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We need to take a closer look at the chance of a sustained rise in the labor participation rate, which is perhaps the single biggest risk to the idea that 2018 will be a good year for the stock market, with limited downside for Treasuries.
The sudden jump in the headline, three-month average, growth rate of average weekly wages to a 10-year high of 3.3% in October, from just 2.4% four months earlier, might indicate that the U.K. has reached the sharply upward-sloping part of the Phillips Curve.
It appears to be something of an article of faith among economic advisors to President-elect Trump that substantial fiscal stimulus will generate faster growth without boosting inflation, because both labor participation and productivity growth will rise.
Households' saving decisions will play a key role in determining whether the economy slips into recession over the next year. Indeed, all of the last three recessions coincided with sharp rises in the household saving rate, as our first chart shows. Will households save more in response to greater economic uncertainty?
The consequences of sterling's sharp depreciation for inflation were brought home yesterday by the news that the iPhone 7 will cost more than its predecessor. The entry-level version is priced at £60 more than its iPhone 6S equivalent. Of course, the new version is more advanced, but the fact that the dollar price held steady, at $649, demonstrates the U.K. price hike entirely is due to the adverse impact of the weaker pound.
The failure of labor market participation to increase as the economy has gathered pace, pushing unemployment down from its 10.0% peak to just 3.7%in September, is one of the biggest macro mysteries in recent years.
The participation rate--the proportion of people either in or looking for work--has held steady over the last decade, despite the ageing of the population and the rise in student numbers.
We are intrigued by the idea that the rollover in oil firms' capital spending on equipment might already be over, even as spending on new well-drilling--captured by the still-falling weekly operating rigs data--continues to decline. The evidence to suggest equipment spending has fallen far enough is straightforward.
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.
In one line: Undershooting consensus, inflation pressures are tame.
In one line: A modest and expected increase; underlying inflation is stable.
In one line: A sharp fall helped by a favourable base effect; underlying pressures are tame.
In one line: Overshooting consensus, due to Covid-19 hit?
In one line: A sharp increase on the month, but underlying pressures remain tame.
December's GDP report, released next Monday, likely will maintain the flow of negative news on the U.K. economy.
In one line: Inflation is under control; no immediate threats here.
In one line: Inflation edged lower in August, leaving the door open for further interest rate cuts.
In one line: A modest increase, but underlying inflation is stable.
In one line: Inflation ended 2019 above the target, due mainly to the meat-price shock.
In one line: No serious inflation threats, at least for now.
In one line: Beef prices drive up inflation, but underlying pressures will remain low.
In one line: Underlying pressures will remain low, despite the food-related shock.
In one line: Inflation is well under control; the BCB will cut rates next week.
In one line: Undershooting expectations, and further opening the door to a final rate cut in August.
In one line: Brazil inflation is well under control.
In one line: Well-behaved inflation in September supports the case for further monetary easing.
In one line: Low inflation due to the Covid-19 shock.
In one line: A sharp increase, but due mainly to temporary factors.
The slowdown in quarter-on-quarter growth in households' real spending to 0.4% in Q1--just half 2016's average rate--was driven entirely by a 0.1% fall in purchases of goods. Households' spending on services, by contrast, continued to grow briskly. Indeed, the 0.8% quarter-on-quarter rise in households' real spending on services exceeded 2016's average 0.5% rate.
In one line: Disinflation resumes as the economy falters.
The EU has had a better start to the Brexit negotiations than its counterpart across the Channel. The risk of disagreement within the EU on the details with of the U.K.'s exit is high, but the Continent has presented a united front so far, mainly because Mr. Macron and Mrs. Merkel agree on the broad objectives. They have no interest in punishing the U.K., but they are also keen to show that exiting the EU has costs for a country which leaves.
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.
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.
The wave of May data due for release today likely will go some way to countering the market narrative of a seriously slowing economy, a story which gained further momentum last week after the release of the May employment report.
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.
The Mexican government last week unveiled its 2017 fiscal budget proposal. The plan makes clear that the shocks which have battered the economy and public finances since 2015 will linger in to next year. Mexico's government has been eager to cut spending in recent years.
It's hard to find anything to dislike in the February employment report.
A quick rebound in growth, after the slowdown to a reported 2.6% in the fourth quarter, is unlikely.
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.
On the face of it, the latest GDP data look awful. December's 0.4% month-to-month fall in GDP closed a poor Q4, in which quar ter-on-quarter growth slowed to 0.2%, from 0.6% in Q3.
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 November industrial production numbers will be dominated by the rebound in auto production following the end of the GM strike.
In one line: Inflation falls sharply helped, by a favourable base effect and a sluggish economic recovery.
Modern Money Theory has come up at two consecutive BoJ press conferences.
Investors focussed last week on Chair Powell's semi-annual Monetary Policy Testimony, but he said nothing much new.
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.
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.
We remain confident that a deal with Greece will be made, and that the country will stay in the euro area. But the need for both parties to avoid losing face domestically is still complicating the negotiations. Most importantly, Greece is no longer pledging an unconditional exit from the bailout program.
The GM strike will make itself felt in the September industrial production data, due today.
The headlines of China's August activity data are missing the real story in recent months.
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.
The Budget on March 11 will be the first time that the new government's ambition and bluster collide with reality.
In one line: Overshooting consensus, but underlying pressures are still modest.
In one line: Starting to recover, but facing a long uphill journey.
In one line: Collapsing, despite no mandatory closures of construction sites.
In one line: Still weighed down by Brexit uncertainty, but next year should be better.
In one line: An unprecedented collapse.
In one line: Year-end struggles should give way to stabilisation in Q1.
In one line: A logical rebound, but builders are bracing for an incomplete recovery.
In one line: A big step in the right direction.
In one line: Overall stagnation masks sub-sector divergence.
In one line: A total collapse.
In one line: Hit by election-related indecision in the public sector; expect a recovery 2020.
In one line: The election has given housebuilding a new lease of life.
In one line: Supply chain disruptions to depress output in the spring.
In one line: A glimmer of light between the storm clouds.
In one line: A Pretty Meaningless Indicator right now.
In one line: Consistent with Q1 GDP growth exceeding the MPC's forecast.
In one line: Horrendous, and probably not reflecting the full devastation.
In one line: Sluggish recovery in activity and falling inflation point to more QE this month.
In one line: Probably still misleadingly weak.
In one line: Cut-off for the survey too early to give a steer on the virus hit to domestic demand.
In one line: Consistent with an immediate pick-up in activity after the election.
In one line: The recovery will lose momentum before long.
In one line: Understating the slump in production now underway.
In one line: A long way from normal, but moving in the right direction.
In one line: A total collapse in April, but tentative signs of recovery in other timelier data.
In one line: A jobless recovery can only extend so far.
In one line: The survey's poor track record recently means its recession signal should not be believed.
In one line: Stagnation signal should be disregarded, again.
In one line: Slowing, but not as sharply as we had feared.
In one line: The downturn is deepening, through a rapid rebound will emerge if no-deal Brexit risk subsides.
In one line: Work is continuing to dry up as no-deal Brexit risk mounts.
In one line: Brexit uncertainty is still hurting, but a boost from lower borrowing costs is coming.
In one line: Stagnation unlikely to persist in Q3.
In one line: A worrying step change in the impact of Brexit uncertainty.
In one line: Underlying pressures are modest, and food prices are starting to stabilise.
In one line: Low energy prices, and plunging domestic demand, push inflation to cyclical lows.
In one line: Low inflation still gives the BCB board room for manoeuvre.
In one line: Brazilian inflation is well under control, giving the COPOM room for manoeuvre.
In one line: Still struggling, but a recovery in 2020 is in sight.
In one line: The downturn is accelerating; Brexit uncertainty still to blame.
In one line: Don't take the PMI's recession signal literally.
In one line: Modest revival weakens the case for fresh monetary stimulus.
In one line: Tentatively moving in the right direction.
In one line: Not much of a Brexit deal bounce.
In one line: Renewed stockpiling provides some near-term relief.
In one line: Renewed stockpiling provides fleeting relief from the downturn.
In one line: Pre-Brexit preparations offering little support, so far
In one line: Probably this year's weakest point.
In one line: No longer outperforming now the stockpiling boost has fully worn off.
In one line: On course to reverse the Q1 boost.
In one line: Low inflation keeps the door open for further rate cuts.
In one line: Destocking is driving the renewed slowdown.
Industrial production hit its stride last year, notching up eight consecutive month-to-month gains--the longest run of unbroken growth since May 1994--before a setback in December, which was triggered by the temporary closure of the Forties oil pipeline.
Data released on Friday in Brazil and recent political events helped to open the door further to a final rate cut in August. The IPCA-15--which previews the full CPI-- rose 0.3% month-to-month in July, well below market expectations, 0.5%.
President Xi Jinping yesterday reiterated China's commitment to reform and the opening of its economy at a highly-anticipated speech at the Boao forum.
Brazil's inflation rate is in double digits for the first time in 12 years. The benchmark IPCA price index rose 1.0% month-to-month in November, lifting the year-over-year rate to 10.5%, the highest since November 2003. The core IPCA increased 0.7% month-to-month, pushing the year-over-year rate in November up to 8.9% from 8.6% in October.
We remain confident in the success of legislation designed to compel the PM to request a further extension of the U.K.'s E.U. membership on October 19, in the overwhelmingly likely scenario that an exit deal is not agreed at next week's E.U. Council meeting.
Friday's final CPI report in the Eurozone confirmed that inflation dipped marginally in January, by 0.1 percentage points, to 1.3%.
The latest batch of FOMC speakers yesterday, together with the December minutes--participants said "the committee could afford to be patient about further policy firming"--offered nothing to challenge the idea, now firmly embedded in markets, that the next rate hike will come no sooner than June, if it comes at all.
The huge drop in the March Markit services PMI, reported yesterday, and the modest dip in the manufacturing index, are the first national business survey data to capture the impact of the Covid-19 outbreak.
The commentariat was very excited Friday by the inversion of the curve, with three-year yields dipping to 2.24% while three-month bills yield 2.45%.
According to Brazil's mid-August inflation reading, which is a preview of the IPCA index, overall inflation pressures are easing. But some price stickiness remains, due to inertia and temporary shocks, despite the severity of the recession and the rapid deterioration of the labour market in recent months.
Data released yesterday in Brazil support our base case that the IPCA inflation rate will remain relatively stable over the coming months, hovering around 2%.
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 manufacturing sector appears to have finished 2017 on a strong note. The Markit/CIPS manufacturing PMI fell to 56.3 in December from 58.2 in November, but it remained above its 12-month average, 55.9.
Don't write off the outlook for the construction sector purely on the basis of June's grim Markit/CIPS survey.
The Markit/CIPS manufacturing PMI shot up to a three-year high of 57.3 in April, from 54.2 in March, bringing an end to the run of downbeat news on the economy. The performance of the U.K. manufacturing sector, however, remains underwhelming, given the magnitude of sterling's depreciation.
The pressure on Theresa May from Brexiteers within her own party intensified yesterday, when 60 Conservative MPs signed a letter arguing that they could not back a proposal for a "customs partnership".
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.
The Fed will raise rates by 25 basis points on Wednesday, but as usual after a widely-anticipated policy decision, most of our attention will be focused on what policymakers say about their actions, and how their views on the economy have changed.
Momentum in French manufacturing eased slightly in November, but the setback was modest. Industrial production dipped 0.5% month-to-month, only partially reversing the revised 1.7% jump in October.
Economic data in the euro area are still slipping and sliding.
The latest IPCA inflation data in Brazil show the year-over-year rate fell to 8.8% in June from 9.3% in May. This is the slowest pace since May 2015, with inflation pulled lower by declines across all major components, except food. Indeed, food prices were the main driver of the modest 0.4% unadjusted monthto-month increase, rising by 0.7%, following a 0.8% jump in May. The year-over-year rate rose to 12.8% in June from 12.4%.
Public borrowing has continued to fall more rapidly than anticipated in the latest official plans.
Inflation pressures in Brazil are still easing rapidly. The mid-May unadjusted IPCA- 15 index rose just 0.2% month-to-month, much less than the 0.6% historical average for the month. Base effects pushed the year-over-year rate down to 3.8% from 4.1% in April. Food prices, healthcare and personal costs were the main drivers of the modest month-to-month increase.
After two big monthly gains in existing home sales, culminating in October's nine-year high of 5.60M, we expect a dip in sales in today's November report. This wouldn't be such a big deal -- data correct after big movements all the time -- were it not for the downward trend in mortgage applications.
Further compelling signs that the U.K. has lost its status as one of the fastest growing advanced economies were presented by the Markit/CIPS manufacturing survey, released yesterday. The PMI fell in February to 50.8--its lowest level since April 2013--from 52.9 in January.
Expectations for a March rate hike have dipped since Fed Vice-Chair Clarida's CNBC interview last Friday.
Brazil's central bank looked through the recent dip in the BRL and left interest rates at 6.50% at Wednesday's Copom meeting, in line with the consensus.
As we write, 25 Conservative MPs have confirmed publicly that they have submitted no-confidence letters to the Chairman of the 1922 Committee. That's 23 short of the 48 required to trigger a leadership contest, though some MPs might have submitted letters without making it public.
The euro area's trade advantage with the rest of the world slipped at the start of the year.
October's Markit/CIPS manufacturing survey indicates that producers are not shying away from passing on to their customers the higher costs stemming from sterling's depreciation.
Brazilian inflation is off to a good start this year, and we think more good news is coming. The January mid-month IPCA-15 index rose an unadjusted 0.3% month-to-month, a tenth less than expected. This was the smallest gain for January since 1994 and the sixth consecutive month in which the number came in below expectations.
Japan's trade balance deteriorated sharply in May, flipping to a ¥967B deficit from the modest ¥57B surplus in April.
Brazil's mid-June inflation reading surprised to the downside, falling to 9.0% from 9.6% in May. The reading essentially confirmed that May's rebound was a pause in the downward trend rather than a resurgence of inflationary pressures. A 1.3% increase in housing prices, including services, was the main driver of mid-June's modest unadjusted 0.4% month-to-month rise in the IPCA-15.
Another deadline has come and gone in the negotiations between Greece and its creditors. This week's meeting between EU finance ministers revealed that the creditors have not seen enough commitments unlock the €7B Greece needs to repay in July. Mr. Tsipras has agreed to energy sector privatizations, and to increase the threshold for income tax exemption.
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.
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.
The Markit/CIPS PMIs for August, slated for release over the next three business days, will be closely watched. They have provided the most resounding indication, so far, that Britain is heading for a recession. In July, the composite PMI--comprised of the manufacturing and services indices--fell to 47.5, from 52.4 in June, its biggest month-to-month fall since records began in 1998.
The nominal value of orders for non-defense capital equipment, excluding aircraft, fell by 3.4% last year. This was less terrible than 2015, when orders plunged by 8.4%, but both years were grim when compared to the average 7.5% increase over the previous five years.
The 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.
The bad news just keeps coming for Brazil's economy. The mid-month CPI, the IPCA-15 index, rose 1.2% month-to-month in March. Soaring energy prices remain the key contributor to the inflation story in Brazil, pushing up the housing component by 2.8% in March, after a 2.2% increase in February.
September's Markit/CIPS services survey added to the evidence indicating that GDP growth softened, rather than fell off a cliff, in the third quarter. The activity index edged down only to 52.6, from 52.9 in August.
The Chancellor probably can't believe his luck. Public borrowing has continued to fall this year at a much faster rate than anticipated by the OBR, despite the sluggish economy.
Friday's inflation data in Brazil confirmed that the ripples from the truckers' strike in May were still being felt at the start of the third quarter.
The sharp and unexpected improvement in the Markit/CIPS manufacturing survey in October released on Monday raised hopes that the recession in the industrial sector might be over. A cool look at the evidence, however, suggests that this probably is just wishful thinking.
The fall in the Markit/CIPS manufacturing PMI to 47.4 in August--its lowest level since July 2012--from 48.0 in July suggests that pre-Brexit stockpiling isn't countering the hit to demand from Brexit uncertainty and the global industrial slowdown.
October's Markit/CIPS services survey suggests that the PM's new Brexit deal has had a lukewarm reception from firms.
October's Markit/CIPS services survey added to evidence that the economy has started Q4 on a very weak footing.
Brazil's benchmark inflation index, the IPCA, rose 0.7% month-to-month in May, above market expectations. The stickiness of some components explains the surprise upshift; food prices in particular rose by 1.4% in May, after a 1% increase in April. Housing also rose at a faster rate than we had expected, due mainly to a 2.8% jump in the electricity component, the largest single contributor to May's headline increase.
The MPC struck a less dovish tone than markets had anticipated yesterday.
The small rise in the Markit/CIPS services PMI to 51.3 in February, from 50.1 in January, came as a relief yesterday.
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.
The post-election run of upbeat business surveys was extended yesterday, with the release of the final Markit/CIPS services PMI for January.
Investors have treated the upbeat message of the Markit/CIPS PMIs this week with caution and continue to think that the chance that the MPC will raise interest rates this year is remote. Overnight index swap rates currently are pricing-in just a one-in-four chance of a 25 basis point increase in Bank Rate in 2017.
On the face of it, markets' newfound view that the MPC's next move is more likely to be a rate cut than a hike was supported by May's Markit/CIPS PMIs.
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.
Brazil's April CPI data this week showed that inflation pressures remain weak, supporting the BCB's focus on the downside risks to economic activity. Wednesday's report revealed that the benchmark IPCA inflation index rose 0.1% unadjusted month-to-month in April, marginally below market expectations.
Slowing FAI growth underscores the urgency for more PBoC easing October was painful and the slowdown in Chinese IP growth is far from over and no, households in China won't come to the economy's rescue. Japan sneaks in a tax hike; GDP data unfazed. Japan's tertiary index jars with the GDP data.
China's retail sector is on its knees at best. China's IP data suggest that the horrendous PMIs underplayed the carnage. A damning FAI report... tertiary capex should rebound, but the hit to global demand will hold back the secondary industry. China's property market grounds to a halt in February. The Bank of Korea steps in with an emergency cut, despite falling new infections locally.
China's manufacturing PMIs suggest the private sector is recovering ahead of SoEs. China's non-manufacturing PMI again masks construction/services cross currents. Japan's industrial production continues to languish. OK so now Japanese households are front-loading spending. Korean IP corrects from the bumper July; the momentum from the Q2 recovery is waning.
China's manufacturing PMI edged up in July. Services in China are finally starting to feel the pinch. Korean IP looks poised for a stronger increase in July, notwithstanding Japan's export curbs.
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%.
Total real inventories rose at a $48.7B annualized rate in the fourth quarter, contributing 1.0 percentage points to headline GDP growth. Wholesale durable goods accounted for $34B of the aggregate increase, following startling 1.0% month-to-month nominal increases in both November and December. The November jump was lead by a 3.2% leap in the auto sector, but inventories rose sharply across a broad and diverse range of other durables, including lumber, professional equipment, electricals and miscellaneous.
Brazil's benchmark inflation index, the IPCA, fell 0.1% month-to-month unadjusted in August, below market expectations.
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 sharp 0.4% month-to-month fall in GDP in December and the slump in the Markit/CIPS PMIs towards 50 have created the impression the economy is on the cusp of recession.
The slump in the Markit/CIPS services PMI in November to its lowest level since July 2016 provides the clearest indication yet that uncertainty about Brexit has driven the economy virtually to a stand-still.
November's Markit/CIPS surveys for the manufacturing, construction and services sectors suggest that GDP growth is on track to strengthen a touch in Q4.
January's Markit/CIPS manufacturing survey suggests that the outcome of the general election has brought manufacturers some momentary relief.
Investors have concluded from June's Markit/CIPS PMIs and Governor Carney's speech on Tuesday that the chance of the MPC cutting Bank Rate before the end of this year now is about 50%, rising to 55% by the time of Mr. Carney's final meeting at the end of January.
We recommend that investors take yesterday's inflation data in the Eurozone with a pinch of salt. The headline rate slipped to 1.2% in April, from 1.4% in March, hit by a slide in core inflation to 0.7%, from 1.0%.
The failure of the Markit/CIPS services PMI to rebound fully in April, following its fall in March, provides more evidence that the economy is in the midst of an underlying slowdown.
The recovery in the Markit/CIPS manufacturing PMI to 53.1 in November, from 51.1 in October, propelled it well above the consensus, and the equivalent reading for the Eurozone, 51.8, for only the second time in the last 19 months.
A further rise in the business activity index of the November Markit/CIPS report on services offset declines in the manufacturing and construction surveys' key balances. The composite PMI--a weighted average of three survey's activity indices -- therefore rose, to a level consistent with quarter-on-quarter GDP growth strengthening to 0.6% in the fourth quarter, from 0.5% in Q3. Nonetheless, we do not think this is a convincing signal that the economic recovery is regaining strength.
Capex data by industry are available only on an annual basis, with a very long lag, so we can't directly observe the impact the collapse in the oil sector has had on total equipment spending. But we can make the simple observation that orders for non-defense capital goods were rising strongly and quite steadily-- allowing for the considerable noise in the data--from mid-2013 through mid-2014, before crashing by 9% between their September peak and the February low. It cannot be a coincidence that this followed a 55% plunge in oil prices.
The 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.
The latest Markit/CIPS manufacturing survey has dashed hopes that sterling's depreciation and the pickup in global trade will facilitate strong growth in U.K. production this year. The PMI dropped to 54.2 in March, from 54.6 in February.
We continue to distrust the suggestion from the Markit/CIPS PMIs that the economy is in recession.
September's Markit/CIPS PMIs indicate that the economy still is stuck in a low gear.
The latest PMIs indicate that the economy remained listless in Q3, undermining the case for a rate rise before the end of this year. The business activity index of the Markit/CIPS services survey rose trivially to 53.6 in September, from 53.2 in August.
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 rise in Markit/CIPS services PMI to 55.0 in March, from 53.3 in February, brings some relief that GDP growth has not stalled in Q1, following manufacturing and construction surveys that signalled near-stagnation.
The rise in the Markit/CIPS services PMI to a nine-month high of 51.4 in July, from 50.2 in June, isn't a game-changer, though it does provide some reassurance that the economy isn't on a downward spiral.
The improvement in the Markit/CIPS services PMI in October was pretty limp, supporting our view here that the recovery is shifting into a lower gear. What's more, the poor productivity performance implied by the latest PMIs indicates that wage growth will fuel inflation soon. As a result, the Monetary Policy Committee--MPC--won't be able to wait long next year before raising interest rates. Indeed, we expect the minutes of this month's meeting, released today, to show that one more member of the nine-person MPC has joined Ian McCafferty in voting to hike rates.
February's Markit/CIPS construction survey brought further evidence that the economy is being weighed down by Brexit uncertainty.
Evidence that the U.K. economy has slowed significantly this year is starting to come in thick and fast. Following the Markit/CIPS manufacturing PMI on Monday --which signalled that growth in production declined in March to its lowest rate since July--the construction PMI dropped to 52.2 in March, from 52.5 in February.
November's Markit/CIPS construction report brings hope that the sector no longer is contracting. The PMI increased to a five-month high of 53.1 in November from 50.8 in October, exceeding the 52-mark that in practice has separated expansion from contraction.
The flow of downbeat business surveys continued yesterday, with the release of the Markit/CIPS construction survey.
The manufacturing sector appears to have started the new year on a weaker note. The Markit/CIPS manufacturing PMI dropped to 55.3 in January--its lowest level since June--from 56.2 in December.
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.
We often hear that the large gap between the slowing rising path for interest rates anticipated by the MPC and the flat profile expected by markets is justified because markets have to price-in all of the downside risks to the economic outlook posed by Brexit.
Friday's June inflation data in Brazil confirmed that the ripples from the worst of the Covid shock were still being felt at the end of the quarter.
French manufacturing cooled at the end of 2016. Industrial production slipped 0.9% month-to-month in December, partially reversing an upwardly revised 2.4% jump in November. The main hits came from declines in oil refining and manufacturing of cars and other transport equipment.
On the face of it, British manufacturers are weathering the global slowdown well. The Markit/CIPS PMI jumped to 55.1 in March, from 52.1 in February, and now comfortably exceeds those for the Eurozone, U.S. and Japan.
President Trump wrote to Congress on Monday, saying that the U.S. finally has reached a trade deal with Japan, about a month after he and Prime Minister Abe announced an agreement in principle, on the sidelines of the G7 Summit in France.
Greece goes to the polls this weekend, but unlike the chaos in the summer, we doubt it will be a nail-biting experience for investors. Polls put Syriza and the conservative New Democracy neck-and-neck, but neither party likely will be able to form a majority. Syriza has ruled out a grand coalition, which potentially means tricky negotiations with minority parties. But we are confident that any new government will be committed to euro membership, and a constructive dialogue with the EU and IMF.
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.
The year-over-year rate of core CPI inflation rose steadily from a low of 1.6% in January 2015 to 2.3% in February this year. At that point, the three-month annualized rate had reached a startling 3.0%. You could be forgiven, therefore, for thinking that the dip in core inflation back to 2.2% in March was an inevitable correction after a period of unsustainably rapid gains, and that the underlying trend in core inflation isn't really heading towards 3%.
Sterling took another pounding last week. Resignations from the Cabinet, protests by the DUP, and the public submission of letters by 21 MPs calling for a confidence vote in Mrs. May's leadership, imply that parliament won't ratify the current versions of the Withdrawal Agreement and the Political Declaration on the future relationship with the E.U. next month.
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.
Jim Bullard, the St. Louis Fed president, said last week that Phillips Curve effects in the U.S. are "weak", and that nominal wage growth is not a good predictor of future inflation.
Data released yesterday showed that gross fixed investment in Mexico started Q4 on a decent note, increasing on the back of healthy purchases of imported machinery and equipment and construction spending.
China's July activity data pretty categorically wiped out any false hopes of a V-shaped recovery, after the June spike.
China's two-tier post-lockdown economic revival continued in April. Industrial production beat expectations easily, rising by 3.9% year-over-year, after slipping by 1.1% in March.
French consumer sentiment dipped slightly in June, but we see no major hit from ongoing labour market disputes. The headline index slipped to 97 in June, from 98 in May; this is a decent reading given the fourpoint jump last month. The headline was constrained by a big fall in consumers' "major purchasing intentions," but this partly was mean-reversion following a surge last month.
When the Fed raised rates in December, it subverted one of its own long-standing conventions by hiking with the ISM manufacturing index below 50. The December survey, released just 15 days before the meeting, showed the headline index slipping to 48.6, the third straight sub-50 reading. It has since been revised down to 48.0, the lowest reading since June 2009.
Rapid growth in labour supply has enabled the U.K. economy to grow quickly over the last three years without generating excessive wage or inflation pressure. The rise in the participation rate--the proportion of those aged over 16 in or looking for work--has been critical to this revival. But the rise in the participation rate largely has reflected cyclical factors rather than a sustainable upward trend, and the downward pressure on participation from demographic factors will build over the coming years.
In our Friday Monitor, we came to the conclusion that prescriptions arising from Modern Money Theory have been designed primarily with the U.S. in mind.
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.
Demand for new cars rebounded strongly last month, following the dip in October. Registrations in the EU27 rose 13.7% year-over-year in November, up from 2.9% in October, lifted mainly by buoyant growth in the periphery. New registrations surged 25.4% and 23.4% year-over-year in Spain and Italy respectively, while growth in the core was a more modest 10%. We also see few signs of the VW emissions scandal hitting the aggregate data. VW group sales have weakened, but were still up a respectable 4.1% year-over-year. This pushed the company's market share down marginally compared to last year. But sizzling growth rates for other manufacturers indicate that consumers are simply choosing different brands.
A casual glance at our char t below, which shows the number of job openings from the JOLTS report, seems to fit our story that the slowdown in payrolls in April and May--perhaps triggered by the drop in stocks in January and February--will prove temporary. Job openings dipped, but have recovered and now stand very close to their cycle high.
It's very tempting to look at the upturn in the participation rate in recent months and extrapolate it into a sustained upward trend. If the trend were to rise quickly enough, it conceivably could prevent any further fall in the unemployment rate, preventing it falling below the bottom of the Fed's estimated Nairu range.
GDP data for Q2 are due July 26; we expect the report to show a marginal dip in growth, to a seasonally adjusted 0.8% quarter-on-quarter, from 1.0% in Q1.
Sterling held on to its recent gains yesterday despite mounting speculation that Eurosceptic Conservative MPs are plotting a leadership challenge.
The trend of consensus-beating EZ economic data was brought to a halt yesterday. The IFO business climate index in Germany slipped to a five-month low of 109.8 in January, from 111.0 in December, mainly due to a fall in the expectations index. But we are not alarmed. The dip in the headline comes after a run of strong data, and the IFO remains consistent with GDP growth of about 1.6% year-over-year.
Our view that households will continue to spend more in the first half of this year, preventing the economy from slipping into a capex-led recession, was not seriously challenged yesterday by the BRC's Retail Sales Monitor.
Yesterday's IFO survey in Germany sent a marginally more downbeat message than the strong PMIs last week. The IFO business climate index fell to 115.2 in September, from 115.9 in August, its second straight monthly dip.
German exporters stumbled at the end of last year. The seasonally adjusted trade surplus in Germany dipped to €18.4B in December, from €21.8B in November, hit by a 3.3% month-to-month plunge in exports. Imports were flat on the month. The fall in exports looks dramatic, but it followed a 3.9% jump in the previous month, and nominal exports were up 2.5% over Q4 as a whole. Advance GDP data next week likely will show that net trade lifted quarter-on-quarter growth by 0.2 percentage points, partly reversing the 0.3pp drag in Q3. Real imports were held back by a jump in the import price deflator, due to rebounding oil prices.
Final inflation data yesterday confirmed Eurozone inflation pressures are still low. Inflation rose to 0.2% year-over-year in December from 0.1% in November, lifted by easing deflation in energy prices. Base effects likely will lift energy price inflation in January and February, but the year-over-year rate will dip in Q2, if the oil price remains depressed. Food inflation fell in December due to a decline in unprocessed food prices, and we see further downside in Q1. Core inflation was unchanged, with the key surprise that services inflation fell to 1.1% from 1.2% in November. We think this dip will be temporary, however, and our first chart shows that risks to services inflation are tilted to the upside.
The combination of weather effects and the meltdown in the oil sector make it very hard to spot the underlying trend in manufacturing activity. The sudden collapse in oil-related capital spending likely is holding down production of equipment, but the data don't provide sufficient detail to identify the hit with any precision.
The headline CPI inflation rate almost certainly dipped below zero in September, barring a startling and deeply improbable surge in the core. We look for a 0.4% month-to-month headline drop, driven by an 11% plunge in gasoline prices, pushing the year-over-year rate to -0.3%. This is of no real economic significance, not least because hugely unfavorable base effects mean the year-over-year rate almost certainly will rise sharply over the next few months, reaching about 1¾% as soon as January.
Japan's trade surplus has whipsawed recently. Sharp changes are to be expected in January and February, due to the shifting timing of Chinese New Year.
Political risks in the periphery have simmered constantly during this cyclical recovery, but they have increased recently. In Italy, the government is scrambling to find a solution to rid its ailing banking sector of bad loans. But recapitalisation via a bad bank is not possible under new EU rules.
The upward trend in German inflation stalled temporarily in August, with an unchanged 0.4% year-over-year reading in August. A dip in core inflation likely offset a continued increase in energy price inflation. The detailed final report next month will give the full story, but state data suggest that the core rate was depressed by a dip in price increases of household appliances, restaurant services, as well as "other goods and services."
Chief U.S. Economist Ian Shepherdson discussing Durable Goods Orders in May
Chief Eurozone Economist Claus Vistesen on the effects of a no-deal Brexit on the EU
Chief U.K. Economist Samuel Tombs on the latest PMI data
Chief U.S. Economist Ian Shepherdson with the latest on the trade war
Claus Vistesen says that the Catalan independence movement has no international support for its cause.
Chief U.K. Economist Samuel Tombs on U.K. economy growth
Chief U.K. Economist Samuel Tombs on U.K. Public Finances
Chief U.K. Economist Samuel Tombs on U.K. House Prices
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.
Banxico cut its policy rate by 25bp to 7.25% yesterday, as was widely expected, following similar moves in August, September and November.
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.
Yesterday's sole economic report showed that the EZ trade surplus rebounded slightly at the start of the year, rising to €17.0B in January, from a revised €16.0B in February, lifted by a 0.8% increase in exports, which offset a 0.3% rise in imports.
The probability of a rate hike on June 14, as implied by the fed funds future, has dropped to 90%, from a peak of 99% on May 5.
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.
Renewed stockpiling ahead of the October Brexit deadline finally appears to be providing some near-term support to manufacturing output.
Brazilian inflation has been well under control in the past few months, laying the ground for a final rate cut at the monetary policy meeting on March 21.
Italy's economy is still bumping along the bottom, after emerging from recession in the middle of last year.
We still think it is a question of when--not if-- MPs will be successful in taking a no -deal Brexit off the table.
Halfway through the third quarter, we have no objection to the idea that GDP growth likely will exceed 2% for the third straight quarter.
We doubt that this week will see the MPC joining the list of other major central banks that have abandoned plans to raise interest rates this year.
Elections will be held on Thursday in two constituencies vacated recently by Labour MPs. Betting markets are pricing-in a 70% chance that the Conservatives will win the by-election in Copeland--even though they trailed Labour there by eight points in the general election in 2015--mainly because around 60% of Copeland's electorate voted to leave the EU last year.
Argentina's inflation ended 2019 badly, and it is still too early to bet on a protracted downtrend, even after the renewed economic slowdown.
Officially, China's real GDP growth was unchanged at 6.0% year-over-year in Q4; low by Chinese standards, but not overly worrying. Full-year growth was 6.1% within the 6.0-to-6.1% target down from 6.7% last year, also in keeping with the authorities' long-term poverty reduction goals.
Data later today will likely show that the Eurozone's external balance remained firm last quarter at a record 2.5% of GDP. We think the seasonally adjusted current account surplus rose to €20.0B in December from €18.1B in November, with positive momentum in the key components continuing.
India's industrial production data last week are the last set of key economic indicators for the fourth quarter, before next week's Q4 GDP report.
Inflation in Brazil ended 2017 well under control, despite December's modest overshoot. This will allow the BCB to cut rates further in Q1 to underpin the economic recovery.
Mrs. May looks set to lose the second "meaningful vote" on the Withdrawal Agreement-- WA--today, whether she decides on a straightforward vote or one asking MPs to b ack it if some hypothetical concessions are achieved.
Yesterday's ECB bank lending survey suggests that credit conditions remain favourable for the EZ economy. Credit standards eased slightly for business and mortgage lending and were unchanged for consumer credit.
Signs of a slowdown in the labour market data are conspicuously absent.
Mark Carney emphasised in his Mansion House speech last month that he wants wage growth to "begin to firm" from recent "anaemic" rates before voting to raise interest rates.
The decision by seven MPs to abandon Labour and set up a new centrist grouping--the Independent Group--will not have a significant impact on the outcome of parliamentary Brexit votes.
As the impeachment hearings gather momentum, we have been asked to provide a cut-out-and-keep guide to the possible outcomes.
The Fed paved the way with a 50bp emergency rate cut on March 3, with more to come.
The key detail in Friday's barrage of economic data was the above-consensus increase in EZ inflation.
The data in LatAm have been all over the map in recent weeks.
We keep hearing that the auto market is struggling, but that idea is not supported by the recent sales numbers.
Predictably, last weekend's G7 meeting in Canada ended in acrimony between the U.S. and its key trading partners.
The case for continuing to increase Bank Rate gradually--recently reiterated by MPC members Andy Haldane and Michael Saunders-- strengthened yesterday with the release of April's labour market report, which revealed renewed momentum in wage growth.
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.
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.
LatAm assets and currencies had a bad November, due to global trade war concerns, the USD rebound and domestic factors.
Brazil's political situation is steadily improving, with the latest events proving a step in the right direction.
Expectations are running high that the MPC will strike a more hawkish tone today in the minutes of this month's meeting and in the quarterly Inflation Report. Investors are pricing in a 45% chance of the MPC raising interest rates before the end of 2017, up from 30% before the last Report in November.
The economy's fragility was underlined by the Q3 national accounts, released just before the Christmas break.
Hopes that GDP growth might be boosted soon by a pick-up in net exports continue to be undermined by the latest data.
Yesterday's final May manufacturing PMIs confirmed that the EZ industrial sector is in fine form. The PMI for the euro area was unchanged at a cyclical high of 57.0 in May, in line with the initial estimate.
The FOMC did nothing yesterday and said nothing significantly different from its June statement, as was universally expected.
Inflation in the Eurozone stumbled at the end of Q3.
We expect the BoK to hike this month, believing that it's necessary to curtail household debt growth now, in order to prevent a sharper economic slowdown as the Fed hiking cycle continues, China slows, and trade risks unfold.
The rate that labour market slack is being absorbed has slowed, potentially giving the MPC breathing space to postpone the first rate rise beyond next month.
Sterling continued to recover last week, hitting its highest level against the dollar since October, despite a series of data releases indicating that the economy is losing momentum. Indeed, sterling was unscathed by the news on Friday that quarter-on-quarter GDP growth slowed to just 0.3% in Q1, from 0.7% in Q4.
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.
Chair Yellen has become quite good at not giving much away at her semi-annual Monetary Policy Testimony.
Japan's labour data threw another January curve ball this year--last year it was wages--with a change in the standards for job openings.
Investors awaiting today's interest rate decision might be a little unnerved to learn that the MPC has a track record of surprises.
Brazilian political risk remains high, due mainly to President Bolsonaro's gross mismanagement of the Covid-19 crisis, but, as we have argued in previous Monitors, it is unlikely to deter policymakers from further near-term monetary easing.
Brazilian political risk remains high but, as we have argued in previous Monitors, it is unlikely to deter policymakers from further near-term monetary easing. The political crisis, however, does suggest that the COPOM will act cautiously, waiting until the latest storm passes before acting more aggressively, despite ongoing good news on the inflation front.
Today's consumer prices figures likely will show that CPI inflation increased to 3.1% in November, from 3.0% in October.
As we reach our Sunday afternoon deadline, no deal has been reached to re-open the federal government.
The weather-driven surge in December housing starts, reported last week, is unlikely to be replicated in today's existing home sales numbers for the same month.
The Prime Minister has revealed that her Plan B for Brexit is to get Eurosceptics within the Tory party on side in an attempt to show the E.U. that a deal could be done if the backstop for Northern Ireland was amended. Her plan is highly likely to fail, again.
On the face of it, the latest public finance data suggest that the economy has lost momentum.
Economic activity is rebounding in LatAm, but the recovery will be slow and uneven.
Speculation that the ECB is considering a rethink of its inflation target has intensified in the past few weeks.
High interest rates and inflation, coupled with increasing uncertainty, put Mexican consumption under strain last year.
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.
Brazil's mid-April inflation report delivered more evidence that inflation is decelerating; it fell to 9.3% from 10.0% in March, reaching the slowest pace since July 2015. The unadjusted month-to-month increase surprised marginally to the upside, but the key story is of a declining year-over-year trend. Core inflation, which is a lagging indicator of the business cycle, slowed again, in line with the decline in services and market prices inflation.
European heads of states will convene tomorrow, virtually, in the Council to continue the debate on a joint and coordinated response to the Covid-19 epidemic. The meeting will progress along two tracks.
The trend in public borrowing has improved significantly over recent months, but it is far too soon to conclude that the Chancellor is on track to meet his goal of running a budget surplus by the end of this decade. The recent economic slowdown has not impacted the public borrowing numbers, yet.
Brazil's recent political and economics news has shifted the near-term outlook from bad to worse. President Rousseff on Friday replaced hawkish Finance Minister Joaquim Levy, appointed just over a year ago, with a close partner, Planning Minister Nelson Barbosa. Mr. Levy resigned after continued conflicts with the government, including frustration by the Congress of his attempts to rein in the fiscal mess. Mr. Barbosa is known to be less market friendly, and will likely defend countercyclical measures, delaying any rapid fiscal consolidation. The appointment will deteriorate investors' confidence even further, placing the markets under enormous strain.
Brazil's inflation rate remained well under control over the first half of February.
Yesterday's barrage of French business sentiment data suggest that confidence in the industrial sector was a little stronger than expected in Q2.
We advise strongly against concluding from the above-consensus rebound in retail sales in May that the economy is embarking on a healthy, V-shaped recovery, from Covid-19.
Most LatAm currencies have been under pressure recently, with the Brazilian real and the Chilean peso breaking all-time lows versus the USD in recent weeks.
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.
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.
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.
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.
Back-to-back elevated weekly jobless claims numbers prove nothing, but they have grabbed our attention.
On a trade-weighted basis, sterling has dropped by only 1.5% since the start of the month, but it is easy to envisage circumstances in which it would fall significantly further.
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.
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".
President Nicolás Maduro has "won' another six-year term, as expected, even as millions of Venezuelans boycotted the election.
The Spanish economy has been living a quiet life recently, amid markets' focus on political risks in Italy and manufacturing slowdowns in Germany and France.
Fed policymakers surprised no one with their May 1 statement, which acknowledged the surprisingly "solid " Q1 economic growth--at the time of the March 19-to-20 meeting, the Atlanta Fed's GDPNow model suggested Q1 growth would be just 0.6%--but stuck to its view that low inflation means the FOMC can be "patient".
We would be very surprised if the Fed were to raise rates today. The Yellen Fed is not in the business of shocking markets, and with the fed funds future putting the odds of a hike at just 22%, action today would assuredly come as a shock, with adverse consequences for all dollar assets.
If the economy is to enter recession, falling business investment probably will have to be the main driver. Growth in consumer spending likely will slow sharply over the next year as firms become more cautious about hiring new workers and inflation begins to exceed wage growth again.
Colombia's GDP report, released last week, confirmed that it was the fastest growing economy in LatAm and everything suggests that it likely will lead the ranking again this year.
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.
The information available to date--which is still very incomplete--suggests that new housing construction will decline in the third quarter. This would be the second straight decline, following the 6.1% drop in Q2. We aren't expecting such a large fall in the third quarter, but it is nonetheless curious that housing investment--construction, in other words--is falling at a time when new home sales have risen sharply.
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.
Inflation in Brazil surprised to the upside this week, with a sharp rebound that looks alarming at face value.
The escalation in the U.S.-Chinese trade wars has understandably pushed EZ economic data firmly into the background while we have been resting on the beach.
Retail sales fell sharply in September, highlighting that consumers still are spending only cautiously amid high economic uncertainty and falling real wages.
Recent economic indicators in Brazil have undershot consensus in recent weeks, but the economy nonetheless continues to recover.
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.
The combination of astounding fourth quarter payroll numbers and weak GDP growth has prompted a good deal of bemused head-scratching among investors and the commentariat. The contrast is startling, with Q4 private payrolls averaging 276K, a 2.4% annualized rate of increase, while the initial estimate for growth seems likely close to 1%. Even on a year-over-year basis, stepping back from the quarterly noise, Q4 growth is likely to be only 2% or so.
Economic growth in Brazil is not likely to improve significantly this year. Our pessimism was underscored by the November industrial production data last week, showing a contraction of 0.7%, and pushing output to its lowest level since June.
The Mexican industrial sector is struggling. December industrial output fell 0.4% month-to-month, the third consecutive drop, driven mainly by a similar decline in mining/oil output.
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".
Yesterday's industrial production report in Mexico added weight to the idea that the sector improved marginally in the first quarter, despite many external threats. Industrial output rose 0.1% month-to-month in February, following a similar gain in January. The calendar-adjusted year-over-year rate rose to -0.1%, after a modest 0.3% contraction in January.
August inflation surprised to the downside across most of LatAm, as food price surges proved transitory, and the lagged effect of the FX depreciations last year faded. Brazil appeared to be the exception last month, but the underlying trend in inflation is downwards.
The federal debt ceiling was re-imposed last week, with no fanfare, and no reaction in the markets. All eyes were focussed instead on the Fed's rate hike and Chair Yellen's press conference.
As we write, markets see a 70% chance that the MPC will cut Bank Rate on January 30.
China reportedly has offered President Trump a $200B reduction in its annual trade surplus with the U.S., engineered by increasing imports of American products, among other steps.
Yesterday's final CPI report for April confirmed that the Eurozone is edging towards deflation.
If the only manufacturing survey you track is the Philadelphia Fed report, you could be forgiven for thinking that the sector is booming.
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.
January's public finance data, released today, take on particular importance because they are the last to be published before the Chancellor delivers his first Budget on March 8. The public finances nearly always swing into surplus in January, primarily because the deadline for individuals to submit self-assessment--SA--tax returns for the previous fiscal year is at the end of the month. Firms also pay their third of four payments of corporation tax for their profits in the current fiscal year.
Markets rightly interpreted yesterday's above consensus GDP report as having little impact on the outlook for monetary policy.
We still don't have the complete picture of what happened to the EZ construction sector in Q2, but we have enough evidence to suggest that it rolled over.
Chile's Q2 GDP report, released on Friday, confirmed that the economy gathered momentum in recent months, following an alarmingly weak start to the year.
Chile's Q2 GDP report, released yesterday, confirmed that the economy gathered strength in the first half of the year, consolidating a strong recovery that started in Q3 2017.
Brazil's current account data last week provided further evidence of stabilisation in the economy, despite the modest headline deterioration. The unadjusted current account deficit increased marginally to USD5.1B in January, from USD4.8B in January 2016, but the underlying trend remains stable, at about 1.3% of GDP. Our first two charts show that the overall deficit began to stabilize in mid-2016, as the rate of improvement in the trade balance slowed, reflecting the easing of the domestic recession.
While financial markets remain obsessed with the Brexit saga, January's labour market data provided more evidence yesterday that the economy is coping well with the heightened uncertainty.
The U.K. economy underperformed its peers to an extraordinary degree in Q2.
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.
The political situation in Spain remains an odd example of how complete gridlock can be a source of relative stability.
The underlying health of the construction sector isn't as poor as today's official output figures likely will imply. Nonetheless, growth in construction output, which accounts for 6% of GDP, probably won't return to the stellar rates seen in 2013 and 2014, and the sector can't be relied upon to provide much support to overall growth.
The New York Times called the China trade agreement reached Friday "half a deal", but that's absurdly generous.
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%.
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.
The recession in Brazilian consumers' spending continues, but the severity of the pain is easing. Retail sales plunged 0.9% month-to-month in March, pushing the year-over-rate down to -5.7%, from a revised -4.2% in February. The March headline likely was depressed by the early Easter.
Mexican industrial production is slowly improving, and further good numbers are likely in coming months.
Brazil's retail sales data undershot consensus in August, falling by 0.5% after four straight gains. But we think this merely a temporary softening, following the strong performance in recent months.
We aren't much bothered by the one-tenth overshoot in the June core CPI, reported yesterday.
Upbeat survey data, a competitive MXN, and the strong U.S. manufacturing sector indicate that Mexican industry should be rebounding.
The costs of the government's failure to lock down quickly in response to the Covid-19 pandemic, ultimately necessitating long-lasting restrictions, were visible in May's GDP figures.
The economy will be a shadow of its former self over the remainder of this year, following the heavy pummelling from Covid-19.
Industrial production bounced back in February. These data point to a reprieve for old-guard dirty industry, after stringent anti-pollution curbs were put in place in Q4.
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.
More depressing economic numbers in LatAm have been released in recent days, and high frequency data continue to show a near-term bleak outlook.
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.
Swap markets currently price-in RPI inflation falling to 3.0% this time next year, from 3.2% in November, before recovering to 3.8% at the start of 2020.
The recent surge in equity prices is not a game- changer for the outlook for households' spending. Like last year, slowing growth in real disposable incomes and house prices will have a far greater impact on spending than rising paper wealth.
Last week's hard data in Colombia were upbeat, confirming that economic growth accelerated in the first half. Retail sales rose 5.9% year-over-year in May, overshooting consensus.
It's hard for a central bank presiding over an ageing economy to achieve a core inflation target of close to 2%. In yesterday's Monitor, we showed that German core inflation has averaged a modest 1.3% in this business cycle, despite solid GDP growth. The picture isn't much better for the ECB if we look at France.
Japan's Ministry of Finance yesterday admitted falsifying documents submitted to the country's parliament during a corruption probe last year.
This week's Monetary Policy Committee meetings in Chile, Mexico and Colombia look set to dominate market events in LatAm. On Friday, we expect Mexico's Banxico to keep rates on hold at 3.75%, after its unexpected 50bp increase in mid-February. At that time, the board cited growing concerns about financial markets, Mexico's weakened currency, and the country's fiscal situation, as reasons for its move.
Last week's detailed GDP data in the Eurozone confirmed that the economy is benefiting from an investment cycle for the first time since before the financial crisis.
Our default position for core durable goods orders over the next few months is that they will fall, sharply.
The new Argentinian president, Alberto Fernández, will have to make a quick start on the titanic task of cleaning up the economic and social mess left by his predecessor, Mauricio Macri.
Brazilian inflation has been well under control in the past few months, still laying the ground for rates to remain on hold for the foreseeable future.
Yesterday's labour market data delivered a further blow to hopes that consumers' spending will retain enough momentum for the MPC to press ahead and raise interest rates this year. The most striking development is the decline in year-over-year growth in average weekly wages to just 1.9% in December, from 2.9% in November.
The BoJ is likely to be thankful next week for a relatively benign environment in which to conduct its monetary policy meeting.
The 20bp increase in 10-year yields over the past month doesn't live up to the hype; bondmageddon it was not.
Ahead of the release of the retail sales report for December 2018, markets expected to see unchanged non-auto sales.
The manufacturing sector likely was the primary driver of Q3 GDP growth in the Eurozone. Data yesterday showed that industrial production rose 1.4% month-to-month in August, pushing the year-over-year rate up to 3.8%, from a revised 3.6% in July.
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.
Today brings a huge wave of data, but most market attention will be on the June CPI, following the run of unexpectedly soft core readings over the past three months.
Inflation in Brazil ended 2018 under control, despite slightly overshooting expectations.
German inflation data are more noise than signal at the moment.
The year-over-year collapse of industrial production in India eased substantially in May, to -35%, from -58% in April, close to our -32% forecast.
Today's employment report in the euro area should extend the run of positive labour market data. We think employment rose 1.4% year-over-year in Q1, accelerating marginally from a 1.2% increase in Q4.
With just days to go until the Government triggers Article 50, the consensus view remains that Britain is heading for a "hard" Brexit, which will leave it without unrestricted access to the single market and outside the customs union. We think this view overlooks how political pressures likely will change over the next two years.
Last week's evidence of still-strong wage growth in the EZ at the start of the year almost surely has gone unnoticed as markets focus on the prospect of rate cuts, not to mention more QE, by the ECB.
Inflation in Brazil Ended 2019 Above the BCB's Target; 2020 will be Fine
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.
We argued earlier this week that the data on the consumer economy are likely to be rather stronger than the industrial numbers.
July's fifth straight undershoot to consensus in the core CPI was very different the previous four. Only one component--lodging away from home--prevented the first 0.2% month-to-month print since February.
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.
It was no surprise that Banxico cut its policy rate by 25bp to 7.00% yesterday, following similar moves in August, September, November and December.
The 0.242% increase in the January core CPI left the year-over-year rate at 2.3% for the third straight month.
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.
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.
Another month, another strong set of labour market data which undermine the case for the MPC to cut Bank Rate, provided a no-deal Brexit is avoided.
Volatility and risk will remain high in L atAm for the foreseeable future. President-elect Donald Trump's uncertain foreign policies could have a considerable impact on LatAm economies in the months and years ahead.
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.
Today's figures likely will bring the first real signs that the Brexit vote has had an adverse impact on the labour market. The employment balances of the key private-sector surveys weakened sharply in July, and recovered only partially in August. In addition, the three-month average level of job vacancies fell by 7K between April and July.
Chile's central bank left rates unchanged on Tuesday for the fourth consecutive month, as recent data confirmed the sluggish pace of the economic recovery and inflation edges down closer to the target range. In the statement accompanying the decision, the BCCh kept its tightening bias, saying that the normalisation of monetary policy needs to continue at a data-dependent pace, in order to achieve its 3% target.
China's trade surplus jumped to a six-month high of $46.8B in December, from $37.6B in November, on the back of a strong increase in exports.
The Eurozone economy was resilient at the end of last year, but yesterday's reports indicated that growth was less buoyant than markets expected. Real GDP in the euro area rose 0.4% quarter-on-quarter in Q4, the same pace as in Q3, but slightly less than the initial estimate 0.5%.
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.
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%.
Korea's jobs report for August was a stonker, with unemployment plunging to 3.1%, from 4.0% in July, marking the lowest rate in more than five years.
Data released last week in Brazil reinforced our view of a modest, final, interest rate cut this week, despite the recent strength of the USD and volatility in global markets.
Chile and Peru faced similar growth trends in 2018, namely, a solid first half, followed by a poor second half, particularly Q3.
Markets are caught in a trade loop.
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.
Yesterday's data provided further evidence of the damage wrought on the EZ at the end of Q1.
Evidence that U.K. asset prices still are depressed by Brexit risk has become harder to find.
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".
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.
Today's labour market report looks set to be a mixed bag, with growth in employment remaining strong, but further signs that momentum in average weekly wages has faded.
Brazil's December economic activity index, released last week, showed that the economy ended the year on a relatively weak footing. The IBC-Br index, a monthly proxy for GDP, fell 0.3% month- to-month, pushing down the adjusted year-over- year rate to 0.3%, from a downwardly-revised 0.7% increase in November.
Today brings a raft of January data on both economic activity and prices, but we expect the headline numbers in each report to be distorted by the impact of severe weather or the plunge in oil prices.
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.
May's activity data underline the weakness of Colombia's economic growth. Domestic demand still is under pressure due to the lagged effect of the deterioration in the terms of trade and other temporary shocks in 2016, and the VAT increase in January this year.
The question of what's really happening to the pace of layoffs is still unanswered, despite the apparent upturn over the past couple of months. The weekly jobless claims numbers are only just emerging from the fog of the usual holiday season chaos. The pattern of pre-holiday hiring and post-holiday layoffs is broadly the same each year, but Christmas and New Year's Day fall on a different day each year, making seasonal adjustment difficult.
Banxico will meet tomorrow, and we expect Mexican policymakers to cut the main interest rate by 25bp, to 7.25%.
Mortgage applications appear to have recovered from their reported February drop, which was due mostly to a very long-standing seasonal adjustment problem
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.
The latest survey evidence strongly supports our view that momentum is building in the industrial economy, but the official production data continue to lag. Yesterday's March Philly Fed survey was remarkably strong, with the correction in the headline sentiment index -- inevitable, after February's 33-year high -- masking increases in all the subindexes.
The jump in CPI inflation to 2.7% in April, from 2.3% in March, was only partly to a temporary boost from the later timing of Easter this year. Indeed, inflation likely will rise further over the coming months as food, energy and core goods prices all continue to pick up in response to last year's depreciation of sterling.
Swap rates imply that markets expect RPI inflation to settle within a 3.3% to 3.5% range over the next five years, once the boost from sterling's depreciation has faded.
The February activity report in Colombia showed a modest pick-up in manufacturing activity and strength in the retail sales numbers.
Evidence of slowing growth in Brazil consumers' spending continues to mount.
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.
With plenty of evidence emerging that consumer spending and business investment are set to suffer from a collapse in confidence, attention is turning to whether other sectors of the economy are ready to step up and support growth. But the fruits from reduced fiscal contraction and stronger net trade will be small and will take a long time to emerge.
Last week, the Chinese authorities were out in force, talking up the economy and markets, and bearing measures to support private firms.
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.
To the extent that markets bother with the NFIB survey at all, most of the attention falls on the labor market numbers. But these data--hiring, compensation, jobs hard-to-fill--haven't changed much in recent months, and in any event most of them are released the week before the main survey, which appeared yesterday. The message from the labor data is unambiguous: Hiring remains very strong, employers are finding it very difficult to fill open positions, and compensation costs are accelerating.
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.
This year has proved to be challenging for retailers in Mexico. The combination of fiscal reform, the economic slowdown over the first half of the year, and the collapse of consumer sentiment took a significant toll in the sector.
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.
A big picture approach to the China trade war, from the perspective of Mr. Trump, is reasonably positive. The president very clearly wants to be re-elected, and he knows that his chances are better if the economy and the stock market are in good shape.
September's GDP report laid bare the economy's sluggishness.
PM Johnson has conceded considerable ground over the terms of Brexit for Northern Ireland in order to get a deal over the line in time for MPs to vote on it on Saturday, before the Benn Act requires him to seek an extension.
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.
Inflation pressures in LatAm are moderating, and governments have been taking steps to pursue fiscal consolidation. These factors, coupled with a relatively favourable external environment, are providing policymakers with the opportunity to start relaxing monetary policy.
We expect today's consumer price figures to show that CPI inflation jumped to 0.9% in September, from 0.6% in August.
Investors in the euro area have mostly been focused on downside risks this year, and the spectre of Turkey spinning out of control has done little to change that.
Policymakers in Chile left rates unchanged at their monetary policy meeting last week, maintaining their neutral bias.
China's GDP report for the fourth quarter, due on Friday, is likely to show that economic growth has stabilised, on the surface.
We lack an adjective sufficiently strong to describe China's February activity data.
LatAm governments and policymakers are bracing for a more dramatic and longer virus-led downturn than initially expected.
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.
Incoming activity data from Colombia over the past quarter have been surprisingly strong, despite many domestic and external threats.
April's labour market data show that slack in the job market is no longer declining, while wage growth still isn't recovering. As a result, we no longer think that the MPC will raise Bank Rate in August and now expect the Committee to stand pat until the first half of 2019.
We had expected the batch of Chinese data released at the end of last week to disappoint.
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.
Over the past 30 years China's role in LatAm and the global economy has increased sharply. Its share of world trade has surged, and its exports have gained significant market share in LatAm.
Leading indicators and survey data in Brazil still suggest a rebound from the relatively soft GDP growth late last year and in Q1.
The effects of Covid-19--both negative and positive--on Korea's labour market certainly were felt in February.
Official industrial production growth in China plunged to 5.4% year-over-year in April, from 8.5% in March.
It's now four weeks since the Prime Minister called a snap general election, and the Conservatives still are riding high in the opinion polls. The average of the last 10 polls suggests that the Tories are on track to take 47% of the vote, well above Labour's 30%.
Tariffs are a tax on imported goods, and higher taxes depress growth, other things equal.
Last week's policy announcement by the ECB and Mr. Draghi's plea to EU politicians to deliver a fiscal boost, indicate that we're living in extraordinary economic times.
LatAm currencies fell sharply in Q1 but the hit hasn't yet pushed inflation higher.
We have been quite bullish on U.S. economic growth this year.
Friday's economic data in the Eurozone provided further evidence of a sharp rebound in manufacturing output as the economy reopened. Industrial production in France jumped by 19.6% month-to-month in May, lifting the year-over-year rate to -23.4% from -35.0% in April.
Before this week's earthquake, the resilience of Mexico's economy in the face of a volatile and challenging global backdrop owed much to the strength of domestic demand, especially private consumption.
Brazil's central bank started the year firing on all cylinders. The Copom surprised markets on Wednesday by delivering a bold 75bp rate cut, bringing the Selic rate down to 13.0%. In October and November, the Copom eased by only 25bp, but inflation is now falling rapidly and consistently. The central bank said in its post-meeting communiqué that conditions have helped establish a "new rhythm of easing", assuming inflation expectations hold steady.
The Eurozone's sovereign bond markets are dying, and this is a good thing, by and large.
China's activity data for May were a mixed bag, but they broadly paint a consistent picture of a slowdown in economic growth from the first quarter.
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.
Incoming data continue to highlight the severe hit from the pandemic on the real economies of the region, but some surveys and leading indicators are already pointing to a gradual upturn from June onwards.
The MPC will have to issue fresh, dovish guidance in order to satisfy markets on Thursday, which now think the Committee is more likely to cut than raise Bank Rate within the next six months.
Labour costs are rising so quickly that the MPC cannot justify an "insurance" cut in Bank Rate to counteract the impending damage from Brexit uncertainty in the run-up to the October deadline.
The euro area economy continues to defy rising political uncertainty. Data yesterday showed that industrial production, ex-construction, in the Eurozone jumped 1.5% month-to-month in November, pushing the year-over-year rate up to 3.2% from a revised 0.8% in October. Output rose in all the major economies, but the headline was flattered by a 16.3% month-to-month leap in Ireland. This was due to a production jump in Ireland's "modern sector" which includes the country's large multinational technology sector.
The trend in manufacturing output probably is about flat, with no real prospect of any serious improvement in the near term.
Core inflation probably will remain close to June's 2.3% rate for the next few months.
Chair Yellen broke no new ground in her Testimony yesterday, repeating her long-standing view that the tightening labor market requires the Fed to continue normalizing policy at a gradual pace.
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.
Yesterday's data showed that industrial production in the Eurozone accelerated at the end of spring. Output, ex-construction, jumped 1.3% month-to-month in May, much better than the downwardly-revised 0.3% rise in April; the rise pushed the year-over-year rate up to a six-year high of 4.0%.
After four straight sub-consensus core CPI readings, we think the odds now favor reversion to the prior trend, 0.2%, over the next few months.
Sebastián Piñera returns to the Presidential Palacio de la Moneda, succeeding Michelle Bachelet as president of Chile, as in 2010.
Inflation in the biggest economies in the region remains close to cyclical lows, allowing central banks to ease even further over the next few months.
Inflation in the Eurozone tumbled last month, increasing the pressure on Mr. Draghi to deliver another dovish message when the central bank meets on Thursday.
We have argued consistently for some time that the next year will bring a clear acceleration in U.S. wage growth, because the unemployment rate has fallen below the Nairu and a host of business survey indicators point to clear upward wage pressures. Nominal wage growth has been constrained, in our view, by the unexpected decline in core inflation from 2012 through early 2015, which boosted real wage growth and, hence, eased the pressure from employees for bigger nominal raises.
Just how low would sterling go in the event of a no-deal Brexit? When Reuters last surveyed economists at the start of June, the consensus was that sterling would settle between $1.15 and $1.20 and fall to parity against the euro within one month after an acrimonious separation on October 31.
Services will bear the brunt of the Covid-19 shock in the euro area, but manufacturing is not far behind.
The surge in the broad money supply in March, as the U.K.'s lockdown began, suggests that businesses are in relatively good shape to survive a multi-month period of greatly depressed demand.
The headline 250K October payroll number looked great.
Economic conditions are deteriorating rapidly in Chile, despite the relatively decent Imacec reading for Q3.
The Caixin services PMI ticked down to 53.6 in January, from 53.9 in December.
The majority of headlines from last week's advance Q4 GDP data in the Eurozone--see here--were negative.
Data released this week in Brazil underscored that the Covid-related shock on the industrial sector is finally easing, as the economy gradually reopens.
We remain optimistic on the scope for sterling to appreciate this year, reflecting our views that a deal for a soft Brexit will be reached soon and that the MPC will resume its tightening cycle later this year.
The economy will endure a sluggish recovery from Covid-19 this year, even if a second wave of the virus is avoided, partly because monetary stimulus is not filtering through powerfully to households.
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.
Brazil's December industrial production report, released yesterday, confirmed that the recovery was stuttering at the end of last year.
Brazil's key data flow started Q4 on a soft note, but we still believe that the economic recovery will gather strength over the next three-to-six months.
News last week increased our conviction that the economy will struggle over the coming months, but then will have a spring in its step next year.
The latest PMIs have added to the weight of evidence that the economic recovery has lost momentum this year. The prevailing view in markets, however, that the Monetary Policy Committee is more likely to cut--rather than raise--interest rates this year continues to look misplaced because inflation pressure is building.
Chancellor Sunak faces a tough first gig on Wednesday, when he delivers the long-awaited Budget.
Demand in German manufacturing rebounded strongly midway through the second quarter.
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.
Friday's CPI data in the euro area confirmed our expectation that inflation jumped last month.
Today's April ADP employment report likely will understate the scale of the net payroll losses which will be reported Friday by the BLS.
It would be astonishing if the May and June payroll numbers looked much like April's strong data, at least in the private sector.
The economic calendar in Mexico was relatively quiet over Christmas, and broadly conformed to our expectations of poor economic activity in Q4.
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.
Brazil's industrial sector is on the mend, but some of the key sub-sectors are struggling.
A range of indicators show that the pace of the economic recovery shifted up a gear in July, when all shops were open for the entire month, and most consumer services providers finally were permitted to reopen.
Yesterday's detailed Q3 growth data in the Eurozone offered no surprises in terms of the headline.
For sterling traders, no election news is good news.
China's Caixin services PMI picked up further in November to 51.9 from October's 51.2, but the rebound is merely a correction to the overshoot in September, when the headline dropped sharply.
Brazilian data strengthened early in Q4, supporting the case for the COPOM to slow the pace of rate cuts. We expect the SELIC policy rate to be lowered by 50bp today, to 7.0%.
The Monetary Policy Committee of the Reserve Bank of India lowered the benchmark repurchase rate by another 25 basis points yesterday, to 6.00%, as widely expected.
We have been telling an upbeat story about the EZ economy in recent Monitors, emphasizing solid services and consumers' spending data.
All the main surveys of business activity in Q1 now have been released and they present a uniformly downbeat picture.
We are struggling to make sense of the third quarter GDP numbers. The reality is that the massive surge in soybean exports--which we estimate contributed 0.9 percentage points, gross, to GDP growth--mostly came from falling inventory, because the soybean harvest mostly takes place in Q4.
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.
Data released in recent days confirmed the intensity of the Covid-related shock to the Chilean economy in Q2.
The continued gradual rise in new confirmed cases of Covid-19 lends more weight to the idea that the economy already has reopened as much as possible while containing the virus.
Data released yesterday confirm that Brazil's recovery has continued over the second half of the year, supported by steady capex growth and rebounding household consumption.
The final July PMIs indicate that the post-referendum slump in activity has been even worse than the flash estimates originally implied. The manufacturing PMI was revised down to 48.2, from the 49.1 flash reading, while the services PMI was unrevised at 47.4, its lowest level since March 2009.
Yesterday's BoJ statement, outlook and press conference raised our conviction on two key aspects of the policy outlook.
Chair Yellen's final FOMC meeting today will be something of a non-event in economic terms.
The Fed made no changes to policy yesterday, as was almost universally expected.
Yesterday's FOMC , announcing a unanimous vote for no change in the funds rate, is almost identical to December's.
Data released last week confirm that Argentina's economy remains a mess.
This Budget will be remembered as the moment when the Government finally threw in the towel on plans to run sustainable public finances.
Yesterday's advance Eurozone Q4 GDP report conformed to expectations. Headline GDP increased 0.6% quarter-on-quarter, slowing trivially from an upwardly-revised 0.7% rise in Q3, and nudging the year-over-year rate down marginally to 2.7%.
It's a myth that the 10-ye ar decline in the unemployment rate has not driven up the pace of wage growth.
Colombia's central bank has found a relatively sweet spot.
The near-term performance for EZ manufacturing will be a tug-of-war between positive technical factors, and a still-poor fundamental outlook.
We've argued for some time that China faces a massive legacy of bad debt that will either have to be dealt with, or will result in the Japanning of its economy.
This week's March economic activity reports in Chile have been relatively strong, with the industrial sector expanding briskly and retail sales solid.
Thursday and Friday were busy days for LatAm economy watchers. In Brazil, the data underscored our view that the economy is on the mend, but the recent upturn remains shaky, and external risks are still high.
The Brazilian economy has been recovering at a decent pace in recent months. The labor market is on the mend, with the unemploymen t rate falling rapidly to 12.5% in August from 14% at the end of Q1.
Eurozone manufacturing boosted GDP growth in the first half of the year, and survey data suggest that momentum will be maintained in Q3.
Sterling's depreciation has done little to remedy the U.K.'s dependence on external finance.
Today's local elections are more important than usual, because they will enable investors to assess if the Conservatives really are on track for a landslide victory in the general election, as suggested by the opinion polls and priced-in by the forex market.
January's money supply figures continued the nerve-jangling flow of data on the economy's momentum.
A cluster of surveys suggest that the manufacturing sector finished 2016 with a flourish, after a dismal performance for most of the year. But momentum will drain away from the sector's recovery in 2017, as higher oil prices make low value-added work unprofitable again and resurgent inflation causes domestic consumer demand to crumble.
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%
Consumption remains an important source of economic growth in LatAm.
The most positive thing to say about the EZ manufacturing PMI at the moment is that it has stopped falling.
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%.
The downbeat tone of Markit's May manufacturing survey shouldn't come as a surprise, given the weak global backdrop and the inevitable fading of the boost to output from Brexit preparations.
Many analysts were alarmed earlier this week by news from across the pond that the U.S. treasury is planning to break the bank in the fight against Covid-19.
Emerging evidence suggests that the economy has passed the period of peak Covid-19 pain.
Investors with long sterling positions should not pin their hopes on Friday's GDP report to reverse some of the losses endured over the last week.
The recovery in small business sentiment since the fourth quarter rollover has been extremely modest, so far.
Economic data have yielded the limelight in recent months to Brexit news and, alas, we doubt that February's GDP data, released on Wednesday, will reclaim investors' attention.
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.
Data released on Friday showed that November inflation was in line with, or below, expectations in Brazil, Colombia and Chile.
It's always easy to find reasons to doubt single monthly observations of any economic time series, but our first chart makes it very clear that the labor market has strengthened markedly over the past few months. The underlying trend rate of growth in private payrolls is now above 300K for the first time in exactly 20 years, and we seen no reason to expect much change over the next few months.
The release of October's GDP report on Tuesday likely will be overshadowed by campaigning ahead of Thursday's general election.
Brazil's recent data show that inflation is still falling, allowing the central bank to ease further next month, while economic activity is improving, though the rate of growth has slowed.
Brazil's improving economic and political situation allowed the BCB to cut the Selic rate by 100bp to 8.25% at its Wednesday meeting, matching expectations.
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.
Economic growth in Chile slowed in Q1, despite a relatively strong end to the quarter, and the chances of an accelerating recovery remains disappointingly low, due to both global and domestic headwinds.
Headline inflation in Brazil remained low in October, and even breached the lower bound of the BCB's target range.
The recent slowdown in labour cash earnings growth in Japan halted in September.
Yesterday's manufacturing data in Germany were poor, but not as weak as implied by the headline.
It would be a mistake to conclude much about the economic impact of the Brexit vote from today's official industrial production figures for September, and the British Retail Consortium's figures for retail sales in October.
Figures due on Friday likely will show that the increase in industrial production in December was much smaller than the 0.6% month-to-month assumed by the ONS in its preliminar y Q4 GDP estimate. We expect a 0.2% rise, which would leave production down 0.1% quarter-on-quarter, rather than up 0.1% as the ONS initially estimated.
The Brazilian central bank cut the benchmark Selic interest rate by 25bp, to 6.75%, on Wednesday night, as expected.
China's official, unadjusted trade data for October grabbed the headlines, as they look great at first glance.
News on Mr. Bolsonaro's economic plans and announcements on key names for his government this week are helping the currency and easing risks perception in Brazil.
Chile's inflation outlook remains benign, allowing policymakers to cut interest rates if the economic recovery falters.
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.
China's export data for April were a mixed bag, to say the least.
Inflation in most economies in LatAm is well under control, allowing central banks to keep a dovish bias, and giving them room for further rate cuts.
China's trade data looked more normal in April. The trade balance rebounded to a surplus of $28.8B in April, from a deficit of $5.0B in March. Exports also bounced back, rising 12.9% year-over-year in April, after a 2.7% decline in March.
We'd be quite surprised if the headline payroll number today turned out to be far from the consensus, 205K, or our forecast, 225K.
The Banxico minutes from the June 20 meeting, released last Thursday, offered more detail about the outlook for policy in the near term.
Friday's industrial production data in Germany added to the manufacturing optimism following the sharp rise in new orders--see here--reported earlier in the week.
April's GDP report probably will be the worst any of us will see in our lifetime.
The coronavirus outbreak has pushed inflation lower in the Andean economies as the shock drives them into the deepest recession on record.
The industrial sector went from strength to strength in 2017. Year-over-year growth in production picked up to 2.1%--its highest rate since 2010--from 1.3% in 2016.
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.
China's current account dropped sharply in Q1, to a deficit of $28.2B, from a surplus of $62.3B in Q4.
April's production data, released today, look set to indicate that the industrial sector's recession--its third in the last eight years--deepened in the second quarter. We think the consensus expectation that industrial production held steady in April is too upbeat. We look for a 0.3% month-to-month drop.
China's unadjusted current account was effectively in balance in Q2, after the deficit in Q1.
Demand in German manufacturing rebounded powerfully at the end of the second quarter, accelerating from an initially modest rebound when lockdowns were lifted.
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.
October's GDP report, released on Monday, might just manage to break through the wall of noise coming from parliament ahead of the key Brexit vote on Tuesday.
The Brazilian central bank cut the benchmark Selic interest rate by 25bp, to 4.25%, on Wednesday night, as expected.
Yesterday's detailed EZ GDP report showed that real output rose 0.3% quarter-on-quarter in Q3, the same pace as in Q2. The year-over-over rate rose marginally to 1.7% from 1.6%, trivially higher than the first estimate, 1.6%. The details showed that consumers' spending and public consumption were the key drivers of growth in Q3, offsetting a slowdown in net trade.
The Brazilian Central Bank's policy board-- COPOM--met expectations on Wednesday, voting unanimously to cut the Selic rate by 25bp to 2.00%.
Sentiment has been improving gradually in Mexico in recent weeks, reversing some of the severe deterioration immediately after the U.S. presidential election. Year-to-date, the MXN has risen 10.3% against the USD and the stock market is up by almost 8%. We think that less protectionist U.S. trade policy rhetoric than expected immediately after the election explains the turnaround.
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%.
Yesterday's minutes of the October 31 COPOM meeting, at which the Central Bank cut the Selic rate unanimously by 50bp at 5.00%, reaffirmed the committee's post-meeting communiqué, which signalled that rates will be cut by the "same magnitude" in December.
The MPC's penchant for providing interest rate guidance reached new heights last week.
The EZ retail sector slowed at the start of Q3, though only slightly.
Manufacturing orders in Germany recovered some ground in the middle of Q1, following the plunge at the beginning of the year. Factory orders rose 3.4% in February, pushing the year-over-year rate up to +4.6% from a revised 0.0% in January.
A trio of data releases yesterday provided no relief from the run of abysmal economic news.
The rally in U.K. equities immediately after the general election has done little to reverse the prolonged period of underperformance relative to overseas markets since the E.U. referendum in June 2016.
German manufacturing is in good shape, but probably is not as strong as implied by yesterday's surge in new orders. Factory orders jumped 5.2% month-to-month in December, rebounding strongly after a downwardly revised 3.6% fall in November. December's jump was the biggest monthly increase in two years, but it was flattered by a leap in bulk investment goods orders, mainly in the domestic market and other EZ economies.
The Brazilian central bank cut its benchmark Selic interest rate by 50bp, to 7.0%, on Thursday night and confirmed our view that the end of the easing cycle is not far off.
If you had asked us in the spring where the action would be in capital spending over the summer, we would have said that the housing component was the best bet. Right now, though, the opposite seems more likely, with housing likely to be the weakest component of capex.
Industrial production in Germany stumbled at the end of Q4. Data yesterday showed that output fell 0.6 month-to-month in December, though this drop has to be seen in light of the downwardly-revised 3.1% jump in November.
Colombia was the fastest growing LatAm economy in 2019, due mostly to strong domestic demand, offsetting a sharp fall in key exports.
Economic conditions remain challenging in Mexico, despite a modest improvement in leading indicators. The usual surveys currently are not well-suited to capture the economy's upturn from the Covid-19 collapse.
Yesterday's manufacturing data in Germany followed the lead from Monday's relatively underwhelming new orders report; see here.
The flow of data pointing to strength in the labor market has continued this week, on the heels of last week's report of a 250K jump in October payrolls.
The economic data calendar for next week is so congested that we need to preview early September's GDP report, released on Monday.
Evidence that mounting concerns about Brexit have caused the economy to slow to a near-halt continued to accumulate last week.
Chile's near-term economic outlook is still negative, but clouds have been gradually dispersing since late Q4, due mostly to better news on the global trade front, China's improving economic prospects, and rising copper prices.
India's services PMI for June underscores the half-hearted nature of Unlock 1.0, with the daily number of new cases of Covid-19 still rocketing.
Recent economic indicators in Mexico have been terrible. The worst of the recession seems to be over, but recent hard data have underscored the severity of the shock and made it clear that the recovery has a long way to go.
Yesterday's economic reports in the Eurozone were mostly positive.
April's GDP report, released on Monday, likely will add fuel to the fire of the re cent sharp decline in interest rate expectations.
Yesterday's economic news in the French economy was solid.
Markets remain convinced that the U.S. faces no meaningful inflation risk for the foreseeable future.
Yesterday's economic data in Germany confirmed that the economy slowed in Q3, but also added to the evidence that growth will rebound in Q4. The second estimate for Q3 showed that real GDP rose 0.2% quarter-on-quarter, slowing from a 0.4% gain in Q2.
The 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.
A cursory glance at July's labour market report gives no cause for alarm. The headline, three-month average, unemployment rate returned to 3.8% in July, after edging up to 3.9% in June.
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%.
Inflation in Brazil and Mexico is ending Q3 under control, allowing the central banks to keep easing monetary policy.
Fed Chair Yellen set out a robust and detailed defense of the orthodox approach to monetary policy in her speech in Amherst, MA, yesterday afternoon. Her core argument could have come straight from the textbook: As the labor market tightens, cost pressures will build. Monetary policy operates with a "substantial" lag, so waiting too long is dangerous; the "...prudent strategy is to begin tightening in a timely fashion and at a gradual pace".
The latest public finance figures make it virtually inevitable that the Chancellor will scrap the existing fiscal rules when he delivers his first Budget.
April's public finances show that borrowing still is falling more slowly than the Chancellor had envisaged. This casts further doubt over whether he will be able to keep his pledge to run a budget surplus before the end of this parliament in 2020.
In a relatively light week in terms of economic indicators in Brazil, the inflation numbers and the potential effect of the recent BRL sell-off garnered all the attention.
Last week's data added yet more weight to our view that manufacturing is in deep trouble, and that the bottom has not yet been reached.
Brazil's inflation rate remained well under control over the first half of February.
MPs look set to take a decisive step next Tuesday towards removing the risk of a calamitous no-deal Brexit at the end of March.
The latest data from container ports around the country are consistent with our view that imports are still correcting after the surge late last year, triggered by the hurricanes.
The IFO continues to tell a story of a German economy on the ropes.
We are fundamentally quite bullish on the housing market, given the 100bp drop in mortgage rates over the past six months and the continued strength of the labor market, but today's May new home sales report likely will be unexciting.
Rising inflation is pressuring some LatAm central banks to take a cautious stance at a time when growth is subpar, particularly in the two biggest economies of the region.
The economy's resilience in the first quarter of this year, in the midst of heightened Brexit uncertainty, can be attributed partly to a boost from no-deal Brexit precautionary stockpiling.
I need to ask your indulgence today, because the release of the durable goods and advance international trade reports coincides with my elder daughter's college graduation ceremony.
Politics in Brazil has been busy in recent days, with local media reporting several items of interest.
The INSEE's manufacturing sentiment data in France are slightly confusing at the moment.
Mexican policymakers yesterday voted unanimously to cut the policy rate by 50bp to 5.00%, the lowest level since late 2016.
This morning's second estimate of Q1 GDP likely will restate the preliminary estimate of a 0.4% quarter-on-quarter rise, confirming that the economic recovery has lost momentum since last year. Meanwhile, the new expenditure breakdown is set to show that growth remained extremely dependent on households and will bring more evidence that businesses held back from investing, ostensibly due to Brexit concerns.
A decade of public deficit reduction was fully reversed in April, as the coronavirus tore through the economy.
This was supposed to be the year that wage growth finally would pick up and signal clearly to the MPC that the economy needs higher interest rates.
Data released last week confirm that the Argentinian economy was resilient at the start of the year, but downside risks to growth have increased.
Hard economic data for the first quarter will appear over the next few weeks, but the EC sentiment survey later today gives a useful overview of how the euro area economy started the year.
The German economy finished last year on the back foot.
The first exit poll published at 18.00 CET on Sunday evening points to a landslide victory for Syriza, and the real possibility that the party could form a majority government. Counter-intuitively, the prospects for Syriza here depend upon how the smaller parties do.
need to add docMea culpa: We failed to spot the press release from the Commerce Department announcing the delay of the release of the advance December trade and inventory data, due to the government shutdown.
We're nudging down our estimate of Q2 GDP growth, due today, by 0.3 percentage points to 1.8%, in the wake of yesterday's array of data.
In our view, the chances of a no-deal Brexit on October 31 have not surged just because Boris Johnson has become Prime Minister and is gesticulating wildly at the Despatch Box.
The run of better-than-expected public borrowing figures ended abruptly with the publication of March data yesterday.
The preliminary estimate of first quarter GDP likely will confirm that the economic recovery lost considerable pace in early 2016. Bedlam in financial markets in January and business fears over the E.U. referendum are partly responsible for the slowdown. The deceleration, however, also reflects tighter fiscal policy, uncompetitive exports, and the economy running into supply-side constraints.
Yesterday's advance consumer sentiment index in the Eurozone confirmed the upside risks for consumers' spending in Q4. The headline index rose to a 17- year high of +0.1 in November, from -1.0 in October.
The EZ national accounts were updated and rebased in 2015--from ESA 1995 to ESA 2010--in the name of timeliness and precision.
While we were out, Brazil's data were relatively positive, showing that inflation is still falling quickly and economic activity is stabilizing. The country has made a rapid and convincing escape from high inflation over the past year.
Sterling jumped last week to its highest level against the dollar since last October in response to news that a general election will be held on June 8. Markets are betting that the Conservative Government will sharply increase its majority, enabling Theresa May to ignore Eurosceptic backbenchers when she strikes a deal with the EU.
The second estimate of Q4 GDP, published on Thursday, probably will show that the economy slowed more abruptly last year than previously thought and that it has become very dependent on consumers for momentum.
One way or another, the preliminary estimate of Q1 GDP--due Friday--will have a big market impact, following Mark Carney's warning last week that a May rate hike is not a done deal.
The COPOM meeting was the centre of attention in Brazil this week. The committee cut the main rate by 25 basis points to a new historical low of 6.50%, in line with market expectations.
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.
Inflation pressures in Brazil and Mexico are well under control, with the August mid-month readings falling more than expected, strengthening the case for the BCB and Banxico to cut interest rates in the near term.
Inflation in Brazil remained subdued at the start of the second quarter, strengthening the odds for an additional interest rate cut next month, and opening the door for further stimulus in June.
The Eurogroup finally agreed on a four-month financing extension for Greece late Friday evening, conditional on Syriza presenting a satisfactory list of reforms later today. At the press conference, Eurogroup President Dijsselboem emphasized that commitments always come before money.
The Conference Board's index of leading economic indicators appears to signal that the U.S. economy is plunging headlong into recession.
Chancellor Sunak looks set to announce more fiscal stimulus next month to reinforce the economic recovery, despite recent record levels of public borrowing.
Barring a meteor strike, the ECB will leave its main refinancing and deposit rates unchanged today, at 0.00% and -0.5% respectively.
Brazil's central bank conformed to expectations on Wednesday, cutting the Selic rate by 75 basis points to 12.25%, without bias. Overall, the BCB recognises that the economic signals have been mixed in recent weeks, but the Copom echoed our view that the data are pointing to a gradual stabilisation and, ultimately, a recovery in GDP growth later this year.
The public finances are in better health than appeared to be the case a few months ago.
The chances of our Brexit base case--a soft departure just before the current October 31 deadline--playing out have declined sharply over the last two weeks.
Brazil has made a convincing escape from high inflation in the past few months, laying the groundwork for a gradual economic recovery and faster cuts in interest rates. Mid-March CPI data, released this week, confirmed that inflation pressures eased substantially this month.
We believe China is going through a paradigm shift in its economic policy, away from GDPism-- the obsession with GDP growth targeting--to environmentalism, setting widespread environmental targets on everything, from air to water to waste.
Consumer confidence in the Eurozone rose marginally at the start of Q4, though it is still down since the start of the year.
Broad-based inflation pressures in Brazil remain tame despite the sharp BRL depreciation this year, totalling about 7% in the last three months alone.
The U.S. household sector carries substantial gross debts, even after the sustained deleveraging since the crash of 2008. The gross debt-to-income ratio stood at 105.3% in the second quarter of this year, down from the 135% peak in late 2007 but still well above the 88% average recorded in the 1990s, which was not a decade of restraint on the part of consumers.
British politics remains a complete mess, with many outcomes, ranging from no-deal Brexit to revoking Article 50, possible in the second half of this year.
The apparent softness of business capex is worrying the Fed.
Brazilian inflation rate remained well under control at the start of this year, and we think the news will continue to be favorable for most of this year.
Brazilian inflation is off to a bad start this year, but January's jump is not the start of an uptrend, and we think good news is coming.
The 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.
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.
Data released yesterday in Brazil helped to lay the ground for interest rate cuts over the coming months.
Sterling depreciated further last week as the Prime Minister's Brexit plans were tweaked by Brexiteers and given a lukewarm reception by the European Commission.
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 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.
Our analysis of the Q3 activity and GDP data in yesterday's Monitor strongly suggests that China's authorities will soon ready further stimulus.
Data released this week have confirmed that the Mexican economy is struggling and that the near-term outlook remains extremely challenging.
The newly-revised data on capital goods orders, released on Friday, support our view that sustained strength in business capex remains a good bet for this year.
Monetary policy usually is the first line of defence whenever a recession hits.
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.
We want to revisit remarks from Fed Vice-Chair Clarida last week.
We have to hand it to Italy's politicians. In an economy with a current account surplus of 3% of GDP, a nearly balanced net foreign asset position and with the majority of government debt held by domestic investors, the leading parties have managed to prompt markets to flatten the yield curve via a jump in shortterm interest rates.
Investors active in the government bond market will be awaiting today, at 07:30 BST, the publication by the Debt Management Office of its updated Financing Remit for the upcoming three months. The new Remit will show that gilt sales, net of redemptions, will be lower in Q3 than in Q2.
Brazil's macroeconomic scenario is becoming easier to navigate for the central bank. Both actual inflation and expectations are slowing rapidly, as shown in our first chart. And since the March BCB monetary policy meeting, the BRL has appreciated about 10% against the USD, while commodity prices and EM sentiment have also improved markedly.
Inflation in Brazil remained subdued at the start of the second quarter, strengthening the odds for an additional interest rate cut next month, and opening the door for further stimulus in June.
Net foreign trade was a drag on GDP growth in the second quarter, subtracting 0.7 percentage points from the headline number.
The Fed will do nothing to the funds rate or its balance sheet expansion program today.
Brazil's external accounts remain relatively solid, making it easier for the country to withstand any potential external or domestic threat.
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.
Brazil's February industrial production numbers, labour market data, and sentiment indicators are gradually providing clarity on the underlying pace of activity growth, pointing to some red flags.
Yesterday's final manufacturing PMIs confirmed that the headline index in the euro area rebounded further last month.
U.K. manufacturers are benefiting from rapid growth in the Eurozone, but increasingly they are being held back by weak domestic demand.
The CPIH--the controversial, modified version of the existing CPI that includes a measure of owner occupied housing, or OOH, costs--will become the headline measure of consumer price inflation when February's data are published on March 21.
Producer price inflation in the euro area almost surely peaked over the summer.
We are all for ambitious economic targets, but the ECB's pledge to drive EZ core inflation in the Eurozone up to "below, but close to" 2% is particularly fanciful.
News that the U.K.'s departure from the E.U. has been delayed by six months, unless MPs ratify the existing deal sooner, appears to have done little to revive confidence among businesses.
Britain now looks set to flirt with deflation in the summer.
The chance of a self-inflicted, unnecessary weakening in the economy this year, and perhaps even a recession, has increased markedly in the wake of the president's announcement on Friday that tariffs will be applied to all imports from Mexico, from June 10.
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.
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.
December's money and credit data support the MPC's decision last week to hold back from providing the economy with more stimulus.
The first economic report of 2020 confirmed the main story in the euro area last year; namely a recession in manufacturing.
Yesterday's sole economic report in the Eurozone confirmed that the economy slowed further at the end of 2018.
The data in LatAm have been all over the map in recent weeks. Brazil's cyclical stabilization continues, while Mexican numbers confirm that the economy has come under pressure in recent months.
The 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.
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.
Fed Chair Powell's semi-annual Monetary Policy Testimony yesterday broke no new ground, largely repeating the message of the January 30 press conference.
Brazil's inflation rate remained well under control over the first half of February. We see no threats in the near term, indicating that more stimulus will be forthcoming from the BCB.
India's government imposed a three-week nationwide lockdown on March 25 to combat the increasingly rapid spread of Covid-19.
The coronavirus pandemic looks set to spread rapidly throughout LatAm.
This week's detailed Q1 GDP data confirmed that the German economy is in dire straits, alongside its euro area peers, but there's a silver lining.
The COPOM meeting minutes, released yesterday, brought a balanced message aimed at curbing market pricing of further rate cuts, in our view.
Orders for non-defense capital goods, excluding aircraft, have risen in six of the past seven months. In the fourth quarter, orders rose at a 4.7% annualized rate, in contrast to the 5.3% year-over-year plunge in the first half of the year.
The 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's September international trade report will be the third to be distorted by hugely elevated soybean exports. The surge began in July, when soybean exports jumped by $3.6B--that's a 220% month-to-month increase--to $5.2B.
Expectations that the MPC will raise Bank Rate again soon have taken a big knock over the last two weeks.
Economic news in the Eurozone, and virtually everywhere else, has been mostly downbeat in the past few months, but French consumers are doing great.
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.
Yesterday's barrage of French business sentiment data was mixed.
Brazilian financial assets lately appear to be responding only to developments in the presidential election race and external jitters.
Don't be alarmed by the second straight jump in consumers' inflation expectations, captured by the Conference Board's May survey, reported yesterday.
The last time oil prices fell sharply, from mid-2014, when WTI peaked at $107, through early 2016, when the price reached just $26, the U.S. economy slowed dramatically.
Beyond the immediate wild swings in prices for food, clothing, hotel rooms and airline fares, the medium-term impact of the Covid outbreak on U.S. inflation will depend substantially on the impact on the pace of wage growth.
The trade war with China is a macroeconomic event, whose implications for economic growth and inflation can be estimated and measured using straightforward standard macroeconomic tools and data.
The early damage in India from Covid-19 and the nationwide lockdown likely was significant enough to hammer the GDP report for the first quarter, due tomorrow.
China's abysmal industrial profits data for October underscore why the chances of less- timid monetary easing are rising rapidly.
The latest profits data out of China were grim, as we had expected.
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.
We covered the detailed German Q1 GDP report in Friday's Monitor--see here--but the investment data could do with closer inspection. The headline numbers looked great.
Brazil's economic prospects continue to deteriorate rapidly, due to a combination of rising political uncertainty, the failure of the new government to advance on reforms, and ongoing external threats.
Yesterday's IFO data reversed the good vibes sent by last week's upbeat German PMIs.
The preliminary estimate of Q1 GDP looks set to show that the economy started 2017 on a weak footing. We share the consensus view that quarter-on-quarter GDP growth slowed to 0.4%, from 0.7% in Q4.
Core durable goods orders in recent months have been much less terrible than implied by both the ISM and Markit manufacturing surveys.
The ECB will receive most of the credit for the recent gain in stock markets, but the main leading indicator for the stock market, excess liquidity, was already turning up late last year. With the MSCI EU ex-UK up 21%, in euro terms, since October, a lot is already priced in, but in the medium term the outlook is upbeat, and we look for further gains this year.
Mexican policymakers voted to leave the main rate on hold at 8.25% yesterday, as inflation remains high--though falling--and the economy is stuttering.
Judging by the survey data, German business sentiment remained depressed at the start of the year.
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.
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.
Today's trade figures likely will continue to show that the benefits from sterling's depreciation are being outweighed by the costs. Exports still are barely growing, but consumers are about to endure a substantial import price shock. The monthly trade deficit has been extremely volatile over the last year, generating a series of excessively upbeat or gloomy headlines. The truth is that the deficit has been on a slightly deteriorating trend, as our first chart shows. We think the trade deficit likely narrowed to £3.8B in December, from £4.2B in November, bringing it closer to its rolling 12-month average of £3.0B.
Inflation pressures are falling rapidly in Brazil, suggesting that the Copom will continue to ease aggressively in the near term. January's CPI report,released Wednesday, showed that inflation plunged to 5.4% year-over-year, from 6.3% in December, chiefly as a result of continued disinflation in key components, such as food, housing prices--including utilities--and transportation.
We have questioned the reliability of the recent consumer confidence numbers, and are very skeptical of their signal that spending is set to accelerate rapidly, but we see no real sign yet of any significant reversal of the post-election spike.
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.
Inflation data in Brazil, Mexico and Chile last week reinforced our view that interest rates will remain on hold, or be cut, over the coming meetings. The recent fall in oil prices, and the weakness of domestic demand, will offset recent volatility caused by the FX sell-off, driven mostly by the coronavirus story.
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.
With the exception of Mexico, November inflation was or below expectations in LatAm. Mexico's overshoot increases the likelihood that Banxico will hike its reference rate at the next board meeting on December 20.
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
Survey data have been signalling a resilient Brazilian economy in the last few months, despite the broader challenges facing LatAm and the global economy in 2019.
The consensus expectation that industrial production rose by 1.0% month-to-month in November is far too low; we expect Wednesday's data to show a jump of 2.0% or so. The rebound, however, should not be interpreted as another sign that the economy has been revitalised by the Brexit vote. Instead, we expect the rise chiefly to reflect volatility in oil production and heating energy supply.
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 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.
Brazil's economy remains mired in a renewed slowdown, and low--albeit temporarily rising-- inflation, which is allowing the BCB to keep interest rates on hold, at historic lows.
LatAm's growth outlook is deteriorating, despite decent domestic fundamentals and political transitions toward more market-oriented governments in some of the region's main economies.
We expect May's GDP report, released on Tuesday, to provide an early blow to hopes that the economy will embark on a V-shaped recovery this year.
The stagnation of industrial production in October ended a run of six consecutive month-to-month increases, the longest spell of unbroken growth since 1994.
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.
History is repeating itself in France. When the Republican Nicolas Sarkozy defeated the Socialist candidate Ségolène Royal in April 2007, consumer sentiment briefly soared to a six-year high, before plunging to an all-time low a year later.
The Conservatives successfully have defended their average poll lead over Labour of 10 percentage points over the last week.
Surveys released over the last week have suggested that the housing market might be past the worst.
On Tuesday, Brazil's Special Committee presented its recommendation for a constitutional amendment capping spending. Currently it is being voted in the Lower House Committee.
The Prime Minister is in a position on Brexit all chess players dread: zugzwang.
The collapse in business activity and consumer confidence since the referendum has sealed the deal on policy easing from the MPC on Thursday. The Committee has cut Bank Rate by 50 basis points when the composite PMI has been near July's level in the past, as our first chart shows.
The consensus view that industrial production rose by a mere 0.1% month-to-month in August looks far too low; we expect today's report to reveal a jump of about 1%.
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.
Manufacturing in France rebounded only modestly at the start of Q3, despite favourable base effects.
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The odds of the MPC cutting interest rates again in November took another knock yesterday after further signs that the manufacturing sector is getting back on its feet quickly.
Economy-wide confidence deteriorated in November, highlighting that Britain continues to struggle to shake off its malaise.
We're expecting a 180K increase in today's May headline payroll number, a bit below the underlying trend--200K or so--for the second straight month.
The U.K.'s still-large current account deficit makes us nervous that sterling will need to depreciate further over the medium-term and would collapse if Brexit talks fail, causing international investors to take flight.
Brazilian inflation hit its lowest rate in almost seven years in March, while Mexico's rate is the highest since July 2009. Yet we expect Mexico to tighten policy only modestly in the near term, while Brazil will ease rapidly.
Friday's manufacturing and trade data added to the evidence of a solid rebound in the EZ economy at the end of Q2, as lockdowns were lifted.
The ECB will be satisfied, and a bit relieved, with yesterday's economic data in the Eurozone.
The Brazilian Central Bank's policy board-- COPOM--voted unanimously on Wednesday to cut the Selic rate by 50bp to 5.00%, as expected.
Data released in recent days have started to reveal a story of horror and misery in the Brazilian economy.
Britain is indisputably beyond the peak of the first wave of Covid-19 infections, though the descent in new cases, hospitalisations and deaths has been shallower than the ascent.
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.
The revival in the construction sector is slowing on all fronts as the fiscal squeeze intensifies, business confidence fades and the recovery in housebuilding loses momentum. These headwinds are likely to ensure that construction output only holds steady this year, thereby contributing to the broader economic slowdown.
Economic conditions in Brazil are deteriorating rapidly.
Hideous though the official April payroll numbers were, the chances are that they'll be revised down.
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.
This week's data confirmed Mexico's strong economic performance over the first few months of this year.
We expect the Budget today to underwhelm investors who are eager to see a quick and powerful government response to the coronavirus outbreak.
Many investors probably will be scratching their heads in the wake of next week's labour market report, which will reveal the Covid-19 hit to employment and wages in April, as well as showing how much further the claimant count soared in May.
This has been a very complicated week for LatAm policymakers, who are particularly uneasy about the performance of the FX market.
It's just not possible to forecast the reaction of businesses and consumers to the coronavirus outbreak.
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.
October's consumer prices report, released on Wednesday, likely will show that CPI inflation has continued to drift further below the 2% target
The latest CPI data in Brazil confirm that inflationary pressures eased considerably last month. Inflation fell to 8.5% year-over-year in September, from 9.0% in August, as a result of both lower market- set and regulated inflation.
China's PPI deflation deepened in August, with prices dropping 0.8% year-over-year, after a 0.3% decline in July.
Lacklustre economic data and persistent no deal Brexit risk mean that the MPC won't rock the boat at this week's meeting.
The Office for National Statistics yesterday released the last major batch of output data before the preliminary estimate of Q3 GDP is published on October 25, just one week before the MPC's key meeting.
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.
Recent inflation numbers across the biggest economies in LatAm have surprised to the downside, strengthening the case for further monetary easing.
We already know that the key labor market numbers in today's May NFIB survey are strong.
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.
Manufacturing in France remained on the front foot at the start of Q4.
The combination of sluggish GDP growth in October and news that the Prime Minister will attempt to renegotiate the terms of the Brexit backstop, most likely pushing back the key vote in parliament until January, has extinguished any lingering chance that the MPC might be in a position to raise Bank Rate at its February meeting.
Mexico's latest forward-looking indicators are showing tentative signs of stabilisation in the wake of recent evidence that growth slowed quicker than markets have been expecting.
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.
The ECB made no changes to its policy stance yesterday.
The economy has remained remarkably resilient in the face of intense political uncertainty.
Data released yesterday reinforced our forecast of a further rate cut in Brazil next month.
The resolution of tensions in Italy and aboveconsensus U.K. PMIs for May last week persuaded investors that the MPC likely will press on and raise interest rates soon.
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.
We see clear upside risk to the inflation data due before the FOMC announcement, from three main sources.
Brazil's consumer recession finally eased in November. Retail sales jumped 2.0% month-to- month, following an upwardly-revised 0.3% drop in October, and the year-over-year rate rose to -3.5% from -8.1%. November's astonishing performance probably reflects seasonal adjustment problems related to Black Friday discounting. Sales have climbed in the last four Novembers, suggesting that consumers' pre-Christmas spending patterns have shifted permanently.
France is solidifying its position as one of the Eurozone's best-performing economies.
China's trade surplus has been trending down in the last two years.
Yesterday's manufacturing data in France were in stark contrast to last week's upbeat German numbers.
The economy looks to be in better shape following May's GDP report than widely feared.
Political risks in Brazil recently have simmered alongside the modest cyclical recovery, but they are now increasing. President Michel Temer's future remains hard to predict as circumstances change by the day.
Consumer price figures for March, released on Tuesday, likely will show that CPI inflation has taken another step up, probably to 0.4% from 0.3% in February. This should jettison lingering fears that the U.K. is mired in deflation and bolster the Monetary Policy Committee's conviction that inflation will hit the 2% target within the next two years.
Chinese PPI inflation fell to 4.9% in December, from 5.8% in November. The decline was expected, but underneath the slowdown in commodity price inflation, the rate of increase of manufacturing goods prices is slowing sharply too.
President Trump made official his plan to impose tariffs on up to $60B of annual imports from China, as well as limitations on Chinese investments in the U.S.
Some of the rise in the saving rate in recent months is real, but part of the increase likely reflects seasonal adjustment problems. The saving rate has risen between the fourth and first quarters in eight of the past 10 years, as our first chart shows.
Sharp falls in energy prices have been a boon for consumers, freeing up considerable funds for discretionary purchases. Domestic energy and motor fuel absorbed just 4.7% of consumers' spending in Q2, the lowest proportion for 12 years and well below the 6.7% recorded three years ago.
The dovish members of Banxico's board garnered further support on Friday for prolonging the current easing monetary cycle over coming meetings.
The trend in retail sales no longer looks quite so flat, following yesterday's May report. The level of sales volumes in April was revised up by 0.3%.
Investors kicked expectations for the first rise in official interest rates even further into the future when last month's labour market data, revealing a sharp fall in wage growth, were released. But a closer look at the official figures reveals that labour cost pressures have remained robust, cautioning against making a snap reaction if even weaker wage data are released on Wednesday.
In her inaugural Monitor, our Chief Asia Economist Freya Beamish plots three scenarios for the Chinese economy. The best-case scenario is that China makes a smooth transition to consumer-led growth.
China's Q2 official GDP growth, to be released on Monday, likely slowed to 6.2% year-over-year, from 6.4% in Q1.
Judging by the headline performance metrics, EZ equity investors have little cause for worry.
Yesterday's industrial production, construction output and trade data for November collectively suggest that the economy lost a little momentum in the fourth quarter. GDP growth likely slowed to 0.5% quarter-on-quarter in Q4, from 0.6% in Q3. Growth remains set to slow further this year, as inflation shoots up and constrains consumers.
Yesterday's final CPI estimate in Germany confirmed that inflation fell to a 15-month low of 1.4% year-over-year in February, down from 1.6% in January.
Chinese New Year effects were very visible in Japan's December trade data. Export growth slowed sharply to 9.3% year-over-year in December, from 16.2% in November.
The four-quarter average growth trend in private investment, excluding dwellings, fell to 0.1% in Q4, and the recent improvement in the PMIs indicates only a modest upturn in Q2. The dearth of investment by non-financial corporates remains one of the biggest threats to long-term growth in the Eurozone.
March's public sector borrowing figures brought more signs that the economy has lost considerable momentum this year. Borrowing, on the PSNB excluding public sector banks measure, came in at £5.1B in March, up slightly from £4.3B in March 2016.
Today's industrial production data will confirm that EZ manufacturing suffered a slow start to Q4. Advance country data signal a 0.2% month-to-month fall in October, slightly worse than the consensus, 0.0%.
The key labor market numbers from the monthly NFIB survey of small businesses are released ahead of the main report, due today.
Activity in the Mexican industrial sector cooled marginally at the start of the second quarter, but the drop was not as dramatic as the headlines suggested. Output fell 4.4% year-over-year in April, after a 3.4% increase in March.
Korea's government is mulling a further tightening of borrowing rules to mitigate the risks of an overheated property market.
The latest data from the Energy Department show that the feared collapse in U.S. oil production in the wake of the plunge in crude prices has no t started yet. The number of rigs in operation is falling sharply, but our first chart shows it is not yet approaching the collapse seen after the financial crash.
The advance trade data for February make it very likely that today's full report will show the headline deficit rose by about $½B compared to March, thanks to rising net imports of both capital and consumer goods, which were only partly offset by improvements in the oil and auto accounts.
Inflation pressures in the Eurozone edged higher last month, reversing weakness at the start of the year.
Britain looks set for a general election during the week commencing December 9, now that all main parties are pushing for a pre-Christmas poll.
Japan's retail sales values jumped 1.2% month-on-month in October, after the upwardly-revised 0.1% increase in September.
The headline in yesterday's EZ money supply report gave the illusion that monetary conditions are stable, but the details tell a different story. M3 growth accelerated marginally to 5.0% year-over-year in June, from 4.9%, but momentum in narrow money fell further. M1 growth slowed to 8.5% year-over-year, from 9.0% in May due to a fall in overnight deposits and currency in circulation.
Q2's GDP figures create a terrible first impression, but a closer look suggests that the risk of a recession remains very low.
Consumers' spending has staged an impressive recovery in the Eurozone, and remains the key driver of accelerating GDP growth. Outside Germany, however, households have struggled, and are still faced with tight credit conditions.
Money supply data continue to support the continuation of cyclical recovery in the Eurozone. M3 growth accelerated to 4.0% year-over-year in February from a revised 3.7% in January. Revisions, however, mean that momentum in the beginning of the year was not as solid as we thought.
We would sum up the final stages of the Brexit negotiations as follows: Both sides have an interest in a deal with minimal disruptions, but we probably have to get a lot closer to the cliff- edge for the final settlement.
We had hoped that the breathtaking doubling of initial jobless claims to 6.65M, in the week ended March 28, would be followed by a steep drop in the week ended April 4; the data will be released today.
The upturn in German manufacturing orders waned slightly towards the end of 2017; factory orders fell 0.4% month-to-month in November.
When trade-weighted sterling fell by 20% in 2016, it was widely expected that net trade would cushion GDP growth from the hit to households' real incomes.
China's FX reserves data pointed to an about-turn in net capital flows in May, with capital leaving the country again after two months of net inflows, and a current account deficit in Q1.
Deflation officially arrived in the Eurozone yesterday as a 6.3% plunge in energy prices pushed the overall rate of inflation to -0.2% year-over-year in December, down sharply from 0.3% in November.
German factory orders struggled in the second quarter. New orders were unchanged month-to-month in May, a poor headline following the revised 1.9% plunge in April. The year-over-year rate rose to -0.2%, from a revised -0.4% in April. The month-to-month rate was depressed by a big fall in domestic orders, which offset a rise in export orders.
Brazil's industrial sector was off to a soft-looking start in Q1, but the fall in January output was chiefly payback for an especially strong end to 2017.
Equities in the Eurozone are off to a strong start in Q2, building on their punchy 12% gain in the first quarter.
This year has been sobering for Eurozone equity investors.
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.
A PBoC rate cut is looking increasingly likely. Policy is already on the loosest setting possible without cutting rates, but the Bank has little to show for its marginal approach to easing, with M1 growth still languishing.
Yesterday's final CPI report in the Eurozone confirmed that headline inflation was unchanged at 1.5% in September.
Manufacturing is in recession, with few signs yet that a floor is near, still less a recovery.
This week sees the release of most of the key May surveys. The prospect of mean reversion following a very strong start to the year, coupled with the impact of recent market volatility, points to a modest loss of momentum, especially for surveys of investors.
Inflation in the Eurozone eased at the start of Q3.
The Brazilian Central Bank's policy board-- Copom--voted unanimously on Wednesday to cut the Selic rate by 50bp to 6.0%.
This week's labour market report--primarily reflecting conditions in March, though some data refer to April--will lift the veil on the initial economic damage from Covid-19, though the full horror will emerge only later.
Hot on the heels of yesterday's news that the NAHB index of homebuilders' sentiment and activity dropped by two points this month -- albeit from December's 18-year high -- we expect to learn today that housing starts fell last month.
Chief U.S. Economist Ian Shepherdson with the latest Covid-19 data
Chief U.K. Economist Samuel Tombs comments on U.K. Manufacturing
Economic sentiment in the Eurozone's largest economy stayed solid at the start of the fourth quarter, despite subdued manufacturing and poor investor sentiment. The headline IFO business climate index fell slightly to 108.2 in October from 108.5 in September, due to a fall in the current assessment index. The expectations index rose, though, to 103.8 from 103.5 last month pointing to a resilient outlook for businesses and solid GDP growth in coming quarters.
Samuel Tombs discussing U.K. Inflation
Chief U.K. Economist Samuel Tombs ok U.K. Retail Sales
Yesterday's final EZ CPI data for March confirmed the message from the advance report that inflation pressures eased last month.
Samuel Tombs on U.K. House Prices
The latest GDP data continue to show that the economy is holding up well, despite the Brexit saga.
German survey data did something out of character yesterday; they fell. The IFO business climate index declined to 117.2 in December from a revised 117.6 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.
Eurozone inflation eased slightly to 0.2% year-over- year in June, down from 0.3% in May, according to the advance data but we continue to think that the trend has turned up. A 5.1% fall in energy prices, accelerating from a 4.8% in May, was partly to blame for the fall in June. But the key driver was the sharp drop in services inflation to 1.0% from 1.3% in May, likely due to volatility in package holiday prices.
Yesterday's first estimate of Q2 GDP in Mexico confirmed that the economy lost momentum in recent months.
Advance PMI data indicate a slow start to the first quarter for the Eurozone economy. The composite index fell to 53.5 in January from 54.3 in December, due to weakness in both services and manufacturing. The correlation between month-to-month changes in the PMI and MSCI EU ex-UK is a decent 0.4, and we can't rule out the ide a that the horrible equity market performance has dented sentiment. The sudden swoon in markets, however, has also led to fears of an imminent recession. But it would be a major overreaction to extrapolate three weeks' worth of price action in equities to the real economy.
Workers in the euro area remain scarred by the zone's repeated crises, but the strengthening cyclical recovery is slowly starting to spread to the labour market. The unemployment rate fell to a three-year low of 10.9% in July, and employment has edged higher after hitting a low in the middle of 2013. Germany's outperformance is a key story, with employment increasing uninterruptedly since 2009, and the unemployment rate declining to an all-time low of 6.4%. Among the other major economies, the unemployment rate in Spain and Italy remains higher than in France. But employment in Spain has outperformed in the cyclical recovery since 2013.
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.
Normal service appears to have resumed in August, with payrolls rising by 201K, very close to the 196K average over the previous year.
Today brings more housing data, in the form of the May existing home sales numbers.
Advance data suggest German inflation pressures eased towards the end of last year. Inflation fell to 0.3% year-over-year in December from 0.4% in November, likely due to a fall in food inflation--mean reversion in fruit and vegetables inflation--and a sharp fall in the annual price increase of clothing and shoes. State data indicate that deflation in household utilities persisted, but that inflation of fuel and transportation is slowly recovering. Assuming a stable oil price in coming months, base effects should push up energy price inflation in the first quarter, though it should then fall again slightly in the second quarter. Overall, though, we expect energy price inflation gradually to stabilise and recover this year.
The adverse consequences of the Brexit vote will become painfully clear in 2017.....
Reforms to Stamp Duty Land Tax paid by first-time buyers likely will take centre stage in the Budget. At the Conservatives' party conference, Theresa May pledged another £10B to expand the Help to Buy Scheme, which helps first-time buyers obtain a mortgage which just a 5% deposit.
Labour costs growth accelerated modestly last year in the Eurozone. Data on Friday showed that Q4 nominal labour costs in the Eurozone rose 1.3% year-over-year, slightly higher than the 1.1% increase in Q3. The modest acceleration was mainly due to a rise in "non-business" labour costs, which rose 1.6% year-over-year, up from a 0.9% increase in Q3.
We are not worried about the reported drop in April manufacturing output, which probably will reverse in May.
We see downside risk to the housing starts numbers for April, due today. Our core view on housing market activity, both sales and construction activity, is that the next few months, through the summer, will be broadly flat-to-down.
We are a bit troubled by the persistent weakness of the Redbook chain store sales numbers. We aren't ready to sound an alarm, but we are puzzled at the recent declines in the rate of growth of same-store sales to new post-crash lows. On the face of it, the recent performance of the Redbook, shown in our first chart, is terrible. Sales rose only 0.5% in the year to July, during which time we estimate nominal personal incomes rose nearly 3%.
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.
Advance Eurozone consumer sentiment fell disappointingly to -7.1 in July, from -5.6 in June, but it is consistent with a solid trend in retail sales growth. Household consumption in the zone has surged in the last four quarters, and a modest loss of momentum in Q3 and Q4 is a reasonable bet. But we see little risk of a sharp slowdown in the shor t run, and the trend in spending growth should stabilize at an annualised 1.5% this year.
The tailwinds that have propelled Eurozone equities higher since the middle of last year remain place, in principle. In the economy, political uncertainty in the euro area has turned into an opportunity for further integration and reforms, and cyclical momentum in has picked up. And closer to the ground, fundamentals also have improved.
Our base case remains that the slowdown in quarter-on-quarter GDP growth to about zero in Q2 is just a blip, and that the economy will regain momentum in Q3 and sustain it well into 2020.
Core machine orders in Japan held up surprisingly well in March, slipping by just 0.4% month-on-month, erasing only part of the 2.3% increase in February.
CPI inflation took a big step in April towards the near-zero rate we anticipate by the summer.
In our Monitor May 15 we described the initial government program in Italy, drafted by the leadership of the Five-Star Movement and the League parties, as a "macroeconomic fairytale."
Data on Friday showed that the EZ current account surplus fell to €25.3B in September, from a revised €29.2B in August. The trade and services surpluses were unchanged, but the income balance slipped after rising in the previous months.
Consumer sentiment in the euro area has slipped this year, though the headline indices remain robust overall.
Economic survey data this week will give the first clear evidence on whether recent market volatility has dented Eurozone confidence. The key business and consumer surveys dipped in January, and we now expect further declines, starting with today's PMI data. We think the composite index fell slightly to 53.0 in February from 53.6 in January.
Consumption and investment spending by state and local government accounts for just over 10% of the U.S. economy, making it more important than exports or consumers' spending on durable goods, and roughly equal to all business investment in equipment and intellectual property.
It is looking increasingly likely that core inflation, which already has fallen to 2.1% in May, from a peak of 2.7% last year, will slip below 2% next year.
German producer price inflation fell last month, following uninterrupted gains since the beginning of this year. Headline PPI inflation fell to 2.8% year-over- year in May, from 3.4% in April, constrained by lower energy inflation, which slipped to 3.0%, from 4.6% in April. Meanwhile, non-energy inflation declined marginally to 2.7%, from 2.8%.
After soaring in the Spring, inflation has slipped back in the Summer. July's consumer prices report, released while we were away last week, showed that CPI inflation held steady at 2.6% in July, one -tenth below the consensus and three tenths below May's year-to-date peak.
Signs that Easter trading was unusually poor lead us to anticipate a downside surprise from today's retail sales data for March. The BRC's Retail Sales Monitor, which surveys companies that account for 60% of total retail sales, was remarkably weak in March.
We think this week's main economic surveys in the Eurozone will take a step back following a steady rise since the end of Q3. Today's composite PMI in the Eurozone likely slipped to 54.0 in February, from 54.4 in January, mainly due to a dip in the manufacturing component. Even if we're right about slightly weaker survey data in February, though, it is unlikely to change the story of a stable and solid cyclical expansion in the EZ.
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.
So far, the surge in retail spending promised by the plunge in gasoline prices has not materialized. The latest Redbook chain store sales numbers dipped below the gently rising trend last week, perhaps because of severe weather, but the point is that the holiday season burst of spending has not been maintained.
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.
Chinese GDP numbers always require a great deal of detective work, and yesterday's needed more than the norm; multiple rounds of revisions needed decoding.
Brazil's external deficit fell marginally in October, but most of the improvement is now likely behind us. The unadjusted current account deficit dipped to USD3.3B, from USD4.3B in October 2015. The trend is stabilizing, with the 12-month total rolling deficit easing to USD22B--that's 1.2% of GDP--from USD23B in September.
The flow of Middle-Eastern refugees taking the treacherous journey towards Europe continues unabated. UNHCR estimates of arrivals through the Western Balkan route--mainly originating from Greece and Serbia--suggest the average daily number of refugees has been stable so far between October and November at about 11,000. These data are very unreliable, but they indicate that the onset of winter on the European continent--and the added risk to migrants with no shelter--will not deter people from attempting the trip to Europe.
French manufacturers recovered their optimism towards the end of Q3. The headline INSEE manufacturing sentiment index rose to 103 in September, from 101 in August, and the composite business confidence gauge also increased. A rebound in transport equipment firms' own production expectations was the key driver of the recovery.
The sell-off in risky assets intensified while we were away, driven by China's decision to loosen its grip on the currency, and looming rate hikes in the U.S. The Chinese move partly shows, we think, the PBoC is uncomfortable pegging to a strengthening dollar amid the unwinding investment boom and weakness in manufacturing.
Mexico's economy slowed marginally in Q4, due mainly to the challenging external environment, but the domestic economy remains relatively healthy. Real GDP rose 0.5% quarter-on-quarter in Q4, following a 0.8% solid expansion in Q3. Year-over-year growth dipped to 2.5% from 2.8%.
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.
Friday's economic data added to the evidence that the German economy stumbled in July. The seasonally adjusted trade surplus slipped to €19.4B, from a revised €21.4B in June.
The Eurozone's current account surplus remained close to record highs at the end of Q1, despite dipping slightly to €34.1B in March, from a revised €37.8B in February. A further increase in the services surplus was the key story.
Last week's enormous €1.3T take-up in the ECB's first post-virus TLTRO auction was hardly a blip for financial markets, consistent with the reactions to previous auctions.
Japan's export data for April unsurprisingly were abysmal, driving a massive deterioration in the trade balance, which flipped from a modest ¥5B surplus in March, to a ¥930B deficit.
Colombia's trade deficit continued to narrow in Q3; a postive development now that EM are back in the firing line. Assuming no revisions, the marginal year-over-year dip in the September trade deficit means that the third quarter deficit was USD3.1B, down from US4.6B a year ago.
November's consumer price report likely will show that October's dip in CPI inflation was just a blip against a strong upward trend. We think that CPI inflation picked up to 1.1% in November, from 0.9% in October, in line with the consensus.
New home sales have tended to track the path of mortgage applications over the past year or so, with a lag of a few months. The message for today's January sales numbers, show in our next chart, is that sales likely dipped a bit, to about 525K.
The Eurozone PMIs stumbled at the end of Q2. The composite index slipped to a five-month low of 55.7 in June, from 56.8 in May, constrained by a fall in the services index. This offset a marginal rise in the manufacturing index to a new cyclical high. The dip in the headline does not alter the survey's upbeat short- term outlook for the economy.
Momentum in the euro area's money supply slowed last month. M3 growth dipped to 4.7% year-over-year in February, from a downwardly-revised 4.8% in January. The headline was mainly constrained by the broad money components. The stock of repurchase agreements slumped 24.3% year-over-year and growth in money market fund shares also slowed sharply.
Recent data have confirmed that Colombian economic activity is still fragile, and that downside risks increased in Q1 as oil prices hav e slipped. The ISE economic activity index rose just 1.0% year-over-year in January, down from a 1.6% average gain in Q4.
We will be paying special attention today to the EC sentiment survey for Italy, where the headline index has climbed steadily so far this year. It was unchanged at an eight-year high of 106.1 in April, and even if it fell slightly in May--we expect a dip to 105.0--it still points to an upturn in economic growth.
The second estimate of Q3 GDP last week confirmed that the Brexit vote didn't immediately drain momentum from the economic recovery. But it is extremely difficult to see how growth will remain robust next year, when high inflation will cripple consumers and the impact of the decline in investment intentions will be felt.
Markets responded to yesterday's disappointing GDP figures by pushing back expectations for the first rise in official interest rates even further into 2017. The first rate hike is now expected--by the overnight index swap market--in April 2017, two months later than anticipated before the GDP release. The figures certainly look weak--particularly when you scratch below the surface--and we expect growth to slow further over the coming quarters. But we don't agree they imply an even longer period of inaction on the Monetary Policy Committee.
The two-year budget deal agreed between the administration and the Republican leadership in Congress will avert a federal debt default and appears to constitute a modest near-term easing of fiscal policy. The debt ceiling will not be raised, but the law imposing the limit will be suspended through March 2017, leaving the Treasury free to borrow as much as necessary to cover the deficit. As a result, the presidential election next year will not be fought against a backdrop of fiscal crisis.
Yesterday's advance CPI data in Germany and Spain suggest that inflation in the Eurozone as a whole dipped slightly in February.
Money supply dynamics in the Eurozone continue to signal a solid outlook for the economy. Headline M3 growth eased marginally to 4.9% year-over-year in January, from 5.0% in December; the dip was due to slowing narrow money growth, falling to 8.4% from 8.8% the month before. The details of the M1 data, however, showed that the headline chiefly was hit by slowing growth in deposits by insurance and pension funds.
After a busy week of data, and a holiday weekend ahead, it's worth stepping back a bit and evaluating the arguments over the timing of the next Fed hike. The first question, though, is whether the data will support action, on the Fed's own terms. The April FOMC minutes said: "Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee's 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June".
Data today will likely show that consumer sentiment in the Eurozone remains firm. In Germany, we expect a slight dip in the advance headline GFK confidence index to 9.8 in June, from an all-time high of 10.1 in May.
Since the Party Congress last month, China has made a number of bold moves in multiple policy fields, with a regularity that almost implies the authorities are working through a list.
French business sentiment cooled marginally at the end of Q3. The headline manufacturing confidence index dipped to 110 in September, from 111 in August, though the overall business sentiment gauge was unchanged at 110.
Multiple factors have shaken LatAm financial markets this week. China's market turmoil, commodity price oscillations, currency volatility, and political mayhem in every corner of the region, have all conspired against markets. But market chaos has also driven some central banks to rethink their monetary policy plans. For EM, in particular for LatAm, the stance of the Federal Reserve is key, given the region's close ties to the U.S., and the dollar.
Former Treasury Secretary and thwarted would-be Fed Chair Larry Summers has been arguing for some time that the Fed should not raise rates "...until it sees the whites of inflation's eyes". As part of his campaign to persuade actual Fed Chair Yellen of the error of her intended ways, he argued at the World Economic Forum in September that the strong dollar has played no role in depressing inflation. Never one to miss an opportunity to diss the competition, he wrote that Stanley Fischer's view that the dollar has indeed restrained inflation is "substantially weakened" by the hard evidence. Dr. Summers' view is that inflation is being held down by other, longer-lasting factors, principally the slack in the lab or market, rather than the "transitory" influences favored by the Fed.
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.
Consumer sentiment data yesterday from the major economies were mixed, signalling that support to Eurozone GDP growth from surging German household consumption is waning. The key "business outlook" index--which correlates best with spending--plunged to a 30-month low in October, while the advance GfK sentiment index dipped to 9.4 in November from 9.6 in October. We see little signs in retail sales data of slowing momentum, and also think consumers' spending rebounded in Q3. But our first chart shows that the fall in the GfK index implies clear downside risks in coming quarters.
Yesterday's EZ money supply data confirmed that liquidity conditions in the private sector improved in Q3, despite the dip in the headline.
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.
The agreement between Presidents Trump and Xi at the G20 is a deferment of disaster rather than a fundamental rebuilding of the trading relationship between the U.S. and China.
President Trump's volatile diplomatic style is one of the biggest risks facing the Mexican economy in the near term, as we have discussed in previous Monitors.
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.
Brazil's external accounts continue to surprise to the upside, with the current account deficit remaining close to historic lows and capital flows performing better than anticipated, mostly due to higher-than- expected FDI.
Data yesterday revealed that headline inflation in Germany was unchanged in March at 1.5%, thanks mainly to higher energy inflation, which offset a dip in food inflation.
Advance inflation data on Friday added to the gloom on the Eurozone economy. Reports from Germany, France, and Spain all surprised to the downside, indicating the euro area as a whole slipped back into deflation in February. Inflation in Germany dipped to 0.0% year-over-year in February, from 0.5% in January, and France slid back into deflation as the CPI index fell 0.2%, down from a 0.2 increase last month.
Momentum in EZ money supply slipped marginally in September. Headline M3 growth slowed to 5.0%, from 5.1%, mainly due to a slowdown in narrow money. Overnight deposit growth slowed to 9.4%, from 9.9% in August, offsetting a slight rise in growth of currency in circulation.
Last week's QE announcement has made Eurozone inflation prints less important for investors, but the market will still be watching for signs of a turning point in benchmark bond yields. The data are unlikely to challenge bond holders in the short run, however, as the Eurozone probably slipped deeper into deflation in January.
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.
Mexico's economy hit a sticky patch in the first quarter, with confidence slipping, employment growth slowing and the downward trend in unemployment stalling. Indeed, the headline unemployment rate rose to 4.5% in May from 4.3% in April. The seasonally adjusted rate, though, was little changed at 4.4%, with a stable participation rate.
Japan's all-industry activity index dropped by 3.8% month-on-month in March, worse than the 0.7% slip in February.
Yesterday's figures from trade body U.K. Finance showed that January's pick-up in mortgage approvals was just a blip.
Sterling weakened further yesterday in response to the perception that the odds of the U.K. leaving the E.U. in the June referendum are rising. Cable fell to $1.39, its lowest level since March 2009. It is now $0.12 below the level one would anticipate from markets' expectations for short rates, as our chart of the week on page three shows.
If you want to know what's going to happen to the real economy over, say, the next year, don't look to the stock market for reliable clues. The relationship between swings in stock prices over single quarters and GDP growth over the following year is nonexistent, as our next chart shows.
If we had known back in June 2014 that oil prices would drop to about $30, the collapse in capital spending in the oil sector would not have been a surprise. Spending on well-drilling, which accounts for about three quarters of oil capex, has dropped in line with the fall in prices, after a short lag, as our first chart shows. We think spending on equipment has tracked the fall in oil prices, too.
Brazil's external accounts were the bright spot last year, once again, but the ne ws will soon take a turn for the worse. The current account deficit fell to just USD24B last year, or 1.3% of GDP, from USD59B in 2015. The improvement was driven by the trade surplus, which rose to USD48B, the highest since 1992, when the comparable data series begins. A 20% plunge in imports, coupled with a mere 3% dip in exports, explain the rising trade surplus.
Yesterday's labour market data brought further signs that wage growth is recovering from its early 2017 dip.
The Eurozone economy is in fine shape, according to the latest PMI data. The composite EZ PMI fell trivially to 54.3 in January, but remains strong. A marginal dip in the services index offset a small increase in the manufacturing PMI to a cyclical high of 55.1. These data tell a story of a strong private sector that continues to support GDP growth.
Last week's advance PMI data suggest that economic activity in the Eurozone was stable at the beginning of Q2. The composite EZ PMI fell trivially to 53.0 in April, from 53.1 in March, because a dip in manufacturing offset a small rise in the services index.
Korea's 20-day export growth came in weaker than we anticipated earlier this week. Granted, year-over- year growth rebounded to 14.8% in May, from 8.3% in April.
Mexican policymakers likely will stick to the script tomorrow and vote by a majority to cut the main rate by 50bp to 5.00%, which would be its lowest level since late 2016.
Brazil's inflation data continue to disappoint, but they are showing some signs of improvement, at the margin. The mid-month CPI, the IPCA-15 index, jumped to 9.3% year-over-year in July, up from 8.8% in June, soaring well above the upper bound of the inflation target and reaching the highest level since December 2003, as shown in our first chart.
The two polls suggesting the U.K. would remain in the EU yesterday proved to be a noose for investors to hang themselves with, as the results pointed to a vote for Brexit. Markets already are in disarray, and the direction is as we expected and feared. EUR/GBP is up 7%, and the DAX 30 in Germany is indicated by futures to plunge a hefty 7%-to-8% at the open. Bund yields will collapse too, and all eyes will be on the spread between Germany and the rest of the periphery.
In a letter earlier this month, Greek prime minister Alexis Tsipras warned German chancellor Angela Merkel that failure to disburse additional bailout funds would lead to an imminent cash crunch. Last week's meeting with EU leaders and the ECB yielded no progress, intensifying the risk that Greece will literally run out of money within weeks.
French industrial production data offered a bit of relief last week following a string of woeful German data, and news of monthly falls in Italian and Spanish manufacturing output. Industrial production jumped 1.6% month-to-month in August, but the headline was flattered by a 0.3% downward revision of the July data. The monthly jump pushed the year-over-year rate higher to 1.6%, from a revised 0.9% fall in July. All sectors performed strongly in August, but the key story was a hefty increase in transport equipment manufacturing, due to a 11.9% surge in vehicle production.
Yesterday's PMIs kicked off a busy week for Eurozone data on a downbeat note. The composite EZ PMI fell to a five-month low of 55.8 in July, from 56.3 in June; it was constrained by a 0.6 point dip in the manufacturing index to 56.8.
CPI data today in France and Germany will confirm that current inflation rates remain very low in the euro area. Inflation in Germany likely rose to 0.3% year-over-year from 0.0% in September, in line with the consensus and initial estimate. State data indicate that the rise was driven by surging fresh food prices and slightly higher services inflation, principally due to a jump in the volatile recreation and culture sector. Looking ahead, food prices will drop back, but energy inflation will rise rapidly as last year's plunge drops out of the year-over-year comparison, while upward core pressure is now emerging too.
Friday's PMI data in the Eurozone added to the evidence that GDP growth is slowing, after a cyclical peak last year. The composite PMI in the euro area slipped to a 21-month low of 52.6 in September, from 52.9 in August.
Brazil's central bank is desperately trying to get a grip on inflation. It has raised the Selic rate by 225bp, to 13.25%, in just the last six months, and real rates now stand at a hefty 5.0%. And, at last, we are seeing tentative signs that policymakers and the government, after hiking rates and adjusting regulated prices, are making some headway.
June's surge in retail sales is not a sign that households' total spending is zipping back to pre- downturn levels.
The July Eurozone PMI survey echoed the message from consumer sentiment earlier of a mild dip in momentum going into Q3. The composite PMI in the euro area fell to 53.7, from 54.2 in June due mainly to a fall in the services index. Companies' own expectations for future business fell in the core, but the survey was conducted soon after the Greek referendum. Markit claims this didn't depress the data, but we are on alert for revisions to the headline and expectations next week, or a rebound next month.
We argued in the Monitor yesterday that the plunge in capital spending on equipment in the oil sector could cost about 300K jobs over the course of this year. Adding in the potential hit from falling spending on structures, which likely will occur over a longer period, given the lead times in the construction process, the payroll hit this year could easily be 500K, or just over 40K per month.
Japanese data continue to come in strongly for the second quarter. The manufacturing PMI points to continued sturdy growth, despite the headline index dipping to 52.0 in June from 53.1 in May. The average for Q2 overall was 52.6, almost unchanged from Q1's 52.8, signalling that manufacturing output growth has maintained its recent rate of growth.
Bloomberg reported on Monday that the PBoC is drafting a package of reforms to give foreign investors greater access to the China's financial services sector. This could involve allowing foreign institutions to control their local joint ventures and raising the 25% ceiling on foreign ownership of Chinese banks.
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.
The chaos in Greece was identified as the main culprit for yesterday's soft IFO report. The headline business climate index fell to 107.4 in July, down from 108.1 in May, driven by declines in respondents' views on the current economy and their expectations for the future. We expected a dip in the he adline IFO, but we were surprised by the fall in the manufacturing sub-index, given the firmer PMI earlier this week.
The Chancellor is likely to announce plans for additional public sector asset sales in today's Autumn Statement, to help arrest the unanticipated rise in the debt-to-GDP ratio this year. But privatisations rarely improve the underlying health of the public finances, partly because assets seldom are sold for their full value. And the Chancellor is running out of viable assets to privatise; the low-hanging, juiciest fruits have already been plucked.
Japan's September PMI report showed some slippage, but overall, it suggests that GDP growth in Q3 was a little stronger than the 0.3% quarter- on-quarter rate in Q2.
Mexican inflation fell sharply in the first two weeks of January, dipping by 0.2% from two weeks earlier, thanks to lower energy prices and a reduction in long-distance phone tariffs. Telecom reform explains about 15bp of the headline reduction.
The sluggishness of existing home sales in recent months, as exemplified by yesterday's report of a small dip in June, is due entirely to a sharp drop in the number of cash buyers.
he ECB governing council gathered last week under the leadership of Ms. Lagarde for the first time to lay a battle plan for the course ahead.
The September core CPI was held down by prescription drug prices, which fell by 0.6%, and vehicle prices, which fell by 0.4%.
Output in EZ construction rebounded sharply in February, erasing a slip at the start of the year.
The Eurozone's trade surplus remained subdued at the end of the second quarter; it dipped to €16.7B in June from €16.9B in May.
On the face of it, December's flash Markit/CIPS PMIs warrant the MPC cutting Bank Rate at its meeting on Thursday.
Selling pressure in LatAm markets after Donald Trump's election victory eased when the dollar rally paused earlier this week. Yesterday, the yield on 10- year Mexican bonds slipped from its cycle high, and rates in other major LatAm economies also dipped slightly.
Even if the Prime Minister fends off an emerging leadership challenge--as we write, the rebels still are short of the 48 signatures required to trigger a confidence vote--her chances of getting parliament to back the Withdrawal Agreement in its current form are slim.
EZ investors are still trying to come to grips with last week's terrifying price action, culminating in the 12.5% crash in equities on Thursday
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.
Growth in new EZ car sales slipped last month, following a strong start to the year. New registrations rose 4.4% year-over-year in February, slowing from a 8.7% rise in January.
Mr. Macron will be in Berlin today with the message that France wants a strong Eurozone and a tight relationship with Germany. Friendly overtures between Paris and Berlin are good news for investors; they reduce political uncertainty while increasing the chance that the economic recovery will continue. But it is too early to get excited about closer fiscal coordination, let alone a common EZ fiscal policy and bond issuance.
The rate of growth of real personal incomes is under sustained downward pressure, slowing to 2.1% year-over-year in December from 3.4% in the year to December 2015. In January, we think real income growth will dip below 2%, thanks to the spike in the headline CPI, reported Wednesday. Our first chart shows that the 0.6% increase in the index likely will translate into a 0.5% jump in the PCE deflator, generating the first month-to-month decline in real incomes since January last year.
On the face of it, the December core retail sales numbers were something of a damp squib. The headline numbers were lifted by an incentive-driven jump in auto sales and the rise in gas prices, but our measure of core sales--stripping out autos, gas and food--was dead flat. One soft month doesn't prove anything, and core sales rose at a 3.9% annualized rate in the fourth quarter as a whole.
The final and detailed April CPI data confirmed that inflation pressures in the Eurozone eased last month. Headline inflation slipped to 1.2%, from 1.3% in March.
Evidence in support of our view that the U.S. industrial slowdown is ending continues to mount, though nothing is yet definitive and the re-escalation of the trade war is a threat of uncertain magnitude to the incipient upturn.
Chinese policymakers' calls to abandon the obsession with high GDP growth--GDPism--are multiplying.
Growth in Eurozone car sales slowed slightly at the end of the first quarter. New car registrations in the euro area rose 5.8% year-over-year in March, down from a 14.4% increase in February. But the 12-month average level of new registrations jumped to new cyclical highs of 440,000 and 252,000 in the core and periphery respectively.
Signs that the economy has been crippled by people's response to the Covid-19 outbreak continued to emerge yesterday.
Yesterday's ECB press conference confirmed our view that Mr. Draghi is the periphery's friend, not enemy. Crucially, the central bank agreed to increase emergency liquidity assistance--ELA--to Greek banks by €900M. This is consistent tent with the agreement by the Eurogroup to give Greece €7B bridge financing, and shows the ECB is ready to act on the back of only a temporary truce between Greece and the EU. The increase in ELA is modest, and we doubt a painful restructuring of the banking system can be avoided. But with Greek bond yields falling, the available pool of collateral will go up, allowing the central bank to provide further relief in coming weeks.
China's money data, out last week, bode ill for real GDP growth in the second half. June M2 growth dipped to 9.4% year-over-year from 9.6% in May and 10.5% in April.
Former Chancellor George Osborne famously quipped after last year's general election that Theresa May was "a dead woman walking and the only question is how long she remains on death row".
The euro area's trade surplus slipped further mid- way through the second quarter; falling to a 15-month low of €16.9B in May, from a downwardly-revised €18.0B in April, and extending its descent from last year's peak of nearly €24.0B.
If the Fed really believed its own rhetoric--"Inflation is expected... to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further"--it would have raised rates yesterday, given the very long lags between policy action and the response from the real economy.
We look for the Fed to increase rates today by 25bp to a range of 0.25%-to-0.50%. The FOMC will likely say that policy remains very accommodative and that rate hikes will be slow. Unfortunately, this will provide only temporary relief to LatAm. According to our Chief Economist, Ian Shepherdson, faster wage gains next year in the U.S. will disrupt the Fed's intention to move gradually. If wages accelerate as quickly as we expect, the Fed will need to raise rates more rapidly than it currently expects, which is also faster than markets anticipate. That, in turn, will put EM markets and currencies under further pressure.
Japanese headline PPI inflation will edge higher in coming months as last year's rise in oil prices feeds through. But inflation in manufacturing goods, excluding processing, is microscopic and should soon roll over as pipeline pressures wane.
In yesterday's Monitor we set out the risk that accelerating wages will force the Fed to raise rates more quickly than expected, but we didn't have space to address the underlying premise of this story, namely, the idea that inflation is largely a cost-push phenomenon. From the perspective of fixed income investors, it might not seem to matter whether this is a realistic description of the inflation process, because Fed Chair Yellen believes it wholeheartedly, and her hands are on the levers of monetary policy.
The EU and Greece finally managed to agree on the framework for a third bailout yesterday, conditional on ratification in the Greek and EU parliaments this week. Mr. Tsipras' capitulation to EU demands will increase tensions within Syriza, but we expect the opposition comfortably to offset any government dissenters in this week's vote.
We expect today's consumer prices figures to show that CPI inflation picked up to 0.5% in May, from 0.3% in April, exceeding the 0.4% rate anticipated by both the consensus and the MPC, in last month's Inflation Report. We expect the increase to be driven by a jump in the core rate to 1.4%, from 1.2% in April.
A closely watched indicator of the German economy has come in weaker than analysts had anticipated, dampening hopes for the country's revival
The consensus for a mere 0.3% month-to-month rise in retail sales volumes in November looks too timid; we anticipate a 0.7% gain.
The U.S. housing market stumbled into 2015 as a leading indicator of home sales dipped in December
Investors in Eurozone banks continue to face uncertain times, despite the ECB's best efforts to prop up the economy and financial markets via QE. The latest hit to confidence comes from the bail-in of selected senior debt in Portugal's Banco Espirito Santo. When the troubled lender was restructured in mid-2014, the equity and junior debt were left in a "bad" bank--and were virtually wiped out--while the deposits and senior debt went into the "good" bank Novo Banco. Senior debt holders expecting to recoup their money, however, were startled earlier this month by the decision to "re-assign" five selected bonds with total face value of €2B from Novo Banco to the bad bank, in effect wiping out the investors.
The key labor market numbers from today's August NFIB survey of small businesses have already been released--they appear a day or two before the employment report--but they will be reported as though they are news. The headline hiring intentions reading dipped to nine from 12, leaving it near the bottom of the range of the past couple of years.
Industrial production in the euro area dipped in February. Output fell 0.8% month-to-month pushing the year-over-year rate down to 0.8% from a revised 2.9% in January. This indicates that Eurozone manufacturing continues to lag the pace seen in previous business cycle upturns.
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%.
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.
Mexican policymakers stuck to the script yesterday and voted unanimously to cut the main rate by 50bp to 5.50%, its lowest level in more than three years.
Yesterday's data provided further evidence of the EZ economy's response to the Covid-19 shock, though we recommend that investors take the numbers with a pinch of salt. In Germany, the final CPI report for April showed that headline inflation slipped to 0.9% year-over-year, from 1.4% in March, trivially above the first estimate, 0.8%.
A modest dip in gasoline prices will hold down the October CPI, due today, but investors' attention will be on the core, after five undershoots to consensus in the past six months.
Italy's political leadership faces its first biggest test in autumn, when it has to deliver its first budget.
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.
We want to be very clear about the terrible-looking December retail sales numbers: The core numbers were much less bad than the headline, and there is no reason to think the dip in the core is anything other than noise.
January's CPI inflation of 1.8%, up from 1.6% in December, was one-tenth lower than anticipated by the consensus, the Bank of England and ourselves. The undershoot, however, was entirely due to a pull-back in clothing inflation which is unlikely to be sustained. Price pressures across the rest of the economy have continued to intensify, suggesting that CPI inflation still is on course greatly to exceed the 2% target later this year.
Yesterday's second estimate of Q4 Eurozone GDP confirmed the upbeat story from the advance report, despite the dip in headline growth.
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.
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%.
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.
We anticipated that the G20 meeting at Osaka over last weekend would be a potentially important mark of thawing relations between China and the U.S., with the hotly awaited meeting between Messrs. Xi and Trump.
The PMI survey points to a slow, but steady improvement, in Eurozone manufacturing. The gauge rose marginally to 52.5 in June, up from 52.2 in May. This pushed the quarterly average in Q2 to 52.2, up from 51.1 in Q1. The survey is also telling a story of broad-based manufacturing strength in the two major peripheral economies, despite declines in June.
The business cycle in the Eurozone tends to follow a fairly simply script, at least in broad terms.
Brazil's economic data last week were appalling. The IPCA-15 price index rose 1.3% month-to-month, the fastest pace in 12 years, pushing the annual rate to 7.4% in mid-February from 6.7% in mid-January,well above the 6.5% upper bound of the BCB's target range.
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.
The deterioration of the Markit/CIPS manufacturing survey in November should temper optimism about the potential benefits of sterling's depreciation. The PMI fell to 53.4 in November, from 54.2 in October.
A no-deal Brexit is a remote possibility. The U.K. government and EU are closing in on a deal and Brexiteers within the Conservative party have failed, so far, to trigger a confidence vote on Mrs. May's leadership.
Bond yields in Italy remain elevated, but volatility has declined recently; two-year yields have halved to 0.7% and 10-year yields have dipped below 3%.
July's consumer price figures--published on August 15th, while we are on vacation--look set to show that June's drop in CPI inflation was just a blip. We think that CPI inflation ticked up to 2.7% in July, from 2.6% in June, on track to slightly exceed 3% toward the end of this year.
Industrial sector activity in the euro area was broadly stable at the beginning of the third quarter, despite the headline dip in the July manufacturing PMI. The Eurozone index fell to 52.0 in July, from 52.8 in June, but if it holds at this level it will be unchanged in Q3 compared with the second quarter.
The March money and credit figures provide more evidence that the economy's weak start to the year won't be just a blip.
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%.
Surveys suggest that today's retail sales figures will show that sales volumes increased by around 1% month-to-month in June, significantly exceeding the consensus, 0.4%. But the pickup in June likely will be just a blip; the further intensification of the squeeze on real wages and a tightening of unsecured lending standards will keep retail sales on a flat path in the second half of 2017.
The Eurozone's current account surplus slipped at the start of Q2, falling to €28.4B in April from an upwardly-revised €32.8B in March.
Under normal circumstances, we would have no hesitation calling for substantially higher long Treasury yields and a lower earnings multiple as the Fed raises rates. History tells us that you fight the Fed at your peril, as our first two charts show.
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.
Greek Finance Minister Yanis Varoufakis' letter requesting a six-month loan extension has been interpreted widely as Syriza throwing in the towel. But we don't see this way. The best possible outcome for Greece is to be able to participate in the ECB's sovereign QE program, and to negotiate a new deal with the Troika; the request for an extension could very well achieve both.
The two key planks of the argument that a substantial easing of fiscal policy won't be inflationary are that labor participation will be dragged higher, limiting the decline in the unemployment rate, while productivity growth will rebound, so unit labor costs will remain under control.
The Andean economies have been clear examples of true leadership in the current global crisis. Leaders of these countries acted rapidly to contain the spread of the virus, jumping right over the phases of denial, anger and unscrupulousness we've seen in Brazil and Mexico.
The Eurozone's current account surplus remains in a firm uptrend, and should continue to rise this year, despite a small dip in the February surplus to €26.4B from a revised €30.4B in January.
As we're writing, the price of U.S. crude oil is only about 50 cents per barrel lower than on Thursday, when markets began to anticipate an OPEC deal to cut production over the weekend. The failure of the Doha talks generated an initial sharp drop in oil prices, but the damage now is very limited, as our first chart shows.
Retail sales fell back to earth in September, indicating that the pick-up in spending over the summer largely was a weather-related blip.
Car sales continue to offer solid support for consumption spending in the Eurozone. Growth of new car registrations in the euro area fell trivially to 10.6% year-over-year in September, from 10.8% in August, consistent with a stable trend. Surging sales in the periphery are the key driver of the impressive performance, with new registrations rising 22.1% and 17.1% in Spain and Italy respectively, and surging 30% in Portugal. Favorable base effects mean that rapid growth rates will continue in Q4, supporting consumers' spending.
Barring a disaster, the four-year cyclical upturn in the euro area will continue in the coming quarters. Inflation is a lagging indicator and therefore should rise, and investors should be adjusting their mindset to higher interest rates. But the reality today looks very different. Final inflation data confirmed that the Eurozone inflation slipped to -0.2% year-over-year in February, from 0.2% in January.
Data on Friday confirmed that headline inflation in the Eurozone rose a bit last month, to 1.5% from 1.4% in January, but also that the core rate dipped by 0.1 percentage points, to 1.0%.
The Eurozone construction sector took a step back at the end of Q1, but only temporarily. Construction output fell 1.1% month-to-month in March, after a revised 5.5% jump in February. The year-over-year rate slipped to +3.6%, from a two-year high of 5.5% in February.
CPI inflation surprised to the downside in April, falling to 0.3% from 0.5% in March. Both the consensus and ourselves expected the rate to hold steady. Nearly all of the surprise, however, was in airfares and clothing inflation, which were depressed, to a greater extent than we anticipated, by the shift in the timing of Easter and bad weather, respectively.
Demands that Germany pay reparations from the Second World War, and the apparently deteriorating relationship between Messrs. Varoufakis and Schauble, have further complicated talks between the Eurogroup and Greece in recent weeks.
The Prime Minister set out her blueprint for Brexit yesterday, asserting that the U.K. will leave the single market and potentially even the E.U.'s customs union in order to control immigration and regain lost sovereignty. She argued that "no deal is better than a bad deal", suggesting that the U.K. might even fall back on its membership of the World Trade Organisation as the basis for trading with the E.U., if her demands were not met.
The euro area's external surplus dipped at the start of Q4.
Fourth quarter construction activity in the Eurozone was much better than in Q3, despite a dip in December. Output fell 0.6% month-to-month in the final month of the year, pushing the year-over-year rate down to -0.4% from a revised 0.3% in November.
Investors have endured a severe test of their resolve in the last few months. Global equity markets have sunk more than 10%, eclipsing the previous low in September, and credit spreads have widened. The bears have predictably pounced and, as if the torrid price action hasn't been enough, media headlines have been littered with advice to "sell everything" and warnings of a 75% fall in U.S. and global equities. When "price is news" we recognise that views from well-meaning economists--often using lagging and revised economic data to describe the world--are of little value.
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.
Historical evidence suggests that we should be worried about the relative weakness in the Eurozone's manufacturing sector. Industrial production ex-construction has historically been a key indicator of the business cycle, despite accounting for a comparatively modest 19% of total value-added in the euro area. In all three previous major downturns, underperformance in the manufacturing sector sounded the alarm six-to-nine months in advance that the economy was about to slip into recession.
After seemingly endless speculation, the confidence vote in Theresa May's leadership of the Conservative party finally has been triggered following the submission of at least 48 letters by disgruntled MPs to the Chairman of the 1922 Committee.
Japan's adjusted trade balance flipped back to a modest surplus of ¥116B in February, after seven straight months of deficit.
The April FOMC minutes don't mince words: "Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee's 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June".
The construction sector in the Eurozone remains moribund. Output fell 0.4% month-to-month in September, pushing the year-over-year rate up to 1.8% from a revised 1.4% fall in August. Declines were recorded in France, Germany, and Italy, with a small increase in Spain. These data could, in theory, lead to revisions in the final Q3 Eurozone GDP data released December 8th, but we very much doubt they will move the needle. Our first chart shows the relationship between construction and GDP growth has broken down since the crisis.
Friday's data confirmed that inflation in the Eurozone slipped to a 14-month low of 1.1%, from 1.3% in January, 0.1 percentage points below the first estimate.
RPI inflation has declined in importance as a measure of U.K. inflation and was stripped of its status as a National Statistic in 2013. Yet it is still used to negotiate most wage settlements, calculate interest payments on index-linked gilts, and revalue excise duties. We have set out our above-consensus view on CPI inflation several times, including in yesterday's Monitor. But the potential for the gap between RPI and CPI inflation to widen over the coming years also threatens the markets' view that the former will remain subdued indefinitely.
CPI inflation held steady at -0.1% in October, matching its lowest rate since March 1960. We had expected the rate to tick down to -0.2%, but the rebound in clothing inflation in October, following a period of discounting in September, was larger than we had anticipated. Looking ahead, we can be fairly confident that CPI inflation will pic k up sharply over the coming months.
A November interest rate rise is far from the done deal that markets still anticipate, even though CPI inflation rose to 3.0% in September from 2.9% in August.
Talks between the EU and the U.K. Prime Minister David Cameron are expected to culminate with a deal today, but we doubt this week's summit will be the final word. A detailed re-negotiation of the U.K.'s relationship with the EU is the last thing the large continental economies need at the moment.
The external surplus in the EZ economy slipped in July. The seasonally-adjusted current account surplus dropped to €21.0B, from a revised €29.5B in June, hit by an increase in the current transfers deficit, and a falling trade surplus. The recent increase in the transfers deficit partly is due to the migrant deal with Turkey, and we expect it to remain elevated.
The elevated September ISM non-manufacturing index reported yesterday--it dipped to 56.9 but remains very high by historical standards--again served to underscore the depth of the bifurcation in the economy. The services sector, boosted by the collapse in gasoline prices and the strong dollar, is massively outperforming the woebegone manufacturing sector.
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.
Germany continues to draw fire for its ballooning trade surplus, but momentum in net exports is easing. The seasonally adjusted trade surplus dipped marginally to a three-month low of €19.7B in April, from €19.8B in March, as stronger imports offset a modest rise in exports. The German trade surplus averaged €19.9B in the first four months of 2017, about 10% lower than the cyclical peak, in the middle of 2016.
A strong December didn't change the story of another year of Eurozone equity underperformance in 2016. The total return of the MSCI EU, ex-UK, last year was a paltry 3.5%, compared to 11.6% and 10.6% for the S&P 500 and MSCI EM respectively. In principle, the conditions are in place for a reversal in this sluggish performance are present. Equities in the euro area do best when excess liquidity--defined as M1 growth less GDP growth and inflation--is rising.
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.
The April CPI report today will be watched even more closely than usual, after the surprise 0.12% month-to-month fall in the March core index. The biggest single driver of the dip was a record 7.0% plunge in cellphone service plan prices, reflecting Verizon's decision to offer an unlimited data option.
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.
In one line: Signs of moderate growth unlikely to tip the balance on the MPC.
In one line: Weakness reflects pre-election nerves; Covid-19, however, has re-written the post-election script.
In one line: Still no sign of a slowdown in tax receipt data.
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.
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.
Yesterday's French industrial production data were worse than we expected. Output slipped 1.1% month-to-month in September, pushing the year-over-year rate down to -1.1% from a revised +0.4% in August. Mean-reversion was a big driver of the poor headline, given the upwardly-revised 2.4% jump in August.
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.
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.
In three of the past four months, new home sales have been reported above the 460K top of the range in place since early 2013. Sales dipped below this mark in November, when the weather across the country as a whole was exceptionally cold, relative to normal.
Peru's central bank likely will cut its main interest rate by 25bp to 3.25% on Thursday. Inflation dipped in September and likely will increase only marginally in October, while economic growth was relatively sluggish at the start of Q3.
The single most startling development in the labor market data in recent months is acceleration in labor force growth. The participation rate has risen only marginally, because employment has continued to climb too, but the absolute size of the labor force is now expanding at its fastest pace in nine years, up 1.9% in the year to September.
Brazil's benchmark inflation index, the IPCA, rose 0.5% unadjusted month-to-month in July, pushing the year-over-year rate down marginally to 8.7%, from 8.8% in June. Overall inflation pressures in Brazil are easing, especially in regulated prices, which have been the main driver of the disinflation trend this year. But market-set prices are still causing problems.
The seasonally adjusted trade surplus in Germany slipped to €19.6B in July, from €21.2B in June, its lowest since April, and we are confident that it has peaked for this cycle.
People don't like to see the value of their portfolios decline, and it is just a matter of time before the benchmark measures of consumer sentiment drop in response to the 7% fall in the S&P since mid-August. Sometimes, movements in stock prices don't affect the sentiment numbers immediately, especially if the market moves gradually. But the drop in the market in August was rapid and dramatic, and gripped the national media.
In one line: Sentiment still very elevated; inflation expectations dip.
In one line: The trend is rising, despite the September dip; new cycle highs likely by year-end.
In one line: The trend in goods spending is now rising; energy inflation rose further, but the core rate dipped.
In one line: Energy inflation rose, but the core rate dipped.
In one line: Decent, but we think production slipped in December.
In one line: Robust, despite marginal dip in M1 growth.
In one line: Don't panic over the dip in consumer sentiment; net trade likely lifted Q4 GDP growth.
In one line: Hit by the unwinding of Easter-distortions, but still a big dip.
China's see-sawing trade surplus is likely to continue in the short run, but it mostly has peaked. Japan's unadjusted current account surplus slipped to ¥1,211B in June, from ¥1,595B in May, marginally surpassing the consensus, ¥1,149B.
In one line: Solid, but held back by a slide in Ireland; dip in the ZEW in line with the Sentix.
In one line: Stung by a collapse in energy inflation, but the core rate dipped too.
In one line: Just a dip; Q1 was excellent overall.
In one line: A plunge in energy inflation, and probably a dip in the core rate
In one line: Positive U.S. tests dip below 5% as new case numbers start to tumble.
In one line: Brexit preparations provide a temporary fillip to manufacturing.
In one line: Too soon to take fright from the slowdown in tax receipts.
Our Brexit base case is that the new Prime Minister will request, and the E.U. will grant, another lengthy extension of the U.K.'s membership in October, thereby perpetuating damaging uncertainty, but avoiding the pain of no-deal.
In one line: The rate of increase of U.S. cases is slowing; daily new cases to dip in late July?
In one line: A collapsing participation rate prevents a sharper deterioration in unemployment.
In one line: Solid start to Q4 for net trade; wage growth dipped, slightly, in Q4.
In one line: Exports hit by slowdown in shipments to Asia and the rest of Europe.
In one line: An expected rebound in the jobless rate, despite plunging participation
A year has now elapsed since sterling began its precipitous descent, and the trade data still have not improved. Net trade subtracted 0.9 percentage points from year-over-year growth in GDP in Q3. And while the trade deficit of £2.0B in October was the smallest since May, this followed extraordinarily large deficits in the previous two months. In fact, the trade deficit has been on a slightly deteriorating trend over the last year, as our first chart shows, and we expect today's data to show that the deficit re-widened to about £3.5B in November.
Investors have lowered once again their expectations for official interest rates and now do not anticipate any rate hikes this year. Markets appear to have judged that the plunge in oil prices will ensure that inflation is too low for the Monetary Policy Committee to tighten policy. Oil prices, however, are not the be-all and end-all for inflation or monetary policy, and we doubt they will distract the MPC from the continued firming of domestic price pressures this year.
Headline inflation in the Eurozone eased at the start of the year, but leading indicators suggest that the dip will be short-lived.
We're expecting the FOMC to vote unanimously not raise rates today, but we do expect a modestly hawkish tilt in the statement. Specifically, we're expecting an acknowledgment of the upturn in business investment reported in the Q4 GDP data, and of the increase in market-based measures of inflation expectations, given that 10-year TIPS breakevens are now above 2% for the first time since September 2014.
Inflation data last week confirmed that the spectre of deflation is slowly but surely encroaching on the euro area. In Germany, inflation slipped to 0.6% year-over- year in November, from 0.8% in October, and in the Eurozone as a whole the he adline rate declined to 0.3%, from 0.4% in September.
Along with just about every other commentator and market participant, we have been wondering in recent months how longer Treasuries would react to the Fed starting to raise rates at the same time the ECB and BoJ are pumping new money into their economies via QE.
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.
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.
You might want a strong coffee before you read today's Monitor, because we're going deep inside the relationship between the ADP employment report and the official numbers. We have long argued that ADP's headline reading is not a useful indicator of payrolls, because the numbers are heavily influenced by the official payroll data for the previous month, which are inputs to the ADP model. To be clear, ADP's employment number is not generated solely from hard data from companies which use the company for payroll processing; that information is just one input to their model.
Economic survey data have been upbeat recently, but key Eurozone data releases yesterday suggest the ECB will be under pressure to increase monetary policy stimulus further this month. The advance inflation estimate showed that the euro area slipped back into deflation in September, as inflation fell to -0.1% year-over- year, from +0.1% in August. The fall was mainly due to a 8.9% collapse in energy prices, though, and we are very confident the relapse is temporary.
Yesterday was a nearly perfect day for investors in the Eurozone. The Q3 GDP data were robust, unemployment fell, and core inflation dipped slightly, vindicating markets' dovish outlook for the ECB.
EZ bond markets were stung earlier this week by a Bloomberg story suggesting that the ECB, in principle, has agreed on a QE exit strategy which involves "tapering" purchases by €10B per month. The story also specified, though, that the central bank has not discussed when tapering will begin.
Unanticipated movements in the Markit/CIPS services PMI often provoke big market reactions, despite its shortcomings as an indicator of the pace of growth. We suspect December's PMI, released today, could surprise to the downside, reversing most of its rise in November to 55.9 from 54.9 in October. Regardless, we place more weight on the official data, which is more comprehensive and shows clearly the recovery is slowing.
...The data were all over the map, with existing home sales plunging while consumer confidence rose; Chicago-area manufacturing activity plunged but national durable goods were flat; real consumption rose at a decent clip but pending home sales dipped again. Markets, by contrast, are little changed from the week before the holidays. What to make of it all?
While we were out, Brazil's economic, fiscal and political position continued to deteriorate further. The recession deepened in the fourth quarter, with Brazil's economic activity index surprising yet again to the downside in October, falling for the eight consecutive month. The index fell 0.6% month-to-month and 6.4% year-over-year, the biggest contraction since the index began in 2004. And the prospects for first quarter consumption and industrial output have deteriorated substantially. Unemployment increased further in November, and inflation continues to rise, with the mid-month CPI--the IPCA-15 index-- increasing 1.2% month-to-month in November, after a 0.9% increase in October.
Data released over the holidays suggest that money supply dynamics in the Eurozone remain solid, but also that growth is no longer accelerating. M3 growth slipped to 5.1% year-over-year in November from 5.3% in October, partly due to a sharp monthly fall in the stock of repurchase agreements. Momentum in narrow money, however, also dipped. M1 growth slowed to 11.2% year-over-year from 11.8% in October, mainly due to a modest fall in overnight deposit growth.
Mexico's economy lost some momentum in Q4, due mainly to weakness in industrial and agricultural activity, but this was partly offset by the strength of the services sector as consumers' spending again carried the economic recovery. Real GDP rose 0.6% quarter-on-quarter in Q4, after a 0.8% expansion in Q3, the tenth consecutive increase. Year-over-year growth dipped marginally to 2.5% from 2.6% in Q3, but the underlying trend remains stable. In 2015 as a whole the economy expanded by 2.5%, up from 2.3% in 2014.
Yesterday's final February PMI data were slightly stronger than expected, due to upbeat services data. The composite PMI in the Eurozone fell to 53.0, a bit above the initial 52.7 estimate, from 53.6 in January. The PMI likely will dip slightly in Q1 on average, compared to Q4, but it continues to indicate stable GDP growth of about 0.3%-to-0.4% quarter-on-quarter.
The chances of a cut in official interest rates were boosted yesterday by the sharp fall in the business activity index of the Markit/CIPS report on services in February, to its weakest level since April 2013. Its decline, to just 52.8 from 55.6 in January, mirrored falls in the manufacturing and construction PMIs earlier in the week and pushed the weighted average of the three survey's main balances down to a level consistent with quarter-on-quarter GDP growth of just 0.2% in Q1.
Disappointing inflation data remain a critical dark spot in the context of otherwise solid evidence of a firming cyclical recovery. Advance data indicate that inflation was unchanged at a mere 0.2% year-over-year in December, with falling food inflation and a dip in services inflation offsetting easing deflation in energy prices. Headline inflation likely will be volatile in coming months. Base effects will push up the year-over-year rate in energy price inflation further in Q1, but we are wary that continued declines in food inflation could offset this effect.
The first major data release of 2016 showed manufacturing activity slipping a bit further at the end of last year, but we doubt the underlying trend in the ISM manufacturing index will decline much more. Anything can happen in any given month, especially in data where the seasonal adjustments are so wayward, but the key new orders and production indexes both rose in January; almost all the decline in the headline index was due to a drop in the lagging employment index.
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.
Yesterday's EZ CPI report points to a dovish backdrop for next week's ECB meeting. Advance data show that inflation was unchanged at 0.2% year-overyear in August, lower than the consensus, 0.3%. The headline was held back by a dip in the core rate to 0.8%, from 0.9% in July; this offset a lower deflationary drag from energy prices.
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.
Nowhere is the gap between sentiment and activity wider than in the NFIB survey of small businesses. The economic expectations component leaped by an astonishing 57 points between October and December, but the capex intentions index rose by only two points over the same period, and it has since slipped back. In February, the capex intentions index stood at 26, compared to an average of 27.3 in the three months to October.
The likely dip in the headline NFIB index of small business sentiment and activity today will tell us that business owners are unhappy and nervous about the potential impact of the latest China tariffs on their sales and profits.
Investors and market observers of a relatively bearish persuasion argued over the weekend that the details of the October employment report were less encouraging than the headline, principally because the household survey showed that all the job growth, net, was among older workers, defined as people aged 55-plus. This, they argue, suggests that most of the increased demand for labor was concentrated in low-paid service sector jobs, where older workers are concentrated, perhaps reflecting retail hiring ahead of the holidays. Such a wave of hiring is unlikely to be repeated over the next few months, so payroll growth won't be sustained at its October pace.
Market participants and analysts have gradually softened their cautious stance towards Mexico, as concerns about the new U.S. administration's trade and immigration policies have eased, and risks of a credit rating downgrade have lessened.
China's November money and credit data were a little less grim, with only M2 growth slipping, due to unfavourable base effects.
Demand for new mortgages to finance house purchase has rebounded somewhat in recent weeks, following an alarming dip in the wak e of October's stock market correction. At the low, in the third week in October, the MBA's index of applications volume was at its lowest since mid-February, when the reported numbers are substantially depressed by a long-standing seasonal adjustment problem.
If Fed Chair Yellen's objective yesterday was to deliver studied ambiguity in her Testimony--and we believe it was--she succeeded. She offered plenty to both sides of the rate debate. For the hawks, she noted that unemployment is now "...in line with the median of FOMC participants' most recent estimates of its longer-run normal level", and that inflation is still expected to return to the 2% target, "...once oil and import prices stop falling".
German net exports were treading water at the start of the fourth quarter. The seasonally adjusted trade surplus slipped to €17.4B in October, from a revised €17.7B in September, constrained by a 1.3% month-to-month rise in imports, which offset a 0.7% increase in exports.
The MPC's asserted its independence in the minutes of December's meeting, firmly stating that there is "no mechanical link between UK policy and those of other central banks". Markets have interpreted this as supporting their view that the MPC won't be rushed into raising interest rates by the Fed's actions. Investors now expect a nine-month gap between the Fed hike we anticipate next week, and the first move in the U.K.
Yesterday's economic data in Germany cemented the story of a strong start to the year, despite the disappointing headlines. Industrial production slipped 0.4% month-to-month in March, pushing the year-over-year rate down to +1.9% from a revised +2.0% in February.
Amid the intensifying debate about the pros and cons of E.U. membership, higher immigration from the rest of Europe often is blamed for the disappointing weakness of wage growth over the last couple of years. But we see little evidence to support that hypothesis.
Demand for new mortgages to finance house purchase has rebounded somewhat in recent weeks, following an alarming dip in the wak e of October's stock market correction. At the low, in the third week in October, the MBA's index of applications volume was at its lowest since mid-February, when the reported numbers are substantially depressed by a long-standing seasonal adjustment problem.
...The Fed told investors that it now requires only "some further improvement" in labor market conditions before starting to raise rates-- the "some" is new--but did not set out any specific conditions. With the unemployment rate now just a tenth above the top of the Fed's Nairu range, 5.0-to-5.2%, and very likely to dip into it by the time of the decision on September 17, while payroll growth is trending solidly above 200K per month, rates already would have been raised some time ago in previous cycles.
The first of this week's two July inflation reports, the PPI, will be released today. With energy prices dipping slightly between the June and July survey dates, the headline should undercut the 0.2% increase we expect for the core by a tenth or so.
The U.K. is one of the smallest winners among advanced economies from the precipitous decline in oil prices. British oil production still fulfils about 55% of the U.K.'s demand, even though it has declined by two-thirds since its 1999 peak. Oil consumption therefore exceeds production by a much smaller margin in the U.K. than in most other European countries. As a result, the boost to the U.K. economy from the $10 decline in oil prices over the last month isn't much to write home about.
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.
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.
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.
Another weekend, another summit, but the sense of urgency is acute this time. Greece, and the rest of the world, will likely have to prepare for Grexit if Mr. Tsipras' final proposal is rebuffed by the EU. We expect a deal, with Greece to remain in the Eurozone, but visibility is limited and uncertainty is high.
Korea's current account surplus should rebound sharply in December. The rate of QE in Japan slipped in December.
The downturn in equity prices deepened yesterday, with the FTSE 100 index closing at 5,537, 22% below its April 2015 peak. We remain unconvinced, however, that financial market turmoil is set to push the U.K. economy into a recession. We continue to take comfort from the weakness of the past relationship between equity prices and economic activity.
Last week's strong ISM manufacturing survey for November likely will be followed by robust data for the non-manufacturing sector today, but the headline index, like its industrial counterpart, likely will dip a bit.
Early last week, Chile's industrial production report for December encouraged some market participants to expect further BCCh easing.
To be clear, the 2.9% year-over-year increase in headline hourly earnings in January does not restore the prior relationship between the rate of growth of nominal wages and measures of labor market tightness.
Colombia's BanRep stuck to the script on Thursday by leaving the policy rate on hold at 4.25%.
Companies' profit margins have fared relatively well during this recovery, and on many measures, they are back to pre-crisis levels. But looking ahead, corporate profitability is set to be squeezed as labour takes a larger share of national income and the Government gets to grips with the budget deficit by increasing corporate taxation.
Survey data in EZ manufacturing remain soft. Yesterday's final PMI report for August confirmed that the index dipped to 54.6 in August, from 55.1 in July, reaching its lowest point since the end of 2016.
China's current account surplus was revised down last week to $46.2B in Q2, from $57.0B in the preliminary data, marking a dip from $49.0B in Q1.
Peru is now in the grip of a severe political storm that is shaking the country's foundations and darkening the already fragile economic outlook.
A general election this year now looks inevitable, after the defection of Phillip Lee MP from the Tories to the Lib Dems, and the PM's threat to seek an election if MPs take control of the Order Paper on Tuesday evening.
December's Markit/CIPS surveys for the manufacturing, construction and services sectors suggest that the economy ended 2017 on a lacklustre note.
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.
The simultaneous decline in both ISM indexes was a key factor driving markets to anticipate last week's Fed easing.
Recession fears were fanned yesterday by the renewed deterioration of the Markit/CIPS services survey.
In principle, predicting the interest rate policies of an inflation-targeting central bank should be simple. Our first chart shows a standard Taylor Rule rate for the Eurozone based on the ECB's inflation target of 2%, the long-run average unemployment rate and a long run "equilibrium interest rate" of 1.5%. This framework historically has been a decent guide to ECB policy.
Yesterday's news that the business activity index of the Markit/CIPS services survey fell again in January, to just 50.1--its lowest level since July 2016--has created a downbeat backdrop to the MPC meeting; the minutes and Q1 Inflation Report will be published on Thursday.
Activity surveys picked up across the board in April, offering hope that the slowdown in GDP growth--to just 0.3% quarter-on-quarter in Q1-- will be just a blip. The headline indicators of surveys from the CBI, European Commission, Lloyds Bank and Markit all improved in April and all exceeded their 2004-to-2016 averages.
Wednesday's Brazilian industrial production data were worse than we expected but the details were less alarming than the headline. Output slipped 1.8% month-to-month in March, the biggest fall since August 2015, setting a low starting point for Q2.
Yesterday's EZ consumers' spending data were mixed. Retail sales in the euro area fell by 0.3% month-to-month in May, extending the slide from a revised 0.1% dip in April.
It will take months, and perhaps years, before markets have any clarity on the U.K.'s new relationship with the EU. In the U.K., the main parties remain shell-shocked. Both leading candidates for the Tory leadership, and, hence, the post of Prime Minister, have said that they would wait before triggering Article 50.
Youth unemployment remains a blemish on the Eurozone economy, despite an increasingly resilient cyclical recovery. The unemployment rate for young workers aged 15-to-24 years stood at 18.4% at the end of April, chiefly due to high joblessness in the periphery.
The nosedive in the Markit/CIPS manufacturing PMI in April provides an early sign that GDP growth is likely to slow even further in the second quarter. The MPC, however, looks set to keep its powder dry. We continue to think that the next move in interest rates will be up, towards the end of this year.
We're hearing a lot about permanent changes to the economy in the wake of Covid-19, but that might not be the right description. Not much is permanent, and assuming permanence in just about anything, therefore, is risky.
The big news in the EZ yesterday was the announcement by German chancellor Angela Merkel that she will step down as party leader for CDU later this year, and that she will hand over the chancellorship when her term ends in 2021.
Advance inflation data from Germany and Spain yesterday indicate that the Eurozone slipped back into deflation in September. German inflation fell to 0.0% in September from 0.2% in August, and deflation intensified in Spain as inflation fell to -0.9% from -0.4% last month. This likely pushed the advance Eurozone estimate--released today--below zero. We think inflation fell to -0.1% in September, down from +0.1% in August. The fall will be due mainly to falling energy prices, and we continue to think that the underlying trend in inflation is stabilising, or even turning up.
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.
We now have consumption data for two-thirds of the first quarter, making it is easy to see that a near-herculean spending effort is required to lift the quarter as a whole into anything like respectable territory. After February's 0.1% dip, real spending has to rise by at least 0.4% in March just to generate a 2.0% annualized gain for the quarter, and a 2.5% increase requires a 0.7% jump.
The key message of the minutes of the Copom meeting, released yesterday, is that policymakers remain worried about the inflation outlook and, in particular, about uncertainties surrounding fiscal tightening. But the Committee reinforced the signal that the Selic rate is likely to remain at the current level, 14.25%, for a "sufficiently prolonged period". The economy is in a severe recession and the rebalancing process has been longer and more painful than the Central Bank anticipated.
The 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.
Over the sleepy August holidays, a view has gained traction in the media that the U.K. economy is showing little damage from the Brexit vote. Optimists argue that the size and composition of the 0.6% quarter-on-quarter rise in Q2 GDP, the 1.4% month-to-month jump in retail sales volumes in July, and the slight dip in the unemployment claimant count demonstrate that the recovery is in good shape.
Advance country data indicate that headline EZ inflation fell slightly in June; we think the rate dipped to 1.3% year-over-year, from 1.4% in May.
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.
Yesterday's advance data from Germany and Spain suggest that today's Eurozone inflation report will undershoot the consensus. In Germany, headline inflation slipped to 1.6% in March from 2.2% in February, and in Spain the headline rate plunged to 2.3% from 3.0%.
Japan's services PMI points to Q2 GDP contraction. China's Caixin services PMI highlights the reasons for official concern over employment. Korea's current account slips into deficit for the first time since 2012.
The days of +2% inflation in the Eurozone are long gone. Data on Friday showed that the headline rate slipped to 1.4% year-over-year in January, from 1.6% in December, thanks to a 2.9 percentage point plunge in energy inflation to 2.6%.
The Eurozone enjoyed a strong start to 2017. Yesterday's advance data showed that real GDP rose 0.5% quarter-on-quarter in Q1, a similar pace to Q4, which was revised up by 0.1 percentage points. The year-over-year rate dipped to 1.7%, from an upwardly revised 1.8% in Q4.
In Friday's Monitor--see here--we argued that the official labour market data were less than accurate at the moment, and we'd make the same point about the CPI. The April report showed that EZ headline inflation fell to 0.4% year-over-year, from 0.7% in March, while the core rate dipped by 0.1pp, to 1.0%.
Following the much-anticipated meeting between Presidents Xi and Trump over the weekend, the U.S. will now leave existing tariffs on $200B of Chinese goods at 10%, rather than increasing the rate to 25% in January, as previously slated.
On all accounts, the ECB announced a significant addition to its stimulus program yesterday. The central bank cut the deposit rate by 0.1%, to -0.3%, and extended the duration of QE until March 2017. The ECB also increased the scope of eligible assets to include regional and local government debt; decided to re-invest principal bond payments; and affirmed its commitment to long-term refinancing operations in the financial sector for as long as necessary. The measures were not agreed upon unanimously, but the majority was, according to Mr. Draghi, "very large".
While we were out, the economic news in LatAm was mostly positive. The main upside surprise came from Mexico, with the IGAE activity index--a monthly proxy for GDP--rising 2.9% year-over-year in August, up from 1.2% in July, and an average of 2.4% in Q2. A modest rebound was anticipated, but the headline was much better than we and the markets expected.
The EU's negotiations with the U.K. over Brexit are off to a bad start. The position in Brussels is that negotiations on a new relationship can't begin before the bill on the U.K.'s existing membership is settled. But this has been met with resistance by Westminster; the U.K. does not recognise the condition of an upfront payment to leave.
Economic data in the Eurozone continue to come in soft. Yesterday's final manufacturing PMIs confirmed that the euro area index slipped to an eight-month low of 56.6 in March, from 58.6 in February.
The latest drop in crude oil prices me ans that sub-zero headline CPI inflation in the spring is now more likely than not. We expect a lurch down from November's 1.3% to 0.7% in December, then 0.3% in January. The rate will remain close to that level for the next few months before hitting zero in May and slipping into negative territory--just--in June and July.
Today's advance EZ CPI report likely will show that inflation pressures eased in May. We think inflation slipped to 1.5% year-over-year, from 1.9% in April, as the boost to the core rate from the late Easter faded.
The Chancellor lived up to his reputation for fiscal conservatism yesterday and is pressing ahead with a tough fiscal tightening. He hopes that this will create scope to loosen policy if the economy struggles after the U.K. leaves the EU in 2019, but we remain concerned his "fiscal headroom" will be much smaller than he currently anticipates.
Mr. Macron's victory in France answers two questions for markets, at least in the short run. Firstly, France will stay in the Eurozone, and Mr. Macron will not call a referendum on EU membership. Mr. Macron has come to power with a mandate to strengthen economic integration and co-operation between Eurozone economies.
We just can't get away from the deeply vexed question of wages; specifically, why the rate of growth of nominal hourly earnings has risen only to just over 2.5%, even though the historical relationship between wage gains and the tightness of the labor market points to increases of 4%-plus.
The Monetary Policy Committee continues to assert that it can leave interest rates at rock-bottom levels, even though the unemployment rate has returned to its pre-recession level, because it understates the extent of slack in the labour market. If that hypothesis were correct, however, the relationship between the unemployment rate and wage growth would have weakened. But this clearly has not happened, as our first chart shows.
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.
China's official manufacturing PMI slipped in June, but the overall picture for Q2 is sound despite the uncertainty posed by rising trade tensions with the U.S.
In contrast to the strong December trade numbers in France--see here--yesterday's German data were soft. The seasonally adjusted trade surplus dipped to €21.5B in December, from €22.3B in November.
The MPC signalled yesterday that it is actively considering a May rate hike, stating that rates likely will "...need to be tightened somewhat earlier and by a somewhat greater degree over the forecast period than anticipated at the time of the November Report".
Sterling was the worst performing G10 currency in 2016 and most analysts anticipate further weakness in 2017. The cost of purchasing downside protection for sterling over the next year also continues to exceed upside protection, as our first chart shows.
The FOMC minutes showed both sides of the hike debate are digging in their heels. As the doves are a majority--rates haven't been hiked--the tone of the minutes is, well, a bit do vish. But don't let that detract from the key point that, "Most participants continued to anticipate that, based on their assessment of current economic conditions and their outlook for economic activity, the labor market, and inflation, the conditions for policy firming had been met or would likely be met by the end of the year." Confidence in this view has diminished among "some" participants, however, worried about the impact of the strong dollar, falling stock prices and weaker growth in China on U.S. net exports and inflation.
Yesterday's industrial production data in Germany were better than we feared. Output slipped 0.3% month-to-month in August, depressing the year- over-rate to -0.4% from 1.6% in July, a minor fall given evidence of a big hit from weakness in the auto sector ahead of the EU emissions tests.
Japan's firms are done hiring. Tokyo inflation points to uptick in national gauge, driven by non-core effects. Japan's start to Q4 goes from bad to worse, as industrial production tanks in October. Still far too soon to call time on Korea's IP recovery, despite the October setback. Governor Lee attempts to manage 2020 expectations, as the BoK stands pat after the October cut.
China's PMIs are not yet fully picking up the coronavirus; China's non-manufacturing PMI lifted by local government spending; not yet hit by the virus; Japan's job postings still suggest the unemployment rate is unsustainably low; Japan's national inflation has less far to fall than Tokyo's; The coronavirus will delay the return of Japanese retail sales to pre-tax hike levels; Investment goods drive Japan's IP rebound in December; no real support now for consumer goods production; December probably is as good as it will get for Korean industrial production, for now
Advance inflation data from Germany and Spain indicate that the Eurozone slipped into deflation last month, piling maximum pressure on Mr. Draghi later this month. Inflation in the euro area's largest economy fell to 0.2% year-over-year in December from 0.6% in November, driven by a 6.6% plunge in the energy component.
Punchy output gains from China's manufacturers will soon give way. A mixed bag for China's non-manufacturing sectors at the start of Q3. Don't be fooled by the June slip in Japan's unemployment rate. Expect only a mild recovery in Japanese industrial production, for now. Korean production ended Q2 on a strong note.
Korean IP was due a bounce after February's sourcing woes... that will pale in comparison to the April hit.
Japan's stable unemployment rate belies underlying weakness. Tokyo energy inflation turns the corner. Sales tax preparations breathe life into Japanese production in May... if only temporarily. Korea's IP plunge in May shows why Japan can't rest on its laurels.
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.
In one line: We anticipate a curve-steepening move in October, combined with some sugar coating.
The BoJ keeps it promises vague. Japan's April is turning out quite nicely. PPI inflation in Korea slipped in May, and is heading for deflation in Q3.
The twists and turns of the French presidential election campaign continue. François Fillon was tipped as favourite after he won the Republican primaries. But Mr. Fillon now is struggling to keep his campaign on track after allegations that he gave high paying "pro-forma" jobs to his wife as an assistant last year. The socialist candidate, Benoit Hamon, has been hampered by the unpopularity of his party's incumbent, François Hollande, and has lost ground to the far-left Jean-Luc Mélenchon.
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.
...The Fed did nothing, surprising no-one; the labor market tightened further; the housing market tracked sideways; survey data mostly slipped a bit; and oil prices jumped nearly $4, briefly nudging above $50 for the first time since May.
We're guessing Fed Chair Yellen would have preferred to have another acceleration in hourly earnings and a dip in the unemployment rate along side the hefty 211K leap in November payrolls, but no matter. At its October meeting, the Fed wanted to see "some further improvement in the labor market", and by any reasonable standard a 509K total increase in payrolls in two months fits the bill.
Hopes that GDP growth will strengthen following the general election, which has eliminated near- term threats of a no-deal Brexit and a business- hostile Labour government, were bolstered yesterday by the release of December's Markit/ CIPS services survey.
Today's consumer credit report for April likely will show that the stock of debt rose by about $15B, a bit below the recent trend. The monthly numbers are volatile, but the underlying trend rate of increase has eased over the past year-and-a-half, as our first chart shows. The slowdown has been concentrated in the non-revolving component, though the rate of growth of the stock of revolving credit--mostly credit cards--has dipped recently, perhaps because of weather effects and the late Easter.
Ms Keiko Fujimori, the candidate of Peru's conservative Fuerza Popular party, seems on course to win the first round of the presidential election this Sunday, April 10. According to the latest Ipsos poll, the daughter of former President Alberto Fujimori continues to lead the race, with the support or about 34% of voters.
Yesterday's EZ PMI data surprised to the downside. The composite PMI in the euro area dipped to 52.9 in August, from 53.2 in July, below the initial estimate 53.3. The headline was marred by weakness in the German services PMI, which crashed to a 40-month low of 51.7, from 54.4 in July.
Our conviction that the economy continues to grow at a snail's pace increased yesterday following the release of August's Markit/CIPS services survey.
EZ consumers' spending slowed at the start of Q3. Retail sales slipped 0.3% month-to-month in July, pushing the year-over-year rate down to 2.6% from an upwardly revised 3.3% in June.
The Greek polls released Sunday evening indicate a comfortable victory for "no," rejecting the latest EU proposal. This is not a good outcome for the market, and volatility will likely increase substantially today. The result--not confirmed as we go to press but very clearly indicated by the count so far--gives an air of legitimacy to Syriza's brinkmanship, but the creditors' reaction to a "no" vote, which they likely did not expect, is uncertain.
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
Data while we were away have intensified fears that the global, and by extension EZ, economy is slipping into recession.
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.
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 Chancellor's Budget today looks set to prioritise retaining scope to loosen policy if the economy struggles in future, rather than reducing the near-term fiscal tightening. In November, the OBR predicted that cyclically-adjusted borrowing would fall to 0.8% of GDP in 2019/20, comfortably below the 2% limit stipulated by the Chancellor's new fiscal rules.
Demand for German manufacturing goods slipped at the end of Q3. Yesterday's report showed that factory orders fell 0.6% month-to-month in September, constrained by weakness in domestic demand and falling export orders to other EZ economies.
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.
Banxico's likely will deliver the widely-anticipated rate hike this Thursday. Policymakers' recent actions suggests that investors should expect a 50bp increase, in line with TIIE pric ing and the market consensus. The balance of risks to inflation has deteriorated markedly on the back of the "gasolinazo", a sharp increase in regulated gasoline prices imposed to raise money and attract foreign investment.
February's GDP report, released on Thursday, likely will show that the economy continued to struggle for momentum, despite the fillip to sentiment stemming from the general election.
As recently as late 2008, the share of employee compensation in GDP was slightly higher than the average for the previous 20 years. But it would be wrong to argue, therefore, that the squeeze on labor is a phenomenon only of the past few years. It's certainly true that labor's share dropped precipitously from 2009 through 2011, and has risen only marginally since then.
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.
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Miguel Chanco helps to produce Pantheon's Asia service, having covered several parts of the region for nearly ten years. He was most recently the Lead Analyst for ASEAN at the Economist Intelligence Unit. Prior to that role, Miguel focused on India and frontier markets in South Asia for Capital Economics and BMI Research, Fitch Group.
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