterday continued the run of poor survey data this week. The headline index fell to 95 in February from 97 in January, indicating downside risk f or Q1 consumers' spending. But we remain optimistic that private consumption will rebound solidly, following a 0.4% quarter-on-quarter fall in Q4.
Chair Yellen's Testimony sought clearly to tell markets that the Fed has upgraded its view on growth, and the state of the labor market. After reading the first few paragraphs, which focussed clearly on the good news, though peppered with the usual caveats, the door was open for the section on policy to signal unambiguously that the Fed is close to its first tightening.
China's 2018 property market boomlet let out more air last month.
The minutes of the Banxico's monetary policy meeting on February 7, when the board unanimously voted to keep the reference rate on hold at 8.25%, were consistent with the post-meeting statement.
On the face of it, the potential for a tangible boost to GDP growth from a revival in business investment after a no-deal Brexit has been averted appears modest.
Friday's economic data in Germany left markets with a confused picture of the Eurozone's largest economy.
Last week's data added yet more weight to our view that manufacturing is in deep trouble, and that the bottom has not yet been reached.
The bad economic news in Brazil is unstoppable. The mid-month CPI index rose 1.3% month-to-month in February, as education, housing, and transport prices increased. School tuition fees jumped 6% month-to-month in February, reflecting their annual adjustment, and transport costs rose by 2% due to an increase in regulated gasoline prices.
Real GDP in Germany grew 0.7% quarter-on-quarter in Q4, thanks mainly to a 0.4% contribution from private consumption, and a 0.2% boost from net trade. Household consumption grew 2.2% annualised in 2014, the best year for German consumers since 2006.
Weakness in risk assets turned into panic yesterday with the Eurostoxx falling over 6%, taking the accumulated decline to 19% since the beginning of August, and volatility hitting a three-year high. Market crashes of this kind are usually followed by a period of violent ups and downs, and we expect volatile trading in coming weeks. Following an extended bull market in risk assets, the key question investors will be asking is whether the economic cycle is turning.
Fed Chair Yellen speaks at Jackson Hole today, at 10:00 Eastern. Her topic is billed as "financial stability", but that does not necessarily preclude remarks on the outlook for the economy and policy.
The second estimate of GDP left the estimate of quarter-on-quarter growth unrevised at 0.3%, a trivial improvement on Q1's 0.2% gain.
If you want to know what's going to happen to the real economy over, say, the next year, don't look to the stock market for reliable clues. The relationship between swings in stock prices over single quarters and GDP growth over the following year is nonexistent, as our next chart shows.
Yesterday's final Q2 GDP report in Germany confirmed the initial data showing that the economy slowed less than we expected last quarter. Real GDP rose 0.4% quarter-on-quarter in Q2, after a 0.7% jump in Q1. The working-day adjusted year-over-year rate fell marginally to 1.8%, from 1.9% in Q1.
July's mortgage approvals data from the BBA brought clear evidence that households have held off making major financial commitments as a result of the Brexit vote. Following a 5% month-to-month fall in June, approvals fell a further 5.3% in July, leaving them at their lowest level since January 2015 and down 19% year-over-year.
The alarming-looking decline in core capital goods orders since late 2014 has been substantially due, in our view, to the rollover in investment in the mining sector. But the 29% jump in the number of oil rigs in operation, since the mid-May low, makes it clear that the collapse is over.
On a headline level, the key message from the Eurozone PMIs was little changed on Friday.
Japan's CPI inflation was unchanged, at 0.2% in February.
Rising inflation is pressuring some LatAm central banks to take a cautious stance at a time when growth is subpar, particularly in the two biggest economies of the region.
In yesterday's Monitor, we suggested that China's monetary policy stance is now easing.
The key data today, covering March durable goods orders and international trade in goods, should both beat consensus forecasts.
We're expecting to learn today that the economy expanded at a 2.6% annualized rate in the first quarter, rather better than we expected at the turn of the year--our initial assumption was 1-to-2%--and above the consensus, 2.3%.
The economy's resilience in the first quarter of this year, in the midst of heightened Brexit uncertainty, can be attributed partly to a boost from no-deal Brexit precautionary stockpiling.
The decline in China's unofficial PMI, which has dropped to a six-year low, signals increasing troubles ahead for U.S. manufacturers selling into China, and U.S. businesses operating in China. This does not mean, though, that the U.S. ISM will immediately fall as low as the Caixin/Markit China index appears to suggest in the next couple of months. Our first chart shows that in recent years the U.S. manufacturing ISM has tended hugely to outperform China's PMI from late spring to late fall, thanks to flawed seasonals.
The IFO did its part to alleviate the stock market gloom yesterday, with the business climate index rising slightly to 108.3 in August from 108.0 in July. The August reading doesn't reflect the panic in equities, though, and we need to wait until next month to gauge the real hit to business sentiment. The increase in the headline index was driven by businesses assessment of current output, with the key expectations index falling trivially to 102.2 from a revised 102.3 in July. This survey currently points to a stable trend in real GDP growth of about 0.4% quarter-on-quarter, consistent with our expectation of full year growth of about 1.5%.
LatAm currencies and stock markets have suffered badly in recent weeks, but Monday turned into a massacre with the MSCI stock index for the region falling close to 4%. Markets rebounded marginally yesterday, but remain substantially lower than their April-May peaks. Each economy has its own story, so the market hit has been uneven, but all have been battered as China's stock market has crashed. The downward spiral in commodity prices--oil hit almost a seven-year low on Monday--is making the economic and financial outlook even worse for LatAm.
The contribution of energy prices to CPI inflation is set to increase over the coming months, following the pick-up in Brent oil prices to $74 per barrel, from $65 at the beginning of March.
The ECB will leave its main refinancing and deposit rates at 0.00% and -0.4% unchanged today, and it will also maintain the pace of QE at €30B per month.
August's public finances figures, released last week, were an unwelcome but manageable setback for the Chancellor.
Inflation in Mexico surprised to the downside in late Q3, supporting our core view that it will continue to fall gradually over the coming months.
Amid all the trade tensions, it's easy to lose sight of the big picture for China.
In recent months we have argued that housing market activity has peaked for this cycle, with rising mortgage rates depressing the flow of mortgage applications.
French manufacturing confidence soared at the start of Q2. The headline INSEE index jumped to a six-year high of 108 in April, from an upwardly revised 105 in March. The headline was flattered by a big increase in the "past activity" index, but the survey's leading indicators also improved.French manufacturing confidence soared at the start of Q2. The headline INSEE index jumped to a six-year high of 108 in April, from an upwardly revised 105 in March. The headline was flattered by a big increase in the "past activity" index, but the survey's leading indicators also improved.
March's public sector borrowing figures brought more signs that the economy has lost considerable momentum this year. Borrowing, on the PSNB excluding public sector banks measure, came in at £5.1B in March, up slightly from £4.3B in March 2016.
Colombia's economy activity is deteriorating rapidly, suggesting that BanRep will have to cut interest rates on Friday. Incoming data make it clear that the economy has moved into a period of deceleration, painting a starkly different picture than a year ago.
According to Brazil's mid-August inflation reading, which is a preview of the IPCA index, overall inflation pressures are easing. But some price stickiness remains, due to inertia and temporary shocks, despite the severity of the recession and the rapid deterioration of the labour market in recent months.
Today's second estimate of Q2 GDP likely will restate the preliminary estimate that quarter-onquarter growth picked up to 0.6%, from 0.4% in Q1. Over the last two decades, the second estimate of GDP has differed from the preliminary estimate just 38% of the time.
After many years in which the phrase "twin deficits" was never mentioned, suddenly it is the explanation of choice for the weakening of the dollar and the sudden increase in real Treasury yields since the turn of the year, shortly after the tax cut bill passed Congress.
Japan's CPI inflation has risen sharply in recent months, driven by non-core elements. The headline faces cross-currents in coming months, but should remain high, posing problems for BoJ policy.
November's interest rate rise, which took investors by surprise, was triggered in part by the MPC slashing its estimate of trend growth to 1.5%, from an implicit 2.0%.
The Prime Minister's announcement on Sunday that the meaningful vote in parliament on her Brexit deal will be delayed from this week, until March 12, came as no surprise after a series of prior postponements.
A trade deal with China is in sight. President Trump tweeted Sunday that the planned increase in tariffs on $200B of Chinese imports to 25% from 10%, due March 1, has been deferred--no date was specified-- in light of the "substantial progress" in the talks.
This week is, potentially, hugely important in determining the Fed's near-term view of the real state of the labor market and its approach to monetary policy over the next few months. The key event is the release of the fourth quarter employment cost index, which could make a material difference to perceptions of the degree of wage pressure.
For a central bank already fighting for every decimal in its attempt to convince markets that underlying inflation is slowly edging higher, the recent shift in HICP methodology drives home an increasingly problematic issue.
Data released yesterday confirmed that the Mexican economy ended Q4 poorly; policymakers will take note.
Mexico's inflation is finally falling, giving policymakers room for manoeuvre.
Friday's final CPI report in the Eurozone confirmed that inflation dipped marginally in January, by 0.1 percentage points, to 1.3%.
Two key reports today, on January consumer prices and durable goods orders, have the power to move markets substantially. We think both will undershoot market expectations, though we would be deeply reluctant to read too much into either report; both are distorted by temporary factors.
Chair Yellen's speech at Jackson Hole at 10am Eastern time today has the potential to move markets substantially, but that's not our core expectation. It's more likely, we think, that Dr. Yellen will stick to the core FOMC view, which remains that "only gradual increases" in rates will be required, and that rates are "likely to remain, for some time, below levels that are expected to prevail in the longer run".
Yesterday's IFO survey in Germany was a nasty downside surprise for markets. The business climate index slipped to 106.2 in August, from 108.3 in July, well below the consensus forecast for a modest rise. In addition, the expectations index slid ominously to 100.1, from a revised 102.1 in July.
Hard economic data for the first quarter will appear over the next few weeks, but the EC sentiment survey later today gives a useful overview of how the euro area economy started the year.
Brazil's external accounts continue to be the country's bright spot, having improved considerably in recent quarters. The unadjusted current account deficit for January, USD4.8B, was lower than expected and much smaller than the USD12.2B shortfall a year earlier.
Yesterday's money supply data gave some respite after last month's disappointing slowdown. Broad money growth--M3--rose to 5.0% year-over-year, from 4.7% in December, but the details were less encouraging. The rebound was solely due slower declines in medium-term deposits, short-term debt issuance, and repurchase agreements.
All eyes will be on the core PCE deflator data today, in the wake of the upside surprise in the January core CPI, reported last week. The numbers do not move perfectly together each month, but a 0.2% increase in the core deflator is a solid bet, with an outside chance of an outsized 0.3% jump.
The IFO survey signals that markets shouldn't be too downbeat on the German economy, even as it faces uncertainty from global trade tensions.
S&P downgraded Chinese government debt last week to A+ from AA- yesterday, following a Moody's downgrade last May.
Japan's CPI inflation was stable at 0.2% in October, despite the sales tax hike, thanks to a combination of offsetting measures from the government and a deepening of energy deflation.
Inflation in the biggest economies in the region remains close to cyclical lows, allowing central banks to ease even further over the next few months.
The weaker is the economy over the next few months, the more likely it is that Mr. Trump blinks and removes some--perhaps even all--the tariffs on Chinese imports.
The PMIs in the Eurozone are still warning that the economy is in much worse shape than implied by remarkably stable GDP growth so far this year.
Improving fundamentals have supported private spending in Mexico during the last few quarters. This week's soft retail sales report does not change the picture of a strong underlying trend in consumption. Sales were weaker than expected, falling 1.1% month-to-month in September, but this followed a 1.5% jump in August, and average gains of 1.1% in the previous three months. Mexican retail sales are much more volatile than in most developed economies, and we have been expecting mean reversion following rapid gains during the first half of the year and most of Q3.
The hefty upward revision to Q3 inventories means we have to lower our working assumption for fourth quarter GDP growth, because the year-end inventory rebound we previously expected is now much less likely to happen. Remember, the GDP contribution from inventories is equal to the change in the pace of inventory accumulation between quarters, and we're struggling to see a faster rate of accumulation in Q4 after the hefty revised $90B third quarter gain. Inventory holdings are in line with the trend in place since the recession of 2001; firms don't need to build inventory now at a faster pace.
The Chancellor is likely to announce plans for additional public sector asset sales in today's Autumn Statement, to help arrest the unanticipated rise in the debt-to-GDP ratio this year. But privatisations rarely improve the underlying health of the public finances, partly because assets seldom are sold for their full value. And the Chancellor is running out of viable assets to privatise; the low-hanging, juiciest fruits have already been plucked.
Survey data in Germany continue to tell an upbeat story on the economy. The IFO business climate index rose to 109.0 in November from 108.2 in October, lifted by gains in both the expectations and current assessment indexes. The IFO tends to be slightly over-optimistic on GDP growth, but our first chart shows that the survey points to upside risks in the fourth quarter.
April's public finances show that borrowing still is falling more slowly than the Chancellor had envisaged. This casts further doubt over whether he will be able to keep his pledge to run a budget surplus before the end of this parliament in 2020.
A widening core trade deficit is the inevitable consequence of a strengthening currency and faster growth than most of your trading partners. Falling oil prices have limited the headline damage by driving down net oil imports, but the downward trend in core exports since late 2014 has been steep and sustained, as our first chart shows. The deterioration meant that trade subtracted an average of 0.3 percentage points from GDP growth in the past three quarters.
We see significant upside risk to today's headline durable goods orders numbers for April.
We expect the second estimate of Q1 GDP, released today, to restate that quarter-on-quarter growth slowed to just 0.3%, from 0.7% in Q4. The second estimate of growth rarely is different to the first.
Markets cheered soaring business surveys in the Eurozone earlier this week, and recent consumer sentiment data also have been cause for celebration. The advance GfK consumer confidence index in Germany rose to a record high of 10.4 in June, from 10.2 in May.
In a relatively light week in terms of economic indicators in Brazil, the inflation numbers and the potential effect of the recent BRL sell-off garnered all the attention.
The headline in yesterday's detailed Q1 German GDP data was old news, confirming that growth in the euro area's largest economy slowed at the start of the year.
Improving consumer fundamentals continue to underpin growth in private spending in Mexico, according to retail sales and inflation reports published this week. March retail sales were much stronger than expected, jumping 3.0% month-to-month, after averaging gains of 0.8% in the preceding three months. And sales for the three months through February were revised up marginally.
Detailed GDP data yesterday showed that the domestic German economy fired on all cylinders in the first quarter. Real GDP rose 0.7% quarter-on-quarter in Q1, up from 0.3% in Q4, lifted by strong investment and spending. Domestic demand rose 0.8%, only slightly slower than the 0.9% ris e in the fourth quarter. Net exports fell 0.3%, a bit better than in Q4, when gross exports fell outright.
This week's November mid-month inflation reports in Brazil and Mexico underscored their divergent trends. Inflation pressures are steadily falling in Brazil, but in Mexico, the pass-through from the MXN's sell- off is driving up inflation and inflation expectations.
The Chancellor hinted in the Autumn Statement that the fiscal consolidation might not be as severe as it appears on paper because he has built in some "fiscal headroom". By that, Mr. Hammond means that he could borrow more and still adhere to his new, self-imposed rules.
The latest public finance figures make it virtually inevitable that the Chancellor will scrap the existing fiscal rules when he delivers his first Budget.
Yesterday's business confidence data in the EZ core were mixed.
Japan's September PMI report showed some slippage, but overall, it suggests that GDP growth in Q3 was a little stronger than the 0.3% quarter- on-quarter rate in Q2.
The two main national surveys--IFO and INSEE-- both beat consensus forecasts yesterday, supporting our story of that economic sentiment is holding up relatively well in the face increasing investor anxiety. In Germany, the main IFO business climate index rose marginally to 108.5 from a revised 108.4 in August, boosted by an increase in the expectations index to a six-month high of 103.3, up from 102.0 in August. The IFO expectations index points to real GDP growth rising 0.5%-to-0.6% quarter-on-quarter in Q3.
The state of the Mexican economy is still favorable, despite the slowdown over the last few quarters. This week, the IGAE economic activity index--a monthly proxy for GDP--rose 2.0% year-over-year in July, a relatively solid pace, but down from 3.2% in June, and 2.6% in the first half. All these data suggest that economic activity failed to gather momentum at the beginning of Q3 after a disappointing first half of the year.
Argentina's economy continues to recover steadily.
The Eurozone economy ended the third quarter on a strong note, according to the PMIs.
Fed Chair Yellen set out a robust and detailed defense of the orthodox approach to monetary policy in her speech in Amherst, MA, yesterday afternoon. Her core argument could have come straight from the textbook: As the labor market tightens, cost pressures will build. Monetary policy operates with a "substantial" lag, so waiting too long is dangerous; the "...prudent strategy is to begin tightening in a timely fashion and at a gradual pace".
Inflation in Brazil and Mexico is ending Q3 under control, allowing the central banks to keep easing monetary policy.
If you're looking for points of light in the economy over the next few months, the housing market is a good place to start.
Yesterday's advance PMI reports in the euro area signal that economic momentum slowed slightly at the start of Q4.
The mortgage market is continuing to hold up surprisingly well, given the calamitous political backdrop.
Yesterday's economic data in Germany confirmed that the economy slowed in Q3, but also added to the evidence that growth will rebound in Q4. The second estimate for Q3 showed that real GDP rose 0.2% quarter-on-quarter, slowing from a 0.4% gain in Q2.
The Bank of Japan's biannual Financial System Report was published earlier this week.
The president was on the warpath with the Fed again yesterday, in an interview with the Wall Street Journal.
Mortgage approvals by the main high street banks dropped to a five-month low of 38.5K in September, from 39.2K in August, according to trade body U.K.Finance.
The ECB will not make any major changes to policy today.
The plunge in capital spending in the oil business appears to be over, at least for now. Orders for non-defense capital goods, excluding aircraft, fell by 8.9% from their September peak to their February low, but they have since rebounded, as our first chart shows. We can't be certain that the sudden drop in core capex orders late last year was triggered by a rollover in oil companies' spending, but it is the most likely explanation, by far.
Yesterday's PMI data were an open goal for those with a bearish outlook on the euro area economy.
Eurozone investors will be drawing a sigh of relief after yesterday's PMI data. The alarming plunge in February and March made way for stabilisation, with the composite PMI in the euro area unchanged at 55.2 in April.
Japan's manufacturing PMI rose to 53.3 in April, from 53.1 in March. The index weakened earlier this year, but remained at levels unjustified by the hard data.
The gap between the hard and soft data from the industrial economy appeared to widen still further last week. But we are disinclined to take the data--the official industrial production report for March, and the first survey evidence for April--at face value.
One way or another, the preliminary estimate of Q1 GDP--due Friday--will have a big market impact, following Mark Carney's warning last week that a May rate hike is not a done deal.
The levelling-off in the industrial surveys in recent months is reflected in the consumer sentiment numbers. Anything can happen in any given month, but we'd now be surprised to see sustained further gains in any of the regular monthly surveys.
Colombia's recently-released data signal that the economy started the year quite strongly, following a relatively poor end to Q4.
CPI inflation was steadfast at 1.9% in March, undershooting the consensus and our forecast for it to rise to 2.0%.
Growth appears to have accelerated in the first quarter in Mexico, as NAFTA-related uncertainty abated, inflation started to fall, and the MXN rebounded.
While we were out, Brazil's data were relatively positive, showing that inflation is still falling quickly and economic activity is stabilizing. The country has made a rapid and convincing escape from high inflation over the past year.
The preliminary April PMIs point to a continuation of the cyclical bounce, despite falling slightly from last month. The composite PMI in the Eurozone fell to 53.5 in April, down from 54.0 in March.
Banxico left Mexico's benchmark interest rate at a record low of 3% on Monday, maintaining its neutral tone and indicating that the balance of risks is unchanged for both inflation and growth. Policymakers remain confident that inflation will remain under control over the coming months, below 3% over the fourth quarter, but they repeated their message that they are vigilant to any inflation pass though from MXN depreciation into prices.
The theory of spontaneous combustion of the U.S. economy appears to be making something of a comeback, if our inbox and market chat is to be believed. The core idea here is that expansions die of old age, and can be helped on their way to oblivion by factors like falling corporate earnings and rising inventory. The current recovery, which began in June 2009 and is now 63 months old, already looks a bit long-in-the-tooth.
Data on Friday showed that German producer price inflation is now in free-fall.
Expectations that the ECB will respond to weakening growth in China with Additional stimulus mean that survey data will be under particular scrutiny this week. The consensus thinks the Chinese manufacturing PMI--released overnight--will remain weak, but advance PMIs in the Eurozone should confirm that the cyclical recovery remained firm in Q3. We think the composite PMI edged slightly lower to 54.0 in September from 54.3 in August, consistent with real GDP growth of about 0.4% quarter-on-quarter in Q3.
French manufacturers recovered their optimism towards the end of Q3. The headline INSEE manufacturing sentiment index rose to 103 in September, from 101 in August, and the composite business confidence gauge also increased. A rebound in transport equipment firms' own production expectations was the key driver of the recovery.
Orders for core capital goods began to fall outright in September last year; we can't blame the severe winter for the 11.1% annualized decline in the fourth quarter of last year. Indeed, the drop in orders in the first quarter will be rather smaller than in the fourth, unless today's March report reveals a catastrophic collapse.
The risk of higher US rates put LatAm currencies under pressure during the first half of the week, before the US FOMC meeting on Wednesday. But they recovered some ground yesterday, following the Fed's decision to leave rates on hold.
Eurozone investors are fixed on Mr. Draghi's speaking schedule this week, looking for hints of the ECB's future policy path.
Industry estimates for August light vehicle sales suggest that the downshift in sales which began at the turn of the year is over, at least for now.
Fed Chair Yellen is a committed believer in the orthodox idea that inflation is largely a cost-push phenomenon, and that the most important cost, by far, is labor. So in order to predict what Dr. Yellen might say about the outlook for Fed policy in her Testimony today--beyond the language of the January FOMC statement--we have to take a view on her assessment of the state of the labor market.
Sentiment in Germany has improved slightly this month with the IFO business climate index rising to 106.8 from 106.7 in January, pushed higher by a small increase in the expectations index.
The proportion of households' annual incomes absorbed by servicing debt has declined steadily this decade, providing a powerful boost to spending. Indeed, the proportion of annual incomes accounted for by interest payments--mainly on mortgages--edged down a record low of 4.6% in Q1, less than half the share in 2008.
Mexico's economy slowed marginally in Q4, due mainly to the challenging external environment, but the domestic economy remains relatively healthy. Real GDP rose 0.5% quarter-on-quarter in Q4, following a 0.8% solid expansion in Q3. Year-over-year growth dipped to 2.5% from 2.8%.
If, like us, you have been cheered by the upturn in mortgage applications since November, you don't need to worry about the apparent drop in activity in the past couple of weeks. The numbers don't look great: The MBA's index capturing the number of applications for new mortgages to finance house purchase has dropped from a peak of 237.7 in the third week of January--ignoring September's spike, which was triggered by a regulatory change--to 213.3 last week.
This week's GDP figures showed that firms invested only sparingly in 2016, but their financial fortunes have been bolstered by a recovery in profits. The gross operating surplus of all firms rose by 4.5% quarter-on-quarter in Q4, the biggest increase for 11 quarters. This pushed the share of GDP absorbed by profits up to 21.3%, just above its 60-year average of 21.2%.
Yesterday's detailed German GDP report raised more questions than it answered. The headline confirmed that growth accelerated to 0.4% quarteron- quarter in Q4, from 0.1% in Q3, leaving the year-over- year rate unchanged at 1.7%.
New home sales have tended to track the path of mortgage applications over the past year or so, with a lag of a few months. The message for today's January sales numbers, show in our next chart, is that sales likely dipped a bit, to about 525K.
Mexican consumers' spending improved toward the end of Q2. Retail sales jumped by 1.0% month-to-month in June, pushing the year-over-year rate up to 9.4%, from an already solid 8.6% in May. Still, private spending lost some momentum in the second quarter as a whole, rising by 2.5% quarter-on-quarter, after a 3.8% jump in Q1. A modest slowdown in consumers' spending had to come eventually, following surging growth rates in the initial phases of the recovery.
We are a bit troubled by the persistent weakness of the Redbook chain store sales numbers. We aren't ready to sound an alarm, but we are puzzled at the recent declines in the rate of growth of same-store sales to new post-crash lows. On the face of it, the recent performance of the Redbook, shown in our first chart, is terrible. Sales rose only 0.5% in the year to July, during which time we estimate nominal personal incomes rose nearly 3%.
Speculation that the U.K. will end up leaving the E.U. in March without a deal has dominated the headlines over the last month. Politicians on both sides of the Channel have warned that the probability of a no-deal Brexit is at least as high as 50%, even though more than 80% of the withdrawal deal already has been agreed.
Yesterday's PMI data in the Eurozone economy were a mixed bag.
We expect today's second estimate of Q2 GDP to confirm that the U.K. has been the slowest growing G7 economy this year.
Mexico's economy continues to withstand several headwinds, especially the sharp currency depreciation--shown in our first chart--falling commodity prices, and the tough external environment. The country is still one of the economic bright spots in the region, thanks to its resilient domestic demand. June retail sales rose 5.4% year-over-year, well above expectations, and up from 4.1% in May. The underlying trend is positive, averaging 4.8% in the second quarter, well above its 2014 pace.
If the plunge in the stock market last week, and especially Friday, was a entirely a reaction to the slowdown in China and its perceived impact on other emerging economies, then it was an over-reaction. Exports to China account for just 0.7% of U.S. GDP; exports to all emerging markets account for 2.1%. So, even a 25% plunge in exports to these economies-- comparable to the meltdown seen as global trade collapsed after the financial crisis--would subtract only 0.5% from U.S. growth over a full year, gross.
Yesterday's advance EZ PMI data were virtually unchanged from previous months, yet again. The composite PMI rose trivially to 53.3 in August from 53.2 in July; this means that the index has been almost stable since February. The headline was lifted by a small increase in services, which offset a slight decline in manufacturing.
The sell-off in risky assets intensified while we were away, driven by China's decision to loosen its grip on the currency, and looming rate hikes in the U.S. The Chinese move partly shows, we think, the PBoC is uncomfortable pegging to a strengthening dollar amid the unwinding investment boom and weakness in manufacturing.
The PBoC left its interest rate corridor, including the Medium-term Lending Facility rate, unchanged last Friday, but published the reformed Loan Prime Rate modestly lower, at 4.20% in September, down from 4.25% in August.
Sterling rallied to $1.25 last week--its highest level against the dollar since Boris Johnson became PM in mid-July--amid growing speculation that a Brexit deal still was possible in the next couple of weeks, enabling the U.K. to leave the E.U. on October 31.
CPI inflation rose only to 2.1% in April, from 1.9% in March, undershooting the 2.2% consensus and MPC forecasts, as well as our own 2.3% estimate.
Japanese policymakers will have been scouring yesterday's data for signs that the trade situation is improving.
Today's EZ calendar is a busy one.
Like just about everyone else, we have struggled in recent years to find a convincing explanation for the persistent sluggishness of growth even as the Fed has cut rates to zero and expanded its balance sheet to a peak of $4.2T. Sure, we can explain the slowdown in growth in 2010, when the post-crash stimulus ended, and the subsequent softening in 2013, when government spending was cut by the sequester.
Margins for German manufacturing firms remained depressed at the start of the second quarter. The headline PPI rose 0.1% month-to-month in April, pushing the year-over-year rate down marginally to -3.1% from a revised -3.0% in March. Falling energy prices are the key driver of the overall decline in the PPI.
The Chancellor claims he can eliminate public borrowing without raising taxes. But the latest borrowing overshoot and the continual optimistic bias of the OBR's forecasts cast doubt on whether his approach will be sufficient to meet his self-imposed surplus target.
Should you be feeling in the mood to panic over inflation risks--or more positively, benefit from the markets' underpricing of inflation risks--consider the following scenario. First, assume that the uptick in wages reported in October really does mark the start of the long-awaited sustained acceleration promised by a 5% unemployment rate and employers' difficulty in finding people to hire. Second, assume that the rental property market remains extremely tight. Third, assume that the abrupt upturn in medical costs in the October CPI is a harbinger o f things to come. And finally, assume that the Fed hawks are right in their view that the initial increase in interest rates will--to quote the September FOMC minutes--"...spur, rather than restrain economic activity". Under these conditions, what happens to inflation?
Mexico's economy gathered momentum in Q3, thanks mainly to solid gains in industrial and services activity. Real GDP rose 0.8% quarter-on-quarter in Q3, the fastest pace since Q3 2013 and the ninth consecutive increase. Year-over-year growth rose to 2.6% year-over-year, from 2.3% in Q2. In short, a positive report, surprising to the upside, and above the INEGI's advance estimate, released in late October.
Yesterday's March retail sales report for Mexico is in line with other recently released hard and survey data, painting an upbeat picture of the economy.
Yesterday's public finance figures brought more good news for the Chancellor.
The Monetary Policy Committee chose to keep its options open in the minutes of this week's meeting, rather than signal as clearly as it did last year that interest rates will rise very soon.
Yesterday's announcement that the administration plans to imposes tariffs worth about $60B per year -- thatìs 0.3% of GDP -- on an array of imports of consumer goods from China is a serious escalation.
The PBoC hiked its 7-day reverse repo rate by 5bp yesterday, stating that the move was a response to the latest Fed hike.
The recovery in the French economy since the sovereign debt crisis has been lukewarm. Growth in domestic demand, excluding inventories, has averaged 0.4% quarter-on-quarter since 2012. This comp ares with 0.8%-to-1.1% in the two major business cycle upturns in the 1990s and from 2000s before the crisis.
Yesterday's detailed Mexican GDP report confirmed that growth was resilient in Q1, despite external and domestic headwinds. GDP rose 0.7% quarter-on-quarter in Q1, in line with our expectation, but marginally above the first estimate, 0.6%.
The monthly new home sales numbers are so volatile that just about anything can happen in any given month.
China's capex growth faces renewed challenges this year, as PPI inflation slows.
The flow of Middle-Eastern refugees taking the treacherous journey towards Europe continues unabated. UNHCR estimates of arrivals through the Western Balkan route--mainly originating from Greece and Serbia--suggest the average daily number of refugees has been stable so far between October and November at about 11,000. These data are very unreliable, but they indicate that the onset of winter on the European continent--and the added risk to migrants with no shelter--will not deter people from attempting the trip to Europe.
Japan will host the Olympics in 2020 and the preparatory surge in construction investment makes 2017-to-2018 the peak spending period.
At the halfway mark of the fiscal year, public borrowing has been significantly lower than the OBR forecast in the March Budget.
Two major themes emerged from the Chinese Party Congress last week, namely, further opening of the financial sector to foreigners, and the threat of a Minsky moment.
On the face of it, the surge in retail sales volumes in September suggests that the U.K. consumer is in fine fettle and can prevent the economic recovery from losing momentum as exporters struggle and government spending retrenches. But the underlying picture is less encouraging and consumers won't be able to sustain the recent robust growth in real spending when inflation revives next year.
In the absence of any significant data releases today, we want to take a closer look at the outlook for wage growth, and the implications of an acceleration in hourly earnings for inflation.
All the regional PMIs and Fed business surveys are volatile in the short-term, so observations for single months need to be viewed with due skepticism.
Argentina's economy is on the verge of a renewed recession; available data for August and the effect of the recent financial crisis, driven by the result of the primaries, suggest that output will come under severe strain.
The gap between U.K. and U.S. government bond yields has continued to grow this year and is approaching a record.
China's September activity data, released at the end of last week, back up our claim that GDP growth weakened in Q3, on a quarter-on-quarter basis.
The woes of the manufacturing sector are likely to intensify over the next few months, even if--as we expect--overall economic growth picks up. The core problem is the strong dollar, which is hammering exporters, as our first chart shows. The slowdown in growth in China and other emerging markets is hurting too, but this is part of the reason why the dollar is strong in the first place.
Mr. Draghi gave one of his most dovish performances to date yesterday. The central bank kept its main interest rates and the pace of QE unchanged, but reiterated that risks to growth and inflation are tilted to the downside. The president noted further that the existing policies will be "reexamined" in December in light of updated staff projections. It is difficult to see how the downbeat assessment on the economy will change materially from now until December, indicating that further stimulus is likely.
October likely was the peak in Japanese CPI inflation, at 1.4%, up from 1.2% in September. The uptick was driven by the non-core elements, primarily food.
The recent plunge in oil prices is another positive development, alongside looser fiscal policy and the striking of a Brexit deal with the E.U., pointing to scope for GDP growth to pick up next year.
Yesterday's barrage of survey data in France, tentatively suggest that business sentiment is stabilising following a string of declines since the start of the year.
Idiosyncratic developments have driven market volatility in LatAm in recent weeks.
Brazil's external deficit fell marginally in October, but most of the improvement is now likely behind us. The unadjusted current account deficit dipped to USD3.3B, from USD4.3B in October 2015. The trend is stabilizing, with the 12-month total rolling deficit easing to USD22B--that's 1.2% of GDP--from USD23B in September.
Brazil economic and political outlook is still opaque, but grim, after a vast array of negative news. Impeachment of President Rousseff remains a possibility; the process of fiscal consolidation is messy and politically bloody; rumors that Finance Minister Levy might leave his post next year have intensified; and the latest data showed that the recession worsened in Q3. As a consequence, the BRL and interest rates have been under pressure and we see no clear signs that the turmoil will ease soon.
As we write, the Commons appears to be on the verge of voting for the Withdrawal Agreement Bill--WAB--at its second reading but then voting against the government's "Programme Motion", which sets out a very tight timetable for its passage through parliament, in a bid to meet the October 31 deadline and to minimise parliamentary scrutiny.
Brazil's central bank conformed to expectations on Wednesday, cutting the Selic rate by 75 basis points to 12.25%, without bias. Overall, the BCB recognises that the economic signals have been mixed in recent weeks, but the Copom echoed our view that the data are pointing to a gradual stabilisation and, ultimately, a recovery in GDP growth later this year.
You could be forgiven for being alarmed at the 1.5% decline in the stock of outstanding bank commercial and industrial lending in the fourth quarter, the first dip since the second quarter of 2017.
Yesterday's barrage of survey data were a mixed bag. The composite EZ PMI edged higher in May to 51.6, from 51.5 in April, but the details were less upbeat, and also slightly confusing.
Yesterday's data in the Eurozone did little to calm investors' nerves amid rising political uncertainty in Italy and tremors in emerging markets.
Korea's 20-day export growth came in weaker than we anticipated earlier this week. Granted, year-over- year growth rebounded to 14.8% in May, from 8.3% in April.
Eurozone PMI data yesterday presented investors with a confusing message. The composite index fell marginally to 52.9 in May, from 53.0 in April, despite separate data that showed that the composite PMIs rose in both Germany and France. Markit said that weakness outside the core was the key driver, but we have to wait for the final data to see the full story.
The recent run of grim sales and earnings numbers from major national retailers, including Kohl's, Nordstrom, and Macy's, reflects two major trends. The first is obvious; the rising market share of internet sales is squeezing brick and mortar retailers, as our first chart shows. We have no idea how far this trend has yet to run but it shows no signs yet of peaking.
Yesterday's PMI reports repeated the message of a firm cyclical Eurozone recovery, despite investors' angst over deflation and the underwhelming Q3 GDP data earlier this month. The composite index in the zone rose to a 54-month high of 54.4 in November from 53.9 in October, lifted by strong output and solid new business growth. Our first chart shows the rise in the PMI points to slight upside risks in Q4 to the four quarter trend in real GDP growth of 0.4% per quarter.
Mauricio Macri, the centre-right candidate of the Cambiemos--Let's Change--coalition won Argentina's weekend presidential election. Mr. Macri, the mayor of Buenos Aires, defeated Daniel Scioli, of the ruling Front for Victory--FpV--coalition on Sunday. His victory marks the end of the 12-year Kirchnerist era, characterized by wild inflation, huge public deficits and unsustainable subsidies. If Mr. Macri lives up to his promises, Argentina, the second-largest economy in South America, will become an orthodox economy on a sustainable path. The recovery will come, we think, but it will be a long and challenging process.
Sterling is well below its $1.57 average of the last five years, despite rallying this month to about $1.45, from a low of $1.38 in late February. But hopes that cable will bounce back to its previous levels, after a vote to remain in the E .U., likely will be dashed.
CPI inflation dropped to 2.4% in April, from 2.5% in March, undershooting the no-change consensus and prompting many commentators to argue that the chances of an August rate hike have declined further.
The recovery in existing home sales appears to have stalled, at best.
The economic recovery would have lost more momentum last year had consumers not delved so deeply into their pockets. Real household spending increased by 0.7% and 0.8% quarter-on-quarter in Q3 and Q4 respectively, in contrast to investment and exports, which fell in both quarters.
Mexico's CPI rose just 0.1% in the first half of March, due to higher core prices. The increase was broadbased within this component, with goods prices increasing by 0.2% and core services 0.4%. Core services prices were driven by temporary factors, including vacation packages and higher airfare tickets. Non-core prices, meanwhile, fell 0.5%, due mainly to falling fresh food prices.
This is the final Monitor before we head out for our spring break, so we have added a page in order to make room to preview the employment report due next Friday, April 4. We expect a solid but unspectacular 175K increase in payrolls, slowing from February's unsustainable 242K, but still robust.
The nominal value of orders for non-defense capital equipment, excluding aircraft, fell by 3.4% last year. This was less terrible than 2015, when orders plunged by 8.4%, but both years were grim when compared to the average 7.5% increase over the previous five years.
The 1.4% month-to-month rise in retail sales volumes in February is not a game-changer for the economy's growth prospects in Q1. The increase reversed just under half of the 2.9% decline between October and January. The 1.5% fall in retail sales in the three months to February, compared to the previous three months, is the worst result in seven years.
The minutes of the May 2/3 FOMC meeting today should add some color to policymakers' blunt assertion that "The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term."
Inflation pressures in Brazil are still easing rapidly. The mid-May unadjusted IPCA- 15 index rose just 0.2% month-to-month, much less than the 0.6% historical average for the month. Base effects pushed the year-over-year rate down to 3.8% from 4.1% in April. Food prices, healthcare and personal costs were the main drivers of the modest month-to-month increase.
An array of data today will be mostly positive, and even the most likely candidate for a downside surprise--the October advance trade numbers--is very unlikely to change anyone's mind on the Fed's December decision. On the plus side, the first revision to third quarter GDP growth should see the headline number dragged up into almost respectable territory, at 2.4%, from the deeply underwhelming 1.5% initial estimate.
A less rapid tightening of monetary policy in the U.K. than in the U.S. should ensure that gilt yields don't move in lockstep with U.S. Treasury yields over the coming years. But the outlook for monetary policy isn't the only influence on gilt yields. We expect low levels of market liquidity in the secondary market, high levels of gilt issuance and overseas concerns about the possibility of the U.K.'s exit from the E.U. to add to the upward pressure on gilt yields.
The EZ doom-and-gloom crew has come crawling out of the woodwork again this year. Earlier this month, Nobel laureate Joseph Stiglitz told a German newspaper that Italy and other euro area countries likely will leave the currency union soon.
Progress in reducing the budget deficit has ground to a virtual halt, despite the ongoing fiscal consolidation. Public sector net borrowing excluding public sector banks--PSNB ex.--was £10.6B in September, exceeding the £9.3B borrowed in the same month last year.
The FTSE 100 has dropped by 7% since the end of September--leaving it on course for its worst month since May 2012--and now is 12% below its May peak.
The U.S. household sector carries substantial gross debts, even after the sustained deleveraging since the crash of 2008. The gross debt-to-income ratio stood at 105.3% in the second quarter of this year, down from the 135% peak in late 2007 but still well above the 88% average recorded in the 1990s, which was not a decade of restraint on the part of consumers.
India's Finance Minister Nirmala Sitharaman finally brought out the big guns on September 20, announcing significant cuts to corporate tax rates.
The rational thing to do when the price of a consumer good you are considering buying is thought likely to rise sharply in the near future is to buy it now, provided that the opportunity cost of the purchase--the interest income foregone on the cash, or the interest charged if you finance the purchase with credit--is less than the expected increase in the price.
This week's key data releases in Mexico likely will reaffirm that growth remains below trend, while inflation continues to ease.
Support for the Conservatives has shown no sign of flagging in recent weeks, despite the setbacks in the Commons earlier this month and the government's failure so far to secure a revised Brexit deal.
The path of new home sales over the past couple of years has followed the mortgage applications numbers quite closely.
Korea's preliminary GDP report for Q3 will be released tomorrow.
Yesterday's detailed GDP report in Germany showed net exports propelled GDP growth to a cyclical high last quarter.
The minutes of Banxico's November 9 policy meeting were released yesterday, in which the Bank left the reference rate unanimously unchanged at 7.0%.
Yesterday's second estimate of Q3 GDP confirmed that the U.K. economy has underperformed this year.
We believe China is going through a paradigm shift in its economic policy, away from GDPism-- the obsession with GDP growth targeting--to environmentalism, setting widespread environmental targets on everything, from air to water to waste.
The Chancellor's Autumn Statement dashed hopes that the fiscal consolidation will be paused while the economy struggles to adjust to the implications of Brexit. Admittedly, Mr. Hammond has another opportunity in the Spring Budget to reduce next year's fiscal tightening.
Consumer confidence in the Eurozone rose marginally at the start of Q4, though it is still down since the start of the year.
In his opening speech at the Party Congress, President Xi received warm applause for his comment that houses are "for living in, not for speculation".
All the evidence indicates that growth in Eurozone consumers' spending is slowing. We think data today will show that the advance GfK consumer sentiment index in Germany was unchanged at 9.5 in April, but the headline index does not correlate well with spending. The "business expectations" index is better, and while it likely will increase slightly, our first chart shows that it continues to signal a slowdown in consumers' spending growth.
In a letter earlier this month, Greek prime minister Alexis Tsipras warned German chancellor Angela Merkel that failure to disburse additional bailout funds would lead to an imminent cash crunch. Last week's meeting with EU leaders and the ECB yielded no progress, intensifying the risk that Greece will literally run out of money within weeks.
The main measure of public borrowing--PSNB excluding public sector banks--came in at £2.6B in December, well below the £5.1B in December 2016 and lower than in any other December since 2000.
Bond markets didn't panic when the ECB announced its intention further to reduce the pace of QE this year, to €30B per month from €60B in 2017.
In November, existing home sales substantially overshot the pace implied by the pending home sales index.
On the face of it, the trend in public borrowing deteriorated sharply late last year. In the three months to December, borrowing on the main "PSNB ex ." measure, which excludes banks owned by the public sector, was a trivial £0.3B, or 1.6%, lower than in the same months of 2017.
The ECB will deliver a carbon copy of its December meeting today, at least in terms of the main headlines.
Korean exports are often a useful gauge of Asian and global trade; the country sits near the beginning of the global supply chain. It also happens to publish early in the data cycle and provides a measure of exports in the first 20 days of the month.
We suspect that under the calm surface of the BoJ, a major decision is being debated.
One of the arguments we hear in favor of an endless Fed pause--in other words, the cyclical tightening is over--is that GDP growth is set to slow markedly this year, to only 2% or so.
Brazilian inflation rate remained well under control at the start of this year, and we think the news will continue to be favorable for most of this year.
The BoJ voted by an 8-to-1 majority yesterday to keep the policy balance rate unchanged at -0.1%, with the 10-year yield curve target also unchanged at around zero.
The ECB conformed to expectations today, at least on a headline level.
Brazilian inflation is off to a bad start this year, but January's jump is not the start of an uptrend, and we think good news is coming.
The public finances are in better health than appeared to be the case a few months ago.
Now that the holidays are just a distant memory, the distortions they cause in an array of economic data are fading. The problems are particularly acute in the weekly data -- mortgage applications, chainstore sales and jobless claims -- because Christmas Day falls on a different day of the week each year.
Consensus forecasts expect further gains in this week's key EZ business surveys, but the data will struggle to live up to expectations. The headline EZ PMIs, the IFO in Germany, and French manufacturing sentiment have increased almost uninterruptedly since August, and we think the consensus is getting ahead of itself expecting further gains. Our first chart shows that macroeconomic surprise indices in the euro area have jumped to levels which usually have been followed by mean-reversion.
The steady decline in mortgage rates since the financial crisis has helped to underpin strong growth in household spending. Existing borrowers have been able to refinance loans at ever-lower interest rates, while the proportion of first-time buyers' incomes absorbed by interest and capital payments has declined to a record low. As a result, the proportion of annual household incomes taken up by interest payments has fallen to 4.6%, from a peak of 10% in 2008.
Most LatAm currencies traded higher against the USD yesterday, adding to the gains achieved after Donald Trump's inauguration last Friday. The MXN, which was the best performer during yesterday's session, was up about 0.8%; it was followed by the CLP, and the BRL. The positive performance of most LatAm currencies, especially the MXN, is related to positioning and technical factors.
After pricing-in the consequences of sterling's depreciation for inflation last year only slowly, markets are at risk of costly inertia again.
The tailwinds that have propelled Eurozone equities higher since the middle of last year remain place, in principle. In the economy, political uncertainty in the euro area has turned into an opportunity for further integration and reforms, and cyclical momentum in has picked up. And closer to the ground, fundamentals also have improved.
The PMI survey yesterday painted a more upbeat picture on the Eurozone economy than we expected. The composite index rose to 54.1 in June from 53.6 in May, taking the quarterly average to its highest level since Q2 2011.
Friday's advance PMI data for the Eurozone added further evidence of stabilisation in the economy after the sharp slowdown in GDP growth since the beginning of last year.
Japan's national CPI inflation has peaked, falling to 0.7% in May from 0.9% in April.
Mexico's private spending stumbled at the start of the second quarter. Retail sales fell 0.3% month-to-month in April after three consecutive increases, hit by an unexpected 1.6% drop in both supermarket and apparel sales, and a surprising 1.2% fall in food sales. In year-over-year terms, total sales rose 4.6% in April, down from 5.6% in March.
The third estimate of first quarter GDP growth, due today, will not be the final word. The BEA will revise the data again on July 30, when it will also release its first estimate for the second quarter and the results of its annual revision exercise. Quarterly estimates back to 2012 will be revised. The revisions are of greater interest than usual this year because the new data will incorporate the first results of the BEA's review of the seasonal problems.
It's probably too soon to start looking for second round effects from the drop in gasoline prices in the core CPI. History suggests quite strongly that sharp declines in energy prices feed into the core by depressing the costs of production, distribution and service delivery, but the lags are quite long, a year or more.
Britain's shock vote to leave the E.U. has unleashed a wave of economic and political uncertainty that likely will drive the U.K. into recession.
The U.K.'s unexpected vote for Brexit means a stronger USD for the foreseeable future, pressure on EM currencies and increasing risk premiums. LatAm fundamentals will a sideshow for some time. The focus will be on the currencies, which will be the main shock absorbers.
This is the last Monitor before we head to the beach, so we want to offer a few thoughts on the upcoming data and the FOMC meeting while we're out. First, a warning about the second quarter GDP number. We think that the data released so far are consistent with growth at about 3%.
Advance Eurozone consumer sentiment fell disappointingly to -7.1 in July, from -5.6 in June, but it is consistent with a solid trend in retail sales growth. Household consumption in the zone has surged in the last four quarters, and a modest loss of momentum in Q3 and Q4 is a reasonable bet. But we see little risk of a sharp slowdown in the shor t run, and the trend in spending growth should stabilize at an annualised 1.5% this year.
Economic activity in Mexico during the past few months has been resilient, as external and domestic threats, particularly domestic political risks, appear to have diminished.
GDP data for Q2 are due July 26; we expect the report to show a marginal dip in growth, to a seasonally adjusted 0.8% quarter-on-quarter, from 1.0% in Q1.
Eurozone consumer confidence remained at its low for the year at the start of Q3.
Sterling depreciated further last week as the Prime Minister's Brexit plans were tweaked by Brexiteers and given a lukewarm reception by the European Commission.
Data released yesterday in Brazil helped to lay the ground for interest rate cuts over the coming months.
Brazil's inflation data continue to disappoint, but they are showing some signs of improvement, at the margin. The mid-month CPI, the IPCA-15 index, jumped to 9.3% year-over-year in July, up from 8.8% in June, soaring well above the upper bound of the inflation target and reaching the highest level since December 2003, as shown in our first chart.
The headline in yesterday's ECB Q2 bank lending survey seemed almost tailor-made for the central bank to deliver a dovish message to markets this week.
Brazil's recession has deepened. Overall, the economy has sunk into its worst slump in six years, and the recovery will be painful and slow. This is not surprising, but the sharper than expected 3% contraction over the first half of the year may have thrown a further bucket of cold water on President Rousseff, whose popularity ratings have fallen to a level not seen since 1992, when President Collor de Mello was forced out of office after being impeached for corruption. Real GDP in Brazil fell 1.9% quarter-on-quarter in Q2, much worse than the downwardly revised 0.7% contraction in Q1.
We are expecting a hefty increase in the August ADP employment number today--our forecast is 225K, above the 175K consensus --but we do not anticipate a similar official payroll number on Friday. Remember, the ADP number is based on a model which incorporates lagged official employment data, the Philly Fed's ADS Business Conditions Index, and data from firms which use ADP for payroll processing.
Larger-than-expected collapse in Japanese retail sales highlight inefficacy of tax-smoothing efforts
Japan's stable unemployment rate belies underlying weakness. Tokyo energy inflation turns the corner. Sales tax preparations breathe life into Japanese production in May... if only temporarily. Korea's IP plunge in May shows why Japan can't rest on its laurels.
Tokyo inflation had further to fall in September than the national gauge. Some positive stories in Chinese industrial profits despite the gloomy headline.
Minimal front-loading ahead of Japan's October tax hike so far.
Japan's firms are done hiring. Tokyo inflation points to uptick in national gauge, driven by non-core effects. Japan's start to Q4 goes from bad to worse, as industrial production tanks in October. Still far too soon to call time on Korea's IP recovery, despite the October setback. Governor Lee attempts to manage 2020 expectations, as the BoK stands pat after the October cut.
China's Caixin gauge still to register renewed tariff threat. Japan's Capex growth on borrowed time. Korean exports stumble in May, but Q2 is shaping up to be better than Q1. Korea's PMI for May highlights the still-huge downside risks facing exporters.
China's Caixin manufacturing PMI was due a correction. Korea's PMI closes out the year strong, chiming with December's punchy trade data.
Headline GDP growth in Q3 was unchanged, but the revised details mostly were positive. BoJ in a holding pattern on aggregate JGB purchases; focus on curve steepening
Japan's PMI report bodes well for Q3, but points to headwinds thereafter. PPI deflation in Korea is unlikely to get worse than the August drop.
Japan's inflationary upturn will be limited. Japan's activity index reinforces case for Q1 GDP downgrades.
November's 20-day data confirm that Korea's export slump bottomed out in October
The renewed trade war is unfortunate timing, as Korea exports are stabilising at the margins. Revised index shows that Korean PPI inflation hasn't been missing this year.
Japan's CPI inflation has peaked. Japan's PMI hit by renewed trade wars, while domestic demand shows signs of slowing. The fledgling recovery in Korean exports lost steam in June.
Japan's flash PMIs for August point to short-term gain and long-term pain. Construction is starting to show signs of peaking.
Non-core items outweigh government measures in Japan's October CPI. Ignore the minor rebound in Japan's manufacturing PMI; the trend remains very weak. The post-tax drop and rebound in Japan's services PMI isn't as sharp, but Q4 looks vulnerable to a painful GDP hit.
Non-core items drive Japan's CPI inflation higher, with energy also indirectly pushing up core inflation, Sino-U.S. Phase One trade deal gives Japan's manufacturing PMI a boost, Japan's services PMI levels look unsustainable
Japan's trade balance continues to struggle with oil gains and post-tax hike recovery. Activity index shows downside risks to Q4 GDP.
Japan is creeping towards CPI deflation, but it should just about avoid it in Q4.
Focus on Japan's job-to-applicant ratio, not the unemployment rate
BoJ snubs the doves. Japan's unemployment rate downtick was minimal. The weak external backdrop dominates Japan's pre-tax front-loading industrial activity.
Korea's current account surplus should rebound sharply in December. The rate of QE in Japan slipped in December.
China's Caixin services PMI corrects from November's Singles' Day bump
Japan's wage growth bounces back on volatile bonuses; distortions still at play? Korea's current account surplus has bottomed out, but pressure on the won will continue to rise in the S/T.
China is not taking any chances with the RMB ahead of its 70th anniversary
China's see-sawing trade surplus is likely to continue in the short run, but it mostly has peaked. Japan's unadjusted current account surplus slipped to ¥1,211B in June, from ¥1,595B in May, marginally surpassing the consensus, ¥1,149B.
China's real imports showing signs of stabilisation? Japan's regular wages staging a comeback?
Valuation effects boost China's June FX reserves. Japan's currency account surplus unlikely to fall further. Japan's core machine orders should shake policymakers' conviction in Capex resilience.
Japan's wage growth is not strong enough to support households through the tax hike
China's meagre cut is not enough. Broad slowdown in Chinese services activity continues. Japan's rate of QE is low but roughly stable.
Japan's services PMI points to Q2 GDP contraction. China's Caixin services PMI highlights the reasons for official concern over employment. Korea's current account slips into deficit for the first time since 2012.
China's manufacturing PMI edged up in July. Services in China are finally starting to feel the pinch. Korean IP looks poised for a stronger increase in July, notwithstanding Japan's export curbs.
China's manufacturing PMIs suggest the private sector is recovering ahead of SoEs. China's non-manufacturing PMI again masks construction/services cross currents. Japan's industrial production continues to languish. OK so now Japanese households are front-loading spending. Korean IP corrects from the bumper July; the momentum from the Q2 recovery is waning.
Tax front-loading in full swing
China's manufacturing PMI was poised for major disappointment... the trade war impact is clear. Don't be fooled by the relative stability of China's non-manufacturing PMI. Japan's March unemployment uptick was early; April was payback. Japan's CPI inflation has peaked. Japan's industrial production ticks up after extreme weakness; don't hold your breath for the recovery. Japan's consumers in poor shape, but maybe it's not that bad. The upswing in Korean industrial production likely to take a breather this month. The BoK holds firm, despite rising calls for a rate cut.
BoJ remains in an alternate reality in order to avoid a rate cut, underlining its concerns over damage to the financial sector. Chances of a serious PBoC blunder are rising. No "Phase 1" sentiment lift for Chinese manufacturers. A sharp fall in China's official services gauge was due. This probably is as good as it'll get for Japanese industrial production. Korean industrial production remains volatile, but the trend is decisively up.
Korea's Q1 GDP downgrade will fuel calls for a rate cut. CPI inflation in Korea should soon peak out. Ignore the uptick in Japanese monetary base; it's a one off.
China's Caixin gauges are picking up but both are volatile
The BoJ's growth upgrade for fiscal 2020 is on the ambitious side, to say the least. Lunar New Year noise hit Korea's 20-day export print for January. Korea completes its exit from a brief and shallow spell of PPI deflation.
Korean exports show no signs of additional pain from Japan's trade salvo. PPI deflation takes hold in Korea.
Japan's machinery orders boosted by one-off transportation spike. Japanese PPI ticks higher on commodities. China's new home price rises should remain on the tepid side for now .
Judgement pending on Chinese industrial production. Chinese retail sales buoyed by inflation. Chinese FAI growth stable through Q4; local government spending better managed this year. China's housing market still not reached a bottom. Japan's tertiary index plunge is more tax hike than typhoon. Japan's PMIs underline damage from tax hike.
PPI deflation should soon trough. Chinese food inflation takes off. Japan's tertiary index points to strong Q3 GDP growth.
PPI inflation in Japan likely has peaked... expect steeper drops in coming months. China's property recovery is spreading to more cities.
Don't expect the BoK to follow the BoJ's unorthodoxy in the foreseeable future. The upward correction in Korean unemployment has much more room to run.
Japan's tertiary index underlines that Q4 was catch-up growth...Q1 is payback
Steady Q4 GDP growth in China masks respectable q/q rebound. Signs of recovery in China's industrial complex, but for how long? China's households continue to struggle. China's FAI growth shows rebuilding confidence around the Phase One deal. Japan's November tertiary index suggests October plunge was more tax than typhoon. January sees the first of many BoK "holds" this year.
China's industrial production growth downtrend worsens. China's retail sales dragged down by autos but boosted as people spend more at home. China's fixed asset investment growth slows despite greater support from infrastructure.
Easing of curbs so far won't slow property decline
Our caution over China's March industrial production spike was justified. Chinese retail sales growth hits lows. Chinese FAI growth suggests private sector policy loosening isn't working. Japan's M2 growth upturn is a welcome break, but needs to be sustained. Korean unemployment jumps in April, showing the limits of the government's hiring spree.
Chinese imports ride high on tech and Phase One trade deal. Risks continue to build in Japan's financial account
Mr. Trump's partial U-turn on September tariffs shows some semblance of an understanding of reality...that's a good thing. China's industrial production crushes June hopes of a swift recovery. Chinese consumers struggle. Chinese FAI: the infrastructure industry growth slowdown is especially worrying. Japan's strong core machine orders rebound in June probably faded in recent weeks. Korea's jobless rate will soon creep back up after remaining steady in July.
Evidence continues to build that Korea's August unemployment plunge was a fluke. October sales tax hike in Japan opens the door for a quicker exit from PPI deflation.
Japan's trade surplus deterioration not as bad as official stats suggest, but more to come
Slowing FAI growth underscores the urgency for more PBoC easing October was painful and the slowdown in Chinese IP growth is far from over and no, households in China won't come to the economy's rescue. Japan sneaks in a tax hike; GDP data unfazed. Japan's tertiary index jars with the GDP data.
Job losses in the over-60 group pull Korea's unemployment rate higher in December. Japanese M2 growth holds steady in December. Still no clear signs of a recovery in machine tool orders in Japan.
China's homes market faces fundamental headwinds.
China's house price rises should continue slowing
China's housing recovery faces headwinds.
PBoC furthers efforts to push down real economy rates, signals more to come.
China's manufacturing PMIs remain in the downdraft
October monetary base growth uptick attributable to shifts on the liabilities side; tapering continues.
Japan's CPI inflation has troughed; Japan's budget forecasts for next year are on the rosy side; China's LPR stability reflects precarious banking sector; Korea should make a complete exit from PPI deflation this month
Unchanged LPR suggests continued need for easing.
China's rate corridor cut was enough to bring down the LPR
Japan's Q1 GDP number leaves sales tax delay on the table
The BoJ keeps it promises vague. Japan's April is turning out quite nicely. PPI inflation in Korea slipped in May, and is heading for deflation in Q3.
Korean inflation surprises to the upside in April. Manufacturing surveys in Korea are turning up.
BoJ does what it can to avoid more deeply negative yields. Korean inflation should peak this month
China's new Loan Prime Rate amounts to a rate cut, but supply-side banking strains limit its efficacy. Chinese slowdown and pre-tax front-loading keeps Japan's trade balance in deficit.
Weak oil prices and flagging domestic demand reduces Japan's trade deficit in August.
Chinese quarterly GDP growth was dire. China's industrial production was due an upward correction. China's retail sales data suggest that households took a Q3 battering. China's FAI growth shows no signs of turning. Japan's CPI avoids deflation.
Japan's trade balance damaged by export weakness and previous oil price gains.
BoJ signals a package is coming in October. Waning construction tarnishes July's all-industry activity report. No PBoC move, for now, but it's coming.
China's manufacturing PMIs turn less grim, but look unsupported, for now. China's non-manufacturing PMI receives a one-off singles day boost. Japan's capex data suggests Q3 upgrade. Net trade is shaping up to be a drag on Q4 GDP, as Korean exports remained weak in November. Korea's exit from deflation is complete, thanks largely to more favourable base effects. Korea's PMI jumps in November... and that's before the likely sentiment boost from normalising ties with Japan.
Both China and U.S. look for good will on opposite side and find none; political and economic constraints will soon kick in. BoJ QE remains neutralised by negative yields
Japan's wage growth rebounded because August is not a bonus month. Japan's current account maintains stability as trade balance cross currents persist. China's services PMI report contains some positive details but we aren't convinced. The rebuilding of Korea's current account surplus will soon lose momentum.
Japan's Q2 GDP growth was not all it's cracked up to be. M2 growth in Japan inched up in July, but trends at the margin have rolled over. China's July inflation uptick shows that the swine flu outbreak is nowhere near under control. China officially enters PPI deflation... but it shouldn't last beyond Q3.
In one line: Another soft headline at the start of Q4.
In one line: Like watching paint dry.
In one line: Ouch; not the best send-off for the Christmas holiday.
In one line: Only a modest Q3 rebound for consumption in France?
In one line: A solid start to Q2 for French consumers.
In one line: Hit by fall in the trade surplus; portfolio outflows remain modest.
In one line: A good start to Q3 for French consumers; German inflation likely fell in August.
In one line: A slow start to Q4 for the consumer; headline inflation is now rising.
In one line: Don't panic over the dip in consumer sentiment; net trade likely lifted Q4 GDP growth.
In one line: Strong finish to Q3, but the quarter as a whole was poor.
In one line: Decent July means net foreign trade unlikely to be a big drag on Q3 GDP growth.
In one line: The road to recovery begins; we hope.
In one line: Spared complete embarrassment by resilient services.
In one line: Solid numbers in Germany, but grim elsewhere.
In one line: Weak, and Q2 as a whole likely will be bleak.
In one line: Flatlining at the end of a weak quarter.
In one line: EZ construction is stalling.
In one line: Solid!
In one line: A modest rebound; net portfolio outflows are still subdued, but that should change soon.
In one line: Hold the press; we have an increase in the EC sentiment index.
In one line: Disappointing given last month's rebound.
In one line: Decent, but more upside is needed in Q1 to tell a positive story overall.
In one line: Positive, but the trend is still down.
In one line: Steady and dovish.
In one line: Weakness in imports lifted the surplus; ZEW is still depressed.
In one line: Surprisingly strong, but too soon to cheer.
In one line: Unchanged and dovish; policy-review time table and details to be revealed later.
In one line: Rebound in the CPI confirmed; the rebound in construction will be short-lived, but Q4 now looks solid overall.
In one line: Solid, but risks loom for the Q2 numbers.
In one line: Are capital flows pointing to a stronger euro?
In one line: Core inflation will fall back this month; construction jumped in Q1, but a setback looms in Q2.
In one line: Stung by weakness across the board, but expect a rebound next month.
In one line: Holding on to recent gains, but we still look for a setback in H1.
In one line: Solid, but probably not sustainable; portfolio flows are accelerating.
In one line: Hit by slowdown in net trade and consumers' spending.
In one line: Portfolio flows are shooting higher; foreigners suddenly like EZ equities.
In one line: Weak, but not recessionary.
In one line: Soft, but decent overall.
Political Reform and change in the Eurozone...How much should investors care?
A complicated year ahead for EZ investors...but the economy still looks robust
We can't find much wrong with the EZ Economy...and that is probably worrying
The Economic Slowdown in the EZ: Temporary or Something More Sinister?
In one line: Marginally better in manufacturing; upturn in consumer sentiment halted, for now.
In one line: EZ inflation is picking up; retail sales look misleadingly strong given base effects in Q4.
In one line: Soft, but not a major shift in the key story.
In one line: Robust.
A familiar sense of crisis in the Eurozone
Muddling Through, Supported by Super-Easy Monetary Policy
Japan's money growth reverts back after a brief uptick. Japan's wage headline improves, details deteriorate. Japan's machine tool orders should turn stomachs.
China's PPI turning the corner. China's CPI inflation should peak this month ber's punchy trade data.
Japan GDP now shows more of the tax distortions. Japan's current account surplus is likely to see another downshift. Chinese imports boosted soybeans and circuits. China's FX reserves slide in November, as Phase One talks enter crunch time.
Not giving up on China's stimulus yet. China's PPI inflation will head higher this month. China's CPI inflation will peak soon.
Japan's capex on a much weaker footing than original data showed. Japan's current account surplus will continue to face cross-currents. China's export weakness is not over yet. China FX reserves spared as intervention goes on behind the scenes.
The Eurozone economy will have a bright start to 2017, but we think growth over the year as a whole will slow modestly compared with 2016.....
Latam Prospects Are Gradually Improving....Easing Trade Tensions Are Helping
In one line: Soft CPI data, but temporary distortions are depressing the core.
In one line: Core inflation is flirting with a break into a new, and higher, range.
In one line: Stabilisation complete; now an upturn?
In one line: Soft; strength in France and Germany offset by weakness elsewhere.
In one line: Stuck in neutral.
In one line: Sinking without a trace, but still not recessionary.
In one line: No relief at the start of Q4.
In one line: Solid; manufacturing index likely hit by pension reform strikes.
In one line: The French economy is bucking the trend, to the upside.
In one line: Amber alert.
In one line: Settling.
In one line: Not pretty PMIs; money supply details better than the headline.
In one line: Stable, but the core rate probably fell a bit.
In one line: Big rebound in services inflation; non-energy goods inflation is flat-lining.
In one line: Easter distortions drove services inflation higher; the core goods CPI is still subdued
In one line: Soft; we still don't know what is going on with the core rate.
In one line: Boosted by a jump in energy inflation; more upside ahead in Q1.
In one line: Trust the national core rate, and the HICP headline rate.
In one line: Hit by the unwinding of Easter-distortions, but still a big dip.
Japan's tertiary index shows Q2 services strength was merely an April leap. Japan's PPI is slated for more deflation.
Japan's M2 growth is going nowhere fast. Japanese machine tool orders suggest some stabilisation in global activity.
The only way to read the December NFIB survey and not be alarmed is to look at the headline, which fell by less than expected, and ignore the details.
The first round of trade talks between the U.S.and China kicked off in Beijing on Monday, marking the first face-to-face meeting between the two sides since Presidents Donald Trump and Xi Jinping struck a "truce" in December.
Yesterday's manufacturing data in Germany provided alarming evidence of a much more severe slowdown in the second half of last year than economists had initially expected.
China's official manufacturing PMI slipped in June, but the overall picture for Q2 is sound despite the uncertainty posed by rising trade tensions with the U.S.
Friday's industrial production data in Germany added to the manufacturing optimism following the sharp rise in new orders--see here--reported earlier in the week.
Mark Carney revealed last week that recent data had given him "greater confidence" that the weakness of Q1 GDP was almost entirely due to severe weather.
The Banxico minutes from the June 20 meeting, released last Thursday, offered more detail about the outlook for policy in the near term.
The recent softening in the ISM employment indexes failed to make itself felt in the June payroll numbers, which sailed on serenely even as tariff-induced chaos intensified at the industry and company level.
Brazil's industrial sector is still struggling, despite recent signs of better economic and financial conditions.
When trade-weighted sterling fell by 20% in 2016, it was widely expected that net trade would cushion GDP growth from the hit to households' real incomes.
The slew of EZ economic data on Friday supports our view that the economy ended 2016. The Commission's economic sentiment index jumped to 107.8 in December from a revised 106.6 in November. The headline strength was due to a big increase in "business climate indicator" and higher consumer sentiment. In individual countries, solid numbers for German construction and French services sentiment were the stand-out details.
For the MXN, last year was especially harsh. The currency endured extreme volatility, plunging 17% against the USD. So far, this year is off to a rocky start too. The MXN fell close to 2.5% during the first week of 2017.
Sterling was the worst performing G10 currency in 2016 and most analysts anticipate further weakness in 2017. The cost of purchasing downside protection for sterling over the next year also continues to exceed upside protection, as our first chart shows.
Colombian inflation ended 2017 slightly above the central bank's 2-to-4% target range, after a year in which policymakers cut interest rates to boost economic growth.
The upturn in German manufacturing orders waned slightly towards the end of 2017; factory orders fell 0.4% month-to-month in November.
We already know that the month-to-month movements in the key labor market components of the December NFIB small business survey were mixed; the data were released last week, ahead the official employment report, as usual.
Last week's news that output per hour jumped by 0.9% quarter-on-quarter in Q3--the biggest rise since Q2 2011--has fanned hopes that the underlying trend finally is improving.
Andean inflation remains under control, due to subpar growth, modest pressures on prices for nontradeables, and broadly stable currencies.
Small business sentiment and activity, as reported by the NFIB survey, has recovered exactly half the drop triggered by the rollover in stock prices in the fourth quarter. This matters, because most people work at small firms, which are responsible for the vast bulk of net job growth.
Brazil's central bank is in a very delicate situation. The economy is on the verge of another recession, but at the same time the BRL is falling, inflation expectations are rising and the inflation rate is overshooting. Fiscal policy is also tightening to restore macro stability magnifying the squeeze on growth.
The second estimate of Eurozone GDP confirmed that the economy grew 0.3% quarter-on-quarter in the final three months of last year, up slightly from 0.2% in the third quarter. Gross fixed capital formation and household consumption both rose 0.4%, but the improving trend in euro area GDP growth is almost exclusively driven by consumer spending.
The ECB's corporate bond purchase program began yesterday with purchases concentrated in utilities and telecoms, according to media sources. This is consistent with the structure of the market, and the fact that bond issues by firms in these sectors are the largest and most liquid. But debt issued by consumer staples firms likely also featured prominently.
In the wake of the February employment report, the implied probability of a June rate hike, measured by the fed funds future, jumped to 89% from 71%. The market now shows the chance of a funds rate at 75bp by the end of the year at just over 60%. That still looks low to us, but it is a big change and we very much doubt it represents the end of the shift in expectations.
We expected a consensus-beating ADP employment number for February, but the 298K leap was much better than our forecast, 210K. The error now becomes an input into our payroll model, shifting our estimate for tomorrow's official number to 250K; our initial forecast was 210K.
We'd be quite surprised if the headline payroll number today turned out to be far from the consensus, 205K, or our forecast, 225K.
It is still premature to make fundamental changes to our core views for the global or LatAm economy, following President Trump's plan to slap hefty tariffs on steel and aluminium imports, potentially escalating into a global trade war.
The industrial sector went from strength to strength in 2017. Year-over-year growth in production picked up to 2.1%--its highest rate since 2010--from 1.3% in 2016.
The latest round of Fed analysis on the weakness of first quarter growth, from the New York Fed, completely contradicts the conclusions of the San Fran Fed's work published a couple of weeks ago. The NY Fed found no statistically significant residual seasonality in the GDP numbers, and argued that the reported decline in economic activity was due entirely to the severe weather, which subtracted about two percentage points from headline growth.
Economic reports released yesterday indicate that the German economy was off to a solid start early in the second quarter. Industrial production rose 0.9% month-to-month in April, equivalent to a 1.4% increase year-over-year, up from a revised tiny 0.2% gain in March. This is the biggest annual jump in production since July last year, but the underlying trend is turning up only slowly, in line with the moderate improvement in survey data this year.
After 29 straight weekly declines, the number of oil rigs in operation in the U.S. rose to 640 in the week ended July 2, from 628 the previous week, according to oil services firm Baker Hughes, Inc. If today's report for the week ended July 9 shows the rig count steady or up again, it will b e much easier to argue that the plunge in activity since the peak--1,601 rigs, in mid-September--is now over.
Yesterday's headline economic data in Germany were decent enough. Industrial output edged higher by 0.3% month-to-month in May, lifted primarily by rising production of capital and consumer goods.
The 7.8% month-on-month plunge in Japan's core machine orders in May re-emphasises the underlying weakness that we have been worrying about, after the 5.2% jump in April.
Bond market volatility and political turmoil in Greece have been the key drivers of an abysmal second quarter for Eurozone equities. Recent panic in Chinese markets has further increased the pressure, adding to the wall of worry for investors. A correction in stocks is not alarming, though, following the surge in Q1 from the lows in October. The total return-- year-to-date in euros--for the benchmark MSCI EU ex-UK index remains a respectable 11.4%.
The rollover in bank lending to commercial and industrial companies probably is over. On the face of it, the slowdown has been alarming, with year-over-year growth in the stock of lending slowing to just 2.6% in April, from a sustained peak of more than 10% in the early part of last year.
The headline changes in yesterday's ECB policy announcement were largely as expected. The central bank left its main refinancing and deposit rates unchanged at 0.00% and -0.4% respectively, and maintained the pace of QE at €60B per month. The central bank also delivered the two expected changes to its introductory statement. The reference to "lower levels" was removed from the forward guidance on rates, signalling that the ECB does not expect that rates will be lowered anytime soon.
The Mexican inflation rate soared at the start of 2017, but this is yesterday's story; the headline will stabilize soon and will decline slowly towards the year-end. May data yesterday showed that inflation rose to 6.2%, from 5.8% in April. Prices fell 0.1% month-to-month unadjusted in May, driven mainly by lower non-core prices, which dropped by 1.3%, as a result of lower seasonal electricity tariffs.
December's payroll numbers were unexciting, exactly matching the 175K consensus when the 19K upward revision to November is taken into account. Some of the details were a bit odd, though, notably the 63K jump in healthcare jobs, well above the 40K trend, and the 19K drop in temporary workers, compared to the typical 15K monthly gain.
New orders data released yesterday for Germany confirmed that weakness in the manufacturing sector remains a key challenge for the economy. Factory orders fell 2.4% month-on-month in November, equivalent to a 0.4% fall year-over-year.
Data released on Friday showed that November inflation was in line with, or below, expectations in Brazil, Colombia and Chile.
The hard data in Germany took a turn for the worse at the start of Q4. The outlook for consumers' spending was dented by the October plunge in retail sales--see here-- and on Friday, the misery spilled over into manufacturing.
The headline NFIB index of small business activity and sentiment in July likely will be little changed from June--we expect a half-point dip, while the consensus forecast is for a repeat of June's 94.5--but what we really care about is the capex intentions componen
In Friday's Monitor we analysed the draft Japanese budget, as reported by Bloomberg. We suggested that the GDP bang-for-government-expenditure- buck is likely to be less than that implied by the authorities' forecasts.
We argued in the Monitor yesterday that the NFIB survey's hiring intentions number is the best guide to the trend in payroll growth a few months ahead. But today's November NFIB report will bring no new information on job growth because the key labor market elements of the survey have already been released.
The price of Brent oil has fallen sharply to $40 per barrel from about $50 just a month ago, and speculation is mounting that it could plunge to $20 soon. But CPI inflation should still pick up over coming months, provided oil prices remain above $30. And the absence of "second-round" effects of lower oil prices this year should reassure the Monetary Policy Committee that lower oil prices won't bear down on inflation over the medium-term.
Economic activity data in Chile have been soft and uneven this year, due mainly to the hit from low commodity prices and uncertainty surrounding the reform agenda, which has badly damaged consumer and investor sentiment. The latest Imacec index, a proxy for GDP, increased just 1.7% year-over-year in October, down from the 2.7% gain in September, and below the 2.2% average seen during Q3 as a whole.
The German manufacturing sector is showing signs of stabilisation with industrial production rising 0.2% month-on-month in October, equivalent to 0.8% year-over- year. This is consistent with a decent retracement in production this quarter, but growth is still only barely above zero.
London has been the U.K.'s growth star for the last two decades. Between 1997 and 2014, yearover-year growth in nominal Gross Value Added averaged 5.4% in London, greatly exceeding the 4% rate across the rest of the country. Surveys since the referendum, however, indicate that the capital is at the sharp end of the post-referendum downturn.
Colombia's economy has continued to slow, due mainly to lagged effect of the oil price shock since mid-2014, and stubbornly high inflation, which has triggered painful monetary tightening. Modest fiscal expansion and capital inflows have helped to avoid a hard landing, but the economy is still feeling the pain of weakening domestic demand. And the twin deficits--though improving--remain a threat.
Inflation pressures in Colombia cooled considerably last month. Saturday's CPI report showed that inflation fell to 3.4% year-over-year in July, its lowest level since 2014, from 4.0% in June.
The headline Chinese trade numbers are beginning to come into line with the story we have been telling about the more recent trends.
China's trade numbers for July surprised to the upside, with both exports and imports faring better than consensus forecasts in year-over-year terms.
We are a bit more optimistic than the consensus on the question of second quarter productivity growth, but the data are so unreliable and erratic that the difference between our 1.2% forecast and the 0.7% consensus estimate doesn't mean much.
Core PPI inflation has risen steadily this year, with month-to-month increases of 0.3% or more in five of the past six months.
China's export data shows little impact from trade tensions so far.
Investors with long sterling positions should not pin their hopes on Friday's GDP report to reverse some of the losses endured over the last week.
Core inflation--a long lagging indicator in the euro area-- will rise next year, in response to surging consumers' spending. Our first chart shows that services inflation likely will be a key theme in this story. Even allowing for a structural drag on inflation due to high unemployment outside Germany, cyclical risks to services inflation are tilted firmly to the upside.
OPEC's decision at the weekend to turn the oil market into a free-for-all means that the rebound in headline inflation over the next few months will be less dramatic than we had been expecting. Falling retail gas prices look set to subtract 0.2% from the headline index in both November and December, and by a further 0.1% in January. These declines are much smaller than in the same three months a year ago, so the headline rate will still rise sharply, to about 1.3% by January from 0.2% in October, but it won't approach 2% until the end of next year or early 2017,
The budget sequestration process, which cut discretionary government spending by a total of $114B in fiscal 2013 and fiscal 2014, was one of the dumbest things Congress has done in recent years.
China's trade surplus tumbled to $20.3B in January, from $54.7B in December, surprising the consensus for little change.
The Brazilian central bank cut the benchmark Selic interest rate by 25bp, to 6.75%, on Wednesday night, as expected.
In contrast to the strong December trade numbers in France--see here--yesterday's German data were soft. The seasonally adjusted trade surplus dipped to €21.5B in December, from €22.3B in November.
The MPC signalled yesterday that it is actively considering a May rate hike, stating that rates likely will "...need to be tightened somewhat earlier and by a somewhat greater degree over the forecast period than anticipated at the time of the November Report".
Colombia's annual inflation rate closed last year at 3.7% year-over-year, unchanged from November, and within Banrep's target, 2%-to-4%. Core inflation, ex-food and fuel, advanced to 2.8% in December from 2.6% in November.
Most of the evidence points to a robust December employment report today, though we doubt the headline number will match the heights seen in November, when the initial estimate showed payrolls up 321K. We look for 275K.
Productivity statistics released yesterday continued to paint a bleak picture. Output per worker rose by a mere 0.1% year-over-year in Q3, despite jumping by 0.6% quarter-on-quarter.
Figures due on Friday likely will show that the increase in industrial production in December was much smaller than the 0.6% month-to-month assumed by the ONS in its preliminar y Q4 GDP estimate. We expect a 0.2% rise, which would leave production down 0.1% quarter-on-quarter, rather than up 0.1% as the ONS initially estimated.
The twists and turns of the French presidential election campaign continue. François Fillon was tipped as favourite after he won the Republican primaries. But Mr. Fillon now is struggling to keep his campaign on track after allegations that he gave high paying "pro-forma" jobs to his wife as an assistant last year. The socialist candidate, Benoit Hamon, has been hampered by the unpopularity of his party's incumbent, François Hollande, and has lost ground to the far-left Jean-Luc Mélenchon.
A core element of our relatively upbeat macro view before the implementation of fiscal stimulus under the new administration is that the ending of the drag from falling capex in the oil sector will have quite wide, positive implications for growth. The recovery in direct oil sector spending is clear enough; it will just track the rising rig count, as usual.
Yesterday's ECB meeting left investors with a lot of thinking to do. The central bank kept its key interest rate unchanged, but extended and tweaked its asset purchase program. QE was extended until December 2017, but the monthly pace of purchases will be reduced by €20B per month to €60B starting April next year.
Mexico's economic outlook has dimmed recently, a point driven home by sentiment data released last week. Still, we think GDP growth will slow only marginally in Q4, to about 11⁄2% year-over-year. Consumers' spending likely will remain strong in the near term, thanks mainly to rising remittances from the U.S., driven by fear of policy changes under the Trump administration.
It's always easy to find reasons to doubt single monthly observations of any economic time series, but our first chart makes it very clear that the labor market has strengthened markedly over the past few months. The underlying trend rate of growth in private payrolls is now above 300K for the first time in exactly 20 years, and we seen no reason to expect much change over the next few months.
Last week's data supported our view that monetary policy across LatAm will continue to diverge in the short term. Brazil will have to prolong its monetary tightening cycle, while economies such as Colombia and Chile will remain on hold despite the recent slowdowns in their economic cycle.
Total real inventories rose at a $48.7B annualized rate in the fourth quarter, contributing 1.0 percentage points to headline GDP growth. Wholesale durable goods accounted for $34B of the aggregate increase, following startling 1.0% month-to-month nominal increases in both November and December. The November jump was lead by a 3.2% leap in the auto sector, but inventories rose sharply across a broad and diverse range of other durables, including lumber, professional equipment, electricals and miscellaneous.
German industrial production data were presented by Bloomberg News as signs that the recovery is "gathering momentum", but it is slightly premature to make that call. Narrow money growth is currently sending a strong signal of higher GDP growth this year in the euro area, but the message from the manufacturing sector is still one of stabilisation rather than acceleration.
The ECB made no major policy changes yesterday, but tweaked its communication. The key refinancing and deposit rates were kept at 0.00% and -0.4%, respectively, and the pace of QE was maintained at €30B per month.
Colombia's disinflation since mid-2016 has been driven by easing pressures on food prices, weak demand, and the better performance of the COP. But higher regulated prices at the start of the second quarter have triggered a pause in the downward trend.
In one line: Some improvement in retails sales, which now face renewed headwinds; infrastructure growth driver sputters.
In one line: Increase reflects valuation effects; China happy to see RMB appreciation.
In one line: Earth to Trump, the PBoC isn't devaluing the yuan
In one line: Still no recovery.
In one line: Machine tool orders feeling for the floor
In one line: Don't count out a likely last-minute PBoC cut before the end of the year
In one line: That's a bit better, but still no room for PBoC complacency
In one line: A rate cut is needed.
In one line: Phase One trade deal takes pressure off the PBoC to defend the RMB.
In one line: Just a valuations drag; net capital outflows up modestly
We read after the employment report that the drop in the unemployment rate was somehow not significant, because it was due in p art to a reported 41K drop in the size of the labor force, completing a 404K cumulative contraction over the three months to August. In our view, though, analysts need to take a broader approach to the picture painted by the household survey, which is much more volatile and less reliable than the payroll survey over short periods.
Final Q2 GDP data yesterday indicate the euro area economy was stronger than initially estimated in the first half of the year. Real GDP rose 0.4% quarter-on-quarter in Q2, slightly higher than the initial estimate of 0.3, following an upwardly revised 0.5% increase in Q1. Upward revisions to GDP in Italy were the key driver of the more upbeat growth picture. The revisions mean that annualised Eurozone growth is now estimated at 1.8% in the first six months of the year, up from the previous 1.4%, consistent with the bullish message from real M1 growth and the composite PMI.
Payroll growth in September and October probably won't be materially worse than August's meager 96K increase in private jobs.
Colombia's August inflation rate exceeded BanRep's 2-to-4% target range yet again, rising to a six-year high of 4.7%, from 4.5% in July. The signs of stabilization over the previous couple of months proved to be temporary. Core inflation has jumped above the upper bound of the inflation target too, climbing to 4.2%--the highest rate since 2009--in August from 4.0% in July, suggesting that the pass-through from the depreciating currency into consumer prices is starting to hurt. Inflation in tradables jumped in August to 5.2% from 4.7%, underscoring the hit from the COP's drop.
Inventories subtracted 1.3 percentage points from headline GDP growth in the second quarter and were by far the biggest constraint on the economy. This was the fifth straight drag from inventories, but it was more than twice the average hit over the previous year.
In one line: Domestic weakness rebuilds China's current account surplus.
Yesterday's ECB policy decision was a carbon copy of the announcement in July. The central bank maintained its key refinancing rate at 0.00%, and also kept its deposit and marginal lending facility rates unchanged at -0.4% and 0.25% respectively. The ECB also kept the pace of QE unchanged at €80B per month. Finally, the central bank refrained from formally extending QE.
In one line: China's October money and credit data make a mockery of the 5bp PBoC rate cut
In one line: That's a bit better, but a rate cut remains more likely than not.
Japan's machinery orders are set to stay weak. Japan's PPI deflation likely just troughed.
Japan's wage picture has turned ugly for workers, even accounting for sampling distortions. China's current account surplus increase is hard to fathom.
China's trade surplus rejoins previous uptrend. China's FX reserves; strong valuations boost outweighs sales. Japan's Q1 GDP gets an upgrade, at the expense of Q2. Japan's current account surplus.
Big gains in the size of the labour force continue to flatter Korea's unemployment rate. Japan's exit from PPI deflation will be followed by only modest inflation.
Japan's machine tool orders remain nasty. Japan's M2 growth shows first signs of looming tax hike.
China's firms aren't passing on tax hikes after all. China takes full advantage of previous oil price declines. Japan's core machine orders better than expected, but that won't help Q2. Japan is heading for a spell of sustained PPI deflation in H2. Better May jobs report will help to keep any BoK rate cuts at bay.
Japan's M2 growth stabilises but the near three year downtrend leaves GDP growth looking exposed
CPI inflation in China punches through the 3% target. PPI deflation in China should soon bottom out. Japan's rugby boost small in the face of pre-tax front loading. September machinery orders data seriously undermines Japan's "resilient capex" story.
Expect Chinese PPI deflation in the second half. China's CPI inflation faces non-core cross currents; services inflation still slowing. Unemployment in Korea held steady in June; the BoK will be chuffed about improving job growth. PPI deflation in Japan will persist until the end of the year.
CPI inflation in China is nearing a peak, with pork prices starting to stabilise. November's data confirm that PPI deflation in China has bottomed out. Japan's M2 growth looks exposed to a downward revision. Japan's machine tool orders refuse to turn.
PBoC holding still in the wake of Fed rate cut. China's Caixin manufacturing PMI was due a bounce. Inflation in Korea will soon take another nosedive, due largely to unfavourable non-core base effects. Korea's export slump turned less bad in July. Korea's two main manufacturing surveys aren't talking to each other.
In one line: Confidence to borrow is lacking, but M1 growth pick-up is a welcome sign.
Easing isn't going exactly to plan... a trade deal would really help
Tankan reinforces our impression of a nasty Q2. China's manufacturing PMIs show why the authorities are eager for a trade deal. China's non-manufacturing sector holds steady for now. Korean exports disappointed in June, but this probably is as bad as it will get. Ignore Korea's volatile PMI readings... sentiment is improving gradually.
April wasn't so bad for Korean exports, which are starting to bottom out in real terms
The Tankan points to a q/q contraction for capex in Q3, but GDP growth overall will stay strong. Japan's unemployment steady, but details bode ill for Q4. September's full-month data dispel some export worries in Korea; expect a Q3 lift from net trade. Korea's PMI pours cold water on the spectacular jobs report for August. September is as bad as it gets for Korean CPI deflation.
Japan's labour market remains tight but will face persistent slackening from here. Caixin manufacturing on a tear. In the end, CPI deflation in Korea lasted just one month. October probably was the y/y trough in Korea's export slump. Business sentiment in Korea is recovering... albeit only slowly.
Friday's detailed Q2 growth data in the EZ broadly confirmed the advance numbers.
Inflation in most economies in LatAm is well under control, allowing central banks to keep a dovish bias, and giving them room for further rate cuts.
Three of the big LatAm economies-- Brazil, Colombia and Chile--released October inflation last week; the data are still showing the pass-through effects of currency depreciation during the first half of the year into prices, though, at different degrees. LatAm currencies have been hit by the weakness in commodity prices and negative sentiment towards EM generally.
At a stroke, the October payroll report returned the short-term trend in payroll growth to the range in place since 2011, pushed the unemployment rate into the lower part of the Fed's Nairu range, and lifted the year-over-year rate of growth of hourly earnings to a six-year high. The FOMC has never quantitatively defined what it means by "some further improvement in the labor market", its condition for increasing rates, but if the October report does not qualify, it's hard to know what might fit the bill. We expect a 25bp increase in December.
This week's Inflation Report--now released alongside the MPC's decision and minutes of its meeting in a deluge of releases now known as "Super Thursday"--is likely to be a damp squib.
Friday's industrial production data capped another dreadful week for German manufacturing. Output fell 1.1% month-to-month in September, pushing the year-over-year rate lower to 0.2%, from a revised 2.9% in August. The 0.6% upward revision of the previous month's data makes the data slightly less awful than the headline, but the details showed weakness across all core sectors. The underlying trend in production is stable at about 1.2% year-over-year, but downbeat new orders suggest it will weaken in the fourth quarter.
The Monetary Policy Committee continues to assert that it can leave interest rates at rock-bottom levels, even though the unemployment rate has returned to its pre-recession level, because it understates the extent of slack in the labour market. If that hypothesis were correct, however, the relationship between the unemployment rate and wage growth would have weakened. But this clearly has not happened, as our first chart shows.
News on Mr. Bolsonaro's economic plans and announcements on key names for his government this week are helping the currency and easing risks perception in Brazil.
The recent surge in the oil price has added to the headwinds set to batter the economy over the next year. The price of Brent crude has jumped by $10 since September to $64, its highest level since June 2015.
We were pretty sure that the underlying trend in jobless claims had bottomed, in the high 230s, before the hurricanes began to distort the data in early September.
The undershoot in April payrolls, relative to the consensus, is a story of a fluke number in just one sector. Retail payrolls reportedly shrank by 3K, after rising by an average of 52K over the previous six months. Our first chart shows clearly that the retail payrolls are quite volatile over short periods, with sudden and often inexplicable swings in both directions quite common.
The trade-off between the timeliness and accuracy of the data is fundamental to macroeconomic analysis. Coincident data such as GDP, industrial production and retail sales are the most direct measures of economic activity, but their first estimates don't always tell the full story.
We just can't get away from the deeply vexed question of wages; specifically, why the rate of growth of nominal hourly earnings has risen only to just over 2.5%, even though the historical relationship between wage gains and the tightness of the labor market points to increases of 4%-plus.
China's trade data looked more normal in April. The trade balance rebounded to a surplus of $28.8B in April, from a deficit of $5.0B in March. Exports also bounced back, rising 12.9% year-over-year in April, after a 2.7% decline in March.
The Prime Minister has argued repeatedly during the general election campaign that Britain will prosper under a "strong and stable" Conservative government with a large majority. "Division in Westminster," she argued when calling the election last month, "...will risk our ability to make a success of Brexit and it will cause damaging uncertainty and instability to the country."
March economic activity in Chile expanded by a solid 4.6% year-over-year, pointing to Q1 real GDP growth of 4.0%, the fastest pace since Q3 2013, up from 3.3% in Q4.
Yesterday's economic reports showed that the German economy firmed at the end of Q1, but this doesn't change the story for a poor quarter overall.
Core producer price inflation is falling, and it probably has not yet hit bottom.
China's trade surplus collapsed unexpectedly in April, to $13.8B, from a trivially-revised $32.4B in March.
China's official, unadjusted trade data for October grabbed the headlines, as they look great at first glance.
A flawed theory still is circulating that the economy might outperform over the next two quarters because firms will stockpile goods due to the risk of a no-deal Brexit.
Yesterday's industrial production data in Germany were better than we feared. Output slipped 0.3% month-to-month in August, depressing the year- over-rate to -0.4% from 1.6% in July, a minor fall given evidence of a big hit from weakness in the auto sector ahead of the EU emissions tests.
Since April, the presidential elections in Brazil have dominated local discourse, prompting several market moves.
Friday's German new orders data were sizzling. Factory orders jumped 3.6% month-to-month in August, pushing the year-over-year rate up to a nine-month high of 7.8%, from an upwardly-revised 5.4% in July.
Over the weekend, the PBoC cut the RRR for the vast majority of banks. FX reserves data released shortly after suggested that the Bank already is propping up the currency.
We expect August's GDP figures, released on Wednesday, to show that month-to-month growth slowed to 0.1%, from 0.3% in July.
The PBoC cut the Reserve Requirement Ratio late on Friday--as signalled at last Wednesday's State Council meeting--by 0.5 percentage points, to be implemented from September 16.
After last week's drama, the pace of political developments should slow down this week.
The dip in payroll growth in September was due to Hurricane Florence. We expect a clear rebound in payrolls in October; our tentative forecast is 250K.
Japanese average regular wages increased at an annualised rate of 0.6% in the three months to August compared with the previous three months, matching the rate in July.
Recent inflation numbers across LatAm have surprised, in both directions. On the upside, Brazil's IPCA index rose 0.2% month-to-month in September, above the market consensus forecast of 0.1%.
We look for August's GDP report, released on Thursday, to show that output held steady, following July's 0.3% month-to-month jump.
Chile's inflation outlook remains benign, allowing policymakers to cut interest rates if the economic recovery falters.
Convention dictates that we lead with yesterday's Fed meeting, but it's hard to argue that it really deserves top billing.
Japan's current account surplus has been broadly stable in absolute terms in the last couple of years, though it has retreated as a share of GDP.
Trade data yesterday added to the downbeat impression of the German economy, following poor manufacturing data earlier in the week. Exports plunged 5.2% month-to-month in August--the second biggest monthly fall ever--pushing the year-over-year rate down to 4.4%, from a revised 6.3% in July. Surging growth in the past six months, and base effects pointed to a big fall in August, but we didn't expect a collapse.
The big four LatAm economies, Brazil, Mexico, Colombia and Chile, released September inflation this week and the data showed three clear--and contrasting--trends. Inflation is accelerating in the Andes, whereas the headline rate hit another historic low in Mexico. Inflation in Brazil is still the depressing outlier, with annual CPI inflation hovering around 9.5% year-over-year in recent months, well above the rates of its regional peers. But it is close to peaking, at last.
The FOMC minutes showed both sides of the hike debate are digging in their heels. As the doves are a majority--rates haven't been hiked--the tone of the minutes is, well, a bit do vish. But don't let that detract from the key point that, "Most participants continued to anticipate that, based on their assessment of current economic conditions and their outlook for economic activity, the labor market, and inflation, the conditions for policy firming had been met or would likely be met by the end of the year." Confidence in this view has diminished among "some" participants, however, worried about the impact of the strong dollar, falling stock prices and weaker growth in China on U.S. net exports and inflation.
In one line: Not pretty; the slowdown intensified in Q3.
In one line: Don't extrapolate low EZ inflation; both the headline and core will rise into year-end.
In one line: No longer insulated from Brexit uncertainties.
In one line: Resilient wage growth bolsters the case for rate hikes.
In one line: Slower growth reported following methodological improvements.
In one line: Clearer signs of "stagflation".
In one line: Another robust report, undermining the case for a rate cut.
In one line: The downturn is deepening, through a rapid rebound will emerge if no-deal Brexit risk subsides.
In one line: Softening gradual enough for the MPC to keep its powder dry.
In one line: Wage growth is too strong for the MPC to mull renewed stimulus.
In one line: Downbeat consumer sentiment casts doubt over the Tories' majority hopes.
In one line: Business and consumer confidence is diverging.
In one line: Slowing, but not as sharply as we had feared.
In one line: Stagnation unlikely to persist in Q3.
In one line: Q1 net trade hit confirmed; a rebound in Q2?
In one line: Stagnation signal should be disregarded, again.
In one line: A mediocre month, but a lasting slowdown isn't likely.
In one line: Still a big gap between business and consumer confidence.
In one line: Consumers are defiantly optimistic, despite the Brexit saga.
In one line: The inflation outlook still does not warrant lower interest rates.
In one line: Pre-Brexit preparations offering little support, so far
In one line: Probably this year's weakest point.
In one line: Maintaining its composure; tightening still likely, if no-deal is averted.
In one line: Lower mortgage rates are limiting the damage from Brexit uncertainty.
In one line: Consistent with steady, if unspectacular, GDP growth.
In one line: New forecasts reveal a slight near-term easing bias.
In one line: No longer slowing; lower mortgage rates are helping.
In one line: Back to normal.
In one line: Depressed, but not knocked out, by Brexit uncertainty.
In one line: No cause for alarm.
In one line: The survey's poor track record recently means its recession signal should not be believed.
In one line: Not much of a Brexit deal bounce.
In one line: Renewed stockpiling provides fleeting relief from the downturn.
In one line: On course to reverse the Q1 boost.
In one line: No longer outperforming now the stockpiling boost has fully worn off.
In one line: Renewed stockpiling provides some near-term relief.
In one line: Don't take the PMI's recession signal literally.
In one line: Tentatively moving in the right direction.
In one line: Modest revival weakens the case for fresh monetary stimulus.
In one line: Inflation still little source of concern.
In one line: A substantial improvement, but not in line with fundamentals.
In one line: Low inflation still gives the BCB board room for manoeuvre.
In one line: Underlying pressures are modest, and food prices are starting to stabilise.
In one line: Inflation falls sharply helped, by a favourable base effect and a sluggish economic recovery.
In one line: Brazilian inflation is well under control, giving the COPOM room for manoeuvre.
In one line: Underlying pressures are tame, despite the CLP sell-off in early Q4.
In one line: A sharp m/m rebound, but it won't impede a rate cut in December.
In one line: A modest m/m increase, but the CLP sell-off in November poses upside risks.
In one line: Pressures are well under control; the BCCh to remain on the sidelines, for now.
In one line: Inflation is well under control; the BCB will cut rates next week.
In one line: Underlying pressures will remain low, despite the food-related shock.
In one line: Disinflation resumes as the economy falters.
In one line: A sharp fall helped by a favourable base effect; underlying pressures are tame.
In one line: Inflation ended 2019 above the target, due mainly to the meat-price shock.
In one line: A sharp increase, but due mainly to temporary factors.
In one line: No serious inflation threats, at least for now.
In one line: Beef prices drive up inflation, but underlying pressures will remain low.
In one line: Well-behaved inflation in September supports the case for further monetary easing.
In one line: An unexpected fall, strengthening BCCh doves.
In one line: The cautious approach continues as the economy struggles and uncertainty remains high
In one line: A strong Q3 and upside risks to private consumption looking forward.
In one line: A good report; on track for another solid quarter.
In one line: A decent report boosted by Black Friday sales and severance funds.
In one line: Stronger than expected, but threats persist.
In one line: The slow recovery of the Brazilian labor market continues.
In one line: The labor market is gradually deteriorating.
In one line: Unemployment nudges higher in Q3.
In one line: The gradual recovery of the labour market continues.
In one line: A big downside surprise.
In one line: A solid m/m increase; the quarter as whole should be decent.
In one line: On hold for now; progress on pension reform is the key.
In one line: A bold cut, and further easing in Q1 is live.
In one line: A bold cut to help the economic recovery, more to come.
In one line: Another bold cut, but the easing cycle is nearly over.
In one line: Another bold cut and more stimulus is likely.
In one line: A modest increase, but an uptrend is consolidating.
In one line: Another signal of feeble economic activity
In one line: No sign of stockpiling ahead of the October deadline.
In one line: Small deficits reflect volatility, not an emerging boost from the weaker pound.
In one line: Consistent with an immediate pick-up in activity after the election.
In one line: Destocking is driving the renewed slowdown.
In one line: Year-end struggles should give way to stabilisation in Q1.
In one line: Probably still misleadingly weak.
In one line: Recovery primarily driven by lower mortgage rates.
In one line: Trade surpluses won't be the norm.
In one line: House price gains are set to strengthen.
In one line: Shockingly weak, leaving the MPC's January meeting now finely balanced.
In one line: Hit by election-related indecision in the public sector; expect a recovery 2020.
In one line: Not subdued enough for the MPC to ease.
In one line: Another positive sign, though the survey is not a precise guide to the PMI.
In one line: Ending the year on a very weak note.
In one line: Mixed messages.
In one line: Driven lower by the volatile airline fares and hotels components; expect a rebound in Q1.
In one line: Consistent with negligible GDP growth in Q4.
In one line: Strong enough to make the doves pause for thought.
In one line: Indicative of confidence recovering, if the Withdrawal Agreement is passed quickly.
In one line: Renewed stockpiling to blame for the larger deficit.
Today brings only the preliminary Michigan consumer sentiment data for January so we want to take some time to look at how recent changes to Medicare Part B premiums, which cover doctors' fees, are likely to affect inflation over the next few months.
In one line: Headline weakness hides employment rebound, but is it real?
In one line: Ouch. The manufacturing recession continues.
In one line: Not sustainable.
In one line: Back to trend.
In one line: Disappointing, but not a change in the trend.
Ian Shepherdson, Pantheon Macroeconomics chief economist, discusses his outlook on the U.S. economy and the long-lasting bull market.
In one line: Solid Dec but downward revisions will hit Q4 GDP estimates.
In one line: No overall PPI threat, but airline fares jump will lift the core PCE deflator.
In one line: Decent core manufacturing hidden by weather-driven utility plunge.
In one line: Both volumes and prices have further to rise.
In one line: The hit from tariffs on consumer goods has gone, mostly.
In one line: Bouncing along the bottom; no real recovery in sight.
In one line: Still soft, but expect a bounce next month from the Phase One trade deal.
In one line: Lifted by the stock market.
In one line: Sentiment is solid, but job openings are softening.
In one line: Philly details much less spectacular than the headline; jobless claims back to lows.
In one line: No signs of manufacturing rebound here.
In one line: Pointing to a rebound in the official data in December, though Q4 trading was subdued overall.
In one line: Still committed to rate hikes, but not willing to pull the trigger just yet.
In one line: Bottoming, but still very weak.
In one line: Disappointing but a rebound is coming.
In one line: Disconnected from the rebound in China's surveys by the trade war.
In one line: Terrible.
In one line: Policy uncertainty is not lifting layoffs.
In one line: Looks bad, but the trend is not--yet--running at 0.3% per month.
In one line: Both better than expected, but downside risk is not over.
In one line: Trade wars have consequences.
In one line: Trade deficit has stabilized, provided the China talks don't fall apart.
In one line: The calm before the export storm?
In one line: The inventory-related slump in export demand nearly is over; industrial production will bounce back in the summer.
In one line: The import surge will unwind in Q2.
In one line: Surprise surplus due to erratic goods; don't expect a trade boost to materialise soon.
In one line: Rising import prices point to upside risk to the MPC's new inflation forecast.
In one line: Solid, but it won't last.
In one line: Exports softening broadly.
In one line: The advance goods deficit rose to $71.4B in April from $70.9B in March, better than the consensus, $73.0B.
In one line: Capex orders and trade are net neutral for Q2 GDP estimates.
In one line: Soft, but the outlook is for a much worse numbers in Q4 and beyond.
In one line: Better, and scope for further gains.
In one line: Better, but still much lower than it should be, thanks to the trade war.
In one line: Surging employment index means payroll weakness likely will be temporary
In one line: The trend in sales is rising, and inventory is falling.
In one line: Small firms don't like the trade war.
In one line: Core sales have surged in Q3, but expect a much weaker Q4.
In one line: Core services prices jump, but it's noise not signal.
In one line: Spending growth is slowing; expect hefty Q3 GDP forecast markdowns.
In one line: Not as good as it looks.
In one line: Grim. Thank the trade war, which means no improvement is likely anytime soon.
In one line: Tariff effects held the deficit down; it will rebound sharply in Q4.
In one line: Looks great but it won't last.
In one line: A decent month, but much better to come later in the year.
In one line: Little sign of the feared trade hit on Q2 GDP growth, so far.
In one line: Trade will be a small drag on Q2 GDP growth.
In one line: Grim; no sign of hitting bottom despite better regional surveys.
In one line: The calm before the storm.
In one line: A modest increase, but underlying inflation is stable.
In one line: Inflation edged lower in August, leaving the door open for further interest rate cuts.
In one line: Stung by weakness in output of electronics and pharmaceuticals.
In one line: We'll take any increase here, but the trend still looks grim.
In one line: The next few months will be better, but Q4 as a whole looks grim.
In one line: A bit better, but Q3 as a whole was weak.
In one line: Core inflation will fall back this month; construction jumped in Q1, but a setback looms in Q2.
In one line: Early EZ inflation data for December coming in hot.
In one line: More poor Q2 data; EZ core inflation rebounds, but it is not going anywhere fast.
In one line: Consumers on track for a solid Q2; services inflation on the rebound?
In one line: Great, but probably not enough to salvage the Q2 number.
In one line: Another poor performance is underway in Q3.
In one line: Robust, but base effects are challenging for manufacturing in Q2.
In one line: Soft; blame Ireland and the Netherlands.
In one line: Manufacturing output has stalled; trade data point to downward Q3 GDP revision.
In one line: So-so, but downside risks to the Q2 GDP headline linger.
In one line: A bit better in German manufacturing; the setback in exports was expected.
In one line: Not bad, but Q3 as a whole likely was soft.
In one line: Not terrible, but outlook for Q2 as a whole is grim.
In one line: Old news in the CPI data, weak trade, and a horrible ZEW.
In one line: What strikes?
In one line: Not pretty, but mostly due to crazy volatility in Germany.
In one line: Disappointing, but online sales will rebound next month.
In one line: Soft, but trend is still firm.
In one line: Blame Germany; the data were decent elsewhere.
In one line: Coming in hot; lifted by higher food and core inflation.
In one line: Surprisingly solid.
In one line: A further rebound in investor sentiment, and a robust Q1 for the EZ consumer.
In one line: Still depressed by deflation in energy prices; the core looks robust.
In one line: A good start to Q4; note the rebound in M1 growth.
In one line: Steady, and still solid.
In one line: EZ labour costs are accelerating.
In one line: Wage growth is firming in the Eurozone, but the ECB is focused elsewhere.
In one line: Grim, but the details are more encouraging.
In one line: A setback within a slowly rising trend.
In one line: Robust, despite marginal dip in M1 growth.
In one line: No recession here.
In one line: Any more or this, and we'll have to upgrade our 2020 GDP growth forecasts.
In one line: Rebound confirmed, we think.
In one line: Decent headline, even better details.
In one line: Hit by lower inflation in energy and clothing.
In one line: Old news, but spectacular details all the same.
In one line: Core firmer in both countries, but they're probably now stabilising.
In one line: All over the place.
In one line: The HICP core rate appears to be returning to its trend of about 1.5%
In one line: Hit by slower inflation in energy and food; the core rate rose, but the details were soft.
In one line: German (HICP) core inflation is rising.
In one line: Leisure services are throwing the core rate around.
In one line: French core inflation is rebounding.
In one line: French core inflation is now back to its previous trend; further upside?
In one line: Deflation in manufactured goods is still a big drag.
In one line: Core inflation remains subdued, but it will rise soon.
In one line: Hit by lower energy and services inflation.
In one line: Soaring, but stabilisation beckons in Q1.
In one line: Rising food inflation offset plunge in energy inflation; core stable.
In one line: Very soft, but services inflation should rebound soon.
In one line: Boosted by sharp rebound in services inflation.
In one line: Grim manufacturing, mixed money supply data.
In one line: Still miserable in EZ manufacturing, but an impressive jump in the Sentix.
In one line: Stability; thanks to solid services.
In one line: A stable headline with resilience in services and depressed manufacturing
In one line: EZ services are still holding up.
In one line: Soft, but also resilient overall.
In one line: Slowdown confirmed; budget surplus stronger than expected, again.
In one line: Mixed, but overall further evidence of stabilisation.
In one line: EZ GDP growth held up by consumers' and government spending.
In one line: Stabilisation, not recession.
In one line: An altogether more positive picture.
In one line: Ugly services PMIs in Spain and Italy, but they should recover next month.
In one line: A bad finish to a bad year.
In one line: Small rebound confirmed, but still overall weak.
In one line: Still weak, but a few signs of improvement.
In one line: Not pretty; downside risks remain for industrial production in Q2.
In one line: Still grim, but the rate of contraction is easing.
In one line: The headline CPI has bottomed for the year.
In one line: Core inflation is overshooting; construction set to remain soft in Q4.
In one line: Looking strong, but the recent jump in geopolitical risk is not fully factored-in.
In one line: Ouch.
In one line: A marginal improvement, but poor mining activity remains a drag.
In one line: The recovery continues; risks are titling to the upside.
In one line: Solid, and further gains likely in coming months.
In one line: A surprising rebound in activity.
In one line: Soft start to the third quarter; the trade war is a huge drag.
In one line: Social unrest puts the economy on its knees.
In one line: Economic activity its rebounding following the social unrest.
In one line: A modest rebound, but the trend is improving.
In one line: The modest recovery is on track, but risks remain.
In one line: A decent improvement, and we expect further good news ahead.
In one line: Modest inflation pressures amid subpar economic activity.
In one line: Underlying inflation pressures continue to ease.
In one line: Inflation falls close to target, allowing Banxico to cut rates.
In one line: An ugly start to the second quarter, despite a modest improvement in sectoral data.
In one line: The modest uptrend continues.
In one line: The economy did very badly in Q1, and risks are still tilted to the downside.
In one line: Better domestic conditions offset by rising external risks.
In one line: A soft headline and a near-term misery looms.
In one line: A poor start to the third quarter and downside risks remain.
In one line: An ugly end to the first quarter, but output likely will stabilize in Q2.
In one line: A soft start to the quarter, but leading indicators point to a decent Q3 as a whole.
In one line: A strong m/m increase, but downside threats remain.
In one line: Weak, but expect better data ahead.
In one line: A decent start to Q4 for the industrial sector.
In one line: A sharp increase on the month, but underlying pressures remain tame.
In one line: A mixed industrial picture; manufacturing output is weakening, but other sectors seem to be reviving.
In one line: Sluggish, but production rose in Q3.
In one line: A soft start to Q2, following an ugly Q1.
In one line: Early signs of stabilisation, but the rebound remains fragile.
In one line: Resilient, but downside risks are emerging .
In one line: A soft start to the year, but we expect better numbers ahead.
In one line: An ugly headline, but the detail are not as horrible.
In one line: The first q/q fall since 2016 due to an array of domestic and external challenges.
In one line: A resilient economy despite many shocks.
In one line: Poor capex in Q3, and consumer confidence is deteriorating.
In one line: Consumption and capex boosted GDP growth last quarter.
In one line: Headline up, but core down.
In one line: Disinflation will resume in Q2; core pressures are easing
In one line: Solid; net exports on track for a Q4 rebound.
In one line: Très bien; boosted by exports of transport goods and pharmaceuticals.
In one line: Lifted by a robust export growth.
In one line: Not pretty, but partly mean reversion from the previous month.
In one line: A Q3 rebound in net exports underway?
In one line: Excellent, but clouds are gathering in some countries.
In one line: Robust; the Q2/Q3 recession call is now even more difficult to sustain.
In one line: Solid export headline, but net trade probably fell in Q1.
In one line: French net exports likely fell sharply in Q3.
In one line: Soaring; probably lifted by pre-Brexit stock building in the U.K.
In one line: A welcome rebound, but investors' bogeymen remain.
In one line: Moods are souring again at the start of Q4.
In one line: Dreadful.
In one line: Grim trade data, but decent labour costs headline.
In one line: Solid start to Q4 for net trade; wage growth dipped, slightly, in Q4.
In one line: Hit by jump in imports.
In one line: Hit by slowing exports, but trend looks stable.
In one line: The positive trend is petering out.
In one line: German unemployment is now rising; about that fiscal stimulus?
In one line: On hold, but the BCRP will cut rates soon.
In one line: Adopting a dovish stance as the economy fails to gather speed.
In one line: Rates on hold; trade tensions are a key risk to start policy normalization.
In one line: On hold; and in no rush to move rates in the foreseeable future.
In one line: On hold; and in no rush to move rates in the foreseeable future.
In one line: Inflation falling rapidly as the economy comes under severe strain.
In one line: On hold, but ready to cut if the economic recovery falters.
In one line: Policymakers surprise markets by cutting rates.
In one line: A modest rate cut, and most of the Board is cautious.
In one line: On hold, patience persists.
In one line: Robust.
In one line: Horrible.
In one line: Back to reality.
In one line: Upwards and onwards.
Pantheon Macroeconomics is pleased to make available to you our Outlooks for the second half of 2017 for the US, Eurozone, UK, Asia, and Latin America. These reports present our key views, giving you a concise summary of our economic and policy expectations. If you are interested in seeing publications which you don't already receive, please request a complimentary trial
In one line: On hold, but challenging external conditions will force BanRep to cut rates in late Q4 or Q1.
Pantheon Macroeconomics is pleased to make available to you our Outlooks for the second half of 2017 for the US, Eurozone, UK, Asia, and Latin America. These reports present our key views, giving you a concise summary of our economic and policy expectations. If you are interested in seeing publications which you don't already receive, please request a complimentary trial
We aren't convinced that China's recovery is in train just yet.
Colombia and Chile faced similar broad trends through most of 2018.
The pick-up in the Markit/CIPS services PMI to an eight-month high of 55.1 in June, from 54.0 in May, has provided another boost to expectations that the MPC will raise Bank Rate at its next meeting on August 2.
Payroll growth rebounded to 223K in May, after two sub-200K readings, and we're expecting today's June ADP report to signal that labor demand remains strong.
The slowdown in quarter-on-quarter growth in households' real spending to 0.4% in Q1--just half 2016's average rate--was driven entirely by a 0.1% fall in purchases of goods. Households' spending on services, by contrast, continued to grow briskly. Indeed, the 0.8% quarter-on-quarter rise in households' real spending on services exceeded 2016's average 0.5% rate.
Headline Eurozone PMI data have declined steadily since the beginning of the year, but the June numbers stopped the rot.
Korea's economic data for June largely were poor, and are likely to make more BoK board members anxious ,ahead of their meeting on July 18.
We have argued consistently for some time that the next year will bring a clear acceleration in U.S. wage growth, because the unemployment rate has fallen below the Nairu and a host of business survey indicators point to clear upward wage pressures. Nominal wage growth has been constrained, in our view, by the unexpected decline in core inflation from 2012 through early 2015, which boosted real wage growth and, hence, eased the pressure from employees for bigger nominal raises.
Argentina's overdue policy tightening, aimed at dealing with the country's severe inflation and fiscal problems, is underway. Printing of ARS at the central bank, the BCRA, to finance the budget, deficit has slowed and will be curbed further. Welfare spending, which accounts for nearly half of government spending, has been put on the chopping block.
Yesterday's EZ consumers' spending data were mixed. Retail sales in the euro area fell by 0.3% month-to-month in May, extending the slide from a revised 0.1% dip in April.
Brazil's external position continue to improve, but we are sticking to our view that further significant gains are unlikely in the second half, given the stronger BRL. For now, though, we still see some momentum, with the unadjusted trade surplus increasing to USD7.2B in June, up from USD4.0B a year earlier. Exports surged 24% year-over-year but imports rose only 3%.
December's Markit/CIPS surveys for the manufacturing, construction and services sectors suggest that the economy ended 2017 on a lacklustre note.
Yesterday's advance CPI report in the Eurozone showed that inflation pressures are rising rapidly. Inflation rose to 1.1% year-over-year in December, from 0.6% in November. Surging energy inflation was the key driver, and this component likely will continue to rise in the next few months. Core inflation, however, stayed subdued, rising only slightly to 0.9%, from 0.8% in November.
The prospect of a Greek parliamentary election on January 25th, following Prime Minister Samaras' failure to secure support for his presidential candidate, weighed on Eurozone assets over the holidays. The looming political chaos in Greece will increase market volatility in the first quarter, but it is too early to panic.
Dilma Rousseff was sworn in for a second term as Brazil's president last Thursday, vowing to extend social welfare programmes and promising to investigate the Petrobras corruption scandal.
November's money and credit figures showed that households increasingly turned to unsecured debt last year in order to maintain rapid growth in consumption. Unsecured borrowing, excluding student loans, rose by £1.7B in November alone, the most since March 2005. This pushed up the year- over-year growth rate of unsecured borrowing to 10.8%--again, the highest rate since 2005--from 10.6% in October.
Yesterday's final PMI data added to the evidence that the EZ economy was firing on all cylinders at the end of last year. The composite PMI in the euro area rose to an 11-year high of 58.5 in December, from 57.5 in November, in line with the initial estimate.
The Caixin services PMI jumped sharply to 53.9 in December from 51.9 in November. All the PMIs picked up significantly, but we find this hard to believe and suspect seasonality is to blame, though the adjustment is tricky.
In the wake of yesterday's ADP report, which showed private payrolls up 250K in December, we have revised our forecast for today's official headline number up to 240K from 210K.
LatAm financial markets have performed solidly in the first sessions of the year, with most regional currencies trading more strongly against the USD.
It will take months, and perhaps years, before markets have any clarity on the U.K.'s new relationship with the EU. In the U.K., the main parties remain shell-shocked. Both leading candidates for the Tory leadership, and, hence, the post of Prime Minister, have said that they would wait before triggering Article 50.
Youth unemployment remains a blemish on the Eurozone economy, despite an increasingly resilient cyclical recovery. The unemployment rate for young workers aged 15-to-24 years stood at 18.4% at the end of April, chiefly due to high joblessness in the periphery.
In the wake of last week's downward revision to fourth quarter GDP growth, productivity will be revised down too. We expect the initial estimate, -1.8%, to be revised down to -2.4%, a startling reversal after robust gains in the second and third quarters.
The ECB will keep interest rates on hold later today, and the commitment to monthly asset purchases of €60B--of which €50B will be sovereigns--until September next year will also remain unchanged. Sovereign QE should begin formally next week, but it has already turned bond markets upside down.
The violence of recent bond market weakness likely has been driven mainly by reduced liquidity, and a squeeze in crowded positions. But we also think that it can be partly explained by an adjustment to higher inflation expectations. The latest ECB staff projections assume the average HICP inflation will be 0.3% this year, up from the zero predicted in March. Allowing for a smooth increase over the remainder of the year, this implies a year-end inflation rate of 0.8%.
China's National People's Congress is set to convene its annual meeting next week.
Friday's economic data in Germany suggest that households had a slow start to the year.
February's Markit/CIPS construction survey brought further evidence that the economy is being weighed down by Brexit uncertainty.
Global economic conditions have been improving for LatAm over recent quarters.
The Prime Minister told the public to "face up to some hard facts" about Brexit in her speech on Friday, but she still clung to an unachievable vision of what Britain can hope to achieve.
All the fundamentals point to a very strong payroll number for May. The NFIB hiring in tentions index, the best single leading indicator of payrolls five months ahead, signalled back in December that May employment would rise by about 300K. The NFIB actual net hiring number, released yesterday, is a bit less bullish, implying 250K, but the extraordinarily low level of jobless claims, shown in our first chart, points to 300K. Finally, the ISM non-manufacturing employment index suggests we should be looking for payrolls to rise by about 260K. Our estimate is 280K.
Brazil's Monetary Policy Committee--Copom--increased the Selic rate by 50bp to 13.75% on Wednesday, as widely expected. The short statement was unchanged from the previous four meetings, indicating the decision was unanimous and without bias, maintaining uncertainty about the next steps. Many Copom members, especially its President, Alexandre Tombini, have signaled that they intend to persevere in their attempt to bring the inflation rate down to 4.5% by the end of 2016.
The headline May ISM non-manufacturing index today likely will mirror, at least in part, the increase in the manufacturing survey, reported Friday.
If you were looking just at investor sentiment in the Eurozone, you would conclude that the economy is in recession.
Japan's monetary base growth showed further signs of stabilisation in May, at 8.1% year-over-year, edging up trivially from 7.8% in April.
Data released last week confirmed the strength of the economic recovery in Chile, and we expect further good news in the next three-to-six months.
Inflation in the Eurozone tumbled last month, increasing the pressure on Mr. Draghi to deliver another dovish message when the central bank meets on Thursday.
Fed Chair Powell yesterday said about as little as he could without appearing to ignore the turmoil in markets since the President announced his intention to apply tariffs to imports from Mexico: "We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective."
The week started well for Brazil's President Bolsonaro.
...Third quarter growth was revised up sharply and the prospects for fourth quarter consumption improved substantially. Less positively, the first signs of faltering capex in the wake of the plunge in oil prices emerged in the macro data, and the ISM manufacturing index began to reverse its run of absurd, seasonally-assisted, "strength".
The majority of headlines from last week's advance Q4 GDP data in the Eurozone--see here--were negative.
We remain optimistic on the scope for sterling to appreciate this year, reflecting our views that a deal for a soft Brexit will be reached soon and that the MPC will resume its tightening cycle later this year.
The Monetary Policy Committee of the Reserve Bank of India lowered the benchmark repurchase rate by another 25 basis points yesterday, to 6.00%, as widely expected.
The relative strength of the investor and consumer confidence reports for March, released this week, signal a better outlook for the Mexican economy.
The forecasts compiled by Bloomberg for today's June German factory orders data look too timid to us. The consensus is pencilling in a 0.5% month-to month rise, which would push the year-over-year rate down to -2.1%, from zero in May. But survey data point to an increase in year-over-year growth, which would require a large month-to-month rise due to base effects from last year.
The MPC's package of stimulus measures, which exceeded markets' expectations, demonstrates that it is currently placing little weight on the inflation outlook. Even so, if inflation matches our expectations and overshoots the 2% target by a bigger margin next year than the MPC currently thinks is acceptable, it will have to consider its zeal for more stimulus.
We often have quite strong views on the balance of risks in the monthly payroll numbers. November is not one of those months. We can generate plausible forecasts between about 50K and 370K, and that's much too wide for comfort. This is probably a payroll release to sit out.
We were worried about downside risk to yesterday's ADP employment measure, but the 67K increase in November private payrolls was at the very bottom of our expected range.
Yesterday's data showed that the euro area PMIs were a bit stronger than initially estimated in November.
Inflation pressures in the Eurozone edged higher last month, reversing weakness at the start of the year.
China hit back against the Trump-administration tariffs yesterday, targeting Mr. Trump's electorate.
Survey data in EZ manufacturing remain soft. Yesterday's final PMI report for August confirmed that the index dipped to 54.6 in August, from 55.1 in July, reaching its lowest point since the end of 2016.
Activity data from Colombia over the past quarter have been strong. Real GDP expanded by a relatively robust 2.8% year-over-year in Q2, and is on track to post a 3.2% increase in Q3.
China's Caixin manufacturing PMI edged down to 50.6 in August, from July's 50.8. This clashed with the increase in the official PMI, though the moves in both indexes were modest.
While we were out, most of the core domestic economic data were quite strong, with the exception of the soft July home sales numbers and the Michigan consumer sentiment survey.
Most of the leading indicators of payroll growth have rebounded in recent months, with the exception of the Help Wanted Online. Our first chart shows that the NFIB's measure of hiring intentions and the ISM non-manufacturing employment index have returned to their cycle highs, while the manufacturing employment index has risen substantially from its late 2015 low. The Help Wanted Online remains very weak, but it might have been depressed by increased prices for job postings on Craigslist.
Brazilian February industrial production data, released yesterday, were relatively positive. Output rose 0.1% month-to-month, pushing the yearover- year rate down to -0.8% from 1.4% in January. Statistical quirks were behind February's year-over-year fall, though.
The advance trade data for February make it very likely that today's full report will show the headline deficit rose by about $½B compared to March, thanks to rising net imports of both capital and consumer goods, which were only partly offset by improvements in the oil and auto accounts.
The divergence between talk and action is steadily widening into a chasm at the ECB. Mr. Draghi continued to strike a dovish tone yesterday reiterating the elevated worries over low inflation and the unanimous commitment to provide further stimulus if needed.
Brazil's central bank doubled the pace of rate increases last Wednesday, in the wake of the re-elected Rousseff government's promise to tackle the severe inflation problem.
We're pretty sure that the unemployment rate didn't drop by 0.3 percentage points in November. We're pretty sure hourly earnings didn't fall by 0.1%. And we're pretty sure payrolls didn't rise by 178K. All the employment data are unreliable month-to-month, with the wages numbers particularly susceptible to technical quirks.
The violent protests in France claimed their first victims over the weekend, providing sombre evidence of the severity of the situation for the government.
Data last Friday showed Japan's labour market trends deteriorating.
Today's December international trade numbers could easily signal a substantial upward revision to fourth quarter GDP growth. When the GDP data were compiled, the December trade numbers were not available so the BEA had to make assumptions for the missing numbers, as usual.
Yesterday's retail sales report indicates that preliminary Eurozone Q4 GDP data next week are likely to paint an upbeat picture of the economy. Sales rose 0.3% month-to-month in December, equivalent to 2.8% year-over-year. An upward revision to November data means that turnover increased 0.8% quarter-on- quarter, the best since the first quarter of 2005.
We very much doubt that Fed Chair Powell dramatically changed his position last week because President Trump repeatedly, and publicly, berated him and the idea of further increases in interest rates.
Private non-financial corporations' profits have held up well over the last two years, despite the net negative impact of sterling's depreciation and modest increases in Bank Rate.
Colombia's BanRep stuck to the script on Thursday by leaving the policy rate on hold at 4.25%.
Brazil's key data flow started Q4 on a soft note, but we still believe that the economic recovery will gather strength over the next three-to-six months.
The key data originally scheduled for today--ADP employment and the ISM non-manufacturing survey, and the revised Q3 productivity and unit labor costs-- have been pushed to Thursday because the federal government will be closed for the National Day of Mourning for president George H. W. Bush.
Last week's strong ISM manufacturing survey for November likely will be followed by robust data for the non-manufacturing sector today, but the headline index, like its industrial counterpart, likely will dip a bit.
Peru's inflation continues to surprise to the downside, paving the way for an additional rate cut next week.
The MXN came under pressure last week as news broke that Banxico Governor Agustin Carstens plans to resign next year. Mr. Carstens has led the bank since 2010; during his term, Banxico cut interest rates to record low levels and managed to keep inflation under control.
Japan's monetary base growth has continued to slow, to 13.2% year-over-year in November from 14.5% in October.
This week's detailed Q3 GDP data will confirm that the euro area economy is going from strength to strength.
With less than a week to go until MPs' meaningful vote on Brexit legislation, on December 11, the Prime Minister still looks set to lose.
November's Markit/CIPS construction report brings hope that the sector no longer is contracting. The PMI increased to a five-month high of 53.1 in November from 50.8 in October, exceeding the 52-mark that in practice has separated expansion from contraction.
Wednesday's Brazilian industrial production data were worse than we expected but the details were less alarming than the headline. Output slipped 1.8% month-to-month in March, the biggest fall since August 2015, setting a low starting point for Q2.
Activity surveys picked up across the board in April, offering hope that the slowdown in GDP growth--to just 0.3% quarter-on-quarter in Q1-- will be just a blip. The headline indicators of surveys from the CBI, European Commission, Lloyds Bank and Markit all improved in April and all exceeded their 2004-to-2016 averages.
Brazil's industrial sector is on the mend, but some of the key sub-sectors are struggling.
We have consistently flagged the likelihood that Japan's government would boost spending after the consumption tax hike was implemented.
The MPC's view that the economy likely will grow at an above-trend rate over the coming quarters was challenged immediately last week by the PMIs.
October payrolls were stronger than we expected, rising 128K, despite a 46K hit from the GM strike.
The ADP measure of private employment hugely overstated the official measure of payrolls in September, in the wake of Hurricane Irma, but then slightly understated the October number.
China's Caixin services PMI picked up further in November to 51.9 from October's 51.2, but the rebound is merely a correction to the overshoot in September, when the headline dropped sharply.
Brazilian data strengthened early in Q4, supporting the case for the COPOM to slow the pace of rate cuts. We expect the SELIC policy rate to be lowered by 50bp today, to 7.0%.
November's Markit/CIPS surveys for the manufacturing, construction and services sectors suggest that GDP growth is on track to strengthen a touch in Q4.
We are not worried, at all, by the slowdown in headline payroll growth to 157K in July from an upwardly-revised 248K in June.
China's PMIs point to softening activity in Q3. The Caixin services PMI fell to 52.8 in July, from 53.9 in June.
Consumers' spending in the Eurozone slowed in the second half of 2017, providing a favourable base for growth in H1 2018.
The rise in Markit/CIPS services PMI to 55.0 in March, from 53.3 in February, brings some relief that GDP growth has not stalled in Q1, following manufacturing and construction surveys that signalled near-stagnation.
Readers have asked us about the availability of flow-of-funds data in the Eurozone similar to the detailed U.S. reports. The ECB's sector accounts come close and cover a lot of ground, but are also released with a lag. We can't cover all sectors in one Monitor, but the investment data for non-financial firms, excluding construction, suggest that investment growth slowed last year.
Your correspondent is on the slopes this week, but the employment report deserves a preview nonetheless.
The meta game between China and Mr. Trump started as soon as he had any possibility of winning the election in 2016.
The rise in the Markit/CIPS services PMI to a nine-month high of 51.4 in July, from 50.2 in June, isn't a game-changer, though it does provide some reassurance that the economy isn't on a downward spiral.
We've always said that China's first weapon, should the trade war escalate, is to do nothing and allow the RMB to depreciate.
Consumers' spending in the Eurozone stalled at the start of Q4. Retail sales slid 1.1% month-to-month in October, pushing the year-over-year rate down to a four-year low of 0.4%, from an upwardly-revised 4.0% jump in September.
The slump in the Markit/CIPS services PMI in November to its lowest level since July 2016 provides the clearest indication yet that uncertainty about Brexit has driven the economy virtually to a stand-still.
The jump in the Caixin services PMI in the past two months looks erratic, with holiday effects playing a role, though there could be more going on here.
Argentina's economy was improving late last year, albeit slowing at the margin, according to the latest published indicators. GDP data confirmed that the revival continued during most of Q4, with the economy growing 0.4% month-to-month in November.
The record 1,178-point drop in the Dow will garner all the headlines today, but a sense of perspetive is in order, despite the chaos. The 113-point, or 4.1%, fall in the S&P 500 was very startling, but it merely returned the index to its early December level; it has given up the gains only of the past nine weeks.
Real M1 growth is slowing, and financial conditions are beginning to tighten in the Eurozone, but shortleading indicators continue to signal firm momentum in the economy.
The latest PMIs suggest that investors have jumped the gun in pricing-in a 50% chance of the MPC raising interest rates again as soon as May.
Chile's Imacec index confirmed that economic growth ended the year on a soft note, due mainly to weakness in the mining sector.
Yesterday's news that the business activity index of the Markit/CIPS services survey fell again in January, to just 50.1--its lowest level since July 2016--has created a downbeat backdrop to the MPC meeting; the minutes and Q1 Inflation Report will be published on Thursday.
We are not concerned by the very modest tightening in business lending standards reported in the Fed's quarterly survey of senior loan officers, published on Monday.
Markets over-reacted to the much smaller-than-expected 0.1% increase in January hourly earnings, in our view. We don't have a full explanation for the shortfall against our 0.5% forecast, but that doesn't make it wise to throw out the baby with the bathwater, making the de facto assumption that wage growth now won't accelerate in the future.
The run of above-consensus news on the U.K. economy came to an abrupt end last week, as a series of survey indicators for January took a turn for the worse. After six months of breathing space, the economic consequences of the Brexit vote are increasingly being felt.
Chilean GDP growth hit bottom in August, but activity is now picking up and will gather speed over the coming quarters. The tailwinds from lower oil prices and fiscal stimulus will soon be visible in the activity data.
The final EZ PMI data for November yesterday confirmed that the composite index in the Eurozone rose to an 11-month high of 53.9, from 53.3 in October. The key driver was an improvement in services, boosted by stronger data in all the major economies. Manufacturing activity also improved, though, and the details showed that new business growth was robust in both sectors.
Yesterday's final PMI data in the euro area for November broadly confirmed the initial estimates.
The odds favor a robust January payroll report today. The key leading indicator--the NIFB hiring intentions index from five months ago--points to a 275K increase, while the coincident NFIB actual employment change index suggests 260K.
The decision by the ECB to remove the waiver for including Greek government bonds in standard refinancing operations changes little in the short run, as the banking system in Greece still has full access to the ELA. It does put additional pressure on Syriza, though, to abandon the position that it will exit the bailout on February the 28th, effectively pushing the economy into the abyss.
Mexico's latest hard data suggest things might not be as bad as we feared. Retail sales and manufacturing output were relatively strong at the end of last year, the Q4 preliminary GDP report was mostly upbeat, and the labor market was firing on all cylinders.
Consumers' spending in the euro area weakened at the end of Q4, but we think households will continue to boost GDP growth in the first quarter. Data on Friday showed that retail sales fell 0.3% month-to-month in December, pushing the year-over-year rate down to 1.1%, from a revised 2.8% in November.
We don't directly plug the ADP employment data into our model for the official payroll number. ADP's estimate is derived itself from a model which incorporates lagged official payroll data, because payrolls tend to mean-revert, as well as macroeconomic variables including oil prices, industrial production and jobless claims -- and actual employment data from firms which use ADP's payroll processing services.
The latest PMIs have added to the weight of evidence that the economic recovery has lost momentum this year. The prevailing view in markets, however, that the Monetary Policy Committee is more likely to cut--rather than raise--interest rates this year continues to look misplaced because inflation pressure is building.
News last week increased our conviction that the economy will struggle over the coming months, but then will have a spring in its step next year.
In recent months we've been thinking more deeply about the themes for the next economic cycle for China, and its impact on the world.
Fed Chair Yellen yesterday reinforced the impression that the bar to Fed action in December, in terms of the next couple of employment reports, is now quite low: "If we were to move, say in December, it would be based on an expectation, which I believe is justified, [our italics] that with an improving labor market and transitory factors fading, that inflation will move up to 2%." The economy is now "performing well... Domestic spending has been growing at a solid pace" making a December hike a "live possibility." New York Fed president Bill Dudley, speaking later, said he "fully" agrees with Dr. Yellen's position, but "let's see what the data show."
Chile's unadjusted unemployment rate fell to 7.1% in July-to-September, from 7.3% in June-to-August, but it was up from 6.7% in September last year.
Headwinds from global growth fears have weighed on Eurozone equities in recent months, leaving the benchmark MSCI EU ex-UK index with a paltry year-to-date return ex-dividends of 1.7%. We think bravery will be rewarded, though, and see strong performance in the next six months. Equities in Europe do best when excess liquidity --M1 growth in excess of inflation and nominal GDP growth--is high.
Yesterday's economic reports in the Eurozone will rekindle the debate on hard versus soft data. The final composite PMI rose to 56.7 in September, from 55.7 in August, in line with the first estimate.
It is possible that the broad-based softness of September payrolls captures a knee-jerk reaction on the part of employers, choosing to wait-and-see what happens to demand in the wake of stock market correction. But that can't be the explanation for the mere 136K August gain, because the survey was conducted before the market rolled over. Even harder to explain is the hefty downward revision to August payrolls, after years of upward revisions. All is not yet lost for August--the last time the first revision to the month was downwards, -3K in 2010, the second revision was +56K--but we aren't wildly optimistic.
Brazil's economic and fiscal outlook has worsened in recent months, and economic activity will likely contract even further in the short-term. Some of last week's economic reports, however, were a bit less bad than of late. The latest industrial production data were less bad than expected in August, but the picture is still very grim. Industrial output plunged 1.2% month-to-month, above the consensus, and allowing the annual rate to stabilize at -9% year-over-year.
The improvement in the Markit/CIPS services PMI in October was pretty limp, supporting our view here that the recovery is shifting into a lower gear. What's more, the poor productivity performance implied by the latest PMIs indicates that wage growth will fuel inflation soon. As a result, the Monetary Policy Committee--MPC--won't be able to wait long next year before raising interest rates. Indeed, we expect the minutes of this month's meeting, released today, to show that one more member of the nine-person MPC has joined Ian McCafferty in voting to hike rates.
Factory orders in Germany probably jumped in September, following a string of losses in the beginning of Q3. We think new orders rose 1.0% month-to-month, pushing the year-over-year rate slightly lower, to 1.8% from 2.0% in August. A rebound in non- Eurozone export orders likely will be the key driver of the monthly gain, following a 14.8% cumulative plunge in the previous two months. The rise will be concentrated in capital and consumer goods, and should be enough to offset a fall in export orders within the euro area. Our forecast is consistent with new orders falling 2.0% quarter-on-quarter in Q3, partly reversing the 3.0% surge in the second quarter, and raising downside risks for production in Q4.
Barclays hit the headlines yesterday with an announcement that it is bringing back no-deposit mortgages for first-time buyers and raising its maximum loan-to-income ratio for borrowers with an income of more than £50K to 5.5, from 4.4. With other lenders likely to follow suit and the supply of homes for sale still extremely low, house price inflation likely will remain brisk this year.
Markets and the commentariat seemed not to like the April ADP employment report yesterday but we are completely indifferent. We set out in detail in yesterday's Monitor the case for expecting a below consensus ADP reading--in short, the model used to generate the number includes lagging official data, some of which were hugely depressed by the early Easter--so it does not change our 200K forecast for tomorrow's official number.
Evidence of slowing growth in Eurozone consumers' spending continues to mount. Retail sales in the euro area fell 0.5% month-to-month in March, pushing the year-over-rate down to 2.1% from a revised 2.7% in February. The headline likely was depressed by the early Easter. March had one trading day less than February, which was not picked up the seasonals.
Economic conditions are deteriorating rapidly in Chile, despite the relatively decent Imacec reading for Q3.
China is facing a nasty mix of spiking CPI inflation and ongoing PPI deflation.
Yesterday's final manufacturing PMIs for October were grim, but they told investors nothing they don't already know.
The simultaneous decline in both ISM indexes was a key factor driving markets to anticipate last week's Fed easing.
Japan's Nikkei services PMI dropped to 51.0 in September from 51.6 in August, continuing the downtrend since June. For Q3 as a whole, the headline averaged 51.5, down from 52.8 in Q2; that's a clear loss of momentum.
The latest PMIs indicate that the economy remained listless in Q3, undermining the case for a rate rise before the end of this year. The business activity index of the Markit/CIPS services survey rose trivially to 53.6 in September, from 53.2 in August.
Yesterday's Brazilian industrial production data were relatively upbeat.
We had hoped that the statistical problems which have plagued the initial estimates of August payrolls in recent years had faded, but Friday's report suggests our judgement was premature.
August's Markit/CIPS services survey, released today, likely will show that the economy's biggest sector is continuing to slow. We think that the PMI fell to just 53.0--its lowest level since it plunged immediately after the Brexit vote--from 53.8 in July, below the consensus, 53.5.
Headline GDP growth in Korea was revised down, to a seasonally-adjusted 0.6% quarter-on-quarter in Q2, from 0.7% in the preliminary report.
We would sum up the final stages of the Brexit negotiations as follows: Both sides have an interest in a deal with minimal disruptions, but we probably have to get a lot closer to the cliff- edge for the final settlement.
The final Eurozone PMIs indicate that the cyclical recovery continued in Q1, but downside risks are rising. The composite index rose marginally to 53.0 in March, from 53.1 in February, below the initial estimate 53.7. Over the quarter as a whole, though, the index fell to 53.2 from 54.1 in Q4, indicating that economic momentum moderated in the first quarter.
Friday's Brazil industrial production data were surprisingly upbeat. Output rose 0.1% month-to-month in July, slightly better than the consensus forecast for no change. July's modest gain was the fifth consecutive increase, confirming that industrial output in Brazil is stabilizing, and it paints a less grim picture of GDP growth at the start of Q3.
August's 14-year high in the ISM manufacturing index, reported yesterday, clearly is a noteworthy event from a numerology perspective, but we doubt it marks the start of a renewed upward trend.
Recession fears were fanned yesterday by the renewed deterioration of the Markit/CIPS services survey.
Labor demand, as measured by an array of business surveys, clearly slowed from the cycle peak, recorded late last year.
Markets tend to take an eclectic view on macroeconomic data in the Eurozone.
Brazil heads to the polls on Sunday, followed by an expected run-off on October 28.
When the BoJ tweaked policy back in July, we think the increase in flexibility in part was to lay groundwork for the BoJ to respond to the Fed's ongoing hiking cycle.
In the wake of the ADP report released Wednesday, we moved up our payroll forecast to 150K from 100K, but we've now taken a closer look at the post-Florence path of jobless claims.
The CPI inflation rate for non-energy industrial goods--core goods, for short--has tracked past movements in trade-weighted sterling closely over the last ten years, because virtually all goods in this sector are imported.
We've been surprised by the fast rate of Japanese GDP growth in the first half, though the Q1 pop merely was due to a plunge in imports.
Data yesterday showed that EZ consumers' spending was off to a bad start in the third quarter.
Households' decision to reduce their saving rate sharply was the main reason why economic growth exceeded forecasters' expectations in the aftermath of the Brexit vote.
This Monitor provides a summary of the main points of interest over the two weeks we were out. The Chinese Caixin manufacturing PMI, published last Friday, confounded expectations for a modest fall, rising to 51.6 in August from 51.1 in July.
While we were out, the economic news in LatAm was mostly positive. The main upside surprise came from Mexico, with the IGAE activity index--a monthly proxy for GDP--rising 2.9% year-over-year in August, up from 1.2% in July, and an average of 2.4% in Q2. A modest rebound was anticipated, but the headline was much better than we and the markets expected.
We are struggling to make sense of the third quarter GDP numbers. The reality is that the massive surge in soybean exports--which we estimate contributed 0.9 percentage points, gross, to GDP growth--mostly came from falling inventory, because the soybean harvest mostly takes place in Q4.
Today's October ADP measure of private payrolls likely will overshoot Friday's official number.
The Tankan survey--published on Monday--points to still buoyant sentiment, a further tightening of the labour market, and building inflation pressures.
Economic data in the Eurozone continue to come in soft. Yesterday's final manufacturing PMIs confirmed that the euro area index slipped to an eight-month low of 56.6 in March, from 58.6 in February.
All the main surveys of business activity in Q1 now have been released and they present a uniformly downbeat picture.
Yesterday's economic reports added to the evidence the euro area economy as a whole is showing signs of resilience in the face of still-terrible conditions in manufacturing.
Japan's services PMI edged down to 52.0 in March, from 52.3 in February, taking the Q1 average to 52.0, minimally up from Q4's 51.9.
The Chancellor's decision immediately to spend all the proceeds from the OBR's upgrade to its projections for tax receipts appears to leave his plans exposed to future adverse revisions to the economic outlook.
Mexico's financial markets and risk metrics plunged early this week, following the AMLO government's decision to cancel the construction of the new airport in Mexico City, after a public consultation held in the previous four days.
Yesterday's data kicked off the release of Eurozone Q3 growth numbers with a robust Spanish headline. Real GDP in Spain rose 0.8% quarter-on-quarter, slowing slightly from 0.9% in Q2, and le aving the year-over-year rate unchanged at 3.1%.
In yesterday's Monitor we suggested that China's profits surge has been party dependent on developers' risky debt issuance practices.
Housing market activity has weakened sharply over the last two months. Indeed, figures this week likely will reveal that mortgage approvals plunged in April and that house price growth slowed in May. The increase in stamp duty for buy-to-let purchases at the start of April and Brexit risk, however, entirely explain the slowdown.
Today's advance Q3 GDP report for Mexico will show that the economy performed relatively well at the start of the second half, despite external and domestic shocks.
Growth in the broad money supply slowed further in September, providing more evidence that the economy is losing momentum.
The Japanese unemployment rate fell again in September, to 2.3% from 2.4%. In the same vein, the job-to-applicant ratio rose to 1.64, from 1.63.
Yesterday's barrage of economic data in the Eurozone offered a good snapshot of the grand narrative.
In yesterday's Monitor we set out how government will have to prepare for an increase in debt issuance both to bring debts on-balance sheet and also to issue new debt as government is obliged to run deficits while the corporate sector deleverages.
Markets still see a near-40% chance of the MPC raising Bank Rate by the end of this year--the same as at the start of this week--despite the notable absence of comments from the Committee yesterday aimed at preparing the ground for a near term hike.
Data released last week confirm that Brazil's recovery has continued over the second half of the year, supported by steady household consumption and rebounding capex.
We're expecting to see November payrolls up by about 200K this morning, but our forecast takes into account the likelihood that the initial reading will be revised up. In the five years through 2014, the first estimate of November payrolls was revised up by an average of 73K by the time o f the third estimate. Our forecast for today, therefore, is consistent with our view that the underlying trend in payrolls is 250K-plus. That's the message of the very low level of jobless claims, and the strength of all surveys of hiring, with the exception of the depressed ISM manufacturing employment index. Manufacturing accounts for only 9% of payrolls, though, so this just doesn't matter.
A further rise in the business activity index of the November Markit/CIPS report on services offset declines in the manufacturing and construction surveys' key balances. The composite PMI--a weighted average of three survey's activity indices -- therefore rose, to a level consistent with quarter-on-quarter GDP growth strengthening to 0.6% in the fourth quarter, from 0.5% in Q3. Nonetheless, we do not think this is a convincing signal that the economic recovery is regaining strength.
Japan's labour market is already tight, but last week's data suggest it is set to tighten further.
The upside to manufacturing survey data in the Eurozone appears endless.
Following the much-anticipated meeting between Presidents Xi and Trump over the weekend, the U.S. will now leave existing tariffs on $200B of Chinese goods at 10%, rather than increasing the rate to 25% in January, as previously slated.
It's not our job to pontificate on the merits, or otherwise, of the tax cut bill from a political perspective.
Sterling strengthened last week to its highest tradeweighted level since mid-May, amid hopes that the U.K. government will concede more ground to ensure that the European Council deems, at its December 14 meeting, that "sufficient progress" has been made in Brexit talks for trade discussions to begin
Industrial production data yesterday confirmed downside risks to Q4's GDP data in Brazil. Output fell 0.7% month-to-month in October, the fifth consecutive decline, pushing the year-over-year rate down to -11.2%, from -10.9% in September. This was the biggest drop since April 2009, when output collapsed by 14.2% during the global financial crisis. The October details were even worse than the headline, as all three broad-measures fell sharply.
On all accounts, the ECB announced a significant addition to its stimulus program yesterday. The central bank cut the deposit rate by 0.1%, to -0.3%, and extended the duration of QE until March 2017. The ECB also increased the scope of eligible assets to include regional and local government debt; decided to re-invest principal bond payments; and affirmed its commitment to long-term refinancing operations in the financial sector for as long as necessary. The measures were not agreed upon unanimously, but the majority was, according to Mr. Draghi, "very large".
The ADP employment report was on the money in October at the headline level--it undershot the official private payroll number by a trivial 6K--but the BLS's measure was hit by the absence of 46K striking GM workers from the data.
Markets initially applauded the ECB for its bold actions, but the tune has changed recently. Negative interest rates, in particular, have been vilified for their margin destroying effect in the banking sector. Our first chart shows that the relative performance of financials in the EZ equity market has dwindled steadily in line with the plunge in yields.
The final July PMIs indicate that the post-referendum slump in activity has been even worse than the flash estimates originally implied. The manufacturing PMI was revised down to 48.2, from the 49.1 flash reading, while the services PMI was unrevised at 47.4, its lowest level since March 2009.
Data released yesterday confirm that Brazil's recovery has continued over the second half of the year, supported by steady capex growth and rebounding household consumption.
Korea's final GDP report for the third quarter confirmed the economy's growth slowdown to 0.4% quarter-on-quarter, following the 1.0% bounce-back in Q2.
The dovish message from the ECB going into today's final meeting of the year has intensified. Mr. Draghi's comments last month, at the European Banking Congress in Frankfurt, point to an increased worry on low core inflation.
The ADP report yesterday has not changed our view that tomorrow's payroll number will be about 180K, well below our estimate of the underlying trend, which is about 250K. ADP's numbers are heavily influenced by the BLS data for the prior month, and tell us little or nothing about the next official report.
Advance CPI data yesterday continue to indicate that inflation pressures remain depressed in the Eurozone's largest economy, for now. Inflation in Germany rose slightly in May, but only to 0.1% year-over-year, from -0.1% in April. The downward pressure on the headline from the crash in oil prices remains significant. Energy prices fell 7.9% year-over-year, slowing slightly from the 8.5% drop in the year to April.
Brazil's economic recovery faltered in the first quarter and the near-term outlook remains challenging.
The Prime Minister achieved a rare victory yesterday, when the Commons passed the government-backed Brady amendment.
Yesterday's first estimate of full-year 2017 GDP in Mexico indicates that growth was relatively resilient, despite domestic and external threats and the hit from the natural disasters over the second half of the year.
Japan's headline jobless rate edged up to 2.8% in December, from 2.7% in November, but the increase was negligible, with the rate moving to 2.76% from 2.74%.
The value of Japanese retail sales bounced back strongly in December, rising 0.9% month-on-month, after a 1.1% drop in November.
The FOMC has gone all-in, more or less, on the idea that the headwinds facing the economy mean that the hiking cycle is over.
The pullback in CPI inflation in June and continued slow GDP growth in Q2 mean that the MPC almost certainly will keep Bank Rate at 0.25% on Thursday.
The jobless rate fell back to 2.8% in June after the surprise rise to 3.1% in May. This drop takes us back to where we were in April before voluntary unemployment jumped in May.
Yesterday's data dump in the EZ delivered something investors haven't seen for a while, namely, positive surprises.
December's money and credit figures suggest that households are in no fit state to step up and drive the economy forwards this year.
Chair Yellen's final FOMC meeting today will be something of a non-event in economic terms.
The upward trend in German inflation stalled temporarily in August, with an unchanged 0.4% year-over-year reading in August. A dip in core inflation likely offset a continued increase in energy price inflation. The detailed final report next month will give the full story, but state data suggest that the core rate was depressed by a dip in price increases of household appliances, restaurant services, as well as "other goods and services."
Colombia's second quarter GDP data, released Monday, revealed a dismal 2.0% year-over-year growth rate, down from 2.5% in Q1. GDP rose by a very modest 0.2% quarter-on-quarter, for the second consecutive quarter. The year-over-year rate was the slowest since the end of the financial crisis, but it is in line with our 2.1% forecast for this year as a whole.
July's money and credit figures provided more evidence that firms have become reluctant to invest following the Brexit vote. Lending by U.K. banks to private non-financial companies--PNFCs--rose by just 0.2% month-to-month in July, below the average 0.5% increase of the previous six months.
Today will be an incredibly busy day for EZ investors with no fewer than eight major economic reports. Overall, we think the data will tell a story of a stable business cycle upturn and rising inflation. Markets will focus on advance Q4 GDP data in France and in the euro area as a whole. Our mo dels, and survey data, indicate that the EZ economy strengthened at the end of 2016, and we expect the headline data to beat the consensus.
The headline employment cost index has been remarkably dull recently, with three straight 0.6% quarterly increases. The consensus forecast for today's report, for the three months to December, is for the same again.
Yesterday's advance Eurozone Q4 GDP report conformed to expectations. Headline GDP increased 0.6% quarter-on-quarter, slowing trivially from an upwardly-revised 0.7% rise in Q3, and nudging the year-over-year rate down marginally to 2.7%.
December's money data likely will bring further signs that the U.K. economy's growth spurt late last year was paid for with unsecured borrowing. Retail sales fell by 1.9% month-to-month in December, so we doubt that unsecured borrowing will match November's £1.7B increase, which was the biggest since March 2005.
June's money and credit figures showed that the economy still doesn't have much zing, even though lending has picked up since Q1.
Brazil's external accounts remain solid, despite the recent modest deterioration.
Today's advance EZ CPI report likely will show that inflation pressures eased in May. We think inflation slipped to 1.5% year-over-year, from 1.9% in April, as the boost to the core rate from the late Easter faded.
The outlook for Argentina is improving. We expect economic growth to remain quite strong over the next year, despite a relatively soft start to 2017 and increasing external threats in recent weeks. The INDEC index of economic activity--a monthly proxy for GDP--is volatile, rising 1.9% month-to-month in March after a 2.6% drop in February, but the underlying trend is improving.
The national accounts look set to show that GDP growth in the fourth quarter was even stronger than previously estimated. Earlier this month, quarter-on-quarter growth in construction output in Q4 was revised up to 1.2%, from 0.2%. As a result, construction's contribution to GDP growth will rise by 0.07 percentage points.
Many investors probably glossed over yesterday's barrage of data in the Eurozone, for fear of being caught out by another swoon in Italian bond yields. Don't worry, we are here to help.
Our Chief Eurozone Economist, Claus Vistesen, is covering the Italian situation in detail in his daily Monitor but it's worth summarizing the key points for U.S. investors here.
Households' willingness to save a smaller fraction of their incomes goes a long way to explaining why the U.K. economy hasn't lost too much momentum since the Brexit vote.
The widespread view, which we share, that GDP will rebound in Q2 following the disruption caused by bad weather in Q1, was supported yesterday by t