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Today's rate hike will be accompanied by a new round of Fed forecasts, which will have to reflect the faster growth and lower unemployment than expected back in September.
China's data on Monday were beyond dire, leading to a dramatic downward revision of our already grim Q1 GDP forecasts for the country.
We are revising down our forecasts for quarteron-quarter GDP growth in Q1 and Q2 to 0.3% and 0.2%, respectively, from 0.4% in both quarters previously, to account for the likely impact of the coronavirus outbreak.
The Chancellor must feel a sense of foreboding before his pre-Autumn Statement meetings with the Office for Budget Responsibility. Even minor revisions to the independent body's economic forecasts could shred into tatters his plans for a budget surplus by the end of the parliament, given the lack of wiggle room in the July Budget borrowing projections. The OBR won't present the Chancellor with disastrous news ahead of next Wednesday's Autumn Statement, but the already slim margin for error he has in meeting his surplus goal likely will be reduced.
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.
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.
Economists' forecasts are changing almost as quickly as market prices these days, and not for the better.
The FOMC delivered no great surprises in the statement yesterday, but the new forecasts of both interest rates and inflation were, in our view, startlingly low. The stage is now set for an eventful few months as the tightening labor market and rising inflation force markets and policymakers to ramp up their expectations for interest rates.
The Office for Budget Responsibility has decided to press ahead with the publication of new fiscal forecasts on November 7, despite the government's decision to postpone the Budget until after the next election.
Nightmare scenario for economy is becoming less likely, award-winning forecaster Ian Shepherdson
Markets expect the Fed will fail to follow through on its current intention to raise rates twice more this year and three times next year. Part of this skepticism reflects recent experience.
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.
Markets see a strong possibility, though not a probability, that the BoJ will cut rates on Thursday.
The Budget on March 11 will be the first time that the new government's ambition and bluster collide with reality.
In some sense, today's ECB meeting will be a sobering one for policymakers.
The Chancellor will struggle to make his Spring Statement heard on March 13 over the noise of next week's key Brexit votes in parliament, likely spanning from March 12 to 14.
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%.
The ECB did its utmost not to say or do anything remotely novel today. The central bank kept its main refinancing and deposit rates unchanged at 0.00% and -0.40%, respectively, and reiterated its plan for QE next year.
The minutes of the MPC's meeting in June indicated that several members' patience for tolerating for above-target inflation is wearing thin.
Inflation pressures in the Eurozone edged lower last month.
Treasury Secretary Mnuchin's five-line letter to House Speaker Pelosi on last Friday--copied to other Congressional leaders--which said that "there is a scenario in which we run out of cash in early September, before Congress reconvenes", introduces a new element of uncertainty to the debt ceiling story.
Friday' second Q4 GDP estimate revealed that the EZ economy barely grew at the end of 2019. The report confirmed that GDP rose by 0.1% quarter-on-quarter in Q4, slowing from a 0.3% rise in Q3, but the headline only narrowly avoided downward revision to zero, at just 0.058%
We'd be very surprised to see anything other than a 25bp rate cut from the Fed today, alongside a repeat of the key language from July, namely, that the Committee "... will act as appropriate to sustain the expansion".
The BoJ kept its main policy settings unchanged yesterday, in another 7-to-2 split.
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.
In yesterday's Monitor, we suggested that China's monetary policy stance is now easing.
The Chancellor has prepared the public and the markets for a ratcheting-up of the already severe austerity plans in the Budget on Wednesday. George Osborne warned on Sunday that he would announce "...additional savings, equivalent to 50p in every £100 the government spends by the end of the decade", raising an extra £4B a year.
CPI inflation surprises look set to trigger larger- than-usual market reactions over the coming months, given that the MPC emphasised last month that it wants to see domestically-generated inflation rebound swiftly, after falling suddenly late last year, in order to justify keeping Bank Rate on hold.
Our current base-case forecast for the second quarter is a 30% annualized drop in GDP, based on our assessment of the hit to discretionary spending by both businesses and consumers.
We expect April's consumer price figures, due on Wednesday, to show that CPI inflation leapt to 2.3%, from 1.9% in March, exceeding the MPC's 2.2% forecast in the latest Inflation Report.
We expect the Fed today to shift its dotplot to forecast one rate hike this year, down from two in December and three in September.
Brace yourselves; GDP growth forecasts are being slashed left and right, as our colleagues take stock of the economic damage Covid-19 likely will inflict in the U.S. and across Europe, where outbreaks and containment measures have escalated significantly.
Our forecast of significantly higher core inflation over the next year has been met, it would be fair to say, with a degree of skepticism.
We expect the Fed to leave rates on hold today, but the FOMC's new forecasts likely will continue to show policymakers expect two hikes this year, unchanged from the March projections. We remain of the view that September is the more likely date for the next hike, because we think sluggish June payrolls will prevent action in July.
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.
Yesterday's industrial production report was grim reading, with volatility in Greece and the Netherlands, as well as revisions, throwing off our own, and the market's, forecasts. Output fell 0.4% month-to-month in May, well below the consensus and our expectation for a 0.2% rise, pushing the year-over-year rate higher to 1.6%, from a revised 0.9% in April.
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.
The Fed's action, statement, and forecasts, and Chair Yellen's press conference, made it very clear the Fed is torn between the dovish signals from the recent core inflation data, and the much more hawkish message coming from the rapid decline in the unemployment rate.
Policymakers and macroeconomic forecasters at the ECB will be doing some soul-searching this week. GDP growth in the euro area accelerated to a punchy 2.5% year-over-year in Q3, and unemployment dipped to a cyclical low of 8.9%.
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".
CPI inflation held steady at 2.4% in October, undershooting the 2.5% consensus expectation and the MPC's forecast in this month's Inflation Report.
Our forecast that CPI inflation will return to the 2% target by the end of 2018 sets us apart from the MPC and consensus, which expect a more modest decline, to 2.4%.
The Chancellor chose in his Budget to increase the total size of the forthcoming fiscal consolidation, to ensure that the Office for Budget Responsibility continues to forecast that a budget surplus will be obtained in 2019/20.
Back in September, after the Fed decided to hold fire in the wake of market turmoil, we expected rates to rise in December and again in March. We forecast 10-year yields would rise to 2.75% by the end of March. in the event, the Fed hiked only once, and 10-year yields ended the first quarter at just 1.77%. So, what went wrong with our forecasts?
The stubbornly slow rate of decline of public borrowing casts doubt on whether the Chancellor will run a budget surplus before the end of this parliament, as his fiscal rule stipulates. But downward revisions to debt interest forecasts by the Office for Budget Responsibility are likely to absolve him again from intensifying the impending fiscal squeeze in the Budget on March 16.
CPI inflation held steady at 3.0% in October, undershooting our forecast and the consensus by 0.1 percentage point and the MPC's forecast by 0.2pp.
Our payroll model, which incorporates survey data as well as the error term from our ADP forecast, points to a hefty 225K increase in November employment. We have tweaked the forecast to the upside because of the tendency in recent years for the fourth quarter numbers to be stronger than the prior trend, as our first chart shows.
The duration and future scope of the current lockdown is the main uncertainty that U.K economic forecasters have to grapple with at present.
You'd be hard-pressed to read the minutes of the September FOMC meeting and draw a conclusion other than that most policymakers are very comfortable with their forecasts of one more rate hike this year, and three next year.
The consensus forecast for a 0.6% month-to month rise in retail sales volumes in December--data released today--is far too timid.
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%.
We set out the reasoning behind the big upward revision to our payroll forecast yesterday, in the wake of the much better-than-expected ADP report.
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.
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.
India's GDP report for the fourth quarter surprised to the upside, with the economy growing by 4.7% year-over-year, against the Bloomberg median forecast of 4.5%.
Retail sales data later today will provide further support for the upbeat consumer story in the Eurozone. We expect a third monthly gain in a row, taking retail sales to a 0.8% expansion quarter-on-quarter in Q4, the fastest since the end of 2006. We are seeing clear signs of improvement in the Eurozone economy, and the data are forcing us to recognise upside risks to our Q4 GDP forecast of 0.3-to-0.4%
Data released on Wednesday, along with the BCB's press release on Tuesday, supported our longstanding forecast of further rate cuts in Brazil in the very near term.
We raised our forecast for today's January payroll number after the ADP report, to 200K from 160K.
Investors now see a 50/50 chance of the MPC cutting Bank Rate within the next nine months, following the slightly dovish minutes of the MPC's meeting, and its new forecasts.
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".
With little reason to doubt that interest rates will remain at 0.50% on Thursday, focus has turned to what signal the MPC will give about future policy, via its economic forecasts and commentary.
Our below-consensus 125K forecast for today's February payroll number is predicated on two ideas.
The ink has hardly dried on economists' and the ECB's inflation projections for 2020, but we suspect that some forecasters are already considering ripping up the script.
The fundamentals underpinning our forecast of solid first half growth in consumers' spending remain robust.
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.
The Chancellor was bolder than widely expected yesterday and scaled back the fiscal consolidation planned for the next two years significantly, even though his borrowing forecast was boosted by the OBR's gloomier prognosis for the economy.
Today's advance inventory and international trade data for December could change our Q4 GDP forecast significantly.
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.
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.
Public sector borrowing still is on course to greatly undershoot the March Budget forecasts this year, despite October's poor figures.
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.
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.
Last week we made a big call and further downgraded our China GDP forecasts for Q1; daily data and survey evidence suggested that our initial take, though grim, had not been grim enough.
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.
Korea's unemployment rate was unchanged in April, at 3.8%, beating even our below-consensus forecast for only a minor uptick, to 3.9%.
Forecasting the health insurance component of the CPI is a mug's game, so you'll look in vain for hard projections in this note.
Unlike other central banks, the MPC has stuck to its message that "an ongoing tightening of monetary policy over the forecast period" likely will be required to keep inflation close to the 2% target, provided a no-deal Brexit is avoided.
If the underlying trend in payroll growth is about 200K, then a weather-depressed 98K reading needs to be followed by a rebound of about 300K in order fully to reverse the hit. But the consensus for today's April number is only 190K, and our forecast is 225K.
The Bank kept interest rates unchanged at 1.50% yesterday, but downgraded its inflation forecast for 2018 to 1.6% from 1.7%
If the Phase One trade deal with China is completed, and is accompanied by a significant tariff roll-back, we'll revise up our growth forecasts, but we'll probably lower our near-term inflation forecasts, assuming that the tariff reductions are focused on consumer goods.
We have downgraded our 2019 and 2020 China GDP forecasts on previous occasions because monetary conditions have been surprisingly unresponsive to lower short-term rates.
The "Super Thursday" releases from the Monetary Policy Committee--MPC--indicate that financial market turbulence and the approaching E.U. referendum have kiboshed the chances of an interest rate rise in the first half of this year. Nonetheless, the MPC's forecasts clearly imply that it expects to raise rates much sooner than markets currently anticipate, and the Governor signalled that a rate cut isn't under active consideration.
Industrial production in India turned around sharply in November, rising by 1.8% year-over-year, following October's 4.0% plunge and beating the consensus forecast for a trivial 0.3% uptick.
Our forecast of a solid 190K increase in headline December payrolls ignores our composite employment indicator, which usually leads by about three months and points to a print of just 50K or so.
The underlying trend in the core CPI is rising by just under 0.2% per month, so that has to be the starting point for our January forecast.
It's hardly surprising that the consensus forecast for month-to-month growth in November GDP, released on Friday, is a mere 0.1%, given the flow of downbeat business surveys.
GDP data today will probably show that the Eurozone economy accelerated to 0.3% quarter-on-quarter in Q4, up from 0.2% a quarter earlier. Industrial production came in disappointingly at 0.0% month-to-month in December, but this is not enough to change our forecast in the light of solid data on household spending.
We're expecting to see the sixth straight drop in initial jobless claims this week, though we think the 2,500K consensus forecast is too ambitious.
The MPC's new inflation forecasts usually take centre stage on "Super Thursday" and provide a numerical indication of how close the Committee is to raising interest rates again.
It's just not possible to forecast the reaction of businesses and consumers to the coronavirus outbreak.
As far as we can tell, most forecasters expect the impact of fiscal stimulus this year to be gradual, with perhaps most of the boost to growth coming next year. At this point, with no concrete proposals either from the new administration or Congress, anything can happen, and we can't rule out the idea of a slow roll-out of tax cuts and spending increases.
With financial markets still turbulent and the Governor stating only two weeks ago that economic conditions do not yet justify a rate hike, the Inflation Report on Thursday will not signal imminent action. Nonetheless, higher medium-term forecasts for inflation are likely to imply that the Committee still envisions raising interest rates this year.
The consensus forecast for the October core CPI, which will be reported today, is 0.2%. Take the over. Nothing is certain in these data, but the risk of a 0.3% print is much higher than the chance of 0.1%.
Chief U.K. Economist Samuel Tombs ranked as one of the top U.K. Economic Forecasters in 2019
The Wall Street Journal is pleased to annouce that Ian Shepherdson, of Pantheon Macroeconomics, has won the US Forecaster of 2014 award.
Yesterday's German manufacturing and trade data did little to allay our fears over downside risks to this week's Q4 GDP data. At -1.2% month-to-month in December, industrial production was much weaker than the consensus forecast of a 0.5% increase. Exports also surprised to the downside, falling 1.6% month-to-month. Our GDP model, updated with these data, shows GDP growth fell 0.2%-to-0.3% quarter-on-quarter in Q4, reversing the 0.3% increase in Q3.
February's consumer price figures, released tomorrow, likely will show that CPI inflation fell to 2.8%--one tenth below the MPC's forecast--from 3.0% in January.
Investors in the gilt market would be wise not to take the new official projections for borrowing and debt issuance at face value. The forecast for the Government's gross financing requirement between 2017/18 and 2021/22 was lowered to £625B in the Budget, from £646B in the Autumn Statement.
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.
The key data today, covering March durable goods orders and international trade in goods, should both beat consensus forecasts.
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.
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.
Mr. Draghi struck a dovish tone yesterday, despite the new ECB staff projections upgrading the inflation forecast this year to an average of 0.3%, up from the zero predicted in March. The president reiterated that the central bank's expectation of a gradual improvement in inflation and real GDP growth is conditional on the full implementation of QE.
The 15% fall in the FTSE 100 since its May 2018 peak undoubtedly is an unwelcome development for the economy, but past experience suggests we shouldn't rush to revise down our forecasts for GDP growth.
Andres Abadia named top Latam FX Forecaster for 2017 by Reuters
Currency markets often make a mockery of consensus forecasts, and this year has been no exception. Monetary policy divergence between the U.S. and the Eurozone has widened this year; the spread between the Fed funds rate and the ECB's refi rate rose to a 10-year high after the Fed's last hike.
The new fiscal projections in the Budget today likely will be based on implausible economic projections, which assume that wage growth will accelerate soon, lifting inflation, but that interest rates won't rise for three more years. You can coherently forecast one or the other, but not both.
We are not political analysts or psephologists, but we note that each of the nine separate election forecasting models tracked by the New York Times suggests that Hillary Clinton will be president, with odds ranging from 67% to greater than 99%.
Ian Shepherdson, chief economist for Pantheon Macroeconomics is the winner of the MarketWatch Forecaster of the Month award for June.
Chief U.S. Economist Ian Shepherdson named Market Watch forecaster of the month for July
Andres Abadia on Mexico GDP Growth
We are pleased to announce that our Chief U.K. Economist, Samuel Tombs, was ranked the most accurate forecaster of the U.K. economy in 2018 by The Sunday Times.
Senior International Economist Andres Abadia comments on the latest Inflation data for Chile
Chief Asia Economist Freya Beamish on China and the Coronavirus
Ian Shepherdson, Pantheon Macroeconomics chief economist, and Vinay Pande, UBS Global Wealth Management head of trading strategies, join "Squawk on the Street" to discuss their forecast for the markets amid strong jobs data.
Freya Beamish, chief Asia economist at Pantheon Macroeconomics, discusses the outlook for China's economy as the World Bank cut its forecast for global growth. The World Bank's report included a downward revision for China to 5.9%, which would be the first sub-6% reading since 1990. Beamish speaks on "Bloomberg Surveillance."
We can't yet know how bad the spread of the coronavirus from the Chinese city of Wuhan will be.
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.
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.
Friday's PMIs were supposed to provide the first reliable piece of evidence of the coronavirus on euro area businesses, but they didn't. Instead, they left economists dazed, confused and scrambling for a suitable narrative.
Eurozone investors are fixed on Mr. Draghi's speaking schedule this week, looking for hints of the ECB's future policy path.
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 flash readings of the Markit/CIPS surveys in February provide reassurance that GDP is on track to rebound in Q1, despite disruption to the global economy caused by the COVID-19 outbreak and bad weather in the U.K. this month.
Japan's January PMIs sent a clear signal that the virus impact is not to be underestimated. The manufacturing PMI fell to 47.6 in February, from 48.8 in January, contrasting sharply with the rising headlines of last week's batch of European PMIs.
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.
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.
April's public finances indicate that the economy has remained weak in Q2, casting doubt on the suggestion from recent business surveys that the slowdown in Q1 was just a blip.
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%.
Today's ECB meeting will mainly be a victory lap for Mr. Draghi--it is the president's last meeting before Ms. Lagarde takes over--rather than the scene of any major new policy decisions.
Core durable goods orders have not weakened as much as implied by the ISM manufacturing survey, as our first chart shows, but it is risky to assume this situation persists.
Yesterday's June PMIs offered more of the same, insofar as the survey's key message goes in the past few months.
We suspect that under the calm surface of the BoJ, a major decision is being debated.
The ECB conformed to expectations today, at least on a headline level.
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.
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 will deliver a carbon copy of its December meeting today, at least in terms of the main headlines.
The public finances are in better health than appeared to be the case a few months ago.
The prospect of fiscal stimulus in the euro area-- ostensibly to "help" the ECB reach its inflation target-- remains a hot topic for investors and economists.
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.
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.
The slowdown in the EZ economy is well publicised.
Public borrowing continues to falling at a very slow pace, despite the major fiscal consolidation implemented this year. Public sector net borrowing excluding public sector banks--PSNB ex.--was £10.5B in August, only 8.1% less than the £11.5B borrowed a year ago.
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.
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.
It seems that yesterday's PMI data left investors and analysts more confused than enlightened.
Back-to-back elevated weekly jobless claims numbers prove nothing, but they have grabbed our attention.
The collapse in oil prices looks near-certain to pull Japan back into deflation in the next few months, though the BoJ normally looks through oil-induced swings in its target inflation measure.
The public finances are in better shape than October's figures suggest in isolation. Public sector net borrowing excluding public sector banks--PSNB ex.--leapt to £11.2B, from £8.9B a year earlier.
The economic data in Brazil were poor while we were away.
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 rate of growth of new coronavirus infections across Europe slowed yesterday, in some cases quite markedly. We can quibble about the reliability of the data in individual countries, given variations in testing regimes, but the picture is strikingly uniform.
The PM now is at a fork in the road and will have to decide in the coming days whether to risk all and seek a general election, or restart the process of trying to get the Withdrawal Agreement Bill--WAB--through parliament.
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.
The 17-point leap in the Richmond Fed index for October, reported yesterday, was startlingly large.
Policymakers and governments are gradually deploying major fiscal and monetary policy measures to ease the hit from Covid-19 and the related financial crisis.
Chancellor Sunak looks set to announce more fiscal stimulus next month to reinforce the economic recovery, despite recent record levels of public borrowing.
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.
The Conference Board's index of leading economic indicators appears to signal that the U.S. economy is plunging headlong into recession.
Barring a meteor strike, the ECB will leave its main refinancing and deposit rates unchanged today, at 0.00% and -0.5% respectively.
Yesterday's PMI data in the euro area were a horror show. The composite EZ index cratered to 13.5 in April, from 29.7 in March, dragged down by a collapse in the services index to 11.7, from 26.4 last month.
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.
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%.
After three days of jaw-dropping actions from President Trump, the position seems to be this: The U.S. will apply 15% tariffs on imported Chinese consumer goods, rather than the previously promised 10%, effective in two stages on September 1 and December 15.
The German economy finished last year on the back foot.
Data released yesterday confirmed that Mexico's economy ended Q4 poorly, confounding the most hawkish Banxico Board members.
The latest public finance figures make it virtually inevitable that the Chancellor will scrap the existing fiscal rules when he delivers his first Budget.
Today's preliminary estimate of Q3 GDP is the last major economic report to be released before the MPC's meeting on November 2.
The gaps in the third quarter GDP data are still quite large, with no numbers yet for September international trade or the public sector, but we're now thinking that growth likely was less than 11⁄2%.
The closer we look at the data, the less concerned we are at the painfully slow decline in the number of new daily confirmed Covid-19 cases.
The mortgage market is continuing to hold up surprisingly well, given the calamitous political backdrop.
A decade of public deficit reduction was fully reversed in April, as the coronavirus tore through the economy.
The spread of the Covid-19 virus remains the key issue for markets, which were deeply unhappy yesterday at reports of new cases in Austria, Spain and Switzerland, all of which appear to be connected to the cluster in northern Italy.
The consensus for today's first post-apocalypse jobless claims number, 1,500K, looks much too low.
Analysing the EZ sentiment data at the moment is a bit like a surveyor being called out to assess the damage on a property after a flood.
Everyone needs to take a deep breath: This is not 1930, and Smoot-Hawley all over again.
We've suspected that China's GDP targeting system was on its last legs for some time now.
Q1 is not over yet, and we still await a lot of important data.
Mexican policymakers yesterday voted unanimously to cut the policy rate by 50bp to 5.00%, the lowest level since late 2016.
In our Webinar--see here--we laid out scenarios for Chinese GDP in Q1 and for this year.
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%.
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.
The ECB made no changes to policy yesterday, leaving its key refinancing and deposit rates unchanged, at 0.00% and -0.5%, and confirmed that it will restart QE in November at €20B per month.
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 verdict is not yet definitive, but prudence dictates we must now assume victory for Donald Trump. The immediate implication of President Trump is global risk-off, with stocks everywhere falling hard, government bonds rallying, alongside gold and the Swiss franc. The dollar is the outlier; usually the beneficiary when fear is the story in global markets, it has fallen overnight because the risk is a U.S. story.
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
The ECB won't make any changes to its policy settings today.
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.
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.
Yesterday's stock market bloodbath stands in contrast to the U.S. economic data, most of which so far show no impact from the Covid-19 outbreak.
Public borrowing has continued to fall more rapidly than anticipated in the latest official plans.
The Monetary Policy Board of the Bank of Korea is likely to keep its benchmark base rate unchanged, at 1.25%, at its meeting this week.
Yesterday was a watershed moment for investors.
China's export data for April were a mixed bag, to say the least.
Some normality has returned in India, more than three weeks from the end of the nationwide lockdown and the start of "Unlock 1.0" on June 1.
Investors think it more likely that the MPC will cut Bank Rate in the first half of next year, following Friday's release of the flash Markit/CIPS PMIs for November.
On the face of it, the latest public finance data suggest that the economy has lost momentum.
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.
We were terrified by the plunge in the ISM manufacturing export orders index in August and September, which appeared to point to a 2008-style meltdown in trade flows.
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.
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.
Yesterday's March PMIs confirmed that governments' actions to contain the Covid-19 outbreak dealt a hammer blow to the economy at the end of Q1.
Even the record-breaking slump in Markit's composite PMI probably understates the hit to economic activity from Covid-19 and the emergency measures to slow its spread.
If Japan's flash PMIs for March are a sign of things to come, then the government really should get moving on fiscal stimulus.
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 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.
Japan's February trade data were a shocker, but not for the reasons we expected, given the signal from the Chinese numbers.
The Fed will leave rates unchanged today.
A lot of ink has been spilled over the relative significance of the supply and demand effects of Covid-19, but the short-term story is clear.
April's consumer prices report, released on Wednesday, likely will show that CPI inflation plunged and is heading quickly to a near-zero rate by the summer.
Chile's Q3 GDP report, released yesterday, confirmed that the economy gathered speed in the third quarter, but this is now in the rearview mirror.
To paraphrase recent correspondence: "How can you possibly believe, given the terrible run of economic data and the turmoil in the markets, that the Fed will raise rates in March/June/at all this year?" Well, to state the obvious, if markets are in anything like their current state at the time of the eight Fed meetings this year, they won't hike. That sort of sustained downward pressure and volatility would itself prevent action at the next couple of meetings, as did the turmoil last summer when the Fed met in September. And if markets were to remain in disarray for an extended period we'd expect significant feedback into the real economy, reducing--perhaps even removing--the need for further tightening.
Yesterday's German ZEW investor sentiment survey provided the first clear evidence of the coronavirus in the EZ survey data.
The Eurozone economy all but stalled at the start of Q4.
China's residential property market surprised again in August, with prices popping by 1.5% month- on-month, faster than the 1.2% rise in July, and the biggest increase since the 2016 boomlet.
The PBoC reduced its 14-day reverse repo by 5bp to 2.65% in a routine operation yesterday.
The next couple of rounds of business surveys will capture firms' responses to the Phase One trade deal agreed last week, though the news came too late to make much, if any, difference to the December Philly Fed report, which will be released today.
From a bird's-eye perspective, the argument for continued steady Fed rate hikes is clear.
Italy's economy is still bumping along the bottom, after emerging from recession in the middle of last year.
As the impeachment hearings gather momentum, we have been asked to provide a cut-out-and-keep guide to the possible outcomes.
The key detail in Friday's barrage of economic data was the above-consensus increase in EZ inflation.
With campaigning for the general election intensifying last week, it was unsurprising that October's money and credit release from the Bank of England received virtually no media or market attention.
Japan's jobless rate was unchanged, at 2.4% in October, as the market took a breather after September's job losses.
LatAm assets and currencies had a bad November, due to global trade war concerns, the USD rebound and domestic factors.
Copom's meeting was the focal point this week in Brazil. The committee eased by 25bp for the second straight meeting, leaving the Selic rate at 13.75%, and it opened the door for larger cuts in Q1. Rates sat at 14.25% for 15 months before the first cut, in October. In this week's post-meeting statement, policymakers identified weak economic activity data, the disinflation process--actual and expectations--and progress on the fiscal front as the forces that prompted the rate cut.
We're reasonably happy with the idea that business sentiment is stabilizing, albeit at a low level, but that does not mean that all the downside risk to economic growth is over.
The Q1 Tankan survey headlines were close to our expectations, chiming with our call for year-over-year contraction in Japanese GDP of at least 2%, after the 0.7% decline in Q4.
Rising mortgage rates appear to have triggered the start, perhaps, of a tightening in lending standards, even before Treasury yields spiked this month and stock prices fell.
Investors have welcomed the flurry of encouraging opinion polls for the Conservatives that were published over the weekend, with cable rising nearly to $1.30 on Monday, a level last seen on a sustained basis six months ago.
The Monetary Policy Board of the Bank of Korea yesterday left its benchmark base rate unchanged, at 1.50%.
The Fed headlines yesterday carried no real surprises; rates were cut by 25bp, with a promise to take further action if "appropriate to sustain the expansion".
Within the space of two months, investors have gone from wondering whether the slowdown in manufacturing would spill-over into the rest of the EZ economy, to the realisation that the crunch in services is now driving the overall story on the economy.
For the record, we think the Fed should raise rates in December, given the long lags in monetary policy and the clear strength in the economy, especially the labor market, evident in the pre-hurricane data.
Policymakers in Chile left rates unchanged at their monetary policy meeting last week, maintaining their neutral bias.
The Monetary Policy Board of the Bank of Korea voted yesterday to lower its policy base rate to 1.25%, from 1.50%.
The beleaguered EZ car sector finally enjoyed some relief at the end of Q3, though base effects were the major driver of yesterday's strong headline.
The GM strike will make itself felt in the September industrial production data, due today.
As warned--see our Monitor April 7--economic data in the Eurozone disappointed while we were away. Industrial production, ex-construction, in the euro area slipped 0.3% month-to-month in February, and the January month-to-month gain was revised down by 0.6 percentage point to +0.3%.
Banxico will meet tomorrow, and we expect Mexican policymakers to cut the main interest rate by 25bp, to 7.25%.
We lack an adjective sufficiently strong to describe China's February activity data.
We were not hugely surprised to see stocks tank again yesterday.
The Bank of Japan yesterday kept its -0.10% policy balance rate and ten-year yield target of "around zero", as expected.
The outlook for growth in the EZ economy is currently both stable and relatively uncomplicated, at least based on the most widely-watched leading indicators.
Latin American markets and policymakers are bracing for another complicated week, after the second, and more aggressive, Fed emergency move over the weekend.
The split between the reality reflected in the economic data and market pricing has never been wider in the euro area
Signs that the economy has been crippled by people's response to the Covid-19 outbreak continued to emerge yesterday.
Boeing's announcement that it will temporarily cut production of 737MAX aircraft to zero in January, from the current 42 per month pace, will depress first quarter economic growth, though not by much.
Data yesterday added further evidence of a slow recovery in Eurozone auto sales.
Friday's second Q1 GDP estimate confirmed that lockdowns to halt the spread of Covid-19 hurt the EZ economy in Q1. Real GDP plunged by 3.8% quarter-on- quarter, following a 0.1% rise in Q4, in line with the first estimate.
Brazil's monetary authority adopted a neutral tone and kept its main rate on hold at 6.5% at its monetary policy meeting on Wednesday, surprising investors.
The Conservatives have maintained a substantial poll lead over Labour since MPs voted two weeks ago to hold a December 12 general election.
The declines in headline housing starts and building permits in September don't matter; both were driven by corrections in the volatile multi-family sector.
Our first impression of the proposed Brexit deal between the EU and the U.K. is that it is sufficiently opaque for both sides to claim that they have stuck to their guns, even if in reality, they have both made concessions.
While Brexit news will dominate the headlines again--see here for why the odds remain against Mrs. May winning the third "meaningful vote"--February's consumer prices report is the highlight in this week's congested economic data calendar.
Japan's trade deficit has bottomed out. The unadjusted shortfall narrowed to -¥833B in May,
The idea that the ECB will use its forthcoming strategic policy review to include a measure of real estate prices in its inflation target has been consistently brought up by readers in recent meetings.
The BoJ is likely to stay on hold this week for all its main policy settings.
The Eurozone inflation data have been relatively calm in the past six months. The headline rate has been stable at about 1.5%, and the core rate has fluctuated closely around 1%.
We expect May's consumer prices report, released on Wednesday, to show that CPI inflation fell to 2.0% in May, from 2.1% in April.
The drop in CPI inflation to 0.5% in May, from 0.8% in April, brought it another big step closer to the near-zero rate we foresee in the second half of this year.
While were out over the holidays, the single biggest surprise in the data was yet another drop in imports, reported in the advance trade numbers for November.
Data on EZ consumption were soft while we were enjoying our Christmas break. The advance EC consumer confidence index slipped to a three-year low of -8.1 in December, from -7.2 in November, breaking its recent tight range.
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 advance EZ PMIs will be watched more closely than usual.
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.
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.
The ECB pressed the repeat button yesterday. The central bank maintained its refinancing rate at 0.00%, and also kept the deposit and marginal lending facility rate at -0.4% and 0.25 respectively. The pace of QE was held at €60B per month, scheduled to run until the end of December, "or beyond, if necessary."
We have had something of a rethink about the likely timing of the coming cyclical downturn. Previously, we thought the economy would start to slow markedly in the middle of next year, with a mild recession--two quarters of modest declines in GDP-- beginning in the fourth quarter.
The recent sharp, if not startling, upturn in the regional manufacturing surveys should continue today with the release of the Philadelphia Fed report. The survey is constructed in the same way as the more volatile Empire State, which has rocketed in the past few months, and the headline indexes follow similar trends, as our first chart shows.
The recent increases in single-family housing construction are consistent with the rise in new home sales, triggered by the substantial fall in mortgage rates over the past year.
Yesterday's headline economic data in the euro area were solid across the board, though the details were mixed.
CPI inflation in India jumped to 4.6% in October, from 4.0% in September, marking a 16-month high and blasting through the RBI's target.
Leading indicators are giving conflicting signals regarding the outlook for core goods CPI inflation.
Chancellor Hammond likely will broadly stick to the current plans for the fiscal consolidation to intensify next year when he delivers his second Budget on Thursday.
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.
Now that the Fed has abandoned the idea of raising rates this year, despite 3.8% unemployment and accelerating wages, it is very exposed to the risk that the bad things it fears don't happen.
In recent client meetings the first and last topic of conversation has been the market implications of the possible departure of President Trump from office.
The rate of growth of Covid-19 cases outside China appears to have peaked, for now, but we can't yet have any confidence that this represents a definitive shift in the progress of the epidemic.
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.
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.
Investor sentiment data still indicate that EZ PMIs are set for a significant rebound at start of the year.
The Eurozone's external surplus recovered a bit of ground mid-way through the third quarter.
Borrowing by local authorities from the Public Works Loan Board, used to finance capital projects-- and arguably dubious commercial property acquisitions--has surged this year.
CPI inflation took a big step in April towards the near-zero rate we anticipate by the summer.
The FOMC kept policy unchanged at April's meeting-- rates stayed at zero, and all the market valves are wide open, as needed--but policymakers spent considerable time pondering what might happen over the next few months, and how policy could evolve.
The year so far in EZ equities has been just as odd as in the global market as a whole.
Japanese trade remained in the doldrums in October, keeping policymakers on their toes as they repeat the refrain of "resilient" domestic demand.
If the only manufacturing survey you track is the Philadelphia Fed report, you could be forgiven for thinking that the sector is booming.
Prospects for further rate cuts in Brazil, due to the sluggishness of the economic recovery and low inflation, have played against the BRL in recent weeks.
Investors have been treated to good news in the past week, at least if they've managed to side-step the barrage of terrible economic data.
Don't bet the farm on today's October payroll numbers, which will be hopelessly--and unpredictably-- compromised by the impact of hurricanes Florence and Michael.
Brazil's central bank kept the Selic policy rate at 6.50% this week, as markets broadly expected.
The MPC's "Super Thursday" communications left markets a little more confident that interest rates will rise again in May, shor tly after the likely start of the Brexit transition period.
Last week's national accounts were a setback for the hawks on the MPC seeking to raise interest rates at the next meeting, on November 2.
We understand the desire of investors and individuals to see the economy re-opening as soon as possible, but the data right now support only a limited opening in some parts of the country and, hence, a limited late spring/summer rebound in the economy.
This week has seen a huge wave of data releases for both January and February, but the calendar today is empty save for the final Michigan consumer sentiment numbers; the preliminary index rose to a very strong 99.9 from 95.7, and we expect no significant change in the final reading.
We'll cover Friday's barrage of EZ economic data later in this Monitor, but first things first. We regret to inform readers that the ECB is behind the curve. Last week, Ms. Lagarde downplayed the idea that the central bank will respond to the shock from the Covid-19 outbreak.
We keep hearing that the auto market is struggling, but that idea is not supported by the recent sales numbers.
China's official manufacturing PMI was unchanged at 50.2 in December, marking a weak end to the year. But it could have been worse; we had been worried that the return to above-50 territory in November had been boosted by temporary factors. December's print allays some of those fears.
Japan's Tankan survey for Q2 was unsurprisingly grim, given the devastation caused by the near- global lockdown in the first half of the quarter, and the nationwide state of emergency that enveloped April and May.
Manufacturers in China continued to trudge along in May, with their post-lockdown recovery looking increasingly fragile.
The number of Covid-19 cases is increasing at a faster rate, though 89% of the new cases reported Saturday were in China, South Korea, Italy and Iran.
Under normal circumstances, the 0.23% increase in the core CPI, reported earlier this month, would be enough to ensure a 0.2% print in today's core PCE deflator.
The INSEE business sentiment data in France continue to tell a story of a robust economy.
Economic and financial conditions continue to deteriorate sharply in LatAm.
The tone of Fed Chair Powell's opening comments at the press conference yesterday was much more dovish than the statement, which did little more than most analysts expected.
We have been on the ECB's case recently. The action taken at last week's official meeting--see here--fell short of market expectations, but more importantly, Ms. Lagarde's communication around the decisions was disastrous.
We would be astonished if the FOMC meeting starting today does not end with a 25bp rate hike.
The national February inflation data are due this Friday, a couple of weeks after the Tokyo report, as usual.
We continue to see signs of a strengthening upturn in Eurozone construction. Output in construction rose 0.3% month-to-month in April, pushing the year-over-year rate down to 3.2%, from an upwardly revised 3.8% in March.
We have been arguing for some time that the drag on growth from falling capital spending in the oil sector would fade to nothing in the third quarter, and would then likely be followed by a small increase in the fourth quarter. But we seem to have been too cautious. It now seems much more likely that oil capex will rebound strongly as soon as the third quarter, following the clear upturn in the rig count data produced by Baker Hughes, Inc.
The market-implied probability that the MPC will cut Bank Rate by June fell to 34%, from 38%, after the release of January's consumer price figures, though investors still see around an 80% chance of a cut by the end of this year.
The BoJ held firm, for the most part, during this year's bout of central bank dovishness.
Production in the EZ construction sector slumped at the end of Q4. Data yesterday showed that output slid by 3.1% month-to-month in December, comfortably reversing the 0.7% increase in November.
Colombia's oil industry--one of the key drivers of the country's economic growth over the last decade--has been stumbling over recent months, raising concerns about the country's growth prospects. But the recent weakness of the mining sector is in stark contrast with robust internal demand and solid domestic production.
Friday's detailed euro area CPI report for December confirmed that inflation pushed higher at the end of last year. Headline inflation increased to 1.3% year-over- year, from 1.0% in November, lifted primarily by higher energy inflation, rising by 3.4pp, to +0.2%. Inflation in food, alcohol and tobacco also rose, albeit marginally, to 2.1%, from 2.0% in November.
The data tell an increasingly convincing story that the Eurozone's external surplus rose further in the second half of last year.
Yesterday's sole economic report in the EZ showed that consumer sentiment in Germany improved mid-way through the fourth quarter.
Friday's manufacturing data in Germany weren't pretty, but fortunately, the report is old news. Factory orders crashed by 25.8% month-to-month in April, extending the slide from a revised 15.4% fall in March.
The single most surprising U.S. economic report ever published likely is explained very simply: We know a great deal about the numbers of people losing jobs, but not much about people finding jobs.
Markets were left somewhat disappointed yesterday by the G7 statement that central banks and finance ministers stand ready "to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks."
The contrast between November's very modest 67K ADP private payroll number and the surprising 254K official reading was startling, even when the 46K boost to the latter from returning GM strikers is stripped out.
Last week's final barrage of data showed that EZ headline inflation rose slightly last month, by 0.1 percentage points to 1.5%, driven mainly by increases in the unprocessed food energy components.
We aren't in the business of trying to divine the explanation for every twist and turn in the stock market at the best of times, and these are not the best of times.
The key story in Brazil this year remains one of gradual recovery, but downside risks have increased sharply, due mainly to challenging external conditions.
The near-term performance for EZ manufacturing will be a tug-of-war between positive technical factors, and a still-poor fundamental outlook.
January's Markit/CIPS manufacturing survey suggests that the outcome of the general election has brought manufacturers some momentary relief.
Investors have revised down their expectations for interest rates since the November Inflation Report and now only a 50% chance of a 25bp hike in Bank Rate is priced-in by the end of this year.
The unexpectedly small 2,760K drop in the ADP measure of May private payrolls is consistent, at least, with the idea that the partial reopening of several states in the early part of the month prompted an immediate wave of rehiring.
The ECB will leave its key refinancing and deposit rates unchanged today, at 0.00% and 0.5%, respectively, but we are confident that the central bank will expand its existing stimulus efforts via a boost and extension of the Pandemic Emergency Purchase Program.
We have spent the past few weeks shifting our story on the EZ economy from one focused on slowing growth and downside risks to a more balanced outlook. It seems that markets are starting to agree with us.
The unexpectedly robust 128K increase in October payrolls--about 175K when the GM strikers are added back in--and the 98K aggregate upward revision to August and September change our picture of the labor market in the late summer and early fall.
We've previously highlighted the pro-cyclical elements of the BoJ's framework, but it's worth repeating, when an economic shock comes along.
Our composite index of employment indicators, based on survey data and the official JOLTS report, looks ahead about three months.
The 0.7% month-to-month rise in industrial production in September marked the sixth consecutive increase, a feat last achieved 23 years ago.
The opening gambits in the post-Brexit trade negotiations were played earlier this week, in speeches from U.K. Prime Minister Boris Johnson and EU chief negotiator, Michel Barnier.
Mr Abe's Liberal Democratic Party took a drubbing at the polls in Tokyo's Assembly election over the weekend. The consequences for fiscal spending probably are minimal but the vote strengthens the case for increased emphasis on the structural reform "arrow" and less focus on monetary policy.
Over the summer, both Chancellor Javid and PM Johnson appeared to be repositioning the Conservatives, claiming that the era of austerity was over and that higher levels of spending and investment were justified.
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.
The verdict is in.
The economic and political backdrop to this week's Monetary Policy Committee meeting is significantly more benign than when it last met on September 19.
The relative strength of the investor and consumer confidence reports for March, released this week, signal a better outlook for the Mexican economy.
Yesterday's data showed that the euro area PMIs were a bit stronger than initially estimated in November.
It's not our job to pontificate on the merits, or otherwise, of the tax cut bill from a political perspective.
Implied volatility on the euro is now so low that we're compelled to write about it, mainly because we think the macroeconomic data are hinting where the euro goes next.
Yesterday's BoJ statement, outlook and press conference raised our conviction on two key aspects of the policy outlook.
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 RMB has been on a tear, as expectations for a "Phase One" trade deal have firmed.
Markets clearly love the idea that the "Phase One" trade deal with China will be signed soon, at a location apparently still subject to haggling between the parties.
Manufacturers in Germany endured another miserable quarter in Q3.
It's a myth that the 10-ye ar decline in the unemployment rate has not driven up the pace of wage growth.
The MPC's decision yesterday was a "dovish hold", designed to keep market interest rates at current stimulative levels and to preserve the option of cutting Bank Rate swiftly and without surprise, if the economy fails to rebound in Q1.
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.
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.
This Budget will be remembered as the moment when the Government finally threw in the towel on plans to run sustainable public finances.
Data yesterday showed that German inflation roared higher at the start of the year, but the devil is in the detail.
The Bank of Korea's two main monthly economic surveys were very perky in January.
A pair of closely-watched reports today will confirm that business and consumer confidence is tanking in the face of the coronavirus outbreak.
The PBoC cut its seven-day reverse repo rate to 2.20%, from 2.40%, while making a token injection; the Bank only moves these rates when it injects funds.
ADP's report of a 235K increase in private payrolls in February is not definitive evidence of anything, but it is consistent with the idea that labor demand remains very strong.
The build-up to today's ECB meeting has drowned in the focus on Italy's new political situation and the rising risk of a global trade war.
We can think of at least three reasons for the apparent softness of ADP's March private sector employment reading.
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.
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.
Mr. Draghi and his colleagues erred on the side of maximum dovishness yesterday.
The MPC would have to change tack sharply on Thursday in order to live up to the markets' expectation that there is a near-zero chance of another rate cut within the next year.
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.
We're looking forward to today's April NFIB survey of activity and sentiment in the small business sector with some trepidation.
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.
This week's MPC meeting and Inflation Report likely will support the dominant view in markets that the chances of a 2017 rate hike are remote, even though inflation will rise further above the 2% target over the coming months. Overnight index swap markets currently are pricing-in only a 20% chance of an increase in Bank Rate this year.
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.
We don't believe that payrolls rose only 138K in May. History strongly suggests that when the May payroll survey is conducted relatively early in the month, payroll growth falls short of the prior trend.
We think today's February payroll number will be reported at about 140K, undershooting the 175K consensus.
The rapid escalation of Covid-19 cases in Korea in recent weeks has broadened the likely damage to the economy this quarter.
Chancellor Sunak faces a tough first gig on Wednesday, when he delivers the long-awaited Budget.
Mr. Draghi was in a slightly more bullish mood yesterday, noting that the significant easing of financial conditions in recent months and improving sentiment show that monetary policy "has worked". Economic risks are tilted to the downside, according to the president, but they have also "diminished".
Chile's IMACEC economic activity index rose 3.9% year-over-year in January, up from 2.6% in December, and 2.9% on average in Q4, thanks to strong mining output growth and solid commercial, manufacturing and services activity.
In today's Monitor, we'll let the economy be, and focus instead on what are fast becoming the two defining political issues for the EU and its new Commission, namely migration and climate change.
The pushback from within the President's own party against the proposed tariffs on Mexican imports has been strong; perhaps strong enough either to prevent the tariffs via Congressional action, or by persuading Mr. Trump that the idea is a losing proposition.
We're expecting to learn this morning that productivity rose by a respectable 1.7% in the year to the fourth quarter, the best performance in nearly four years.
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.
It's hard to overstate the geopolitical importance of Friday's assassination of Qassim Soleimani, architect of Iran's external military activity for more than 20 years and perhaps the most powerful man in the country, after the Supreme Leader.
Friday's early EZ CPI data for December were red hot. Headline HICP inflation in Germany jumped to 1.5%, from 1.3% in November, while the headline rate in France increased by 0.4pp, to 1.6%.
If the Chancellor is true to his word, Wednesday's Budget will be a pedestrian affair with few major policy changes designed to prevent the economy from slowing this year. In an article in The Sunday Times, Philip Hammond asserted that "we cannot take our foot off the pedal" in the mission to eliminate the budget deficit by the end of the next parliament.
Yesterday's economic reports in the Eurozone were solid across the board.
The jump in oil prices over the past two trading days eventually will lift retail gasoline prices by about 35 cents per gallon, or 131⁄2%.
Judging by interactions with readers in the past few weeks, fiscal policy is one of the most important topics for EZ investors as we move into the final stretch of the year.
October's Markit/CIPS services survey suggests that the PM's new Brexit deal has had a lukewarm reception from firms.
Productivity growth reached the dizzy heights of 1.8% year-over-year in the second quarter, following a couple of hefty quarter-on-quarter increases, averaging 2.9%.
The MPC's penchant for providing interest rate guidance reached new heights last week.
A trio of data releases yesterday provided no relief from the run of abysmal economic news.
The collapse in global demand last month will have derailed China's trade recovery, causing exports to drop unpleasantly month-on-month after the bounce of around 45% in March; the January/February breakdown is not provided, so we can't be sure of the extent of the March rebound.
The main story to emerge from China's Economic Work Report is the extent of tax cuts, which on our calculations will leave a large funding hole.
Our hope for a year-end jump in German factory orders was laughably optimistic.
The case for the MPC to hold back from raising interest rates in May remains strong, despite the improvement in the Markit/CIPS services survey in February.
Nobody knows the damage China's virus- containment efforts will have on GDP, and we probably never will, for sure, given the opacity of the statistics.
Chile's IMACEC economic activity index rose 2.4% year-over-year in January, down from 2.6% in December, and 3.3% on average in Q4, thanks mostly to weak mining production.
Yesterday's economic reports in the Eurozone were mostly positive.
The economic data calendar for next week is so congested that we need to preview early September's GDP report, released on Monday.
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.
Yesterday's final manufacturing PMIs for October were grim, but they told investors nothing they don't already know.
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.
The run of consensus-beating activity measures and the pickup in leading indicators of inflation have led markets to doubt that the MPC really will follow up August's package of stimulus measures with another Bank Rate cut this year.
The Monetary Policy Committee of the RBI ventured into the unknown yesterday, cutting its benchmark repo rate further, by an unconventional 35 basis points, to 5.40%.
The simultaneous decline in both ISM indexes was a key factor driving markets to anticipate last week's Fed easing.
Support in opinion polls for both the Conservatives and Labour has been increasing steadily.
The ECB took another big step yesterday in assuring markets that it won't waver in the fight against Covid-19.
The comforting 183K increase in February private payrolls reported by ADP yesterday likely overstates tomorrow's official number.
It will take a while for the economic data in the euro area fully to reflect the Covid-19 shock, but the incoming numbers paint an increasingly clear picture of an improving economy going into the outbreak.
Speculation mounted yesterday that the MPC will follow the U.S. Fed and cut interest rates before its next meeting on March 26.
The U.K. services sector has vanished overnight, following the introduction of tough restrictions on everyday life to stem the spread of Covid-19.
Today's ECB meeting will follow the same script as in July. No-one expects the central bank to make any formal changes to its policy settings. The ECB will keep its main refinancing and deposit rates at zero and -0.4%, respectively.
Korea's trade data for January provided the first real glimpse of the potential hit to international flows from the disruptions caused by the outbreak of the coronavirus.
Behind all the talk of slowdowns and Fed pauses, we see no sign that the labor market is loosening beyond a very modest uptick in jobless claims, and even that looks suspicious.
Productivity likely rose by 1.7% last year, the best performance since 2010.
Yesterday's final PMI data in the Eurozone were better than we expected.
The post-election run of upbeat business surveys was extended yesterday, with the release of the final Markit/CIPS services PMI for January.
Yesterday's detailed Q3 growth data in the Eurozone offered no surprises in terms of the headline.
One bad month proves nothing, but our first chart shows that October's auto sales numbers were awful, dropping unexpectedly to a six-month low.
Friday's final PMI data for March were even more terrifying than the advance numbers. The composite index in the euro area collapsed to 29.7, from 51.6 in February, lower than the consensus 31.4. A downward revision was coming.
We have consistently flagged the likelihood that Japan's government would boost spending after the consumption tax hike was implemented.
Brazil's industrial sector is on the mend, but some of the key sub-sectors are struggling.
October payrolls were stronger than we expected, rising 128K, despite a 46K hit from the GM strike.
French consumer confidence and consumption have been among the main bright spots in the euro area economy so far this year.
The ECB made no changes to its policy stance yesterday. The central bank left its refinancing and deposit rates at 0.00% and -0.4%, respectively, and maintained the pace of QE at €60B per month. The program will run until December "or beyond, if necessary."
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.
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.
The Fed will do nothing to the funds rate or its balance sheet expansion program today.
Our ECB-story since Ms. Lagarde took the helm as president has been that the central bank will do as little as possible through 2020, at least in terms of shifting its major policy tools.
The extent of shut downs within China is now reaching extreme levels, going far beyond services and threatening demand for commodities, as well as posing a severe risk to the nascent upturn in the tech cycle.
The preliminary estimate of Q3 GDP, showing quarter-on-quarter growth slowing only to 0.5% from 0.7% in Q2, has kiboshed the chance that the MPC cuts Bank Rate next Thursday.
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.
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.
China's abysmal industrial profits data for October underscore why the chances of less- timid monetary easing are rising rapidly.
The coronavirus outbreak has pushed inflation lower in the Andean economies as the shock drives them into the deepest recession on record.
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.
Survey data in Germany showed few signs of picking up from their depressed level at the start of Q4.
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.
The advance international trade data for December were due for publication today, but the report probably won't appear.
As the dust settles from Wednesday's budget proposal by the EU Commission--see here--economists and investors are left with a myriad of questions.
To avoid rocking the 2020 boat, the Phase One trade deal needed to be sufficiently vague, so that neither side, and particularly Mr. Trump, would have much cause to kick up a fuss around missed targets.
Traders looking for a sustained move in the euro have been left disappointed in the past six-to-12 months, but it is now teasing investors with a break to the upside against the dollar.
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.
Leading economic indicators in the Eurozone continue to send contradictory signals. Most of the headline surveys indicate that a further slowdown, and perhaps even recession, are imminent, while the money supply data suggest that GDP growth is about to re-accelerate.
The Monetary Policy Board of the Bank of Korea yesterday voted unanimously to lower its base rate by 25 basis points to a record low of 0.50%.
Headline money supply growth in the Eurozone accelerated further at the start of Q2.
The MPC won't seek to make waves on Thursday.
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.
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.
The stock market did not like the renewed closure of bars in Texas and Florida, announced Friday morning.
Markets often greet the monthly international trade numbers with a shrug.
Core durable goods orders in recent months have been much less terrible than implied by both the ISM and Markit manufacturing surveys.
January's GDP report, released on Wednesday, was set to be one of the most important data releases of this year, due to its role in providing the first official steer on the economy's post-election performance.
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.
Japan's all-industry activity index dropped by 3.8% month-on-month in March, worse than the 0.7% slip in February.
Japan's retail sales data--due out on Thursday-- have been badly affected by the October tax hike.
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.
The coronavirus pandemic looks set to spread rapidly throughout LatAm.
India's government imposed a three-week nationwide lockdown on March 25 to combat the increasingly rapid spread of Covid-19.
The dovish members of Banxico's board garnered further support on Friday for prolonging the current easing monetary cycle over coming meetings.
Yesterday's State Council meeting significantly expanded support to the economy, through a number of channels.
Friday's PMI data were a mixed bag.
Economic activity in Mexico during the past few months has been relatively resilient, as external and domestic threats appear to have diminished.
The EZ economy's liquidity gears were well-oiled coming into the crisis.
The Brazilian central bank cut the benchmark Selic interest rate by 25bp, to 4.25%, on Wednesday night, as expected.
Today's wave of data will bring new information on the industrial sector, consumers, the labor market, and housing, as well as revisions to the third quarter GDP numbers.
The Fed will soon have to step in to try to put a firebreak in the stock market.
The BoK surprised markets and commentators by keeping rates unchanged at 1.25% yesterday, rather than cutting to 1.0%.
Retail sales in Mexico fell in Q4, but we think households' spending will continue to contribute to GDP growth in the first quarter, at the margin.
Housebuilders were one of the biggest winners from the post-election relief rally in U.K. equity prices.
Yesterday's IFO data reversed the good vibes sent by last week's upbeat German PMIs.
Headline M3 money supply growth in the Eurozone was steady as a rock at around 5% year-over-year between 2014 and the end of 2017.
The Policy Board of the Bank of Japan stepped up its Covid-19 liquidity relief measures yesterday, while retaining its main policy settings--namely, the -0.10% balance rate and the ten-year yield target of "around zero percent".
The Fed's 50bp rate cut last week, aiming to shield the U.S. economy against Covid-19, has opened the door for some central banks in LatAm to emulate the move.
Labour cash earnings in Japan ostensibly started the year strongly, jumping by 1.5% year-over-year in January, much better than December's 0.2% slip.
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.
Leave it to an economist to tell contradictory stories; German manufacturing orders, at the start of the year, rose at their fastest pace since 2014, but it doesn't mean anything.
Retail sales values in Japan plunged by 14.4% month-on-month in October, reversing September's 7.2% spike twice over.
The emergence last month of a new E.U. Withdrawal Agreement that has a strong chance of being ratified by MPs appears to have given a small boost to business confidence.
Markets were surprised yesterday by the absence of hawkish comments or guidance accompanying the MPC's decision to raise interest rates to 0.50%, from 0.25%.
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.
We're fully expecting to see a hit to September payrolls from Hurricane Florence, which struck during the employment survey week.
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.
Japan is one of the countries most exposed to economic damage from the coronavirus.
The MPC restated its commitment to an "ongoing tightening of monetary policy" yesterday, but provided no new guidance to suggest that the next hike is imminent.
Banxico's Quarterly Inflation Report--QIR--for Q4 2016, published this week, confirmed that the monetary authority is concerned about the slowing pace of economic activity and rising inflation pressures. Banxico noted that signs of a recovery have emerged in external demand, but it also pointed out that the Trump administration might impose policies which would hit FDI flows into Mexico.
It has been a nasty start to the year for LatAm as markets have been hit by renewed volatility in China, triggered by the coronavirus.
The ECB stood pat yesterday, keeping its key refinancing and deposit rates unchanged at zero and -0.4%, respectively. The marginal lending facility rate was also left at 0.25%, and the monthly pace of QE was maintained at €80B, with a preliminary end-date in the first quarter of 2017. Purchases of corporate bonds will begin June 8, and the first new TLTRO auction will take place June 22.
Yesterday's final manufacturing PMIs confirmed that all remained calm in the EZ industrial sector through February.
The Bank of England issued a statement yesterday that it is "working closely with HM Treasury and the FCA--as well as our international partners--to ensure all necessary steps are taken to protect financial and monetary stability".
Something of a debate appears to be underway in markets over the "correct" way to look at the coronavirus data.
Yesterday's economic reports in the euro area were mixed.
Yesterday's FOMC , announcing a unanimous vote for no change in the funds rate, is almost identical to December's.
Industrial profits in China collapsed by 38.3% year- over-year in the first two months of 2020, making December's 6.3% fall look like a minor blip.
The U.S. coronavirus outbreak is not slowing. The curve is not bending much, if at all. Confirmed cases continue to increase at a steady rate, averaging 23% per day over the past three days.
The economic downturn and the Chancellor's unprecedented fiscal measures mean that public borrowing likely will be about four times higher, in the forthcoming fiscal year, than anticipated in the Budget just over two weeks ago.
The news in Brazil on inflation and politics has been relatively positive in recent weeks, allowing policymakers to keep cutting interest rates to boost the stuttering recovery.
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.
We have two competing explanations for the unexpected leap in November payrolls. First, it was a fluke, so it will either be revised down substantially, or will be followed by a hefty downside correction in December.
Yesterday's advance CPI data in Germany suggest that EZ inflation is now rebounding slightly.
Chancellor Javid told the Financial Times earlier this month that he wants to lift the rate of GDP growth to between 2.7% and 2.8%, the average rate in the 50 years following the Second World War.
Data released on Friday showed that November inflation was in line with, or below, expectations in Brazil, Colombia and Chile.
Data released last week confirm that Argentina's economy remains a mess.
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.
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.
The first economic report of 2020 confirmed the main story in the euro area last year; namely a recession in manufacturing.
Monetary policy usually is the first line of defence whenever a recession hits.
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.
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.
Later today, the Chancellor likely will take the first step towards abandoning plans for further fiscal tightening. In
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.
The reported drop in mortgage applications over the holidays is now reversing, not that it ever mattered.
Our analysis of the Q3 activity and GDP data in yesterday's Monitor strongly suggests that China's authorities will soon ready further stimulus.
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.
Yesterday's EZ money supply data confirmed that liquidity conditions in the private sector improved in Q3, despite the dip in the headline.
Resistance is futile.
April's GDP report probably will be the worst any of us will see in our lifetime.
Today's payroll number is completely irrelevant, because 97% of the 10.2M increase--so far--in initial jobless claims from their pre-coronavirus level came after the employment survey was conducted, between Sunday March 8 and Saturday March 14.
China's economic targets are AWOL this year, thanks to Covid-19 disruptions to the legislative calendar... and because policymakers seem unsure of what targets to set in such uncertain times.
The number of coronavirus cases continues to increase, but we're expecting to see signs that the number of new cases is peaking within the next two to three weeks.
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.
The German manufacturing sector appears to have settled into an equilibrium of sustained misery.
Friday's advance Q4 growth numbers in the EZ were a bit of a dumpster fire.
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.
Chile's stronger-than-expected industrial production report for December, and less-ugly-than- feared retail sales numbers, confirmed that the hit from the Q4 social unrest on economic activity is disappearing.
President Trump tweeted yesterday that he wants to re-introduce tariffs on steel and aluminium imports from Brazil and Argentina, after accusing these economies of intentionally devaluing their currencies, hurting the competitiveness of U.S. farmers.
The political momentum in the run-up to the election now lies with Labour.
Yesterday's final manufacturing PMIs confirmed that the headline index in the euro area rebounded further last month.
The Redbook chainstore sales survey today is likely to give the superficial impression that the peak holiday shopping season got off to a robust start last week.
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.
The Covid-19 scare can be split into two stages, the initial outbreak in China, concentrated in Wuhan, and the now-worrying signs that clusters are forming in other parts of the world, primarily in South Korea, the Middle East and Italy.
Today brings a wave of data which will help analysts narrow their estimates for first quarter GDP growth, and will offer some clues, albeit limited, about the early part of the second quarter.
Hideous though the official April payroll numbers were, the chances are that they'll be revised down.
Last week finished as it started, with more depressing economic numbers in the Eurozone, this time from manufacturing in the core economies.
The MPC's pause for breath last week disappointed a majority of investors, who thought that it would at least tweak aspects of the support programmes put in place in March.
Economic conditions in Brazil are deteriorating rapidly.
Yesterday's industrial production data in Germany were downbeat. Output fell 1.3% month-to-month in March, pushing the year-over-over rate down to 0.3%, from 2.0% in February. Production was held back by weakness in manufacturing and a plunge in construction, Meanwhile, energy output rebounded slightly following last month's fall. Over Q1 as a whole, though, the industrial sector performed strongly.
Friday's data force us to walk back our recession call for Germany. The seasonally adjusted trade surplus rose in September, to €19.2B from €18.7B in August, lifted by a 1.5% month-to-month jump in exports, and the previous months' numbers were revised up significantly.
The latest GDP data continue to show that the economy is holding up well, despite the Brexit saga.
Yesterday's economic reports in the Eurozone were ugly.
The undershoot in the September core CPI does not change our view that the trend in core inflation is rising, and is likely to surprise substantially to the upside over the next six-to-12 months.
October's consumer prices report, released on Wednesday, likely will show that CPI inflation has continued to drift further below the 2% target
The MPC emphasised yesterday that its faith that interest rates need to rise further has not been shaken by recent downside data surprises.
Chancellor George Osborne has invested considerable personal capital in attaining a budget surplus by the end of this parliament, and he has passed a 'law' to ensure he and his successors achieve this goal. But the current fiscal plans, which will be reviewed in the Budget on March 16, make a series of optimistic assumptions on future tax revenues and spending savings.
France is solidifying its position as one of the Eurozone's best-performing economies.
The upturn in the new monthly measure of GDP in May, released yesterday, was strong enough--just--to suggest that the MPC likely will raise Bank Rate at its next meeting on August 2.
Wage growth in Japan accelerated to a six-month high in December, inching up to 1.8% year-over-year, from November's 1.7%.
A reader pointed out Friday that the standard measurement of the impact of the weather on January payrolls--the number of people unable to work due to the weather, less the long-term average--likely overstated the boost from the extremely mild temperatures.
The big story in financial markets at the moment is the idea that major global central banks are about to embark on a policy easing cycle.
The People's Bank of China likely will be more than content with the latest money and credit data, to the point where it probably won't see the need to cut interest rates further anytime soon.
We expect the Budget today to underwhelm investors who are eager to see a quick and powerful government response to the coronavirus outbreak.
It's still unclear how exactly Covid-19 will impact the euro area as a whole, but little doubt now remains that Italy's economy is in for a rough ride.
The Fed announced no significant policy changes yesterday, but the FOMC reinforced its commitment to maintain "smooth market functioning", by promising to keep its Treasury and mortgage purchases "at least at the current pace".
Today's general election looks set to be a closer race than opinion polls suggested two weeks ago.
The U.K. general election is the main event in today's European calendar, but the first official ECB meeting and press conference under the leadership of Ms. Lagarde also deserves attention.
The Fed paved the way with a 50bp emergency rate cut on March 3, with more to come.
Chancellor Sunak's "temporary, timely and targeted" fiscal response to the Covid-19 outbreak, and the BoE's accompanying stimulus measures, won't prevent GDP from falling over the next couple of months.
China's money and credit data for February were reassuring, at least when compared with the doomsday scenario painted, so far, by other key indicators for last month.
Core machine orders in Japan collapsed in April, as expected, falling by 12.0% month-on-month, worse than the minor 0.4% slip in March.
It's hard to find anything to dislike in the February employment report.
Friday's industrial production headlines in the Eurozone were weak, but the details tell a more nuanced story.
The 0.1% dip in the core CPI in March was the first outright decline in three years, but we expect another-- and bigger--decline in today's April numbers.
The Q1 GDP figures, released on Wednesday, likely will show that the quarter-on-quarter decline in economic activity eclipsed the biggest decline in the 2008-to-09 recession--2.1% in Q4 2008--even though the U.K. went into lockdown towards the very end of the quarter.
The Andean countries were quick to implement significant measures in response to the initial stage of the pandemic, adopting a broad range of economic and social policies to ease the effects.
The absence of a hawkish slant to the MPC's Inflation Report or the minutes of its meeting suggest that an increase in interest rates remains a long way off.
We expect May's consumer prices report, released on Wednesday, to show that the headline rate of CPI inflation fell to a four-year low of 0.4% in May, from 0.8% in April.
Monthly core CPI prints of 0.3% are unusual; June's was the first since January 2018, so it requires investigation.
Our suggestion that the ECB could still raise the deposit rate later this year, by 20bp to -0.4%, has met with strong scepticism in recent conversations with readers.
On a headline level, the Spanish economy conformed to its image as the star performer in the EZ in Q4.
Chair Powell broke no new ground in his semi-annual Monetary Policy Testimony yesterday, repeating the Fed's new core view that the current stance of policy is "appropriate".
The FOMC did mostly what was expected yesterday, though we were a bit surprised that the single rate hike previously expected for next year has been abandoned.
Japan's preliminary GDP report for Q4 is out on Thursday, and we expect to see a punchy number.
We're very interested in the detail of today's January NFIB survey; the headline index, not so much.
June's RICS Residential Market Survey brings hope that the housing market already is over the worst.
The U.S. Commerce Department on Tuesday released a list of Chinese imports, with an annual value of $200B, on which it is threatening to impose a 10% tariff, after a two-month consultation period.
Markets are looking for the BCCh to remain on hold and the BCRP to ease on Thursday; we think they will be right. In Chile, the BCCh will hold rates because inflation pressures are absent and economic activity is stabilizing following temporary hits in Q1 and early Q2.
Yesterday's Sentix investor sentiment survey provided the first glimpse of conditions on the ground in the EZ economy in the wake of the coronavirus scare.
The clear threat to demand posed by the coronavirus and China's efforts at containment have sent a shock wave through commodities markets.
The BoJ yesterday kept the policy balance rate at -0.1%, and the 10-year yield target at "around zero", in line with the consensus.
The Brazilian Central Bank's policy board-- COPOM--voted unanimously on Wednesday to cut the Selic rate by 50bp to 5.00%, as expected.
We expect to see a 70K increase in October payrolls today.
Yesterday's first estimate of Q1 GDP in Mexico confirmed that growth was under severe pressure at the start of the year.
The more headline hard data we see in the Eurozone, the more we are getting the impression that 2019 is the year of stabilisation, rather than a precursor to recession.
The BoJ kept policy unchanged, as expected, at its meeting yesterday.
The early Q4 hard data in Germany recovered a bit of ground yesterday.
Official Chinese real GDP growth likely slipped to 6.3% year-over-year in Q1, the lowest on record, from 6.4% in Q4, which matched the trough in the Great Financial Crisis.
Leading indicators all point to a solid August payroll number. Survey-based measures of the pace of hiring signal a 200K-plus increase, and jobless claims--a proxy for the pace of gross layoffs--are at a record low as a share of the workforce.
On the heels of yesterday's benign Q3 employment costs data--wages rebounded but benefit costs slowed, and a 2.9% year-over-year rate is unthreatening--today brings the first estimates of productivity growth and unit labor costs.
Sterling fell to $1.38, from $1.39, in the hour following the EU's publication of a draft Article 50 withdrawal treaty, which set out the practical consequences of the principles the U.K. agreed to in December.
The entire 10.5% increase in personal income in April, reported on Friday, was due to the direct stimulus payments made to households under the CARES Act.
Today's March ADP employment report likely will catch the leading edge of the wave of job losses triggered by the coronavirus.
The recent slide in market interest rates suggests investors expect the Monetary Policy Committee--MPC--to strike a dovish note today, when the decision and minutes of this week's meeting are released and the Inflation Report is published, at 12.00 GMT.
Samuel Tombs has more than a decade of experience covering the U.K. economy for investors. At Pantheon, Samuel's research is rigorous, free of dogma and jargon, and unafraid to challenge consensus views. His work focuses on what matters to professional investors: The links between the real economy, monetary policy and asset prices. He has a strong track record of getting the big calls right. The Sunday Times ranked Samuel as the most accurate forecaster of the U.K. economy in both 2014 and 2018. In addition, Bloomberg consistently has ranked Samuel as one of the top three U.K. forecasters, out of pool of 35 economists, throughout 2018 and 2019. His in-depth knowledge of market-moving data and his forensic forecasting approach explain why he consistently beats the consensus. Samuel's work on Brexit goes beyond simply reporting developments and is always analytical and unbiased, enabling investors to see through the noise of the daily headlines. While his analysis points to a particular path that politicians will take, he acknowledges the inherent uncertainty and draws out the economic and financial market implications of all plausible Brexit scenarios. Samuel holds an MSc in Economics from Birkbeck College, University of London and an undergraduate degree in History and Economics from the University of Oxford. Prior to joining Pantheon in 2015, he was Senior U.K. Economist at Capital Economics. In 2011, Samuel won the Society of Business Economists' prestigious Rybczynski Prize for an article on quantitative easing in the UK. He is based in London but frequently visits our other offices. Recent key calls include: 2018 - Correctly forecast that GDP growth would slow and inflation would undershoot the MPC's initial forecast, prompting the Committee to shock investors and almost other economists by waiting until August to raise Bank Rate, rather than pressing ahead in May. 2017 - Argued that the MPC was wrong to expect CPI inflation to stay below 3% following sterling's depreciation. He also highlighted that economic indicators pointed to the Conservatives losing their outright majority in the snap general election.
The trend in manufacturing output probably is about flat, with no real prospect of any serious improvement in the near term.
China's official PMIs for March surprised well to the upside, cheering markets across Asia.
Recent economic weakness in Brazil, particularly in domestic demand, and the ongoing deterioration of confidence indicators, have strengthened the case for interest rate cuts.
Data released in recent days have started to reveal a story of horror and misery in the Brazilian economy.
Mark Carney's assertion that "...some monetary policy easing will likely be required over the summer" is a clear signal that an interest rate cut is in the pipeline. But easing likely will be modest, due to the much higher outlook for inflation following sterling's precipitous decline.
Yesterday's EZ data showed that French households came out swinging as the economy reopened. Consumers' spending, ex-services, jumped by 36.6% month-to-month in May, driving the year-over-year rate up to -8.3%, from -32.7% in April.
The monthly survey of small businesses conducted by the National Federation of Independent Business is quite sensitive to short-term movements in the stock market, so we're expecting an increase in the November reading, due today.
Friday was a busy day in the Eurozone. The final and detailed GDP report confirmed that growth in the euro area slowed to 0.2% quarter-on-quarter in Q3, from 0.4% in Q2, with the year-over-year rate slipping by 0.6 percentage points to 1.6%, just 0.1pp below the first estimate.
We're now starting to see clear signs in unofficial data that households are slashing their expenditure on discretionary services, in order to minimise their chances of catching the coronavirus.
The collapse in oil prices was the immediate trigger for the 7.6% plunge in the S&P 500 yesterday, but the underlying reason is the Covid-19 epidemic.
In this Monitor we'll let the data be, and try to make some sense of the recent market volatility from a Eurozone perspective, with an eye to the implications for the economy and policymakers' actions.
Most countries in LatAm are now fighting a complex global environment; a viral outbreak of biblical proportions and plunging oil prices, after last week's OPEC fiasco.
The stakes are raised ahead of today's ECB meeting after the central bank's pledge in January to "review and reassess" its policy stance. Since then, survey data have weakened, inflation has fallen and volatility in financial markets has increased. The ECB likely will act accordingly and deliver a boost to monetary stimulus today.
The ECB made no major policy changes yesterday. The central bank kept its refinancing and deposit rates unchanged at 0.00% and -0.4% respectively, and the scheduled reduction in the pace of QE to €60B per month was confirmed. The core part of the central bank's language retained its dovish bias.
Markets rightly placed little weight on October's below-consensus GDP report yesterday, and still think that the chances of the MPC cutting Bank Rate within the next six months are below 50%.
We see clear upside risk to the inflation data due before the FOMC announcement, from three main sources.
Manufacturing in France remained on the front foot at the start of Q4.
Gloom and uncertainty are spreading across the global economy as we head into the final stretch of the year.
China's trade balance flipped to an unadjusted deficit of $7.1B in the first two months of the year, from a $47.2B surplus in December.
We would be surprised, but not astonished, if the Fed were to announce a shift to explicit yield curve control at today's meeting.
Friday's industrial production data in the core EZ economies, for December, were startlingly poor. In Germany, industrial production plunged by 3.5% month-to-month, comfortably reversing the revised 1.2% rise in November.
The reported 225K jump in payrolls in January was even bigger than we expected, but it is not sustainable. The extraordinarily warm weather last month most obviously boosted job gains in construction, where the 44K increase was the biggest in a year
We can't quibble with the consensus that GDP likely rose by 0.2% month-to-month in December, reversing only two-thirds of November's drop.
China's January trade data were scheduled for release on Friday, but instead, the customs authority delayed the publication, saying it would publish the numbers with the February data
December's industrial production figures, released today, look set to surprise the consensus to the downside, pushing down the pound and increasing the chances that the preliminary estimate of a 0.5% quarter-on-quarter increase in fourth quarter GDP will be revised down.
The market-implied probability that the MPC will cut Bank Rate in the first half of this year leapt to 50% yesterday, from 35%, following Mark Carney's speech.
The pound can't get a break. Sterling fell to just $1.24 yesterday, its lowest level against the dollar since March 2017, bar the momentary "flash crash" in January.
Yesterday's industrial production report in Germany was much better than implied by the poor new orders data--see here--released earlier this week.
The year-long surge in CPI inflation in China will soon end.
India's shocking PMIs for April leave little doubt that the second quarter will be bad enough to result in a full-year contraction in 2020 GDP, even if economic activity recovers strongly in the second half.
Yesterday's third and detailed EZ GDP data confirmed the economy hit the wall in Q1.
China's main activity data for October disappointed across the board, strengthening our conviction that the PBoC probably isn't quite done with easing this year.
The two biggest economies in the region have taken divergent paths in recent months, with the economic recovery strengthening in Brazil, but slowing sharply in Mexico.
Korea's unemployment rate rose faster than expected in May, jumping to 4.5%, from 3.8% in April. We've been arguing for some time that the delayed impact of the economic growth slowdown from late- 2017 to early-2019 would eventually push the jobless rate to the mid-4% level this year; the sudden stop caused by Covid-19 merely sped up this process.
Today's MPC meeting and minutes are the first opportunity for Committee members to speak out in over a month, now that election "purdah" rules have lifted.
The rate of growth of nominal core retail sales substantially outstripped the rate of growth of nominal personal incomes, after tax, in both the second and third quarters.
Yesterday's second Q3 GDP estimate confirmed that the EZ economy expanded by 0.2% quarter-on- quarter in Q3, the same pace as in Q2, leaving the year-over-year rate unchanged at 1.2%.
The New York Times called the China trade agreement reached Friday "half a deal", but that's absurdly generous.
Few Eurozone investors are going blindly to accept the rosy premise of last week's relief rally in equities that both a Brexit and a U.S-China trade deal are now, suddenly, and miraculously, within touching distance. But they're allowed to hope, nonetheless.
We expect September's consumer prices report, released on Wednesday, to show that CPI inflation held steady at 1.7%, below the 1.8% consensus.
Yesterday's second estimate of GDP confirmed that Eurozone growth slowed significantly in Q3.
Markets' reaction last week to the ECB's October meeting accounts--see here--shows that investors are beginning to take seriously the idea of an inflection point in Eurozone monetary policy.
Yesterday's preliminary full-year GDP data in Germany tell a cautionary tale of the dangers in taking national accounts at face value. The headline data suggest real GDP growth rose to 1.7% in 2015, up slightly from 1.6% in 2014, but these data are not adjusted for calendar effects. The working-day adjusted measure buried in the press release instead indicates that growth slowed marginally to 1.5% from 1.6% in 2014.
The ECB's key message was unchanged yesterday. The main refinancing and deposit rates were maintained at zero and -0.4%, respectively, and they are expected "to remain at their present levels at least through the summer of 2019."
Sterling leapt to $1.27, from $1.22 last week, amid some positive signals from all sides engaged in Brexit talks.
Today's CPI report from India should raise the pressure on the RBI to abandon its aggressive easing, which has resulted in 135 basis points worth of rate cuts since February.
Friday's data added further colour to the September CPI data for the Eurozone.
The January core CPI numbers are consistent with our view that the U.S. faces bigger upside inflation risks than markets and the Fed believe.
Eurozone investors should by now be accustomed to direct intervention in private financial markets by policymakers.
France just about avoided slipping into deflation in December, with the CPI rising 0.1% year-over-year, down from 0.3% in November. The 4.4% drop in the energy component should have pushed inflation below zero, but a seasonal increase in tourism services was enough to offset the drag from oil prices.
Members of the Monetary Policy Committee have signalled that January's flash Markit/CIPS composite PMI, released on Friday 24, will have a major bearing on their policy decision the following week.
The weekly jobless claims numbers are due Thursday, as usual, but in the wake of a flood of emails from readers, all asking a variant of the same question-- should we be worried about the rise in continuing jobless claims?--we want to address the issue now.
Last week, the Bank of Mexico unanimously voted to leave the main rate on hold, at 7.50%, its highest level since early 2009.
ate last week, China and the U.S. reached an agreement, averting the planned U.S. tariff hikes on Chinese consumer goods that were slated to be imposed on December 15.
The November industrial production numbers will be dominated by the rebound in auto production following the end of the GM strike.
Your correspondent is headed to the beach for the next couple of weeks, with publication resuming on Tuesday, September 4.
We look for yet another unanimous vote by the MPC to keep Bank Rate at 0.75% on Thursday, with no new guidance on the near-term outlook.
Tariffs are a tax on imported goods, and higher taxes depress growth, other things equal.
China's activity data outperformed expectations in November.
We're sticking to our call that the Eurozone PMIs have bottomed, though we concede that the picture so far is more one of stabilisation than an outright rebound.
A strong finish to the fourth quarter spared the EZ auto sector the embarrassment of posting an outright fall in domestic sales through 2019 as a whole.
All major EZ governments are now in the process of lifting lockdowns, but investors should expect less a grand opening, more of a careful tip-toeing.
Data on air quality in China provide some useful insights into the economic disruptions--or lack thereof--caused by the outbreak of the coronavirus from Wuhan and the government's aggressive containment measures.
When the MPC last met, on November 2, it attempted to persuade markets that Bank Rate would need to rise three times over the next three years to keep inflation close to the 2% target.
Yesterday's final inflation data in France for September were misleadingly soft.
Evidence of accelerating economic activity in Colombia continues to mount, in stark contrast with its regional peers and DM economies.
Judging by the solid advance data in the major economies, yesterday's EZ industrial production report should have hit desks with a bang, but it was a whimper in the end.
The BoJ is likely to be thankful next week for a relatively benign environment in which to conduct its monetary policy meeting.
Friday's sole economic report showed that wage growth in France remained robust mid-way through the year. The non-seasonally adjusted private wage index, ex-agriculture and public sector workers, published by the Labour Ministry, rose by 0.3% quarter-on-quarter in Q3.
The "Phase One" China trade deal announced late last week is a step in the right direction, but a small one. With no official text available as we reach our deadline, we're relying on media reporting, but the outline of the agreement is clear.
Ahead of the release of the retail sales report for December 2018, markets expected to see unchanged non-auto sales.
The ramifications of continued disappointing Asian growth, particularly in China, and its impact on global manufacturing, are especially hard-felt in LatAm.
China's official real GDP growth likely slowed to 6.0% year-over-year in Q3, from 6.2% in Q2.
The House passage of a stimulus bill last Friday, seeking to ameliorate some of the damage done by the coronavirus outbreak, will not be nearly enough.
Sterling received a shot in the arm yesterday following the release of the minutes of the MPC's meeting, which revealed that three members voted to raise interest rates to 0.50%, from 0.25% currently. Markets and economists--including ourselves--had expected another 7-1 split, but Ian McCafferty and Michael Saunders switched sides and joined Kristin Forbes in seeking higher rates.
After recent interventionist moves and plans in Mexico from AMLO's incoming administration and his political party, uncertainty and soured sentiment are the name of the game.
We were surprised by the weakness of the April housing starts report; we expected a robust recovery after the March numbers were depressed by the severe snowstorms across a large swathe of the country. Instead, single-family permits rose only trivially and multi-family activity--which is always volatile--fell by 9% month-to-month.
The measures to support the economy through the coronavirus crisis, unveiled by policymakers on Budget day, exceeded expectations.
The effects of Covid-19--both negative and positive--on Korea's labour market certainly were felt in February.
LatAm governments and policymakers are bracing for a more dramatic and longer virus-led downturn than initially expected.
The French manufacturing data delivered another upside surprise last week, following the solid numbers in Germany; see here. French industrial production rose slightly in November, by 0.3% month-to-month, extending the gains from an upwardly-revised 0.5% rise in October.
Yesterday's ECB meeting was a tragedy in two acts. Markets were initially underwhelmed by the concrete measures unveiled, and they were then shell-shocked by Ms. Lagarde's performance in the press conference.
The NY Fed's announcement yesterday restarts QE. The $60B of bill purchases previously planned for the period from March 13 through April 13 will now consist of $60B purchases "across a range of maturities to roughly match the maturity composition of Treasury securities outstanding".
The third straight 0.3% increase in the core CPI-- that hasn't happened since 1995--was ignored by the Treasury market yesterday, which appeared to be focusing its attention on the ECB.
Retail sales account for some 30% of GDP--more than all business investment and government spending combined--so the monthly numbers directly capture more of the economy than any other indicator. Translating the monthly sales numbers into real GDP growth is not straightforward, though, because the sales numbers are nominal. Sales have been hugely depressed over the past year by the plunging price of gasoline and, to a lesser extent, declines in prices of imported consumer goods.
The political situation in Spain remains an odd example of how complete gridlock can be a source of relative stability.
Last week's decision by the ECB to keep rates unchanged until the beginning of 2020, at least, raises one overarching question for markets.
Here's the bottom line: U.S. businesses appear to have over-reacted to the impact of the trade war in their responses to most surveys, pointing to a serious downturn in economic growth which has not materialized.
China's GDP report for the fourth quarter, due on Friday, is likely to show that economic growth has stabilised, on the surface.
It's pretty easy to dismiss back-to-back 0.3% increases in the core CPI, especially when they follow a run of much smaller gains.
Japan's PPI data yesterday confirmed that October was a turning point for prices--due to the consumption tax hike--despite the surprising stability of CPI inflation in Tokyo for the same month.
Mexico's industrial sector did relatively well in Q3, due mainly to the resilience of the manufacturing sector, and the rebound in construction and oil output, following a long period of sluggishness.
Financial assets of all stripes are, by most metrics, expensive as we head into year-end, but for some markets, valuations matter less than in others. The market for non-financial corporate bonds in the euro area is a case in point.
Next week is so crammed full of data releases that we need to preview November's consumer price data early, in the eye of the storm of the general election.
Today's November retail sales numbers are something of a wild card, given the absence of reliable indicators of the strength of sales over the Thanksgiving weekend, and the difficulty of seasonally adjusting the data for a holiday which falls on a different date this year.
December's consumer prices report looks set to show that CPI inflation was stable at 1.5%--in line with the consensus--though the risks are skewed to the downside.
Quarter-on-quarter GDP growth last year was buffeted by the accumulation, and subsequent depletion, of inventories, around the two Brexit deadlines in March and October.
The fact that Italy's economy is in poor shape will not surprise anyone following the euro area, but the advance Q4 GDP headline was astonishingly poor all the same.
The ECB and Ms. Lagarde played it safe yesterday.
We are easily excitable when it comes to monetary policy and macroeconomics, but we are not expecting fireworks at today's ECB meetings.
We suspect that today's ECB meeting will be a sideshow to the political chaos in the U.K., but that doesn't change the fact that the central bank's to-do list is long.
Markets are becoming more sensitive to rumours about changes in ECB policy. The euro and yields jumped on Friday after a Bloomberg report that the central bank has discussed raising rates before QE ends.
The ECB will leave its main refinancing and deposit rates unchanged at 0.00% and -0.4%, respectively,
The Fed will hike by 25 basis points today, but what really matters is what they say about the future, both in the language of the statement and in the dotplot for this year and next.
Inflation in Brazil Ended 2019 Above the BCB's Target; 2020 will be Fine
Yesterday's data provided further evidence of the damage wrought on the EZ at the end of Q1.
The Chancellor kept his word and made only trivial policy changes in the Spring Statement, but he hinted at higher spending plans in the Autumn Budget.
We argued a couple of weeks ago that the stock market could suffer a relapse, on the grounds that valuations hadn't fallen far enough from their peak to reflect the extent of the hit to the economy; that hopes for an early re-opening were likely to prove forlorn; and that investors were likely to be spooked by the incoming coronavirus data.
To answer the question: Yes, growth could hit 5% in the second quarter.
As expected, the Chancellor kept his powder dry in the Spring Statement, preferring instead to wait for the Budget in the autumn to deploy the funds technically available to him to support the economy.
Manufacturing in the EZ was held above water by Ireland at the end of Q3.
Our base case is that the core CPI rose 0.2% in December, but the net risk probably is to the upside. We see scope for significant increases in sectors as diverse as used autos, apparel, healthcare, and rent, but nothing is guaranteed.
The broad strokes of yesterday's ECB meeting were in line with markets' expectations. The central bank left its main refinancing and deposit rates unchanged, at 0.00% and -0.4% respectively, and maintained the same forward guidance.
Car registrations, French inflation, advance PMIs and a central bank meeting make up today's substantial menu for investors in the euro area.
German inflation data are more noise than signal at the moment.
Japan's GDP likely dropped by a huge 0.9% quarter-on-quarter in Q4, after the 0.5% increase in Q3, with risks skewed firmly to the downside.
We've already raised a red flag for today's second Q4 GDP estimate in the Eurozone, but for good measure, we repeat the argument here.
The EZ calendar has been extremely busy in the first few weeks of the year, making it virtually impossible to see the forest for the trees.
Chancellor Javid's resignation, only eight months after assuming the role, is the clearest sign yet that the Johnson-led government wants fiscal policy to play a bigger part in stimulating the economy over the next couple of years.
The 0.242% increase in the January core CPI left the year-over-year rate at 2.3% for the third straight month.
It's hard to know what to make of the October CPI data, which recorded hefty increases in healthcare costs and used car prices but a huge drop in hotel room rates, and big decline in apparel prices, and inexplicable weakness in rents.
March's consumer prices figures, released on Wednesday, are even more important than usual, as they are the last to be published before the MPC's next meeting on May 10.
Inflation in the Andes remains in check and the near term will be benign, suggesting that central banks will remain on hold over the coming months.
We expect the Fed to drop "patient" from its post-meeting statement today, paving the way for a rate hike in June, data permitting. And the data will permit, in our view, despite what seems to have been a long run of disappointing numbers, and the likelihood that inflation will fall further below the Fed's 2% informal target in the near-term.
Senior International economist Andres Abadia comments on Chile's economic growth
Chile's economic sector survey, released on Monday, provides further evidence that the cyclical recovery in the economy continues, albeit at a moderate pace. On the demand side, the rebound is still in place, with retail sales jumping 2.0% month-to-month in February and the underlying trend firm.
After a slew of media reports in recent days, we have to expect that the president will today announce that Fed governor Jerome Powell is his pick to replace Janet Yellen as Chair.
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.
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.
For countries with developed non-banking funding channels, narrow money isn't necessarily a good predictor of GDP growth.
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%.
CPI inflation has undershot the consensus forecast six times this year, but surprised to the upside only twice.
The consensus forecast for retail sales in December has been consistently too upbeat in recent years and we think most analysts are too sanguine yet again.
The latest model-based third quarter GDP forecast from the Atlanta Fed is 3.6%, well above the 2.5% consensus forecast reported by Bloomberg. We are profoundly skeptical of so-called "tracking models" of GDP growth, because they are based mostly on forecasts and assumptions until very close to the actual GDP release.
As we reach our deadline on Sunday afternoon, eastern time, Tropical Storm Florence continues to dump vast quantities of rain on the Carolinas, and is forecast to head through Kentucky and Tennessee, before heading north.
The headline rate of CPI inflation held steady at the 2% target in June, in line with the consensus and the MPC's Inflation Report forecast.
Inflation data are known to defy economists' forecasts, but it should in principle b e straightforward to predict the cyclical path of EZ core inflation. It is the longest lagging indicator in the economy, and leading indicators currently signal that core inflation pressures are rising.
CPI inflation held steady at 1.5% in November, marking the fourth consecutive below-target print, though it was a tenth above both the MPC's forecast and the consensus.
We can't finalize our forecast for residential investment in the second quarter until we see the June home sales reports, due next week, but in the wake of yesterday's housing starts numbers we can be pretty sure that our estimate will be a bit below zero.
Today's ZEW investor sentiment report in Germany will kick off a busy week for Eurozone economic survey data, which likely will be tainted by the U.K. referendum result. We think the headline ZEW expectations index fell to about five in July, from 19.2 in June, below the consensus forecast, 9.2. Our forecastis based on the experience from recent "unexpected" shocks to investors' sentiment.
Markets don't believe the Fed's interest rate forecasts. For the fourth quarter of this year, that's probably right; the FOMC's median projection back in March was 0.63%; that will likely be revised down this week. For the next two years, though, things are different.
We expect August's consumer price figures, released on Wednesday, to show that CPI inflation declined to 2.4%, from 2.5% in July, matching the consensus and the Bank of England's forecast.
October's colossal 1.9% month-to-month jump in retail sales volumes greatly exceeded the 0.5% consensus and even our own top-of-the- range 1.0% forecast.
The gloom which descended on the FOMC in April has lifted, mostly, and policymakers remain on track for two rate hikes this year, likely starting in September. The median fed funds forecast for the end of this year remains at 0.625%, implying a target range of 0.5-to-0.75%.
We think the FOMC's announcement this afternoon will not include the phrase "considerable time", signaling that the first rate cut will come at or before the middle of next year. At the same time, the Fed's new forecasts likely will show the unemployment rate falling into the Fed's estimated Nairu range this year, rather than the spring of 2016, as implied by their September forecasts.
We expect June's consumer prices report, released on Wednesday, to show that CPI inflation increased to 2.7%, from 2.4% in May, above the consensus, 2.6%, and the Bank of England's forecast, 2.5%.
Today's brings the June retail sales and industrial production reports, after which we'll update our second quarter GDP forecast.
In yesterday's Monitor, we argued that if the upside risk in an array of core CPI components crystallised in January, the month-to-month gain would print at 0.3%, for the first time since August. That's exactly what happened, though we couldn't justify it as our base forecast. A combination of rebounding airline fares, apparel prices, new vehicle prices, and education costs conspired to generate a 0.31% gain, lifting the year-over-year rate back to the 2.3% cycle high, first reached in February last year.
Today's retail sales figures for August likely will rebut the widespread view that spendthrift consumers will prevent a sharp economic slowdown. We look for a 1% month-to-month decline in retail sales volumes in August, well below the -0.4% consensus forecast.
The first real glimpse of India's economic performance early this quarter is grim, adding weight to our below-consensus GDP forecast.
We are pushing back our forecast for the next rise in Bank Rate to May 2020, from the tail-end of this year.
It might seem odd to describe a meeting at which the Fed raised rates for only the third time since 2006 as a holding operation, but that just about sums up yesterday's actions. The 25bp rate hike was fully anticipated; the forecasts for growth, inflation and interest rates were barely changed from December; and the Fed still expects a total of three hikes this year.
We have revised up our second quarter consumption forecast to a startling 4.0% in the wake of yesterday's strong June retail sales numbers, which were accompanied by upward revisions to prior data.
Final October inflation data surprised to the upside yesterday, consistent with our view that inflation will rise faster than the market and ECB expect in coming months. Inflation rose to 0.1% year-over-year in from -0.1% in September, lifted mainly by higher food inflation due to surging prices for fruits and vegetables. This won't last, but base effects will push the year-over-year rate in energy prices sharply higher into the first quarter, and core inflation is climbing too. Core inflation rose to 1.1% in October from 0.9% in September, higher than the consensus forecast, 1.0%.
Eurozone GDP data on Friday were better than we expected, but were still soft compared to upbeat market expectations. Real GDP rose 0.3% quarter-onquarter in the third quarter, down slightly from 0.4% in Q2, and lower than the consensus forecast for another 0.4% gain. These data are not a blank check for ECB doves, but they probably are enough to push through further easing in December. This looks odd given growth in the last four quarters of an annualised 1.6%--the strongest since 2011--and probably slightly above the long-run growth rate.
The second round of EZ GDP data on Friday confirmed the resilience of cyclical upturn. Real GDP in the euro area rose 0.5% quarter-on-quarter in Q1, up from 0.3% in Q4, and the fastest pace since the first quarter of last year. But the headline was slightly lower than the initial estimate, 0.6%, and consistent with our forecast before Friday's data.
Yesterday's labour market data significantly bolster the consensus view on the MPC that interest rates do not need to rise this year to counter the imminent burst of inflation. Granted, the headline, three-month average, unemployment rate fell to 4.7% in January--its lowest rate since August 1975--from 4.8% in December, defying the consensus forecast for no-change.
The MPC's forecast in August, which predicted that inflation would overshoot its 2% target over the next two years only modestly--giving it the green light to ease policy--assumed that inflation in sectors insensitive to swings in import prices would remain low. We doubt, however, that domestically generated inflation will remain benign.
Tomorrow's Q1 GDP report for Korea has a wider spread of forecasts than usual, reflecting Covid-19's uneven hit to the economy.
It's hard to have much conviction in any forecast for September retail sales, as the relationship between the official data and the surveys has weakened considerably.
August's consumer price figures caught everyone by surprise. CPI inflation increased to 2.7%, from 2.4% in July, greatly exceeding the consensus and the MPC's forecast, 2.4%.
Usually, we forecast existing home sales from the pending sales index, which captures sales at the point contracts are signed.
In the September forecasts, the median forecast of FOMC members for the long-term fed funds rate was 3.5%. Their long-term inflation forecast is 2%-- it has to be 2%, otherwise they would be forecasting permanent failure to meet their policy objectives -- implying a real rate of 1.5%. This is well below the long-run average; from 1960 through 2005, the real funds rate--the nominal rate less the rate of increase of the PCE deflator--averaged 2.4%.
Yesterday's EZ construction data confirmed that capex in the building sector plunged in the second quarter. Construction output fell 0.5% month-to-month in May, pushing the year-over-year rate up trivially to -0.8%, from a revised -1.0% in April. Our forecast for construction investment in Q2 is not pretty, even after including our assumption that production rebounded by 0.5% month-to-month in June.
May's consumer prices report contained few surprises. The fall in the headline rate of CPI inflation to 2.0%, from April's Easter-boosted 2.1%, matched the consensus, our forecast and the MPC's.
Forecasting BoJ policy for this year is trickier than it has been in a long time.
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.
China's import growth in dollar terms slowed sharply to 4.5% year-over-year in December from 17.7% in November, significantly below the consensus forecast.
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.
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.
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.
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.
Today's official figures likely will show that retail sales weakened a touch in December. Indeed, we think that the consensus forecast for a 0.1% month-to-month decline in sales volumes is too timid; we look for a 0.5% drop. Retail sales surged by 1.8% month-to-month in October and then rose by 0.2% in November, so a correction is overdue. Clothing sales, in particular, likely fell sharply in December.
Markets tend to ignore Eurozone construction data, but we suspect today's report will be an exception to that rule. Our first chart shows that we're forecasting a 8.5% month-to-month leap in February EZ construction output, and we also expect an upward revision to January's numbers.
The FOMC statement did enough to keep alive the idea that rates could rise in March, but the ball is now mostly in Congress' court. If a clear plan for substantial fiscal easing has emerged by the time of the meeting on March 15, policymakers can incorporate its potential impact on growth, unemployment and inflation into their forecasts, then a rate hike will be much more likely.
The 253K increase in May private payrolls reported by ADP yesterday was some a bit stronger than our 225K forecast. Plugging the difference between these numbers into our payroll model generates our 210K forecast for today's official number.
We are taking our spring break starting tomorrow so it makes sense to preview the employment report today. To forecast payrolls, we start with the underlying trend -- mean reversion is the most powerful force in payrolls, most of the time -- and then look for reasons why this month's number might deviate from it.
We don't use the index of leading economic indicators as a forecasting tool. If it leads the pace of growth at all, it's not by much, and in recent years it has proved deeply unreliable.
A powerful cocktail of cheap money, labour and commodities, allowed to infuse by a hiatus in the government's austerity programme, has reinvigorated the U.K. economy over the last three years. But these supports are now weakening while new headwinds are emerging. The U.K. economy is heading for a pronounced slowdown, one that is under-appreciated by most forecasters and under-priced by markets.
The ECB will not make any adjustments to its policy stance today. We think the central bank will keep its main refinancing and deposit rates unchanged at 0.0% and -0.4%, respectively, and also that will maintain the pace of QE purchases at €80B a month. The updated macroeconomic projections likely will include a modest upgrade of this year's GDP forecast to 1.5%, from its 1.4% estimate in March.
Advance inflation data in the Eurozone will likely surprise to the upside today. The consensus forecast expects inflation to rise slightly to -0.5% year-over-year in February from -0.6% in January, but we expect a much bigger jump, to -0.2% year-over-year.
As a general rule, the best forecast of ADP payrolls in any given month is the official estimate for private payrolls in the previous month. This partly reflects the simple observation that payroll trends, once established, tend to persist, but it also is a consequence of ADP's methodology. The ADP number is generated from a model which combines both data collected from firms which use ADP for payroll processing, and lagged official data. The latter appear to be more important in determining in the month-to-month swings in the ADP number. ADP does not hide the incorporation of lagged official data in its model--you can read about it in the technical guide to the report--but neither does it shout it from the rooftops.
The key market risk in the August employment report is the hourly earnings number. The consensus forecast is for a 0.2% month-to-month increase, in line with the underlying trend, but the balance of risks is firmly to the downside.
The MPC likely will raise interest rates today, but as we explained here, it probably will revise down its medium-term inflation forecast, signalling that it is content with the further 35bp tightening currently priced-in by markets for 2018.
The Fed yesterday acknowledged clearly the new economic information of recent months, namely, that first quarter GDP growth was "solid", with Chair Powell noting that it was stronger than most forecasters expected.
The Fed will do nothing and say little that's new after its meeting today. The data on economic activity have been mixed since the March meeting, when rates were hiked and the economic forecasts were upgraded, largely as a result of the fiscal stimulus.
Retail sales volumes jumped by 2.3% month-to-month in April, exceeding the 1.0% consensus and even our 2.0% forecast. It would be a big mistake to conclude, however, that households' spending will propel the economy forward this year like it did between 2013 and 2016.
The rate of inventory-building regularly is a major influence on GDP growth, but often is overlooked by analysts. Much slower inventory accumulation than in 2014 was the key source of downside surprise to the 2015 consensus GDP growth forecast, and we think inventories likely will be a sustained drag on GDP growth this year too.
Inflation pressures in Brazil are now well- contained, with the headline rate falling to a decade low in July. We think inflation is now close to bottoming out, but the current benign rate strengthens our base case forecast for a 100bp rate cut at the next policy meeting, in September.
Our base case forecast for today's July core CPI is that the remarkable and unexpected run of weak numbers, shown in our first chart, is set to come to an end, with a reversion to the prior 0.2% trend.
Data released yesterday reinforced our forecast of a further rate cut in Brazil next month.
Industrial production figures look set to surprise the consensus to the downside again today. We think that production was flat on a month-to-month basis in August, falling short of the consensus forecast of 0.2% growth.
On the face of it, our forecast of higher core inflation by the end of this year is seriously challenged by the recent data.
The rebound in GDP growth in the second quarter seems not to have been enough to prevent year-over-year productivity growth slowing to about zero. The consensus forecast for the first estimate of Q2 productivity growth, due today, is a 1.6% annualized increase, pushing the year-over-year rate down to 0.3% from 0.6% in the first quarter, but we think this is too optimistic.
Retail sales ex-autos have undershot consensus forecasts in eight of the 11 reports released so far this year, prompting interest rate doves to argue that consumers have not spent their windfall from falling gas prices. But this ignores the impact of falling prices--for gasoline, electronics, furniture, and clothing--on the sales numbers, which are presented in nominal terms.
In the wake of the soft-looking ADP employment report released on Wednesday, the true consensus for today's official payroll number likely is lower than the 230K reported in the Bloomberg survey. As we argued in the Monitor yesterday, though, we view ADP as a lagging indicator and we don't use it is as a forecasting tool.
We're pretty sure our forecast of a levelling-off in capital spending in the oil sector will prove correct. Unless you think the U.S. oil business is going to disappear, capex has fallen so far already that it must now be approaching the incompressible minimum required for replacement parts and equipment needed to keep production going.
The MPC went against the grain last month by forecasting that CPI inflation would overshoot the 2% target if it raised Bank Rate as slowly as markets anticipated.
Analysts' forecasts for January's consumer prices report, released on Wednesday, are unusually dispersed.
October industrial production data in France surprised to the upside yesterday, with headline output rising 0.5% month-to-month, well above the consensus estimate and our own forecast for a monthly fall. Production was lifted by a 5.1% month-to-month jump in energy output, due to unusually cold weather, offsetting a 0.5% decline in manufacturing output, the fifth drop in the past six months.
For some time now we have argued that the forces which have depressed business capex--the collapse in oil prices, the strong dollar, and slower growth in China--are now fading, and will soon become neutral at worst. As these forces dissipate, the year-over-year rate of growth of capex will revert to the prior trend, about 4-to-6%. We have made this point in the context of our forecast of faster GDP growth, but it also matters if you're thinking about the likely performance of the stock market.
We expect Banxico to keep interest rates on hold at 7.50% at Thursday's meeting. But policymakers likely will adopt a slightly dovish tone, as inflation has fallen faster than they were expecting in their recent forecast.
We are pretty bullish about the prospects for the economy this year, but we try not to let our core view interfere with our take on the individual indicators. And our analysis suggests that the odds strongly favor a "disappointing" headline payroll number today; we have revised down our forecast to 160K from our previous 175K estimate.
We are wary of a downside surprise in today's German orders, due to weak advance data from the engineering organisation, VDMA. We think factory orders fell 0.5% month-to-month, pushing the year-over-year rate slightly lower to 4.5% in June from 4.7% in May. This is noticeably worse than the market expects, but the consensus forecast for a 0.3% rise implies a jump in the year-over-year rate, which is difficult to reconcile with leading indicators.
Stanley Fischer said something interesting and potentially very revealing in the Q&A following his speech Tuesday afternoon at the Council on Foreign Relations. The Fed Vice-Chair argued that wage increases of 3% are "where people would like to be", meaning, presumably, that he believes sustained wage gains at this pace are consistent with the Fed's 2% medium-term inflation forecast.
China's 2018 growth forecast revised up...but activity in Japan took a breather in Q1
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.
Today's March retail sales report will likely disappoint, despite the already- downbeat consensus forecast of a 0.7% month-to-month fall. We think sales fell 1.2%, equivalent to a 1.3% increase year-over-year, due mostly to the bigger-than-expected 2.3% plunge in German sales, reported too late to be incorporated in the Bloomberg consensus.
The underlying trend in payroll growth is running at about 225K-to-250K, perhaps more, and the leading indicators we follow suggest that's a reasonable starting point for our December forecast. The trend in jobless claims is extraordinarily low and stable--the week-to-week volatility is eye-catching, especially over the holidays, but unimportant--and indicators of hiring remain robust. The unusually warm weather in the eastern half of the country between the November and December survey weeks also likely will give payrolls a small nudge upwards, with construction likely the key beneficiary, as in November.
China's PMIs surprised the consensus forecasts to the downside for February. The manufacturing PMI dropped to 50.3 in February from 51.3 in January, while the non-manufacturing PMI fell to 54.4 from 55.3 in January.
Yesterday's Chinese PMI numbers disappointed forecasts across the board, failing to meet widespread expectations for either stability or a continued, albeit marginal, improvement in April.
At next Wednesday's Budget, the Chancellor will have the rare pleasure of announcing lower-than- anticipated near-term borrowing forecasts. But hopes that he will prevent the fiscal tightening from intensifying when the new financial year begins in April look set to be dashed, just as they were at the Autumn Statement in November.
We're expecting a strong-looking 225K increase in the May ADP measure of private sector payroll growth, due today. The consensus forecast is 180K.
In the wake of the soft-looking ADP employment report released on Wednesday, the true consensus for today's official payroll number likely is lower than the 230K reported in the Bloomberg survey. As we argued in the Monitor yesterday, though, we view ADP as a lagging indicator and we don't use it is as a forecasting tool.
The popular belief that economists rarely agree about anything is reinforced by the extremely wide dispersion of forecasts for March industrial production. The forecasts range from the wildly optimistic prediction of a 1.9% month-to-month rise, to a downright miserable 0.3% decline. We think production rose by about 0.5% month-to-month, and this likely will be interpreted as a decent result, following the recent run of bad news.
French industrial production data surprised to the upside yesterday. Output rose 0.1% month-to-month in September, a solid gain following an upwardly-revised 1.7% rise in August, and also higher than the consensus, forecast for a 0.4% fall. The details, however, were less upbeat than the headline. Transport equipment fell, as expected, following production being pushed forward ahead of the Summer holidays. But this story was overshadowed by a 22.5% month-to-month jump in oil refining-- included in manufacturing--as refineries resumed full production following maintenance over the summer.
In a busy week in Brazil, ongoing signals of feeble economic activity have strengthened our forecast for GDP growth of just 1.0% this year, below the 1.3% consensus forecast.
Peru's central bank, the BCRP, kept borrowing costs at 3.25% last week, surprising the consensus forecast for a 25bp increase. This was an unexpected move because inflation risks have not abated much since the previous meeting, when policymakers lifted rates for the third straight month.
CPI inflation increased to 2.9% in May, from 2.7% in April, exceeding the no-change expectation of both the consensus and the MPC, as well as our own 2.8% forecast.
January's CPI data contained no major surprises, even though the 1.8% headline rate undershot our forecast and the consensus by one tenth.
We have no real argument with the consensus forecasts for the January CPI, with the headline likely to rise by 0.3%, with the core up 0.2%.
We take little comfort from the fact that the 2.0% quarter-on-quarter drop in Q1 GDP was a bit smaller than the consensus forecast, 2.5%, and the 3.0% fall pencilled-in by the MPC in its Monetary Policy Report.
So, what should we make of the fourth straight disappointment in the retail sales numbers? First, we should note that all is probably not how it seems. The 0.2% upward revision to March sales was exactly equal to the difference between the consensus forecast and the initial estimate, neatly illustrating the danger of over-interpreting the first estimates of the data.
The Fed's unanimous vote for a 25bp rate hike was overshadowed by the bump up in the dotplot for next year, with three hikes now expected, rather than the two anticipated in the September forecast. Chair Yellen argued the uptick in the rate forecasts was "tiny", but acknowledged that some participants moved their forecasts partly on the basis that fiscal policy is likely to be eased by the new Congress.
Eurozone GDP data last Friday suggest the cyclical recovery continued at the end of last year. Real GDP in euro area rose 0.3% quarter-on-quarter in Q4, the same as in Q3, lifted by growth in all the major economies. This was in line with the consensus forecast, but noticeably higher than implied by monthly industrial production and retail sales data.
July's consumer price figures, due tomorrow, likely will bring early evidence that sterling's Brexit-driven depreciation already is pushing up inflation. We think that CPI inflation picked up to 0.6% in July from 0.5% in June, exceeding the consensus forecast for an unchanged reading. Experience of past depreciations suggests that July's figures likely won't be the last time the consensus is surprised by the speed of the rise in inflation.
The unexpected rise in CPI inflation to 2.1% in July--well above the Bank of England's 1.8% forecast and the 1.9% consensus--from 2.0% in June undermines the case for expecting the MPC to cut Bank Rate, in the event that a no-deal Brexit is avoided.
Investors anticipate a shift up in the MPC's hawkish rhetoric today. After August's consumer price figures showed CPI inflation rising to 2.9%--0.2 percentage points above the Committee's forecast--the market implied probabilities of a rate hike by the November and February meetings jumped to 35% and 60%, respectively, from 20% and 40%.
All eyes in the Eurozone will be on the second estimate of Q4 GDP today, and the report likely will confirm that growth accelerated in Q4. We think real GDP rose 0.5% quarter-on-quarter, up from a 0.3% increase in Q3, in line with the first estimate. If this forecast is correct, the year-over-year rate will be unchanged at 1.8%. Risks to the headline, however, are tilted to the downside.
The Fed surprised no-one by raising rates 25bp yesterday and leaving in place the median forecast for three hikes next year and two next year.
Today's Q4 GDP report in the Eurozone likely will show that growth slowed again at the end of last year. We think GDP growth dipped to 0.2% quarter-on-quarter in Q4, down from 0.3% in Q3, and risks to our forecast are firmly tilted to the downside. The initial release does not contain details, but we think a slowdown in consumers' spending and a drag from net exports were the main drivers of the softening.
May's consumer price figures, released on Wednesday, likely will show that CPI inflation held steady at 2.4%--matching the consensus and the MPC's forecast--though the risks lie to the upside.
Outside the battered energy sector, the most consistently disconcerting economic numbers last year, in the eyes of the markets, were the monthly retail sales data. Non-auto sales undershot consensus forecasts in nine of the 12 months in 2015, with a median shortfall of 0.3%.
February's industrial production and construction output data leave us little choice but to revise down our forecast for quarter-on-quarter GDP growth in Q1 to 0.2%, from 0.3% previously.
We fully expect to learn today that import prices rose in March for the first time since June last year. Our forecast for a 1% increase is in line with the consensus, but the margin of error is probably about plus or minus half a percent, and an increase of more than 1.2% would be the biggest in a single month in four years. Most, if not all, of the jump will be due to the rebound in oil prices.
Eurozone manufacturing probably stalled at the start of the second quarter. We think industrial production rose a mere 0.1% month-to-month in April, lower than the 0.4% consensus forecast, and equivalent to a 0.8% increase year-over-year. Output ex-construction was up 0.8% in Germany, but this is likely to be offset by declines in France and Italy, and a hefty 3.2% fall in Greece.
Last week's official data supported our forecast that GDP growth likely will slow further in Q1, suggesting that a May rate hike is not the sure bet that markets assume.
May's consumer price figures, released today, will provide the first clean inflation read for three months, following the distortions created by this year's late Easter. Consensus forecasts and the MPC have underestimated CPI inflation regularly since the middle of last year, when the impact of sterling's depreciation began to push into the data.
At today's MPC meeting, the centre of gravity of the policy debate is likely to shift towards the merits of raising interest rates, rather than cutting them. CPI inflation rose from 0.3% in February to 0.5% in March, one tenth above the MPC's forecast in February's Inflation Report.
Over the last decade, the MPC has underestimated the extent and duration of departures of CPI inflation from the 2% target. Inflation exceeded the MPC's expectations in the early 2010s, as policymakers underestimated the impact of sterling's prior depreciation and overestimated the role that slack would play in stifling price pressures. Inflation also undershot the MPC's forecast between 2014 and 2016, when sterling's appreciation reduced import prices.
One of the main conclusions we drew from last week's ECB meeting was that the QE program is here to stay for a while. If the economy improves, the central bank could reduce the pace of purchases further. But we struggle to come up with a forecast for growth and inflation next year that would allow the ECB to signal that QE is coming to an end.
Our forecast for a 0.3% increase in the September core PPI, slightly above the underlying trend, is even more tentative than usual.
The ONS published provisional new weights for the main components of the CPI on Tuesday. The changes boost our forecast for the average rate of CPI inflation this year by a trivial 0.03 percentage points.
Chile's central bank, the BCCh, held its reference rate unchanged at 2.75% on Tuesday, in line with the majority of analysts' forecasts.
The rebound in the ISM non-manufacturing index in February was in line with our forecast, but behind the strong headline, the employment index dropped to an eight-month low.
Any model of payrolls based on the usual indicators--jobless claims, ISM hiring, NFIB hiring, and other sundry surveys--right now points to payroll growth at 250K or better. Indeed, the ISM non-manufacturing report on Wednesday is consistent with payroll growth closer to 400K, and the lagged NFIB hiring intentions number points to 300K. Yet the consensus forecast for today's October report is just 182K. Why so timid?
Our base forecast for today's February payroll number is an unspectacular 220K, though if you twist our arms we'd probably say that we'd be less surprised by a big overshoot to this estimate than an undershoot. The single biggest argument against a big print today is simply that February payrolls have initially been under-reported in each of the past five years and then revised higher.
First, a deep breath: June payrolls, with a margin of error of +/-107K, missed the consensus by 10K. Adding in the -60K revisions and the miss is still statistically insignificant. The story, therefore, is that there is no story. Even relative to our more bullish forecast, the miss was just 37K. Nothing bad happened in June. But we hav e to acknowledge that payroll growth has now undershot the pace implied by the NFIB's hiring intentions number--lagged by five months--in each of the past four months. In June, the survey pointed to a 320K jump in private employment, overshooting the actual print by nearly 100K.
We're expecting a 175K increase in December payrolls today. Our forecast has been nudged down from 190K in the wake of the ADP employment report, which was slightly weaker than we expected.
The ADP private sector employment number was a bit weaker than we expected in May, and the undershoot relative to our forecast has pulled down our model's estimate for today's official number
A growing number of economists have marked down their forecasts for Chinese growth next year to below the critical 6% year-over-year rate, required to ensure that the authorities meet their implicit medium- term growth targets.
We're nudging up our forecast for today's August payroll number to 180K, in the wake of the ADP report.
ADP's reported 158K increase in private payrolls was very close to our model-based estimate, so it doesn't change our 220K forecast for todays official payroll number, well above the 177K consensus.
In the wake of Wednesday's ADP report, showing a mere 27K increase in private payrolls, we cut our payroll forecast to 100K.
As things stand, we see little reason to revise down our forecasts for the U.K. economy in response to the tailspin in equity markets
We're sticking to our 220K forecast for today's official payroll number, despite the slightly smaller-than- expected 179K increase in the ADP measure of private employment.
In Brazil, the minutes of the Copom's November meeting, released yesterday, are consistent with our forecast for a 50bp rate cut in January. At its last two meetings, the BCB cut the Selic rate by only 25bp, to 13.75%, amid concerns about services inflation, global uncertainty, and the Fed's likely rate hike next week.
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.
With only three weeks to go until the release of the initial official estimate of first quarter GDP, the Atlanta Fed's GDPNow measure shows growth at just 0.4%. Our own estimate, which includes our subjective forecasts for the missing data--the Atlanta Fed's measure is entirely model-based--is a bit higher, at 1%, and both measures could easily be revised significantly.
The ECB left its key interest rates unchanged yesterday, and maintained the pace of QE at €60B a month, but increased the issue limit to 33% from 25%. The updated staff projections revealed a downward adjustment of the central bank's inflation and growth forecasts across all horizons up to 2017. These forecasts were accompanied by a very dovish introductory statement, noting disappointment with the pace of the cyclical recovery, and emphasizing renewed downside risks to the economy and the inflation outlook.
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.
The ADP employment report suggests that the hit to payrolls from Hurricane Florence was smaller than we feared, so we're revising up our forecast for the official number tomorrow to 150K, from 100K.
Mean-reversion is a wonderful thing; it's what gives the ADP employment report the wholly unjustified appearance of being a useful leading indicator of payroll growth. Over time, the best single forecast of payroll gains or losses in any particular month is whatever happened last month.
The least-bad way to forecast the ADP employment number is to look at the official private payroll number for the previous month. ADP's methodology generates employment numbers from a model incorporating lagged data from the Bureau of Labor Statistics as well as information from companies which use ADP for payroll processing.
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.
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.
At the start of the year, consensus forecasts expected Eurozone equities to outperform their global peers this year, on the back of a strengthening cyclical recovery and an increase in earnings growth. Both of these conditions have been met, and yesterday's sentiment data suggest that EZ equity investors remain constructive.
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.
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.
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.
We expect to see a 160K increase in June payrolls today, though uncertainty over the extent of the rebound after June's modest 75K increase means that all payroll forecasts should be viewed with even more skepticism than usual.
All the signs are that ADP will today report a solid increase in February private payrolls; our forecast is 200K, but if you twist our arms we'd probably say the mild weather last month across most of the country points to a bit of upside risk.
In the wake of yesterday's ADP report, which showed private payrolls rising by only 163K, we have pulled down our forecast for today's official number to 170K.
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.
Tankan suggests downside risks to our -6% y/y Q2 GDP forecast. Private manufacturers in China continue to play catch-up. Expect a bumpy recovery for Korean exports in Q3. Korean business sentiment is finally recovering.
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're among a small minority of economists forecasting that GDP rose by 0.1% month-to-month in March.
We'd be quite surprised if the headline payroll number today turned out to be far from the consensus, 205K, or our forecast, 225K.
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
In one line: Any more or this, and we'll have to upgrade our 2020 GDP growth forecasts.
In one line: Consistent with Q1 GDP growth exceeding the MPC's forecast.
In one line: Full-year borrowing remains on course to undershoot the OBR's forecast.
In one line: Spending growth is slowing; expect hefty Q3 GDP forecast markdowns.
In one line: Rising import prices point to upside risk to the MPC's new inflation forecast.
In one line: New forecasts reveal a slight near-term easing bias.
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.
April's 2.0% month-to-month leap in industrial production was the biggest upside surprise on record to the consensus forecast, which predicted no change. The surge, however, just reflects statistical and weather-related distortions. These boosts will unwind in May, ensuring that industry provides little support to Q2 GDP growth. Make no mistake, the recovery has not suddenly gained momentum.
We aren't revising our payroll forecast in the wake of the ADP report, which showed private payrolls rising by 241K in December. We expected a bigger increase because ADP tends to lag the official data for the previous month, and the BLS reported a 314K jump in private employment in November, but the "shortfall" is too small to matter.
Odds-on, the consensus forecast for May's GDP report, released on Wednesday, will miss the mark.
In the midst of heightened and potentially longerlasting Brexit uncertainty, the MPC revised down its forecast for GDP growth sharply yesterday and came close to endorsing investors' view that the chances of a 25bp rate hike before the end of this year have slipped to 50:50.
The Monetary Policy Committee of the Reserve Bank of India shocked most forecasters yesterday, including us, with a 4-to-2 majority voting in favour of a 25-basis point rate cut.
We're hearing a good deal of speculation about the dotplot after next week's FOMC meeting, with investors wondering whether the median dot will rise in anticipation of the increased inflation threat posed by substantial fiscal loosening under the new administration. We suspect not, though for the record we think that higher rate forecasts could easily be justified simply by the tightening of the labor market even before any stimulus is implemented.
We have had a modest rethink of our June payroll forecast and have nudged up our number to 150K, still below the 180K consensus. Our forecast has changed because we have re-estimated some of our models, not because of the 172K increase in the ADP measure of private payrolls. ADP is a model-based estimate, not a reliable survey indicator.
At their March meeting FOMC members' range of forecasts for the unemployment rate in the fourth quarter of this year ranged from 4.4% to 4.7%, with a median of 4.5%. But Friday's report showed that the unemployment rate hit the bottom of the forecast range in April.
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 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.
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.
Industrial production in Germany had a decent start to the third quarter. Output rose 0.7% month-to-month in July, less than we and the consensus expected, but the 0.5% upward revision to the June data brings the net headline almost in line with forecasts. Rebounds of 2.8% and 3.2% month-to-month in the capital goods and construction sectors respectively were the key drivers of the gain, following similar falls in June. A 3.2% fall in consumer goods production, however, was a notable drag.
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.
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.
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.
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.
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.
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.
Markets are trading like Emmanuel Macron has already moved into the Élysée Palace. Eurozone equities soared at the open yesterday, lead by the French banks, 10-year yields in France plunged, and the euro jumped. This makes sense given the signal from the polls. They were correct in their prediction of Mr. Macron's victory on Sunday, and they have been consistently forecasting that he will comfortably beat Mrs. Le Pen in the runoff.
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.
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.
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.
The speculation is over: 3.283 million people filed a new claim for unemployment benefits last week, nearly double the 1.7M consensus forecast, which looked much too low.
Recent upbeat economic reports have mitigated the downside risks we had been flagging to our growth forecast for Mexico for the current quarter.
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.
In the absence of reliable advance indicators, forecasting the monthly movements in the trade deficit is difficult.
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.
Banxico's quarterly inflation report, released last week, underscored concerns over growth as well as the weakness of the MXN and the risks p osed by the Fed's imminent tightening. Policymakers downgraded Mexico's GDP forecast for 2017 to 2.3-to-3.3% year-over-year, from 2.5-to-3.5%. Weaker-than-expected U.S. manufacturing activity is behind the downshift.
Robust demand in the ECB's final TLTRO auction was the main story in EZ financial markets yesterday. Euro area banks--474 in total-- took up €233.5B in the March TLTRO, well above the consensus forecast €110B. To us, this strong demand is a sign that EZ banks are taking advantage of the TLTROs' incredibly generous conditions.
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.
Korea's preliminary Q4 GDP report was stronger than nearly all forecasters, including ourselves, expected.
The Chancellor warned last week that he would hold an Emergency Budget shortly after a vote to leave the E.U. to address a £30B black hole in the public finances. The £30B--some 1.6% of GDP-- is the mid-point of the Institute for Fiscal Studies' estimates of the impact of Brexit on public borrowing in 2019/20, which were based on the GDP forecasts of a range of reports.
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.
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.
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.
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.
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.
Data released in recent days confirm the story of a struggling economy and falling inflation pressures in Mexico, strengthening our forecast of interest rate cuts over the second half of the year.
CPI inflation was steadfast at 1.9% in March, undershooting the consensus and our forecast for it to rise to 2.0%.
At the halfway mark of the fiscal year, public borrowing has been significantly lower than the OBR forecast in the March Budget.
The latest iteration of the Atlanta Fed's GDPNow model puts second quarter GDP growth at 4.1%. Assuming a modest upward revision to growth in the first quarter -- the data will be released Friday -- that would mean average growth of 2.5% in the first half, in line with our forecast for the year as a whole, and rather better than the 1.6% growth recorded in 2016.
Recent political and economic developments in Brazil make us more confidence in our forecast of a gradual recovery. On Wednesday, interim President Michel Temer scored his first victory in Congress, winning approval for his request to raise this year's budget target to a more realistic level. Under the new target, Brazil's government plans to run a budget gap, before interest, of about 2.7% of GDP this year.
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%.
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.
We aren't materially changing our U.S. economic forecasts in the wake of the U.K.'s Brexit vote, though we have revised our financial forecasts. The net tightening of financial conditions in the U.S. since the referendum is just not big enough--indeed, it's nothing like big enough--to justify moving our economic forecasts.
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.
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.
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.
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.
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.
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.
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.
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.
Downside risks to our growth forecast for Brazil and Mexico for this year have diminished this week. In Brazil, concerns over the potential impact of the meat scandal on the economy have diminished. Some key global customers, including Hong Kong, have in recent days eased restrictions on imports from Brazil, and other counties have ended their bans.
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.
The downside surprise in April payrolls reflected weakness in just three components--retail, construction, and government--compared to their prior trends. Of these, we think only the construction numbers are likely to remain soft in May. Had it not been for the Verizon strike, then, we would have expected payrolls to rise by just over 200K in May, but the 35K strike hit means our forecast is 170K.
Today's FOMC meeting will be the first non-forecast meeting to be followed by a press conference.
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%.
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 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.
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.
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 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.
Our base case forecast has core PCE inflation at 1.9% from November 2018 through July this year.
The publication yesterday of the BCB's second quarterly inflation report under the new president, Ilan Golfajn, revealed that inflation is expected to hit the official target next year, for the first time since 2009. The inflation forecast for 2017 was lowered from 4.7% to 4.4%, just below the central bank's 4.5% target.
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.
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.
Data released over the last few weeks have confirmed that Colombia's economic performance in Q2 was grim, adding weight to our below-consensus GDP forecast.
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.
Market-based measures of uncertainty and volatility remain elevated, but if we look beyond the headlines, two overall assumptions still inform forecasters' analysis of the economy and Covid-19.
Andres Abadia authors our Latin American service. Andres is a native of Colombia and has many years' experience covering the global economy, with a particular focus on Latin America. In 2017, he won the Thomson Reuters Starmine Top Forecaster Award for Latam FX. Andres's research covers Brazil, Mexico, Argentina, Chile, Colombia, Peru and Venezuela, focusing on economic, political and financial developments. The countries of Latin America differ substantially in terms of structure, business cycle and politics, and Andres' researchhighlights the impact of these differences on currencies, interest rates and equity markets. He believes that most LatAm economies are heavily influenced by cyclical forces in the U.S. and China, as well as domestic policy shocks and local politics. He keeps a close eye on both external and domestic developments to forecast their effects on LatAm economies, monetary policy, and financial markets. Before starting to work at Pantheon Macroeconomics in 2013, Dr. Abadia was the Head of Research for Arcalia/Bancaja (now Bankia) in Madrid, and formerly Chief Economist for the same institution. Previously, he worked at Ahorro Coporacion Financiera, as an Economist. Andres earned a PhD in Applied Economics, and a Masters Degree in Economics and International Business Administration from Universidad Autónoma de Madrid, and a BSc in Economics from the Universidad Externado de Colombia.
Chief U.S. Economist Ian Shepherdson on the Fed's growth forecast
Chief U.K. Economist Samuel Tombs on U.K. Public Finances
Will EZ services hold their own amid weakness in manufacturing?
Why is the EZ current account surplus rising and net exports falling at the same time?
Chief US economist Ian Shepherdson on June Consumer Confidence data
Chief U.S. Economist Ian Shepherdson on the U.S. Economy
Chief U.K. Economist Samuel Tombs discussing U.K. GDP
Andres Abadia on Chile GDP
Chief U.S. Economist Ian Shepherdson on the latest employment data.
Chief U.K. Economist Samuel Tombs on the U.K. Election
Samuel Tombs discussing U.K. Inflation
Chief Eurozone Economist Claus Vistesen on the ECB
Chief U.K. Economist Samuel Tombs on U.K. Public Finances
Chief U.K. Economist Samuel Tombs on U.K. House Prices
Chief U.S. Economist Ian Shepherdson on U.S. housing starts
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Pantheon Macroeconomics' Chief Economist Dr. Ian Shepherdson provides unbiased, independent economic intelligence to financial market professionals.
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