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March auto sales were much weaker than expected, falling by 5.5% month-to-month to a 25-month low, 16.5M. The average for the previous six months was 17.8M. The sudden drop in March likely was driven in large part by the huge snowstorm which tracked across the Northeast in the middle week of the month, so we think a decent rebound in April is a good bet.
The 1.2% month-to-month fall in retail sales volumes in March undoubtedly was due mostly to the bad weather.
Today's official figures likely will show that retail sales weakened a touch in December. Indeed, we think that the consensus forecast for a 0.1% month-to-month decline in sales volumes is too timid; we look for a 0.5% drop. Retail sales surged by 1.8% month-to-month in October and then rose by 0.2% in November, so a correction is overdue. Clothing sales, in particular, likely fell sharply in December.
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.
Retail sales volumes jumped by 2.3% month-to-month in April, exceeding the 1.0% consensus and even our 2.0% forecast. It would be a big mistake to conclude, however, that households' spending will propel the economy forward this year like it did between 2013 and 2016.
The level of mortgage applications long ago ceased to be a reliable indicator of the level of new home sales, thanks to the fracturing of the mortgage market triggered by the financial crash. But the rates of change of mortgage demand and new home sales are correlated, as our first chart shows, and the current message clearly is positive.
April's retail sales figures, released today, likely will show only a partial reversal of the sharp 1.3% month-to-month fall in sales volumes in March. This would reinforce the impression that the recovery in consumer spending has been becalmed by slower job growth, the intensification of the fiscal squeeze and heightened uncertainty about the economic and political outlook.
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.
June's 0.5% month-to-month fall in retail sales volumes does little to change the picture of recent strength.
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.
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.
On the face of it, June's retail sales figures suggest that households have splurged in Q2, re-energising GDP growth after its slowdown in Q1. Sales volumes rose by 0.6% month-to-month in June, completing a 1.5% quarter-on-quarter jump in Q2.
August's retail sales figures, released today, look set to show that growth in consumers' spending has remained subpar in Q3, casting doubt over whether the MPC will conclude that the economy can cope with a rate hike this year.
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.
Today brings more housing data, in the form of the May existing home sales numbers.
Usually, we forecast existing home sales from the pending sales index, which captures sales at the point contracts are signed.
Retail sales fell sharply in September, highlighting that consumers still are spending only cautiously amid high economic uncertainty and falling real wages.
December's retail sales figures, released today, likely will show that the surge in spending in November was driven merely by people undertaking Christmas shopping earlier than in past years, due to Black Friday.
In the short-term, all the housing data are volatile. But you can be sure that if the recent pace of new home sales is sustained, housing construction will rise.
Yesterday's data on EZ car sales added to the evidence that consumers' spending is slowing. We now reckon sales will rise by 1% quarter-on-quarter in the third quarter, after gains averaging 2.6% in the first half of the year.
This week's labour market, inflation and retail sales data--the last before the MPC meets on May 10--will have a major bearing on the Committee's decision.
On the face of it, recent retail spending surveys have been puzzlingly weak in light of the pick-up in employment growth, still-robust real wage gains and renewed momentum in the housing market. We think those surveys are a genuine signal that retail sales growth is slowing, and expect today's official figures to surprise to the downside. But retail sales account for just one-third of household spending, and, in contrast to the early stages of the economic recovery, consumers now are prioritising spending on services rather than goods.
The softness of the headline September retail sales numbers hid a decent 0.5% increase in the "control" measure, which is the best guide to consumers' spending on non-durable goods.
The consensus view that today's retail sales data will show volumes increased by 0.2% month-to-month in October is too sanguine.
January's retail sales figures look set to show that growth in consumers' spending remains stuck in low gear.
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.
Chinese April retail sales growth slowed sharply in value terms, to 9.4% year-over-year, from 10.1% in March.
Today's official retail sales figures look set to show that consumers tightened their purse strings at the start of this year, following last year's spending spree. We think that retail sales volumes rose by just 1.0% month-to-month in January; that would be a poor result after December's 1.9% plunge. Surveys of retailers have been weak across the board. The reported sales balance of the CBI's Distributive Trade Survey collapsed to -8 in January, from +35 in December. The balance is notoriously volatile, but the 43-point drop is the largest since the survey began in 1983.
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.
October's colossal 1.9% month-to-month jump in retail sales volumes greatly exceeded the 0.5% consensus and even our own top-of-the- range 1.0% forecast.
The first estimate of retail sales growth in August was weaker than implied by the Redbook chainstore sales survey, but our first chart shows that the difference between the numbers was well within the usual margin of error.
If we're right in our view that the strength of the dollar has been a major factor depressing the rate of growth of nominal retail sales, the weakening of the currency since January should soon be reflected in stronger-looking numbers. In real terms--which is what matters for GDP and, ultimately, the lab or market--nothing will change, but perceptions are important and markets have not looked kindly on the dollar-depressed sales data.
Growth in EZ car sales slowed further at the beginning of Q4. New registrations in the euro area fell 1.2% year-over-year in October, down from a 7.2% increase in September.
We are becoming increasingly convinced that momentum is starting to build in the housing market. That might sound odd in the context of the recent trends in both new and existing home sales, shown in our first chart, but what has our attention is upstream activity.
Sharp increases in retail sales over the last two months suggest that consumers are not overly concerned by the risk that the U.K. could leave the E.U. next week. Sales volumes rose 0.9% month-on-month in May, and April's surge was revised larger, to 1.9% from 1.3%.
The consensus for a modest 0.5% month-to- month rise in retail sales volumes in October looks too timid; we expect today's data to show a 1% increase.
Household spending has been the sole source of growth in the economy so far this year, amid worsening investment and net trade. Today's official retail sales figures, however, look set to show that consumers suffered the Brexit blues in June.
Retail sales volumes held steady in September, undershooting the consensus, 0.3%, and they were unchanged in August too. At this stage, evidence of a slowdown in retail sales growth is only tentative, but the trend will weaken decisively when retailers raise prices sharply next year.
The startling 5.5% drop in auto sales in March left sales at just 16.5M, well below the 17.4M average for the previous three months and the lowest level since February last year. A combination of the early Easter, which causes serious problems for the seasonal adjustments, and the lagged effect of the plunge in stock prices in January and February, likely explains much of the decline.
Most of the time, markets view auto sales as a bellwether indicator of the state of the consumer. Vehicles are the biggest-ticket item for most households, after housing, and most people buy cars and trucks with credit. Auto purchase decisions, therefore, tend not to be taken lightly, and so are a good guide to peoples' underlying confidence and cashflow. We appreciate that things were different at the peak of the boom, when anyone could get a loan and homeowners could tap the rising values of their properties, but that's not the situation today.
Auto industry watchers at WardsAuto and JD Power are in agreement that today's September sales numbers will be little changed from a year ago, at around 17.5M.
Retail sales in Mexico plunged at the end of Q4, but we think households' spending will continue to contribute to GDP growth in the first quarter.
Improving fundamentals have supported private spending in Mexico during the last few quarters. This week's soft retail sales report does not change the picture of a strong underlying trend in consumption. Sales were weaker than expected, falling 1.1% month-to-month in September, but this followed a 1.5% jump in August, and average gains of 1.1% in the previous three months. Mexican retail sales are much more volatile than in most developed economies, and we have been expecting mean reversion following rapid gains during the first half of the year and most of Q3.
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 recovery in existing home sales appears to have stalled, at best.
The recent run of grim sales and earnings numbers from major national retailers, including Kohl's, Nordstrom, and Macy's, reflects two major trends. The first is obvious; the rising market share of internet sales is squeezing brick and mortar retailers, as our first chart shows. We have no idea how far this trend has yet to run but it shows no signs yet of peaking.
Japanese retail sales were unchanged in October month-on-month, after a 0.8% rise in September.
Data yesterday showed that consumers in the euro area increased their spending in February, following recent weakness. Retail sales rose 0.7% month-to-month in February, reversing the cumulative 0.4% decline since November. The year-over-year rate was pushed higher to 1.8% from an upwardly revised 1.5% in January.
The release yesterday of the weekly Redbook chainstore sales report for the week ended Saturday August 4 means that we now have a complete picture of July sales.
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.
If the Redbook chain store sales survey moved consistently in line with the official core retail sales numbers, it would attract a good deal more attention in the markets. We appreciate that brick-and-mortar retailers are losing market share to online sellers, but the rate at which sales are moving to the web is quite steady and easy to accommodate when comparing the Redbook with the official data.
The downturn in car sales is showing no sign of abating. Data released yesterday by the Society of Motor Manufacturers and Traders showed that private registrations fell 10.1% year-over-year in October, much worse than the 6.6% average drop in the previous 12 months.
At first glance, car sales appear to be staging a strong recovery, mirroring the better news on high street spending in Q2.
Consumers' spending in the Eurozone stalled at the start of Q4. Retail sales slid 1.1% month-to-month in October, pushing the year-over-year rate down to a four-year low of 0.4%, from an upwardly-revised 4.0% jump in September.
Car sales were predictably weak in September, but they could have been a lot worse. Private registrations were down 8.8% year-over-year in the second most important month of the year.
The 5% year-over-year increase in private new car registrations in January ended a nine-month period of falling sales. January's increase, however, is unlikely to be a bellwether for car sales over the whole year, or for the strength of consumer spending more generally.
In November, existing home sales substantially overshot the pace implied by the pending home sales index.
Now that the holidays are just a distant memory, the distortions they cause in an array of economic data are fading. The problems are particularly acute in the weekly data -- mortgage applications, chainstore sales and jobless claims -- because Christmas Day falls on a different day of the week each year.
We have been pleasantly surprised by the recent Redbook chainstore sales numbers.
April's retail sales figures, due Thursday, likely will show that spending recovered from snow-induced weakness in March.
The rate of growth of chain store sales has levelled off in recent months, after slowing dramatically in the first four months of this year, almost certainly in response to falling prices for dollar-sensitive goods like household electronics. In the fourth quarter of last year, the Redbook recorded same-store sales growth averaging 4.3%, but that has slowed to a 1-to-2% range since April.
The remarkably strong existing home sales numbers in recent months, relative to the pending home sales index, are hard to explain. In January, total sales reached 5.69M, some 6% higher than the 5.35M implied by December's pending sales index. The gap between the series has widened in recent months, as our first chart shows, and we think the odds now favor a correction in today's February report.
The intensity of the pressure on households' finances was highlighted last week by December's retail sales report, which showed that volumes fell by 1.5% month-to-month, the most since June 2016.
Retail sales increased by 1.0% month-to-month in August, exceeding our no-change forecast and spurring markets to price-in a 65% chance that the MPC will raise interest rates at its next meeting on November 2, up from 60% beforehand.
August's retail sales figures create a misleading impression that consumers can be relied upon to pull the economy through the next six months of heightened Brexit uncertainty unscathed.
The consensus forecast of a mere 0.3% month-to-month decline in retail sales volumes in December, following the 1.7% surge in November, looks far too timid. We anticipate a much bigger decline, about 1%, bringing volumes back in line with their underlying trend. We can't rule out a bigger fall.
The level of new home sales is likely to hit new cycle highs over the next few months, with a decent chance that today's July report will show sales at their highest level since late 2007.
If the recovery in existing homes hadn't been interrupted by the taper tantrum, in the spring of 2013, sales by now would likely be running at an annualized rate in excess of 6M. The rising trend in sales from late 2010 through early 2013 was strong and stable, as our first chart shows, but the decline was steep after the Fed signalled it would soon slow the pace of QE, and it was made temporarily worse by the severe late fall and early winter weather.
Industry estimates for August light vehicle sales suggest that the downshift in sales which began at the turn of the year is over, at least for now.
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%.
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.
On the face of it, the surge in retail sales volumes in September suggests that the U.K. consumer is in fine fettle and can prevent the economic recovery from losing momentum as exporters struggle and government spending retrenches. But the underlying picture is less encouraging and consumers won't be able to sustain the recent robust growth in real spending when inflation revives next year.
The monthly new home sales numbers are so volatile that just about anything can happen in any given month.
Under normal circumstances, we would expect today's retail sales figures to reveal that volumes rebounded in February, following the 2.7% fall over the previous three months. But the continued weakness of spending surveys suggests that we should brace for another soft report.
New home sales are much more susceptible to weather effects -- in both directions -- than existing home sales. We have lifted our forecast for today's February numbers above the 575K pace implied by the mortgage applications data in recognition of the likely boost from the much warmer-than-usual temperatures.
The remarkable recent strength in retail sales continued into November, with total sales volumes rising by 0.2% and sales ex-motor fuels up by 0.5%. Those numbers aren't spectacular but they have to be seen in the context of October's huge 1.9% jump in sales ex-motor fuel; usually, after such a big gain we'd expect a correction the following month.
The downshift in the rate of growth of retail sales, which has caused a degree of consternation among investors, likely has further to run. The Redbook chain store sales survey clearly warned at the turn of the year that a slowdown was coming, but forecasters didn't want hear the warning: Five of the seven non-auto retail sales numbers released this year have undershot consensus.
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.
April's Retail Sales Monitor from the British Chambers of Commerce, released yesterday, provided a powerful signal that households' spending rebounded in April, following a terrible Q1.
Take at look at the chart below, which shows core retail sales on a month-to-month and year-over-year basis. What's most striking about the chart is not the latest data, showing robust 0.8% gains in core sales--we exclude autos, gasoline and food--in both October and November, but the solidity of the trend since the winter.
You might remember that the December retail sales report surprised significantly to the downside, thanks to the impact of falling gasoline prices. The data are reported in nominal dollars, not volumes, so falling prices depress the numbers.
No matter how you choose to slice-and-dice the recent retail sales numbers, the core data for the past couple of months have been disappointing. Our favorite measure--total sales less autos, gasoline, food and building materials--rose by just 0.1% month-to- month in May but then reversed this minimal gain in June.
Outside the battered energy sector, the most consistently disconcerting economic numbers last year, in the eyes of the markets, were the monthly retail sales data. Non-auto sales undershot consensus forecasts in nine of the 12 months in 2015, with a median shortfall of 0.3%.
Let's be clear: The July retail sales numbers do not mean the consumer is rolling over, and the PPI numbers do not mean that disinflation pressure is intensifying. We argued in the Monitor last Friday, ahead of the sales data, that the 4.2% surge in second quarter consumption--likely to be revised up slightly--could not last, and the relative sluggishness of the July core retail sales numbers is part of the necessary correction. Headline sales were depressed by falling gasoline prices, which subtracted 0.2%.
The 0.8% jump in nominal November retail sales is consistent with a 0.4% rise in real total consumption, which in turn suggests that the fourth quarter as a whole is likely to see a near-3% annualized gain.
After a very light week for economic data so far, everything changes today, with an array of reports on both activity and inflation. We expect headline weakness across the board, with downside risks to consensus for the December retail sales and industrial production numbers, and the January Empire State survey and Michigan consumer sentiment. The damage will b e done by a combination of falling oil prices, very warm weather, relative to seasonal norms, and the stock market.
Retail sales ex-autos have undershot consensus forecasts in eight of the 11 reports released so far this year, prompting interest rate doves to argue that consumers have not spent their windfall from falling gas prices. But this ignores the impact of falling prices--for gasoline, electronics, furniture, and clothing--on the sales numbers, which are presented in nominal terms.
The headline ISM non-manufacturing index is not, in our view, a leading indicator of anything much. The survey covers a broad array of non manufacturing activity, including mining, healthcare, and financial services, but most of the time it tends to follow the track of real core retail sales, as our first chart shows.
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.
Brazil's consumer spending data yesterday appeared downbeat. Retail sales fell 2.1% month-to-month in December, pushing the year-over-year rate down to 4.9%, from -3.8% in November. This is a poor looking headline, but volatility is normal in these data at this time of the year, and the underlying trend is improving.
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.
Retail sales have lost steam over the past couple of months, even if you look through the headline gyrations triggered by swings in auto sales and gasoline prices.
Brazil's retail sales ended the second quarter on a less-bad footing. Sales volumes increased 0.1% month-to-month in June, pushing the year-over-year rate up to -5.3%, from -9.0% in May. Smoothed year-over-year growth in retail sales has improved to -7% from its cyclical trough of around -9% in the end of last year.
Today's March retail sales report will likely disappoint, despite the already- downbeat consensus forecast of a 0.7% month-to-month fall. We think sales fell 1.2%, equivalent to a 1.3% increase year-over-year, due mostly to the bigger-than-expected 2.3% plunge in German sales, reported too late to be incorporated in the Bloomberg consensus.
Retail sales have consistently disappointed markets this year, but investors' concerns are misplaced. The rate of growth of core sales has slowed because the strength of the dollar has pushed down the prices of an array of imported consumer goods, and people appear to have spent a substantial proportion of the saving on services.
The Redbook chain store sales survey used to be our favorite indicator of the monthly core retail sales numbers, but over the past year it has parted company from the official data. Year-over-year growth in Redbook sales has slowed to just 0.7% in February, from a recent peak of 4.6% in the year to December 2014
Evidence that Brazil's consumption recession has hit bottom seemed to vanish yesterday with the May retail sales report. Sales plunged 1.0% month-to-month, pushing the year-over-rate down to a terrible-looking -9.0%, from a revised -6.9% in April. Adding insult to injury, the month-to-month number for April was revised down by 0.2 percentage points.
We have argued for some time that market disappointment over the recent sluggishness of consumption has been misplaced. In our view, investors have placed too little weight on the impact of the severe winter, and have been too hasty in looking for the impact of the drop in gasoline sales.
Retail sales account for some 30% of GDP--more than all business investment and government spending combined--so the monthly numbers directly capture more of the economy than any other indicator. Translating the monthly sales numbers into real GDP growth is not straightforward, though, because the sales numbers are nominal. Sales have been hugely depressed over the past year by the plunging price of gasoline and, to a lesser extent, declines in prices of imported consumer goods.
The headline March retail sales numbers probably will look horrible, thanks to the unexpected drop in auto sales reported by the manufacturers earlier this month. Their unit sales data don't always move exactly in line with the dollar value numbers in the retail sales report, as our first chart shows, but it's hard to imagine anything other than a clear decline today.
Sooner or later, the surge in consumers' spending power triggered by the drop in gas prices and the acceleration in payrolls will appear in the retail sales data.
So, what should we make of the fourth straight disappointment in the retail sales numbers? First, we should note that all is probably not how it seems. The 0.2% upward revision to March sales was exactly equal to the difference between the consensus forecast and the initial estimate, neatly illustrating the danger of over-interpreting the first estimates of the data.
After last week's relatively light flow of data, today brings a wave of information on both the pace of economic growth and inflation. The markets' attention likely will fall first on the September retail sales numbers, which will be subject to at least three separate forces. First, the jump in auto sales reported by the manufacturers a couple of weeks ago ought to keep the headline sales numbers above water.
April's impressive-looking retail sales numbers--the headline jumped 1.3%, with non-auto sales up 0.8%--were boosted by two entirely separate factors, one of which will play no p art in May and one which will offer very modest support. The key lift in April came from the very early Easter, which confounded the seasonal adjustments, as it usually does.
Evidence of a modest upturn in Brazilian consumers' spending continues to mount. Retail sales rose 1.0% month-to-month in April, pushing the year-over-rate up to +1.9%, from an upwardly-revised -3.2% in March.
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.
We are a bit uneasy about today's data on economic activity. The NFIB index of activity in the small business sector is likely to undershoot consensus expectations, while retail sales are something of a black hole, at least at the core level, where we have no reliable month-to-month advance indicators. Our bullish view on the underlying state of the economy, and its likely second-half performance, hasn't changed, but perceptions count in the short-term and these reports will help set the market mood just ahead of Chair Yellen's Testimony tomorrow.
Whichever way you choose to slice the numbers, retail sales growth has slowed this year. Ex-gasoline, ex-autos, core, whatever, sales growth in year-over-year terms is notably weaker now than at the end of last year. It is equally, true, however, that after-tax incomes have risen at a robust pace--up 3.8% in the year to May, exactly the same pace as in the year to May 2014--so consumers in aggregate have plenty of cash to spend. So, what's holding people back at the mall? Why aren't they spending more?
Wednesday's better-than-expected, but still grim, November retail sales report in Brazil does not change the miserable underlying trend. Sales volumes rose 1.5% month-to-month, much better than expected, and the biggest increase in a year. But the year-over-year rate fell to -7.8% from -5.7% in October. The details underscored our view that the month-to-month jump in sales was due mostly to temporary factors.
The combination of unexpectedly strong auto sales and rising gas prices should generate strong-looking headline retail sales numbers for October. We have no idea what to expect for November, with two-thirds of the month coming after the election, but the final pre- election sales report will look good.
The story of U.S. retail sales since last summer is mostly a story about the impact of the hurricanes, Harvey in particular.
This week's wave of data starts today, but most of the attention will fall on just one report, February retail sales. We expect weak-looking numbers, thanks to the plunge in gas prices, which likely will subtract some 0.6% from the non-auto sales number.
Brazil's retail sales improved at the start of the second quarter, increasing 0.5% month-to-month in April, partially reversing the 0.9% contraction in March. But the details were less upbeat than the headline.
Today's wave of data will be mixed, but most of the headlines are likely to be on the soft side, so the reports are very unlikely to trigger a wave of last minute defections to the hawkish side of the FOMC. As always, though, the headlines don't necessarily capture the underlying story, and that's certainly been the case with the retail sales data this year. Plunging prices for gas and imported goods, especially audio-video items, have driven down the rate of growth of nominal retail sales, but real sales have performed much better.
Today's retail sales figures for August likely will rebut the widespread view that spendthrift consumers will prevent a sharp economic slowdown. We look for a 1% month-to-month decline in retail sales volumes in August, well below the -0.4% consensus forecast.
July's retail sales report signalled a good start to the third quarter but also implied that second quarter spending was stronger than previously thought. The upward revisions--totalling 0.5% for total sales and 0.4% for non-auto sales--were the biggest for some time, but we were not unduly surprised.
We are not concerned by the slowdown in retail sales over the past few months.
Momentum in new EZ car sales improved slightly in the middle of Q3. New registrations in the euro area rose 6.8% year-over-year in August, accelerating marginally from a 5.3% increase in July.
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%.
Don't worry about the weakness of the recent retail sales numbers. The three straight 0.1% month-to- month declines tell us nothing about the underlying state of the consumer.
The Brazilian consumer will continue to suffer from high interest rates and a deteriorating labour market this year. But sentiment data imply that the fundamentals are stabilising, at least at the margin. The headline consumer sentiment gauge, published by the FGV, has improved significantly in the past five months, and we expect another modest increase later this month
The EZ retail sector slowed at the start of Q3, though only slightly.
Economic data in Brazil over the second quarter were relatively positive, and June reports released in recent weeks, coupled with leading indicators for July, are encouraging.
The first wave of domestic third quarter data crashes ashore this morning.
Mexico's private spending stumbled at the start of the second quarter.
It would be a mistake to conclude from July's car registrations data that the market finally has turned a corner.
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.
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.
We argued yesterday that the steep declines in the ISM surveys in August, both manufacturing and services, likely were one-time events, triggered by a combination of weather events, seasonal adjustment issues and sampling error. These declines don't chime with most other data.
Consumer spending has been the main locomotive of the economic recovery over the last couple of quarters, as investment and net trade have dragged on growth. Signs are emerging, however, that consumption is slowing too.
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 economic recovery would have lost more momentum last year had consumers not delved so deeply into their pockets. Real household spending increased by 0.7% and 0.8% quarter-on-quarter in Q3 and Q4 respectively, in contrast to investment and exports, which fell in both quarters.
Economic data in Mexico continue to come in strong.
Today's housing market data likely will look soft, but will probably not be representative of the underlying story, which remains quite positive.
Further evidence emerged yesterday in support of our view that mortgage lending conditions are easing. The monthly mortgage origination report from Ellie Mae, Inc., a private mortgage processing firm, shows average credit scores for both successful and unsuccessful loan applications continue to trend downwards--though the latter rose marginally in February--while loans are closing much more quickly than in the recent past.
August's money and credit figures show that households' incomes remain under pressure, indicating that the recent pick-up in growth in consumers' spending likely won't last.
The RICS Residential Market Survey caught our eye last week for reporting that new sale instructions to estate agents rose in May for the first month since February 2016.
Momentum in the EZ auto sector rebounded at the end of the second quarter.
Equity prices for U.K. retailers have performed woefully since the E.U. referendum. The FTSE All-Share Index for general retailers has underperformed the overall All-Share Index by nearly 30% since the Brexit vote.
A very light week for U.S. data concludes today with four economic reports, which likely will be mixed, relative to the consensus forecasts. The recent run of clear upside surprises and robust-looking headline numbers is likely over, for the most part.
Over the past couple of weeks, the number of applications for new mortgages to finance house purchase have reached their highest level since late 2010, when activity was boosted by the impending expiration of a time-limited tax credit for homebuyers.
Politics remain centre-stage in Brazil, despite positive news on the economic front. President Michel Temer's government continues to advance pension reform, despite the tight calendar and concerns about his political capital. But volatility is on the rise.
Mexico's February industrial production report was weaker than markets expected. Output expanded by 0.7% year-over-year, below the consensus, 1.2%, and slowing from 0.9% in January.
Mexico's private spending stumbled at the start of the second quarter. Retail sales fell 0.3% month-to-month in April after three consecutive increases, hit by an unexpected 1.6% drop in both supermarket and apparel sales, and a surprising 1.2% fall in food sales. In year-over-year terms, total sales rose 4.6% in April, down from 5.6% in March.
Recent retail surveys have indicated that consumers are not suffering yet from Brexit blues. The BRC reported that year-over-year growth in total sales values picked up to 1.9% in July, from 0.2% in June. After adjusting for falling prices, this measure suggests that year-over-year growth in official retail sales volumes held steady at about 4% last month.
Improving consumer fundamentals continue to underpin growth in private spending in Mexico, according to retail sales and inflation reports published this week. March retail sales were much stronger than expected, jumping 3.0% month-to-month, after averaging gains of 0.8% in the preceding three months. And sales for the three months through February were revised up marginally.
New home sales surprised to the upside in May, rising 6.7% to 689K, a six-month high.
Mexican consumers' spending improved toward the end of Q2. Retail sales jumped by 1.0% month-to-month in June, pushing the year-over-year rate up to 9.4%, from an already solid 8.6% in May. Still, private spending lost some momentum in the second quarter as a whole, rising by 2.5% quarter-on-quarter, after a 3.8% jump in Q1. A modest slowdown in consumers' spending had to come eventually, following surging growth rates in the initial phases of the recovery.
The slowdown in retail sales in the first quarter and the recent pick-up in the number of retailers seeking protection from creditors begs the question: are consumers retrenching, or just spending their money elsewhere?
Chile's April retail sales data, released on Monday, show that private consumption started the second quarter on a solid footing. Sales rose 3.0% month-to-month, pushing the year-over-rate up to 7.9% from 1.4% in March and an average of 4.0% in Q1. The headline was boosted by a favourable calendar effect, as April this year had two more trading days than April 2015.
Eurozone consumers' spending jumped in Q2, but we are pretty certain that a slowdown in retail sales constrained growth in Q3.
The 1.4% month-to-month rise in retail sales volumes in February is not a game-changer for the economy's growth prospects in Q1. The increase reversed just under half of the 2.9% decline between October and January. The 1.5% fall in retail sales in the three months to February, compared to the previous three months, is the worst result in seven years.
Data yesterday suggest Eurozone consumers' spending rebounded towards the end of Q4. Retail sales rose 0.3% month-to-month in December, pushing the year-over-year rate down to 1.4%, from a revised 1.6% in November. A +0.3 percentage point net revision to the month-to-month data added to the optimism, but was not enough to prevent a slowdown over the quarter as a whole.
Eurozone consumers had a slow start to the second quarter. Retail sales increased a modest 0.1% month- to-month in April, but the March headline was revised up by 0.3 percentage points, and the year-over-year rate increased by 0.2pp to 1.7% due to base effects.
Mexico's latest hard data suggest things might not be as bad as we feared. Retail sales and manufacturing output were relatively strong at the end of last year, the Q4 preliminary GDP report was mostly upbeat, and the labor market was firing on all cylinders.
Consumers' spending in the euro area weakened at the end of Q4, but we think households will continue to boost GDP growth in the first quarter. Data on Friday showed that retail sales fell 0.3% month-to-month in December, pushing the year-over-year rate down to 1.1%, from a revised 2.8% in November.
...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?
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.
Last Friday's August auto sales numbers were overshadowed by the below-consensus payroll report and the six-year high in the ISM manufacturing index, but they are the first data to reflect the impact of Hurricane Harvey.
The run-up to the release of the official retail sales figures has become so congested with other indicators, following alterations by the ONS to its publication schedule, that we now have to preview the data earlier than usual.
The delay in the processing of personal income tax refunds this year appears not to have had any adverse impact on retail sales, so far. Indeed, the Redbook chainstore sales survey suggests that sales have accelerated over the past few weeks.
The obvious answer to the question posed in our title is that it's far too early to tell what will happen to first quarter growth. More than half the quarter hasn't even happened yet, and data for January are still extremely patchy, with no official reports on retail sales, industrial production, housing, capex, inventories or international trade yet available. For what it's worth, the Atlanta Fed's GDPNow model signals growth of 3.4%, though we note that it substantially overstated the first estimate of growth in the fourth quarter.
Evidence of slowing growth in Eurozone consumers' spending continues to mount. Retail sales in the euro area fell 0.5% month-to-month in March, pushing the year-over-rate down to 2.1% from a revised 2.7% in February. The headline likely was depressed by the early Easter. March had one trading day less than February, which was not picked up the seasonals.
Yesterday's retail sales report indicates that preliminary Eurozone Q4 GDP data next week are likely to paint an upbeat picture of the economy. Sales rose 0.3% month-to-month in December, equivalent to 2.8% year-over-year. An upward revision to November data means that turnover increased 0.8% quarter-on- quarter, the best since the first quarter of 2005.
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.
Retail sales data later today will give us the first hard data from the fourth quarter, and the story should be altogether more positive than the still downbeat message from the manufacturing sector.
Media reports suggest that the underlying trends in retailing--rising online sales, declining store sales and mall visits--continued unabated over the Thanksgiving weekend.
This week's Mexican retail sales report for February offered more support to our view that domestic conditions improved at the end of Q1.
In the wake of the robust July data and the upward revisions to June, real personal consumption--which accounts for 69% of GDP--appears set to rise by at least 3% in the third quarter, and 3.5% is within reach. To reach 4%, though, spending would have to rise by 0.3% in both August and September, and that will be a real struggle given July's already-elevated auto sales and, especially, overstretched spending on utility energy.
Japan's June retail sales data add to the run of numbers suggesting a strong rebound in real GDP growth in Q2, after the 0.2% contraction in activity in Q1.
We have argued for some time that investors began much too soon to look for stronger consumption in the wake of the drop in gasoline prices. Typically, turning points in gas prices trigger turning points in the rate of growth of retail sales with a lag of six or seven months.
While we were out, most of the core domestic economic data were quite strong, with the exception of the soft July home sales numbers and the Michigan consumer sentiment survey.
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%
Across all the major economic data, perhaps the biggest weather distortions late last year and in the early part of the year were in the retail sales numbers, specifically, the building materials component. Sales rocketed at a 16.5% annualized rate in the first quarter, the biggest gain since the spring of 2014, following a 10.2% increase in the fourth quarter of last year.
Another day, another couple of April reports likely to reverse March "weakness", triggered by the early Easter. We look for robust core durable goods and pending home sales reports, with the odds favoring consensus-beating numbers. In both cases, though, the noise-to-signal ratio is quite high, and we can't be certain the Easter seasonal unwind will be the dominant force in the April data.
Data this week confirmed that private spending in Colombia stumbled in June. Retail sales fell 0.7% year-over-year, from an already poor -0.4% in May. The underlying trend is negative, following two consecutive declines, for the first time since late 2009. Domestic demand remains subdued as consumers are scaling back spending due to weaker real incomes, lower confidence and tighter credit and labor market conditions.
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.
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.
It would be a serious mistake to conclude from July's retail sales figures that consumers' spending will be immune to the fallout of the Brexit vote. Households have yet to endure the hiring freeze and pay squeeze indicated by surveys of employers, or the price surge signalled by sterling's sharp depreciation. The real test for consumers' spending lies ahead.
When the dust settles after today's wave of data, we expect to have learned that core retail sales continued to rise in June, core inflation nudged back up to its cycle high, and manufacturing output rebounded after an auto-led drop in May. None of these reports will be enough to push the Fed into early action, but they will add to the picture of a reasonably solid domestic economy ahead of the U.K. Brexit referendum.
The February activity report in Colombia showed a modest pick-up in manufacturing activity and strength in the retail sales numbers.
At the headline level, much of the recent U.S. macro dataflow has been disappointing. January retail sales, industrial production, housing starts, and both ISM surveys--manufacturing and non-manufacturing-- undershot consensus, following a sharp and unexpected drop in December durable goods orders.
Colombia's economic activity surprised to the upside in February, despite the challenging domestic environment. Private spending rose more than expected, but leading indicators suggest that household consumption will remain weak in Q2. Retail sales jumped 4.6% year-over-year in February, up from a 2.1% increase in January, and the fastest pace since August 2015.
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.
January's retail sales figures, released today, look set to indicate that consumers are keeping the recovery going, amid deteriorating business sentiment and faltering external trade.
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.
The Greek economy escaped recession in the second half of last year. Real GDP rose a cumulative 1.2% in Q2 and Q3, following a 0.6% fall in Q1. And industrial production and retail sales data suggest that the advance GDP report released later this month will show that the momentum was sustained in Q4. Headline survey data, however, indicate that downside risks to the economy remain.
The robust July retail sales numbers, coupled with the substantial upward revisions to prior data, should finally put to bed the idea that consumers have chosen spontaneously to raise their saving rate, accelerating the pace of deleveraging seven years after the financial crash. People just don't behave like that unless interest rates are soaring and the economy is rolling over, and that's not happening.
Brazil's consumer recession seems never-ending. Retail sales fell 0.8% month-to-month in October, pushing the headline year-over-year rate down to -8.2% in October, from -5.7% in September. Recent financial market volatility, credit restrictions and the ongoing deterioration of the labour market continue to hurt consumers.
April's consensus-beating retail sales figures fostered an impression that the recovery in consumer spending is in fine fettle, even though the rest of the economy is suffering from Brexit blues. Retailers have stimulated demand, however, by slashing prices at an unsustainable rate. With import prices and labour costs now rising, retailers are set to increase prices, sapping the momentum in sales volumes.
Colombian activity data released this last week were upbeat, better than we expected, showing a significant pickup in manufacturing output and improving retail sales. Retail sales rose 3.1% year- over-year, after a modest 1.0% increase in June.
The macro data reported in Brazil this week added weight to the view that the economy ended the second quarter in a severe recession. Brazil's retail sales fell 0.4% month-to-month in June, the fifth consecutive contraction. The broad retail index, which includes vehicles and construction materials, fell 0.8% month-to-month, with a sharp contraction in auto sales, down 2.8%.
Evidence of slowing economic activity in Colombia continues to mount. Retail sales fell 2.0% year- over-rate in April, down from a revised plus 3.0% in March; and the underlying trend is falling. This year's consumption tax increase, low confidence, tight credit conditions, and rising unemployment continue to put private consumption under pressure.
Eurozone GDP data last Friday suggest the cyclical recovery continued at the end of last year. Real GDP in euro area rose 0.3% quarter-on-quarter in Q4, the same as in Q3, lifted by growth in all the major economies. This was in line with the consensus forecast, but noticeably higher than implied by monthly industrial production and retail sales data.
Yesterday's report on October private spending in Mexico was positive, suggesting that consumption remained relatively strong at the start of Q4. Retail sales jumped 1.6% month-to-month, following a modest 0.2% drop in September. October's rebound was the biggest gain since March this year, but note that wild swings are not unusual in these data. The headline year-over-year rate rose to 9.3%, from 8.1% in September, but survey data signal to a gradual slowdown in coming months to around 5%.
Monthly manufacturing and retail sales data point to upside risk to the consensus expectation of 0.4% quarter-on-quarter in Q1 Eurozone real GDP growth. Advance country data indicate that industrial production was unchanged month-to-month in March, equivalent to a 0.9% increase quarter-on-quarter.
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.
Colombia's economy defied rising political uncertainty at the start of the year. Retail sales growth jumped to plus 6.2% year-over-year in January, up from -3.8% in December and -1.8% in Q4.
December's retail sales numbers are the most important of the year for retailers, but they don't necessarily tell us anything about the future prospects for consumers' spending or the broad economy. The December 2016 numbers, however, might be different, because they capture consumers' behavior in the first full month after the election.
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.
Brazil's retail sales plunged in August, falling 0.9% month-to-month--the seventh consecutive contraction -- and with a net revision of -0.6%. The broad retail index, which includes vehicles and construction materials, dropped 2.0% month-to-month, the biggest fall this year, due mainly to a 5.2% collapse in auto sales, reversing July's unexpected increase. In annual terms, headline sales fell by an eye-popping 6.9% in August, after the downwardly-revised 3.9% drop in July. In short, the sales data show that consumers are suffering. They will struggle for some time yet.
New home sales performed better during the winter than any other indicator of economic activity. At least, we think they did. The mar gin of error in the monthly numbers is enormous, typically more than +/-15%.
Consumers' spending in the second quarter is still set to be less than great, thanks in part to unfavorable base effects from the first quarter, but a respectable showing of about 2¾% now seems likely. The core May retail sales numbers were a bit stronger than we expected, with gains in most sectors, and the upward revisions to April and March were substantial.
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.
Yesterday's March retail sales report for Mexico is in line with other recently released hard and survey data, painting an upbeat picture of the economy.
March data for retail sales and manufacturing have tempered our optimism for the advance Q1 GDP estimate in Germany next week. Industrial production fell 0.5% month-to-month in March, equivalent to a mere 0.1% increase year-over-year, mainly as a result of weakness in core manufacturing activities.
This week brings home sales data for July, which we expect will be mixed. New home sales likely rose a bit, but we are pretty confident that existing home sales will be reported down, following four straight gains. We're still expecting a clear positive contribution to GDP growth from housing construction in the third quarter, but from the Fed's perspective the more immediate threat comes from the rate of increase of housing rents, rather than the pace of home sales.
The Chinese activity data published yesterday were a mixed bag, with headline retail sales and production weakening, while FAI growth was stable. We compile our own indices for all three, to crosscheck the official versions.
The rate of growth of Brazil consumers' spending is perhaps beginning to stabilize, though at a very low pace. Core retail sales volumes were flat in Q4 after a 2.7% contraction in Q3, and sentiment data suggest this improving trend should continue, at least in the very near term.
A classic indicator of impending recession is the emergence of excessive levels of inventory across the economy. The pace of businesses inventory accumulation typically lags sales growth, so when activity slows, usually in response to higher interest rates, firms are left with unsold goods.
October's retail sales figures confirm that consumers have adopted a more cautious mindset since the summer, when retail sales increased at a faster rate than incomes.
The headline May retail sales numbers were flattered by a 2.4% leap in the wildly volatile building materials component and a price-driven 2.0% surge in gasoline sales.
Growth in new EZ car sales remained brisk last month, growth slowed in Q3. New registrations rose 9.4% year-over-year in September, marginally lower than the 9.6% increase in August. Growth in France fell most, sliding to 2.5% from 6.7% in August, but sales in Germany picked up to 9.4%, from 8.3%.
Mexican retail sales jumped 1.0% month-to-month in October, the biggest gain since February, following a poor performance in Q3.
Consumption remains a serious weak spot in Brazil's economic cycle. High inflation, rising interest rates, surging unemployment, plunging confidence, and the government's belt tightening, have trashed Brazilians' purchasing power. Retail sales surprised to the downside in April, falling 0.4% month-to-month, equivalent to a huge 3.5% contraction year-over-year, down from a revised 0.3% gain in March. The underlying trend is awful, as our first chart shows.
Whatever today's report tells us about existing home sales in January, the underlying state of housing demand right now is unclear. The sales numbers lag mortgage applications by a few months, as our first chart shows, so they're usually the best place to start if you're pondering the near-term outlook for sales. But the applications data right now are suffering from two separate distortions, one pushing the numbers up and the other pushing them down. Both distortions should fade by the late spring, but in they meantime we'd hesitate to say we have a good idea what's really happening to demand.
EZ households' demand for new cars was off to a strong start in 2017. Car registrations in the euro area jumped 10.9% year-over-year in January, accelerating from a 2.1% rise in December. We have to discount the headline level of sales by about a fifth to account for dealers' own registrations. Even with this provision, though, the January report was solid. Growth rebounded in France and Germany, and a 27.1% surge in Dutch car registrations also lifted the headline. We think car registrations will rise about 1.5% quarter-onquarter in Q1, rebounding from a weak Q4. But this does not change the story of downside risks to private spending.
Samuel Tombs on U.K. Retail Sales
Chief U.S. Economist Ian Shepherdson on US Retail Sales
The U.S. housing market stumbled into 2015 as a leading indicator of home sales dipped in December
Chief U.K. Economist Samuel Tombs on U.K. Retail Sales
Demand for new cars in the Eurozone has climbed a long way since the last recession, but growth is slowing. Overall, new car registrations in the EZ rose a solid 15.2% in 2016 as a whole. But momen tum slowed in the second half, and sales likely will remain comparatively muted this year. In December, registrations in the euro area rose 2.1% year-over-year in December, down from 5.8% in November. The headline was depressed by plunging growth in some of the smaller countries, offsetting better numbers in the major four economies.
In the wake of the September retail sales report, we can be pretty sure that real consumers' spending rose at a 2¾% annualized rate in the third quarter, slowing from the unsustainable 4.3% jump. That would mean consumption contributed 1.9 percentage points to headline GDP growth.
Chief U.K. Economist Samuel Tombs on U.K. Retail Sales in July
Chief Eurozone Economist Claus Vistesen on European Car Sales
Chief US Economist Ian Shepherdson on "Remarkable" New Home Sales Data for February
Ian Shepherdson on December's low US retail sales.
We can be reasonably sure that the headline May retail sales number will look quite strong, thanks to the surge in auto sales reported by the manufacturers last week. Sales of cars and light trucks soared past industry analysts' expectations to a nine-year high, rising 7.5% from their April level.
Retail sales jumped by 1.6% month-to-month in April, more than reversing the 1.2% March decline. Even so, the level of sales merely matched their November peak and the underlying trend still looks flat, as our first chart shows.
Chief US Economist Ian Shepherdson attributes bad weather to February US Retail Sales
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.
Chief US Economist Ian Shepherdson on Retail Sales figures, March
Chief U.K. Economist Samuel Tombs on U.K. New Car Sales
The run of soft-looking headline retail sales numbers in recent months--the initial estimates for February, January and December were -0.6%, -0.8% and -0.9% respectively--will end today; the March number will look solid.
Chief U.K. Economist Samuel Tombs ok U.K. Retail Sales
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.
Chief Eurozone economist Claus Vistesen comments on the Eurozone PMIs
Senior International Economist Andres Abadia on mexico
Chief U.K. Economist Samuel Tombs discussing U.K. New Car Registrations
Chief U.K. Economist Samuel Tombs comments on U.K. Manufacturing
We would like to be able to argue with confidence that today's December durable goods orders report will show core capital goods orders rebounding after three straight declines, totalling 3.4%.
The closer we look at the startling surge in imports in the fourth quarter, the more convinced we become that it was due in large part to a burst of inventory replacement following the late summer hurricanes.
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.
The preliminary estimate of GDP showed that the economy finished 2016 on a strong note. Output increased by 0.6% quarter-on-quarter, the same rate as in the previous two quarters. The year-over-year growth rate of GDP in 2016 as a whole--2.0%--was low by pre-crisis standards, but it likely puts the U.K. at the top of the G7 growth leaderboard. We cannot tell how well the economy would have performed had the U.K. not voted to leave the EU in June, but clearly the threat of Brexit has not loomed large over the economy.
Mexico's economy continues to bring good news, despite the tough external environment for all EM economies. According to the economic activity index, a monthly proxy for GDP, growth gained further momentum in Q4. Activity rose 2.7% year-over-year in November, supported by stronger services activities, which expanded 0.3% month-to-month. The services sector has been the main driver of the current cycle, growing 3.8% year-over-year in November, bolstering our optimism about the domestic economy in the near-term.
Today's FOMC announcement will be something of a non-event. Rates were never likely to rise immediately after December's hike, and the weakness of global equity markets means the chance of a further tightening today is zero.
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.
It would be astonishing if the Fed doesn't raise rates today, and Chair Powell is not in the astonishment business; they will hike by 25bp.
The squeeze on real wages has just ended and GfK's consumer confidence index hit a 11-month high in March.
We're still no nearer to a definitive answer to the question of what went wrong in the manufacturing sector over the summer, when we expected to see things improving on the back of the rebound in activity in the mining sector, rising export orders and an end to the domestic inventory correction. Instead, the August surveys dropped, and September reports so far are, if anything, a bit worse.
Mexico's National Institute of Statistics--INEGI-- will release preliminary GDP data for Q1 on Friday. We are expecting good news, despite the tough external and domestic environment. According to the economic activity index--a monthly proxy for GDP-- growth gained further momentum in Q1, based on data up to February.
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.
Mexican consumers started the third quarter strongly, supporting our relatively upbeat view for the economy in the near term. Private consumption represents about 70% of Mexico's GDP, one of the consumption shares in the EM world, so the strength of spending is hugely important.
It's always dangerous when risk assets rally strongly into an ECB meeting, but we doubt that investors have much to fear from today's session in Frankfurt. We think the central bank will leave its main refinancing and deposit rates at 0.00% and -0.4% respectively.
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.
New York Fed president Dudley toed the Yellen line yesterday, arguing that the effects of "...a number of temporary, idiosyncratic factors" will fade, so "...inflation will rise and stabilize around the FOMC's 2 percent objective over the medium term.
After four straight above-trend increases in the core CPI, you could be forgiven for thinking that something is afoot. It's still too soon, though to rush to judgment. The data show three previous streaks of 0.2%-or-bigger over four-month periods since the crash of 2008, and none of them were sustained.
Recent consumer confidence numbers have been strong enough that we don't need to see any further increase. The expectations components of both the Michigan and Conference Board surveys are consistent with real spending growth of 21⁄2-to- 3%, which is about the best we can expect when real income growth, after tax, is trending at about 21⁄2%.
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".
In recent months we have argued that housing market activity has peaked for this cycle, with rising mortgage rates depressing the flow of mortgage applications.
The good news in today's March durable goods report is that a rebound in orders for Boeing aircraft means February's 3.0% drop in headline orders won't be repeated. The company reported orders for 69 aircraft in March, compared to just one in February.
Today's preliminary estimate of Q3 GDP is the last major economic report to be released before the MPC's meeting on November 2.
We have been very encouraged in recent months to see core capital goods orders breaking to the upside, relative to the trend implied by the path of oil prices.
A widening core trade deficit is the inevitable consequence of a strengthening currency and faster growth than most of your trading partners. Falling oil prices have limited the headline damage by driving down net oil imports, but the downward trend in core exports since late 2014 has been steep and sustained, as our first chart shows. The deterioration meant that trade subtracted an average of 0.3 percentage points from GDP growth in the past three quarters.
The hefty upward revision to Q3 inventories means we have to lower our working assumption for fourth quarter GDP growth, because the year-end inventory rebound we previously expected is now much less likely to happen. Remember, the GDP contribution from inventories is equal to the change in the pace of inventory accumulation between quarters, and we're struggling to see a faster rate of accumulation in Q4 after the hefty revised $90B third quarter gain. Inventory holdings are in line with the trend in place since the recession of 2001; firms don't need to build inventory now at a faster pace.
This week's November mid-month inflation reports in Brazil and Mexico underscored their divergent trends. Inflation pressures are steadily falling in Brazil, but in Mexico, the pass-through from the MXN's sell- off is driving up inflation and inflation expectations.
Colombia's economy activity is deteriorating rapidly, suggesting that BanRep will have to cut interest rates on Friday. Incoming data make it clear that the economy has moved into a period of deceleration, painting a starkly different picture than a year ago.
The key data today, covering March durable goods orders and international trade in goods, should both beat consensus forecasts.
The verdict from the German business surveys is in; economic growth probably slowed further in Q2.
U.S. President Trump on Wednesday signed an executive order aimed at delivering on his campaign pledge to build a wall on the U.S.-Mexico border. The executive order also includes measures to boost border patrol forces and increase the number of immigration enforcement officers. As previous U.S. presidents have discovered, however, signing an executive order is one thing and fulfilling it is something else. President Obama, for instance, signed an executive order to close the Guantanamo detention facility on his second day in office.
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.
The tumultuous political and economic crises in Brazil continue to feed off each other, grabbing most of the LatAm headlines. Sentiment will remain depressed, and volatility and uncertainty will persist, hampering any real signs of stabilization in the near-term. The Pacific Alliance countries, by contrast, managed to grow at relatively solid rates during the first half of this year, after absorbing the hit from falling commodity prices.
Today brings more housing market data, in the form of the Case-Shiller home price report for April.
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.
Today's second estimate of Q2 GDP likely will restate the preliminary estimate that quarter-onquarter growth picked up to 0.6%, from 0.4% in Q1. Over the last two decades, the second estimate of GDP has differed from the preliminary estimate just 38% of the time.
Two key reports today, on January consumer prices and durable goods orders, have the power to move markets substantially. We think both will undershoot market expectations, though we would be deeply reluctant to read too much into either report; both are distorted by temporary factors.
Yesterday's national business surveys provided an optimistic counterbalance to the underwhelming PMIs on Monday, although they all suggest that the euro area economy is in good form.
A rate hike from the Fed this week would be a gigantic surprise, and Yellen Fed has not, so far, been in the surprise business. It would be more accurate to describe the Fed's modus operandi as one of extreme caution, and raising rates when the fed funds future puts the odds of action at close to zero just does not fit the bill.
Yesterday's consumer confidence report in Germany was soft, in contrast to surging business sentiment data earlier in the week.
The expectations components of both the Michigan and Conference Board measures of consumers' confidence have risen sharply since gasoline prices rolled over.
Brazil's recovery has been steady in recent months, and Q1 likely will mark the end of the recession. The gradual recovery of the industrial and agricultural sectors has been the highlight, thanks to improving external demand, the lagged effect of the more competitive BRL, and the more stable political situation, which has boosted sentiment.
The April international trade numbers were startlingly, and surprisingly, horrible. The deficit in trade in goods leaped by $6.2B -- the biggest one-month jump in two years -- to $67.1B, though the headline damage was limited by a sharp narrowing in the oil deficit, thanks to lower prices, and a rebound in the aircraft surplus.
The Fed left in place the three key elements of its statement yesterday, repeating that the extent of labor market under-utilization is "diminishing"; that the inflation drop as a result of falling oil prices will be "transitory" and that the Fed can be "patient" before starting to raise rates.
We have been waiting a long time to see signs that business investment spending is becoming less reliant on movements in oil prices.
The MPC will be looking for the Q1 national accounts and April's index of services data, both released on Friday, to support its view that the economy hasn't lost momentum this year.
The decline in headline durable goods orders in May, reported yesterday, doesn't matter.
The Eurozone is on the brink of its first exit this week after the ECB refused to offer incremental emergency liquidity to Greek banks, forcing the start of bank holiday through July 7--two days after next weekend's referendum--and beginning today. We have no doubt that if the banks were to open, they would soon be bust; bank runs have a habit of accelerating beyond the point of no return very quickly.
This is the final report before your scribe disappears into the Scottish Highlands for a few weeks, and we are leaving you with a Eurozone economy in fine form. The calendar will be relatively light in our absence and will tell us what we already know; namely that the euro area economy maintained its strong momentum in Q2.
The FOMC flagged recent market developments as a source of risk to the U.S. economy yesterday, unsurprisingly, but didn't go overboard: "The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook."
Money supply dynamics in the Eurozone continue to signal a solid outlook for the economy. Headline M3 growth eased marginally to 4.9% year-over-year in January, from 5.0% in December; the dip was due to slowing narrow money growth, falling to 8.4% from 8.8% the month before. The details of the M1 data, however, showed that the headline chiefly was hit by slowing growth in deposits by insurance and pension funds.
The third estimate of first quarter GDP growth, due today, will not be the final word on the subject. Indeed, there never will be a final word, because the numbers are revised indefinitely into the future.
The MPC's hawks are framing the interest rate increase they want as a "withdrawal of part of the stimulus that the Committee had injected in August last year", arguing that monetary policy still would be "very supportive" if rates rose to 0.5%, from 0.25%.
Surveys released yesterday failed to support the MPC's view that the economy has bounced back in Q2.
Yesterday's advance CPI data in Germany and Spain suggest that inflation in the Eurozone as a whole dipped slightly in February.
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.
Mexico's central bank, Banxico, will hold its first monetary policy meeting of this year tomorrow. It will break with tradition, holding the meeting on Thursday at 1:00 p.m, local time, instead of the previous 9:00 a.m slot.
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.
In contrast to surveys of manufacturing activity and sentiment, the Conference Board's measure of consumer confidence rose sharply in August, hitting an 11-month high. People were more upbeat about both the current state of the economy and the outlook, with the improving job market key to their optimism. The proportion of respondent believing that jobs are "plentiful" rose to 26%, the highest level in nine years.
We have argued for some time that the revival in nonoil capex represents clear upside risk for GDP growth next year, but it's now time to make this our base case.
The durable goods numbers were among the first short-term indicators to warn clearly of the hit to manufacturing from the rollover in oil sector capex, which began last fall. The trend in core capital goods orders was rising strongly before oil firms began to cut back, with the year-over-year rate peaking at 11.9% in September. Leading capex indicators in the small business sector remained quite robust, but just nine months later, core capex orders were down 6.4% year-over-year, following annualized declines of more than 14% in both the fourth quarter of 2014 and the first quarter of this year.
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.
President Temer seems to be advancing on his reform agenda.
Recent upbeat economic reports have mitigated the downside risks we had been flagging to our growth forecast for Mexico for the current quarter.
We were wrong about headline durable goods orders in April, because the civilian aircraft component behaved very strangely.
Friday's advance Eurozone PMI reports capped a fine quarter for the survey. The composite PMI jumped to a 80-month high of 56.7 in March, from 56.1 in February, rising to a cyclical high over Q1 as a whole.
The balance of risks to activity in Mexico this year is still tilted to the downside, even though recent data have been mixed. Key indicators show that the manufacturing sector is gathering strength on the back of lagged effect of the MXN's sell-off last year, and the improving U.S. economy.
The headline durable goods orders number for October, due today, likely will be depressed by falling aircraft orders, both civilian and military. Boeing reported orders for 55 civilian aircraft in September, compared to only three in August, but a hefty adverse swing in the seasonal factor will translate that into a small seasonally adjusted decline.
The last few years have thrown up surprise after surprise for establishment parties. Mr. Abe's Liberal Democrat Party is about as establishment as they come.
We have been asked how we can justify raising our growth forecasts but at the same time arguing that the housing market is set to weaken quite dramatically, thanks to the clear downshift in mortgage applications in recent months. Applications peaked back in June, so this is not just a story about the post-election rise in mortgage rates.
We argued in the Monitor yesterday that the very low and declining level of jobless claims is a good indicator that businesses were not much bothered by the slowdown in the pace of economic growth in the first quarter. The numbers also help illustrate another key point when thinking about the current state of the economy and, in particular, the rollover in the oil business.
Markets often greet the monthly international trade numbers with a shrug.
Fed Chair Yellen's speech in Cleveland yesterday elaborated on the key themes from last week's FOMC meeting.
Money supply growth in the Eurozone firmed last month. Broad money--M3--rose 5.0% year-overyear in August, after a tepid 4.5% rise in July.
The first estimate of Q1 growth will show that the economy struggled in the face of the severe winter and, to a lesser extent, the rollover in capital spending in the oil sector. But the weather hit appears to have been much smaller than last year, when the economy shrank at a 2.1% rate in the first quarter; this time, we think the economy expanded at an annualized rate of 1.1%.
We see significant upside risk to today's headline durable goods orders numbers for April.
The flat trend in core capital goods orders continued through May, according to yesterday's durable goods orders report. We are not surprised.
The renewed slide in oil prices in recent weeks will crimp capital spending, at the margin, but it is not a macroeconomic threat on the scale of the 2014-to-16 hit.
Friday's economic data suggest that the downtrend in German PPI inflation is reversing.
The Governor's comments late last week successfully recalibrated markets, which had concluded that a May rate hike was virtually certain, despite the MPC's deliberately vague guidance.
Today's market attention will be focused on the advance August PMI data in the major EZ economies. We think the composite PMI in the euro area was unchanged at 53.2 in August, consistent with stable GDP growth of 0.3%-to-0.4% quarter-on-quarter in Q3. The signal of "stability" in the Eurozone business cycle has been consistently relayed by the PMI since the beginning of the year.
The hawks clearly tried hard to persuade their more nervous colleagues to raise rates yesterday. In the end, though, they had to make do with shifting the language of the FOMC statement, which did not read like it had come after a run of weaker data.
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.
Surging soybean exports contributed 0.9 percentage points, gross, to third quarter GDP growth, though the BEA said that this was "mostly" offset by falling inventories of wholesale non-durable goods.
November data for most of the major EZ business and consumer surveys arrive this week. We doubt the reports will change our view that EZ GDP growth likely will remain steady at about 1.6% year-over-year in Q4. But appearances matter, and risks are tilted to the downside in some of the main surveys, after jumps in October.
Public borrowing was below consensus expectations in August, fuelling speculation that the Chancellor might pare back the remaining fiscal tightening in the Autumn Budget on November 22.
Dire warnings that the plunge in s tock prices would depress consumers' confidence and spending have not come to pass. It's too soon to draw a definitive conclusion--the S&P hit its low as recently as the 11th--but peoples' end-February brokerage statements are on track to look less horrific than the end-January numbers, provided the market doesn't swoon again over the next few days.
The White House budget proposals, which Roll Call says will be released in limited form on March 14, will include forecasts of sustained real GDP growth in a 3-to-3.5% range, according to an array of recent press reports.
In April last year, something odd happened in the FX market.
Back on May 14, we argued--see here--that the stars were aligned to generate very strong second quarter GDP growth, perhaps even reaching 5%.
A couple of Fed speakers this week have described the economy as being at "full employment". Looking at the headline unemployment rate, it's easy to see why they would reach that conclusion.
We see considerable downside risk to the consensus forecast that GDP increased by 0.4% quarter-on-quarter in Q4, the same as in Q3.
Today's data likely will show that EZ households' sentiment remained close to a record high at the start of the year.
U.K. activity data have consistently surprised to the downside over the last month.
The Eurozone has come under the spotlight for its growing external surplus, but domestic households have been doing the heavy lifting for GDP growth in this business cycle. During the last four quarters, consumers' spending has boosted year-over-year GDP growth by an average of 1.0 percentage points, in contrast to a 0.4pp drag from net exports.
Today brings a wave of data, some brought forward because of Thanksgiving. We are most interested in the durable goods orders report for October, which we expect will show the upward trend in core capital goods orders continues.
Core inflation has risen, albeit modestly, in the past two months. The uptick, to 1.8% in March from 1.6% in January, has come as something of a surprise. The narrative in the media and markets remains, as far as we can tell, one of downward pressure on inflation and, still, fear of possible deflation.
Sentiment in the French business sector ended this year on a high. The headline manufacturing index fell slightly to 112 in December, from an upwardly-revised 113 in November, but the aggregate sentiment gauge edged higher to a new cycle high of 112.
This is the final U.S. Economic Monitor of 2017, a year which has seen the economy strengthen, the labor market tighten substantially, and the Fed raise rates three times, with zero deleterious effect on growth.
We expect the official estimate of quarter-on-quarter GDP growth in Q4 to be revised up to 0.7% today, from last month's preliminary estimate of 0.6%. The consensus forecast is for no revision, so the data likely will boost interest rate expectations and sterling, if we're right.
Fed Chair Yellen said in her press conference last week that she has "...been surprised that housing hasn't recovered more robustly than it has. In part I think it reflects very tight credit--continuing tight credit conditions for any borrower that doesn't have really pristine credit... my hope is that that situation will ease over time".
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.
The New York Fed tweeted yesterday that "Housing market fundamentals appear strong.
Consumer sentiment in the euro area has slipped this year, though the headline indices remain robust overall.
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.
We have learned over the years not to become too excited in the face of swings in the jobless claims numbers, even when the movement appears to persist for a month or two.
We're expecting a substantial inventory hit in the fourth quarter, subtracting about 1¼ percentage points from headline GDP growth. Businesses very likely added to their inventories in Q4, in real terms, but the we reckon the increase was only about $30B, annualized, compared to the $85.5B jump in the third quarter. Remember, the contribution to GDP growth is the change in the pace of inventory-building between quarters.
We pointed out in yesterday's Monitor that Fed Chair Yellen appears to be putting a good deal of faith in the idea that the recent upturn in core inflation is temporary. She argued that "some" of the increase reflects "unusually high readings in categories that tend to be quite volatile without very much significance for inflation over time".
Slack in the labour market no longer is being absorbed and wage growth still is struggling for momentum, placing little pressure on the MPC to rush the next rate rise.
Even the most bullish estate agent in Britain would struggle to put a positive spin on the latest housing market news. The latest levels of the official, Nationwide, and Halifax measures of house prices all are below their peaks.
Dr. Yellen's Testimony yesterday was largely a cut-and-paste job from the FOMC statement last week and her remarks at the press conference. The Fed's core views have not changed since last week, unsurprisingly, and policymakers still expect to raise rates gradually as inflation returns to the target, but will be guided by the incoming data.
The closer we look at the Fed's new forecasts, the stranger they seem. The FOMC cut its GDP estimate for this year and now expects the economy to grow by 1.9%--the mid-point of its forecast range--in the year to the fourth quarter. Growth is then expected to pick up to 2.6% next year, before slowing a bit to 2.3% in 2017. Unemployment, however, is expected to fall much less quickly than in the recent past.
Yesterday's data don't significantly change our view that first quarter GDP growth will be reported at only about 1%, but the foreign trade and consumer confidence numbers support our contention that the underlying trend in growth is rather stronger than that.
The MPC was more hawkish than we and most investors expected yesterday. The vote to keep Bank Rate at 0.50% was split 6-3, f ollowing Andy Haldane's decision to join the existing hawks, Ian McCafferty and Michael Saunders.
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.
With most poll-of-poll measures showing a very narrow margin in the U.K. Brexit referendum, while betting markets show a huge majority for "Remain", today brings a live experiment in the idea that the wisdom of crowds is a better guide to elections than peoples' preferences.
The plunge in capital spending in the oil business appears to be over, at least for now. Orders for non-defense capital goods, excluding aircraft, fell by 8.9% from their September peak to their February low, but they have since rebounded, as our first chart shows. We can't be certain that the sudden drop in core capex orders late last year was triggered by a rollover in oil companies' spending, but it is the most likely explanation, by far.
Broad-based inflation pressures in Brazil remain tame despite the sharp BRL depreciation this year, totalling about 7% in the last three months alone.
Today brings new housing market data, in the form of the weekly applications numbers from the MBA. The weekly data are seasonally adjusted but are still very volatile, especially in the spring.
A startlingly wide gap has emerged over the past nine months between the ISM manufacturing index and Markit's manufacturing PMI.
The minutes of Banxico's November 9 policy meeting were released yesterday, in which the Bank left the reference rate unanimously unchanged at 7.0%.
This is the final Monitor before we head out for our spring break, so we have added a page in order to make room to preview the employment report due next Friday, April 4. We expect a solid but unspectacular 175K increase in payrolls, slowing from February's unsustainable 242K, but still robust.
Robust demand in the ECB's final TLTRO auction was the main story in EZ financial markets yesterday. Euro area banks--474 in total-- took up €233.5B in the March TLTRO, well above the consensus forecast €110B. To us, this strong demand is a sign that EZ banks are taking advantage of the TLTROs' incredibly generous conditions.
The minutes of the May 2/3 FOMC meeting today should add some color to policymakers' blunt assertion that "The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term."
The second estimate of GDP left the estimate of quarter-on-quarter growth unrevised at 0.3%, a trivial improvement on Q1's 0.2% gain.
The alarming-looking decline in core capital goods orders since late 2014 has been substantially due, in our view, to the rollover in investment in the mining sector. But the 29% jump in the number of oil rigs in operation, since the mid-May low, makes it clear that the collapse is over.
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.
We have argued over the past couple of years that if you want to know what's likely to happen to U.S. manufacturing over the next few months, you should look at China's PMI, rather than the domestic ISM survey, which is beset by huge seasonal adjustment problems.
Markets cheered soaring business surveys in the Eurozone earlier this week, and recent consumer sentiment data also have been cause for celebration. The advance GfK consumer confidence index in Germany rose to a record high of 10.4 in June, from 10.2 in May.
Today's advance inventory and international trade data for December could change our Q4 GDP forecast significantly.
We've seen some alarming estimates of the potential impact on inflation of the House Republicans' plans for corporate tax reform, with some forecasts suggesting the CPI would be pushed up as much as 5%. We think the impact will be much smaller, more like 1-to-11⁄2% at most, and it could be much less, depending on what happens to the dollar. But the timing would be terrible, given the Fed's fears over the inflation risk posed by the tightness of the labor market.
The bad economic news in Brazil is unstoppable. The mid-month CPI index rose 1.3% month-to-month in February, as education, housing, and transport prices increased. School tuition fees jumped 6% month-to-month in February, reflecting their annual adjustment, and transport costs rose by 2% due to an increase in regulated gasoline prices.
Data this week look set to emphasise that heat is returning to the housing market, again. The Financial Policy Committee--FPC--still has additional tools it could deploy to cool housing demand. But the root cause of surging house prices remains very cheap debt. Alongside the inflation risk posed by the labour market, the case for the MPC to begin to raise interest rates to prevent a widespread debt problem is becoming compelling.
It's probably too soon to start looking for second round effects from the drop in gasoline prices in the core CPI. History suggests quite strongly that sharp declines in energy prices feed into the core by depressing the costs of production, distribution and service delivery, but the lags are quite long, a year or more.
The third estimate of first quarter GDP growth, due today, will not be the final word. The BEA will revise the data again on July 30, when it will also release its first estimate for the second quarter and the results of its annual revision exercise. Quarterly estimates back to 2012 will be revised. The revisions are of greater interest than usual this year because the new data will incorporate the first results of the BEA's review of the seasonal problems.
The woes of the manufacturing sector are likely to intensify over the next few months, even if--as we expect--overall economic growth picks up. The core problem is the strong dollar, which is hammering exporters, as our first chart shows. The slowdown in growth in China and other emerging markets is hurting too, but this is part of the reason why the dollar is strong in the first place.
The theory of spontaneous combustion of the U.S. economy appears to be making something of a comeback, if our inbox and market chat is to be believed. The core idea here is that expansions die of old age, and can be helped on their way to oblivion by factors like falling corporate earnings and rising inventory. The current recovery, which began in June 2009 and is now 63 months old, already looks a bit long-in-the-tooth.
Orders for core capital goods began to fall outright in September last year; we can't blame the severe winter for the 11.1% annualized decline in the fourth quarter of last year. Indeed, the drop in orders in the first quarter will be rather smaller than in the fourth, unless today's March report reveals a catastrophic collapse.
The Monetary Policy Committee chose to keep its options open in the minutes of this week's meeting, rather than signal as clearly as it did last year that interest rates will rise very soon.
Yesterday's announcement that the administration plans to imposes tariffs worth about $60B per year -- thatìs 0.3% of GDP -- on an array of imports of consumer goods from China is a serious escalation.
The 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.
If we are right in our view that the lag between shifts in gasoline prices and the response from consumers is about six months--longer than markets seem to think--then the next few months should see spending surge.
Yesterday's barrage of economic data in the Eurozone added to the evidence that economic momentum is slowing.
The gap between the hard and soft data from the industrial economy appeared to widen still further last week. But we are disinclined to take the data--the official industrial production report for March, and the first survey evidence for April--at face value.
The initial "official estimate" of the French presidential election--released 20.00 CET--suggest that the runoff will be between the centre-right Emmanuel Macron and Front National's Marine Le Pen. This is consistent with opinion polls. The average of five early estimates also suggests that Mr. Macron won the vote with 23.1% of the vote against Mrs. Le Pen's 22.5%.
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.
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.
This is the last Monitor before we head to the beach, so we want to offer a few thoughts on the upcoming data and the FOMC meeting while we're out. First, a warning about the second quarter GDP number. We think that the data released so far are consistent with growth at about 3%.
Sentiment in Germany has improved slightly this month with the IFO business climate index rising to 106.8 from 106.7 in January, pushed higher by a small increase in the expectations index.
Yesterday's PMI data in the Eurozone economy were a mixed bag.
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.
We expect today's second estimate of Q2 GDP to confirm that the U.K. has been the slowest growing G7 economy this year.
We expect the second estimate of Q1 GDP, released today, to restate that quarter-on-quarter growth slowed to just 0.3%, from 0.7% in Q4. The second estimate of growth rarely is different to the first.
We have argued frequently that the ADP employment report is not a reliable advance payroll indicator--see our Monitor of May 4, for example-- so for now we'll just note that it is generated by a regression model which includes a host of nonpayroll data and the official jobs numbers from the previous month. It is not based solely on reports from employers who use ADP for payroll processing, despite ADP's best efforts to insinuate that it is.
Survey data continue to suggest that GDP growth will accelerate in Q1. The final PMI reports on Friday showed that the headline EZ composite index rose to 56.0 in February, from 54.4 in January, in line with the first estimate.
LatAm assets have struggled in recent days as it has become clear that the Fed will hike next week. But we don't expect currencies to collapse, as domestic fundamentals are improving and the broader external outlook is relatively benign.
Chile's IMACEC economic activity index rose 3.9% year-over-year in January, up from 2.6% in December, and 2.9% on average in Q4, thanks to strong mining output growth and solid commercial, manufacturing and services activity.
If 2017 really is the year of "reflation", somebody forgot to tell the gilt market. Among the G7 group, 10-year yields have fallen only in the U.K. during the last three months, as our first chart shows.
Business surveys released over the last week have made us more confident in our call that quarter-on- quarter GDP growth will recover to about 0.4% in Q2, from Q1's weather-impacted 0.1% rate.
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.
Economic activity is slowing in Colombia. The ISE activity index--a monthly proxy for GDP--rose only 0.6% year-over-year in April, down from 2.3% in March, and we expect it to rise at this pace over the coming months. During the first quarter, the index rose at an average year-over-year rate of 3.0%.
The 6.4-point rebound in the May ISM non-manufacturing employment index, to a very high 57.8, supports our view that summer payroll growth will be strong. On the face of it, the survey is consistent with job gains in excess of 300K, as our first chart shows, but that's very unlikely to happen.
The results of Sunday's parliamentary elections in Italy carry two key messages.
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 PMI survey points to a slight loss of momentum in Eurozone growth towards the end of Q3. The composite index fell to 53.6 in September from 54.3 in August, trivially lower than the initial estimate of 53.9. This is not enough to move the needle on the survey's signal for Q3 GDP growth, though; our first chart shows it pointing to stable growth of 0.4% quarter-on-quarter.
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.
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.
The MPC's penchant for providing interest rate guidance reached new heights last week.
German manufacturing data continues to offer a sobering counterbalance to strong services and consumers' spending data. New orders plunged 1.7% month-to-month in September, well below the consensus, pushing the year-over-year rate down to a 1.0% fall from a revised 1.7% increase in August. These data are very volatile, and revisions probably will lift the final number slightly next month, but the evidence points to clear risks of a further decline in the underlying trend of production.
The wide spread in first quarter GDP growth "trackers"--which at this point are more model and assumption than actual data--is indicative of the uncertainty surrounding the international trade and inventory components.
China's National People's Congress yesterday laid out its main goals for this year, on the first day of its annual meeting.
The latest U.K. PMIs were unambiguously dreadful. The manufacturing, construction and services PMIs all fell in April, and their weighted average points to quarter-on-quarter growth in GDP slowing to zero in Q2, from 0.4% in Q1. The U .K.'s composite PMI also undershot the Eurozone's for the second month this year.
It's probably happening a decade too late, but the EU is now moving in leaps and bounds to restructure the continent's weakest banks. Yesterday, the Monte dei Paschi saga reached an interim conclusion when the Commission agreed to allow the Italian government to take a 70% stake in the ailing lender.
Today's June ADP employment report likely will undershoot the 183K consensus, but we then expect the official payroll number tomorrow to surprise to the upside.
Japan's Nikkei services PMI dropped to 51.0 in September from 51.6 in August, continuing the downtrend since June. For Q3 as a whole, the headline averaged 51.5, down from 52.8 in Q2; that's a clear loss of momentum.
Brazil heads to the polls on Sunday, followed by an expected run-off on October 28.
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.
Yesterday's economic reports in the Eurozone will rekindle the debate on hard versus soft data. The final composite PMI rose to 56.7 in September, from 55.7 in August, in line with the first estimate.
It is possible that the broad-based softness of September payrolls captures a knee-jerk reaction on the part of employers, choosing to wait-and-see what happens to demand in the wake of stock market correction. But that can't be the explanation for the mere 136K August gain, because the survey was conducted before the market rolled over. Even harder to explain is the hefty downward revision to August payrolls, after years of upward revisions. All is not yet lost for August--the last time the first revision to the month was downwards, -3K in 2010, the second revision was +56K--but we aren't wildly optimistic.
Data released last week confirmed the strength of the economic recovery in Chile, and we expect further good news in the next three-to-six months.
Friday's economic data in Germany suggest that households had a slow start to the year.
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.
August's 14-year high in the ISM manufacturing index, reported yesterday, clearly is a noteworthy event from a numerology perspective, but we doubt it marks the start of a renewed upward trend.
Chile's economy appears to have gathered momentum in February with the Imacec index, a proxy for GDP, increasing 2.8% year-over-year, up from a modest 0.1% contraction in January and its fastest pace since January 2015. Activity was driven mainly by expansion in services, mining and retail commerce activities.
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.
Real M1 growth is slowing, and financial conditions are beginning to tighten in the Eurozone, but shortleading indicators continue to signal firm momentum in the economy.
The latest PMIs suggest that investors have jumped the gun in pricing-in a 50% chance of the MPC raising interest rates again as soon as May.
Brazilian data strengthened early in Q4, supporting the case for the COPOM to slow the pace of rate cuts. We expect the SELIC policy rate to be lowered by 50bp today, to 7.0%.
November's Markit/CIPS surveys for the manufacturing, construction and services sectors suggest that GDP growth is on track to strengthen a touch in Q4.
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.
Consumers' spending in the Eurozone slowed in the second half of 2017, providing a favourable base for growth in H1 2018.
Negotiations between Greece and its creditors will come to a head in the next few weeks as the country faces imminent risk of running out of money. Following a meeting with the head of the IMF, Christine Lagarde, on Sunday Greek finance minister Faroufakis assured investors that the country intends to make a scheduled €450M payment to the fund on Thursday.
Yesterday's German industrial production data were poor, but better than we expected. Output fell 0.5% month-to-month in February, pushing annual growth down to 1.3% from a revised 1.8% in January. In addition, net revisions to the month-to-month data were a hefty -1.0%, but this is not enough to change the story of a Q1 rebound in industrial production.
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
Mexico's economic outlook has dimmed recently, a point driven home by sentiment data released last week. Still, we think GDP growth will slow only marginally in Q4, to about 11⁄2% year-over-year. Consumers' spending likely will remain strong in the near term, thanks mainly to rising remittances from the U.S., driven by fear of policy changes under the Trump administration.
A core element of our relatively upbeat macro view before the implementation of fiscal stimulus under the new administration is that the ending of the drag from falling capex in the oil sector will have quite wide, positive implications for growth. The recovery in direct oil sector spending is clear enough; it will just track the rising rig count, as usual.
Colombia's economy has continued to slow, due mainly to lagged effect of the oil price shock since mid-2014, and stubbornly high inflation, which has triggered painful monetary tightening. Modest fiscal expansion and capital inflows have helped to avoid a hard landing, but the economy is still feeling the pain of weakening domestic demand. And the twin deficits--though improving--remain a threat.
Friday's industrial production report in Germany capped a miserable week for economic data in the Eurozone's largest economy.
We planned to write today about the rebound in housing market activity over the past few months, arguing that it is about to run out of steam in the face of the recent flat trend in mortgage applications. The Mortgage Bankers Associations' purchase applications index rocketed in the spring, but then moved in a narrow range from mid-April through late September. Then, out of the blue, the MBA reported a 27% leap in applications in the week ended October 2, taking the index to its highest level in more than five years.
Yesterdays' industrial production report capped a poor week for German manufacturing. Output fell 1.2% month-to-month in August, well below the consensus, +0.2%, though note that a 0.5% upward revision to the July data made the August headline look worse. Similar to the factory orders report earlier this week--see our October 6th Monitor--base effects also mean that production accelerated to 2.5% year-over-year, from a revised 0.8% gain in July.
The combination of upbeat survey data and solid consumer spending numbers indicate that the German economy is in good shape. But manufacturing data continue to disappoint; factory orders fell 0.9% month-to-month in February, equivalent to a 1.3% decline year-over-year.
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 slew of EZ economic data on Friday supports our view that the economy ended 2016. The Commission's economic sentiment index jumped to 107.8 in December from a revised 106.6 in November. The headline strength was due to a big increase in "business climate indicator" and higher consumer sentiment. In individual countries, solid numbers for German construction and French services sentiment were the stand-out details.
We were pretty sure that the underlying trend in jobless claims had bottomed, in the high 230s, before the hurricanes began to distort the data in early September.
Inventories subtracted 1.3 percentage points from headline GDP growth in the second quarter and were by far the biggest constraint on the economy. This was the fifth straight drag from inventories, but it was more than twice the average hit over the previous year.
The run of soft core CPI numbers is over. The average 0.18% increase over the past two months probably is a good indication of the underlying trend -- the prints would have been close to this pace in both months had it not been for wild swings in the lodging component -- and the other one-time oddities of recent months' have faded.
The undershoot in April payrolls, relative to the consensus, is a story of a fluke number in just one sector. Retail payrolls reportedly shrank by 3K, after rising by an average of 52K over the previous six months. Our first chart shows clearly that the retail payrolls are quite volatile over short periods, with sudden and often inexplicable swings in both directions quite common.
Yesterday's economic reports showed that the German economy firmed at the end of Q1, but this doesn't change the story for a poor quarter overall.
The upturn in German manufacturing orders waned slightly towards the end of 2017; factory orders fell 0.4% month-to-month in November.
We expected a consensus-beating ADP employment number for February, but the 298K leap was much better than our forecast, 210K. The error now becomes an input into our payroll model, shifting our estimate for tomorrow's official number to 250K; our initial forecast was 210K.
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.
The impending retirement of New York Fed president Dudley creates yet another vacancy on the FOMC.
The economy is bifurcating. Manufacturing is weak, and likely will remain so for some time, though talk of recession in the sector is overdone. Even more overdone is the idea that the softness of the industrial sector will somehow drag down the rest of the economy, which is more than seven times bigger.
We've been hearing a good deal about the slowdown in the rate of growth of consumer credit in recent months, and with the April data due for release today, it makes sense now to reiterate our view that the recent numbers are no cause for alarm.
All the signs are that ADP will today report a solid increase in February private payrolls; our forecast is 200K, but if you twist our arms we'd probably say the mild weather last month across most of the country points to a bit of upside risk.
As things stand, we see little reason to revise down our forecasts for the U.K. economy in response to the tailspin in equity markets
We were a bit disappointed by the November ADP employment report, though a 190K reading in the 102nd month of a cyclical expansion is hardly a disaster.
...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.
China's unadjusted current account was effectively in balance in Q2, after the deficit in Q1.
China last week banned unlicensed micro-lending and put a ceiling on borrowing costs for the sector, in an effort to curtail the spiralling of consumer credit.
Last week's heavy snowfall, which blighted the entire country, will depress GDP growth in Q1, making it harder for the MPC to read the economy.
No single measure of labor demand is always a reliable leading indicator of the official payroll numbers, which is why we track an array of private and official measures.
German GDP growth jumped in the first quarter, but monthly economic data suggest the economy all but stalled in Q2. Yesterday's industrial production data are a case in point. Output slid 1.3% month-tomonth in May, pushing the year-over-year rate down to -0.4% from a revised 0.8% gain in April. Adding insult to injury, the month-to-month number for April was revised down by 0.3 percentage points
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.
Early results suggest that Mr. Macron has comfortably beat Marine Le Pen to become French president, defying a leak of emails and other documents from his En Marche campaign over the weekend. The final results won't be published until Monday morning, but the initial estimate indicates that Mr. Macron will edge Ms. Le Pen by 65.1% to 34.9%.
Japan's services sector PMI last week was disappointing.
Friday's final EZ inflation report of 2017 sent a dovish signal to bond markets.
The two major EZ economic reports released while we were away conformed to the consensus. Advance data suggest that real GDP in the euro area rose 0.3% quarter-on-quarter in Q3, the same pace as in Q2, and the year-over-year rate was similarly unchanged at 1.6%.
The jobless claims numbers today likely will mark the end of the calm before the storm effect, even though the data cover the week ended September 1, and Harvey hit on August 26.
The headline May ISM non-manufacturing index today likely will mirror, at least in part, the increase in the manufacturing survey, reported Friday.
If you were looking just at investor sentiment in the Eurozone, you would conclude that the economy is in recession.
Today's ECB meeting will be accompanied by an update of the staff projections, where the inflation outlook will be in the spotlight. The June forecasts predicted an average inflation rate of 0.3% year-over-year this year, currently requiring a rather steep increase in inflation towards 1.1% at the end of the year. We think this is achievable, but we doubt the ECB is willing to be as bold, and it is reasonable to assume this year's forecast will be revised down a notch.
We already have a pretty good idea of what happened to consumers' spending in March, following Friday's GDP release, so the single most important number in today's monthly personal income and spending report, in our view, is the hospital services component of the deflator.
We're expecting a hefty increase in private payrolls in today's August ADP employment report. ADP's number is generated by a model which incorporates macroeconomic statistics and lagged official payroll data, as well as information collected from firms which use ADP's payroll processing services.
We're fully expecting to see a hit to September payrolls from Hurricane Florence, which struck during the employment survey week.
Producer price inflation in the euro area almost surely peaked over the summer.
Speeches by Chair Yellen and Vice-Chair Fischer give the two most important Fed officials the perfect platform today to signal to markets whether rates will rise this month.
The Fed likely will do nothing today, both in terms of interest rates and substantive changes to the statement. We'd be very surprised to hear anything new on the Fed's plans for its balance sheet.
Yesterday's advance Q1 GDP data in the EZ confirmed that growth slowed at the start of the year.
The seasonal adjustment problems which tend to drive up the national ISM manufacturing survey in late spring and summer are more or less absent from the Chicago PMI, which will be released today. As far as we can tell, the biggest short-term influence on the Chicago number is variations in the order flow for Boeing aircraft; the company moved its headquarters to the city from Seattle in 2001.
The unemployment rate hit its post-1970 low in April 2000, at the peak of the first internet boom, when it nudged down to just 3.8%. The low in the next cycle, first reached in October 2006, was rather higher, at 4.4%.
The November ADP employment report today likely will show private payrolls rose by about 180K. We have no reason to think that the trend in payroll growth has changed much in recent months, though the official data do appear to be biased to the upside in the fourth quarter, probably as a result of seasonal adjustment problems triggered by the crash of 2008. We can't detect any clear seasonal fourth quarter bias in the ADP numbers.
Mexico's data over the last few weeks have confirmed our view that private consumption remains the key driver of the current economic cycle. Solid economic fundamentals, thanks to stimulative monetary policy and structural reforms, have supported the domestic economy in recent quarters. Falling inflation has also been a key driver, slowing to 2.5% by mid-September, a record low, from an average of 4% during 2014.
Yesterday's relatively good news--we discuss the implications of the August trade data below--will be followed by rather more mixed reports today. We hope to see a partial rebound, at least, in the September Chicago PMI, but we fully expect soft August consumer spending data.
October's money and credit report indicates that the economy had little momentum at the start of the fourth quarter.
The rate of growth of third quarter consumers' spending was revised up by 0.3 percentage point to 3.3% in the national accounts released yesterday.
Markets expect the Fed will fail to follow through on its current intention to raise rates twice more this year and three times next year. Part of this skepticism reflects recent experience.
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 downside surprise in April payrolls reflected weakness in just three components--retail, construction, and government--compared to their prior trends. Of these, we think only the construction numbers are likely to remain soft in May. Had it not been for the Verizon strike, then, we would have expected payrolls to rise by just over 200K in May, but the 35K strike hit means our forecast is 170K.
The ECB stood pat yesterday, keeping its key refinancing and deposit rates unchanged at zero and -0.4%, respectively. The marginal lending facility rate was also left at 0.25%, and the monthly pace of QE was maintained at €80B, with a preliminary end-date in the first quarter of 2017. Purchases of corporate bonds will begin June 8, and the first new TLTRO auction will take place June 22.
Economic data released on Friday underscored our view that bolder rate cuts in Brazil are looming. The BCB's latest BCB's inflation report, released on Thursday, showed that policymakers now see conditions in place to increase the pace of easing "moderately" .
We'd be very surprised to see a material weakening in today's March ISM manufacturing survey. The regional reports released in recent weeks point to another reading in the high 50s, with a further advance from February's 57.7 a real possibility.
We fear that private spending in the EZ slowed in Q1, despite rocketing survey data. This fits our view that household consumption will slow in 2017 after sustained above-trend growth in the beginning of this business cycle.
The picture of the economy's recent performance will be redrawn today, when the national accounts are published.
The estimate of services output for the first month of the current quarter usually gets lost among the deluge of national accounts and balance of payments data released for the previous quarter.
The biggest single driver of the downward revision to first quarter GDP growth, due this morning, will be the foreign trade component. Headline GDP growth likely will be pushed down by a full percentage point, to -0.8% from +0.2%, with trade accounting for about 0.7 percentage points of the revision.
It doesn'tt matter if third quarter GDP growth is revised up a couple of tenths in today's third estimate of the data, in line with the consensus forecast.
Today's Case-Shiller report on existing home prices will likely show that August prices were little changed, month-to-month, for the fourth straight month. The slowdown in the pace of price gains since the first quarter, when price gains averaged 1.0% per month, has been startling. In all probability, though, the apparent stalling is a reflection of the quality of the data rather than the underlying reality in the housing market.
The national accounts for the fourth quarter showed that the economy relied on households slashing their saving rate to a record low in order to spend more. Now, growth in consumer spending will have to fall back in line with real incomes, which will increasingly be impaired by rising inflation.
Japan's unemployment rate edged back up to 2.5% in February after the drop in January to 2.4%.
The next nine weeks bring three jobs reports, which will determine whether the Fed hikes again in September, as we expect, and will also help shape market expectations for December and beyond.
The startling jump in supplier delivery times in the June ISM manufacturing survey, to a 14-year high, was due--according to the ISM press release--to disruptions to steel and aluminum supplies, transportation problems and "supplier labor issues".
Rumours of Greece stepping back from the brink and accepting its creditors' demands, have taunted markets this week. But the response from the EU, so far, is that talks will not resume before this weekend's referendum. Our base case is a "yes" to the question of whether Greece should accept the proposal from the EU and IMF.
While we were out, the data showed that consumers' confidence has risen very sharply since the election, hitting 15-year highs, but actual spending has been less impressive and housing market activity appears poised for a marked slowdown.
Short of saying "We're going to hike rates in two weeks' time", Dr. Yellen's view of the immediate economic and policy outlook, set out in her speech yesterday, could hardly have been clearer. Yes, she threw in the usual caveats: "...we take account of both the upside and downside risks around our projections when judging the appropriate stance of monetary policy", and saying the FOMC will have to evaluate the data due ahead of this month's meeting, but her underlying message was straightforward.
We look for a 210K increase in July payrolls. That would be consistent with the message from an array of private sector surveys, as well as the recent trend.
Even Charles Dickens could not have written a more dramatic prologue to today's ECB meeting. Elevated expectations ahead of major policy events always leave room for major disappointment, but we think the central bank will deliver. Advance data yesterday indicated inflation was unchanged at 0.1% year-over-year in November, below the consensus 0.2%, and providing all the ammunition the doves need to push ahead. We expect the central bank to cut the deposit rate by 20bp to -0.4%, to increase the pace of bond purchases by €10B to €70B a month, and to extend QE to March 2017.
Today's wave of economic reports are all likely to be strong. The most important single number is the increase in real consumers' spending in July, the first month of the third quarter.
We are expecting a hefty increase in the August ADP employment number today--our forecast is 225K, above the 175K consensus --but we do not anticipate a similar official payroll number on Friday. Remember, the ADP number is based on a model which incorporates lagged official employment data, the Philly Fed's ADS Business Conditions Index, and data from firms which use ADP for payroll processing.
The 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.
The ADP employment report suggests that the hit to payrolls from Hurricane Florence was smaller than we feared, so we're revising up our forecast for the official number tomorrow to 150K, from 100K.
The news-flow in the Eurozone was almost unequivocally bad over the summer.
Today brings the first glimpse of the post-hurricane employment picture, in the form of the September ADP report.
The current momentum in house prices partly reflects a dearth of homes offered for sale by existing homeowners. This scarcity reflects a series of constraints, which we think will ease only gradually. Further punchy gains in house prices therefore look sustainable and we expect average prices to rise by about 8% next year.
Today's ADP employment report for December ought to show private payrolls continue to rise at a very solid pace
Data yesterday showed that Momentum in the EZ retail sector stumbled through middle of Q2.
The underlying trend in payroll growth ought to be running at 250K-plus, based on an array of indicators of the pace of both hiring and firing. The past few months' numbers have fallen far short of this pace, though, for reasons which are not yet clear. We are inclined to blame a shortage of suitably qualified staff, not least because that appears to be the message from the NFIB survey, which shows that the proportion of small businesses with unfilled positions is now close to the highs seen in previous cycles. If we're right, payroll growth won't return to the 254K average recorded in 2014 until the next cyclical upturn, but quite what to expect instead is anyone's guess.
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.
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.
December's Markit/CIPS surveys for the manufacturing, construction and services sectors suggest that the economy ended 2017 on a lacklustre note.
The June ISM manufacturing index signalled clearly that the industrial recovery continues, with the headline number rising to its highest level since August 2014, propelled by rising orders and production. But the industrial economy is not booming and the upturn likely will lose a bit of momentum in the second half as the rebound in oil sector capex slows.
Currency markets often make a mockery of consensus forecasts, and this year has been no exception. Monetary policy divergence between the U.S. and the Eurozone has widened this year; the spread between the Fed funds rate and the ECB's refi rate rose to a 10-year high after the Fed's last hike.
The Caixin services PMI jumped sharply to 53.9 in December from 51.9 in November. All the PMIs picked up significantly, but we find this hard to believe and suspect seasonality is to blame, though the adjustment is tricky.
In the wake of yesterday's ADP report, which showed private payrolls up 250K in December, we have revised our forecast for today's official headline number up to 240K from 210K.
Peru's inflation continues to surprise to the downside, paving the way for an additional rate cut next week.
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.
It probably would be wise to view the increase in the ISM manufacturing index in December with a degree of skepticism. The index is supposed to record only hard activity, but we can't help but wonder if some of the euphoria evident in surveys of consumers' sentiment has leaked into responses to the ISM. That said, the jump in the key new orders index-- which tends to lead the other components--looked to be overdue, relative to the strength of the import component of China's PMI.
The manufacturing indexes for January showed a small improvement for the biggest economies in LatAm: Brazil and Mexico. In Brazil, the PMI manufacturing index increased marginally to 50.7 in December from 50.2 in November, thanks to stronger output and new orders components, which rose together for the first time in ten months.
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.
On the face of it, the February consumer spending data, due today, will contradict the upbeat signal from confidence surveys. The dramatic upturn in sentiment since the election is consistent with a rapid surge in real consumption, but we're expecting to see unchanged real spending in February, following a startling 0.3% decline in January.
Downside risks to our growth forecast for Brazil and Mexico for this year have diminished this week. In Brazil, concerns over the potential impact of the meat scandal on the economy have diminished. Some key global customers, including Hong Kong, have in recent days eased restrictions on imports from Brazil, and other counties have ended their bans.
The most important number, potentially, in today's wave of economic reports is the Employment Costs Index for second quarter.
June's money and credit figures showed that the economy still doesn't have much zing, even though lending has picked up since Q1.
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."
The headline employment cost index has been remarkably dull recently, with three straight 0.6% quarterly increases. The consensus forecast for today's report, for the three months to December, is for the same again.
Japan's headline jobless rate edged up to 2.8% in December, from 2.7% in November, but the increase was negligible, with the rate moving to 2.76% from 2.74%.
In the wake of April's 0.2% increase in real consumers' spending, and the upward revisions to the first quarter numbers, we now think that second quarter spending is on course to rise at an annualized rate of about 3.5%.
Many investors probably glossed over yesterday's barrage of data in the Eurozone, for fear of being caught out by another swoon in Italian bond yields. Don't worry, we are here to help.
The March employment report didn't tell us what we really want to know. The underlying trend in wage growth remains obscured by the calendar quirk which depresses reported hourly earnings when the 15th of the month--pay day for people paid semi-monthly -- falls after the payroll survey week.
Industrial production data yesterday confirmed downside risks to Q4's GDP data in Brazil. Output fell 0.7% month-to-month in October, the fifth consecutive decline, pushing the year-over-year rate down to -11.2%, from -10.9% in September. This was the biggest drop since April 2009, when output collapsed by 14.2% during the global financial crisis. The October details were even worse than the headline, as all three broad-measures fell sharply.
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.
The Brazilian manufacturing sector remains very depressed by weak end-demand, but the misery is easing, at the margin. Industrial production fell 2.5% month-to-month in February, equivalent to an eye-watering 9.8% contraction year-over-year, but this was rather less bad than the 13.6% slump in January.
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.
Defaults by Chinese companies have been on the rise lately. Most recently, China Energy, an oil and gas producer with $1.8B of offshore notes outstanding, missed a bond payment earlier this week. We've highlighted the likelihood of a rise in defaults this year, for three main reasons.
In yesterday's Monitor we suggested that China's profits surge has been party dependent on developers' risky debt issuance practices.
Last week's second estimate of GDP reaffirmed that quarter-on-quarter growth declined to 0.1% in Q1--the lowest rate since Q4 2012--from 0.4% in Q4.
We have not been expecting the Fed to raise rates next week, and yesterday's data made a hike even less likely. The September Philly Fed and Empire State surveys were alarmingly weak everywhere except the headline level, and the official August production data were grim.
Official, real GDP growth was low in Q1, at 1.4% quarter-on-quarter, down from 1.6% in Q4.
Yesterday's economic data in Brazil suggest that retailers suffered in the second quarter, hit by the effect of the truckers' strike, but private consumption remains somewhat resilient.
Manufacturing in the Eurozone rebounded midway through the second quarter.
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%.
November production data in Mexico, released Monday, showed that the industrial economy remained quite soft in the last part of last year. The collapse in capital spending in the oil sector, slowing public spending, and weaker growth in EM and the U.S. manufacturing sector have combined to hit Mexican industrial output quite hard. Total production rose just 0.1% year-over-year in November, down from an already weak 0.5% in October, and below the 1.3% average increase in Q3. Output fell 0.5% month-to-month, the biggest drop since May, reflecting broad-based weakness.
Most of the time we don't pay much attention to the monthly import and export prices numbers, which markets routinely ignore. Right now, though, they matter, because the plunge in oil prices is hugely depressing the numbers and, thanks to a technical quirk, depressing reported GDP growth.
Consumers' spending in Brazil weakened at the end of Q4, but we think households will support GDP growth in the first quarter.
Under normal circumstances, we can predict movements in the headline NFIB index from shifts in the key labor market components, which are released a day ahead of the official employment report, and, hence, about 10 days before the full NFIB survey appears.
For more than two years, the BoJ has fretted, in the outlook for economic activity and prices, that "there are items for which prices are not particularly responsive to the output gap."
Macroeconomic data in the euro area were mixed in our absence.
Three separate stories will come together to generate today's September core CPI number. First, we wonder if the hurricanes will lift the core CPI.
Yesterday EZ industrial production report confirmed the message from advance country data that manufacturing rebounded towards the end of summer. Output, ex-construction, jumped 1.6% month-to-month in August, and the July data were revised up by 0.4 percentage points.
Mexican manufacturing data continue to offer a counterweight to strong consumers' spending and services numbers. Output in the key manufacturing sector contracted by 0.2% month-to-month in September, due mainly to severe external headwinds. But the year-over-year rate was unchanged at 3.3%, with a flat underlying trend. Total industrial output, by contrast, rose 0.4% month-to-month in September, pushing the year-over-year rate up to 1.7%, from an upwardly-revised 1.1% gain in August.
The MPC's meeting on Thursday looks set to be a perfunctory affair. Signs that the economy has lost momentum this year, alongside downward surprises from CPI inflation in January and wage growth in December, mean the Committee won't give the idea of hiking rates a moment's thought.
Industrial production in the Eurozone fell a disappointing 0.1% month-on-month in January, driven by low output in Italy and Germany, as well as a large drop in Finland. But December production was revised up to 0.3% month-to-month, from the initially estimated 0.0%.
Straight-line extrapolations are always risky--nothing lasts forever--but if you allow us the indulgence, our first chart suggests that domestic U.S. oil production will breach 10M barrels per day by the summer.
Over the last few months we have started to see hard evidence of Brazil's deceleration, and, as we have argued in previous Monitors, the slowdown is now set to become more visible. Over the coming weeks, markets will focus on whether Brazil is already in recession, its likely severity, and how the country will get out of this mess.
Yesterday's labour market data showed that growth in households' income has slowed significantly in recent months. Firms are both hiring cautiously and restraining wage increases, due to heightened uncertainty about the economic outlook and rising raw material and non-wage labour costs. Consumers' spending, therefore, will support GDP growth to a far smaller extent this year than last.
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.
Next week is a big one for China. The five yearly Party Congress opens on Wednesday, and on Thursday, the monthly raft of activity data is published, along with Q3 GDP.
Our forecast for a 0.3% increase in the September core PPI, slightly above the underlying trend, is even more tentative than usual.
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.
Japanese M2 growth increased trivially in June to 3.9% year-on-year from 3.8% in May, significantly higher than the 3.2% rate in August, before the BoJ began targeting the yield curve.
The recent cyclical upturn in the EZ began in the first quarter of 2013. GDP growth has accelerated almost uninterruptedly for the last two years to 1.5% year-over-year in Q3, despite the Greek debt crisis and slower growth in emerging markets. Overall we think the recovery will continue with full-year GDP growth of about 1.6%. But we also think the business cycle is maturing, characterised by stable GDP growth and higher inflation, and we see the economy slowing next year.
The downside surprise in the November core CPI, which rose by 0.1%, a tenth less than expected, was due entirely to an unexpected 1.3% drop in apparel prices. This alone subtracted 0.05% from the core, but we think the chance of a reversal in December is quite high.
Data released yesterday support our view that the Brazilian retail sector has gathered strength in recent months, following a weak Q2, when activity was hit by the truckers' strike.
The Monetary Policy Committee likely will not follow up August's stimulus measures with another rate cut at its meeting on Thursday. The partial revival in surveys of activity and confidence have weakened the case for immediate action.
Industrial production in Mexico surged 2.6% year-over-year in February, up from a 0.8% increase in January. A favourable calendar effect, however, is a key part of this story. Once adjusted for the leap year, which added an extra working day, industrial production rose only 0.8%, down from a 1.6% expansion in January.
Today's producer price report for March likely will show a further increase in core goods inflation, which already has risen to 2.0% in February, from 0.2% in the same month last year. The acceleration in the U.S. PPI follows the even more dramatic surge in China's PPI for manufactured goods, which jumped to 6.6% year-over-year in February, from minus 4.9% a year ago. China's PPI is much more sensitive to commodity prices than the U.S. series, so there's very little chance that core U.S. PPI goods inflation will rise to anything like this rate.
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.
It's tempting to conclude that the pick-up in year over-year growth in average weekly wages, excluding bonuses, to a three-year high of 3.1% in July, from 2.8% in June, signals that employees' bargaining power has strengthened and that a sustained wage recovery now is under way.
The key labor market numbers from the monthly NFIB survey of small businesses are released ahead of the main report, due today.
The key piece of evidence supporting our view that housing market activity has peaked for this cycle is the softening trend--until recently--in applications for new mortgages to finance house purchase.
Data released yesterday in Brazil are consistent with our view that private consumption will continue to drive the recovery over the second half, offsetting the ongoing weakness in private investment.
Since January 2015, Core CPI inflation has risen to 2.3% from 1.6%, propelled by a combination of accelerating rents, a substantial rebound in the rate of increase of healthcare costs, and a modest-- though unexpected--upturn in core goods prices. It's always risky, though, simply to extrapolate recent trends and assume you now have a clear guide to the future.
Our view on the trade data last week was that U.S. tariff hikes have caused minimal damage, so far. China's tariff increases on imports to date have resulted in stockpiling, with little evidence in the CPI of any inflationary pressure.
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.
The Bank of England won't set markets alight today. We expect another 9-0 vote to leave rates unchanged at 0.25%, and to continue with the £50B of gilt purchases and $10B of corporate bond purchases announced in August. This is not to say, though, that everything is plain sailing for the Monetary Policy Committee.
Japanese real Q2 GDP growth surprised analysts, increasing sharply to a quarterly annualised rate of 4.0%, up from 1.0% in Q1 and much higher than the consensus, 2.5%. But its no coincidence that the jump in Japanese growth follows strong growth in China in Q1.
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.
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.
We were right about the below-consensus inflation numbers for June, but wrong about the explanation. We thought the core would be constrained by a drop in used car prices, while apparel and medical costs would rebound after their July declines.
Consumers' spending in Brazil slowed at the start of Q4, but we don't see this as the start of a downtrend.
The ECB did its utmost not to say or do anything remotely novel today. The central bank kept its main refinancing and deposit rates unchanged at 0.00% and -0.40%, respectively, and reiterated its plan for QE next year.
Private consumption remains resilient in Brazil and recent data suggest that growth will continue over the coming months.
The German inflation rate soared at the start of 2017, but it likely will fall in the next few months. Final February data yesterday showed that inflation rose to 2.2% in February, from 1.9% in January, consistent with the initial estimate. Since December, headline inflation in Germany, and in the EZ as a whole, has been lifted by two factors. Base effects from the 2016 crash in oil prices have pushed energy inflation higher, and a supply shock in fresh produce--due to heavy snowfall in southern Europe--has lifted food inflation.
The collapse in capital spending in the oil sector and poor construction spending have constrained aggregate Mexican industrial output in recent months, despite the strength of the manufacturing sector. Total production fell 0.1% year-over-year in January, though note this was a clear improvement after the 0.6% drop in December, and better than the average 0.4% contraction over the second half of 2016.
The PBoC has left rates unchanged, so far, in the wake of the Fed hike.
Today's MPC meeting and minutes are the first opportunity for Committee members to speak out in over a month, now that election "purdah" rules have lifted.
Fed Chair Yellen delivered no great surprises in her semi-annual Monetary Policy Testimony, though she certainly was clear on her attitude to the balance sheet. The Fed does not want to "...use the balance sheet as an active tool of monetary policy."
The January core CPI numbers are consistent with our view that the U.S. faces bigger upside inflation risks than markets and the Fed believe.
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.
A significant minority of investors were betting on a repeat of January's outsized 0.349% increase in the core, judging from the immediate market reaction to the release of the February CPI report.
We have no real argument with the consensus forecasts for the January CPI, with the headline likely to rise by 0.3%, with the core up 0.2%.
Today's Eurozone data will provide further details on what happened in Q4. Advance data suggest that industrial production rose a modest 0.1% month- to-month, lifting the year-over-year rate to 4.3% in December, from 3.9% in November.
Yesterday's data were second-tier in the eyes of the markets, but not, perhaps in the eyes of the Fed. The continued surge in job openings, which reached a 14-year high in December, means that the Beveridge Curve--which links the number of job openings to the unemployment rate--shows no signs at all of returning to normal.
The Fed will raise rates by 25bp today, but we expect no change in the median expectation-the dotplot-for two rate hikes both next year and in 2018. We fully appreciate that fiscal easing on the scale proposed by President-elect Trump, or indeed anything like it, very likely would propel inflation to a pace requiring much bigger increases in rates.
The Fed surprised no-one by raising rates 25bp yesterday and leaving in place the median forecast for three hikes next year and two next year.
China's M2 growth surprised on the upside in July, rising to 8.5% year-over-year, from 8.0% in June.
Car registrations, French inflation, advance PMIs and a central bank meeting make up today's substantial menu for investors in the euro area.
EZ survey data were solid in the fourth quarter, pointing to robust GDP growth, but numbers from the real economy have so far not lived up to the rosy expectations. Data yesterday showed that industrial production fell 0.7% month-to-month in November, pushing the year-over-year rate down to 1.1% from a revised 2.0% in October. Italian data today likely will force marginal revisions to the headline next month, but they are unlikely to change the big picture.
Brazil's economic situation has improved this year, and we still expect the recovery to continue over the second half, despite recent political volatility and soft Q2 data.
May's consumer prices figures bolster the case for the MPC to sit tight and wait until next year to raise interest rates, when the economy should have more momentum.
The consumer in Brazil was off to a strong start to the first quarter, and we expect household spending will continue to boost GDP growth in the near term.
The Fed was more hawkish than we expected yesterday.
The Fed will hike by 25 basis points today, but what really matters is what they say about the future, both in the language of the statement and in the dotplot for this year and next.
Brazil's monetary policy committee, the Copom, cut the Selic rate by 25bp to 14.0% in a unanimous decision, without bias, on Wednesday. This marks the start of the first easing cycle since 2012, and it arrives after 15 months with rates held at 14.25%.
Data yesterday showed that industrial production in the Eurozone stumbled in May. Production fell 1.2% month-to-month, driven by weakness in all major economies and falling output in all sub-industries. The poor headline follows an upwardly revised 1.4% jump in April, which means that production rose marginally in the first two months of the second quarter.
It's unrealistic to have a repeat of the second quarter's 4.2% leap in consumers' spending as your base case for the third quarter. It's not impossible, though, given the potential for the saving rate to continue to decline, and the apparently favorable base effect from the second quarter.
February's industrial production and construction output data leave us little choice but to revise down our forecast for quarter-on-quarter GDP growth in Q1 to 0.2%, from 0.3% previously.
All the regional PMI and Fed business surveys we follow suggest that today's national ISM manufacturing report for November will be weaker than in October
Inflation in the Eurozone rose modestly last month. Yesterday's advance CPI report showed the headline rate rising to 0.6% year-over-year in November, from 0.5% in October, mainly because of a jump in fresh food inflation. Energy prices fell 1.1% year-over-year, slightly more than the 0.9% decline in October, but we expect a sharp increase over the next six months.
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 in the euro area edged higher in November, but our prediction of a rebound in the core proved to be wrong. Headline inflation increased to 1.5% in November, from 1.4% in October.
The big story in global macro over the past 18 months or so has been the gigantic transfer of income from oil producers to oil consumers. The final verdict on the net impact of this shift--worth nearly $2T at an annualized rate--is not yet clear, because the boost to consumption takes longer than the hit to oil firms ' capex, which began to collapse just a few months after prices began to fall sharply. But our first chart, which shows oil production by country as a share of oil consumption, plotted against the change in real year-over-year GDP growth between Q2 2014 and Q2 2015, tells a clear story.
Friday's data deluge suggests that EZ economic growth slowed less than we expected in the second quarter. The advance estimate indicates that real GDP in the euro area rose 0.3% quarter-on-quarter in Q2, down from a 0.6% jump in the first quarter. This was in line with the consensus, but it likely doesn't tell the whole story.
Advance data indicate German inflation rose to 0.4% year-over-year in November, up from 0.3% in October, lifted by higher food and energy price inflation. The upward trend in food prices won't last, but base effects in energy prices will persist, boosting headline inflation significantly in coming months. The details show that services inflation was stable at 1.2% last month, despite state data indicating a fall in volatile leisure and entertainment inflation, while net rent inflation was also stable, at 1.1%.
China's manufacturing PMIs have softened in Q4. Indeed, we think the indices understate the slowdown in real GDP growth in Q4, as anti-pollution curbs were implemented. More positively, though, real GDP growth should rebound in Q1 as these measures are loosened.
Headline inflation in the Eurozone eased at the start of the year, but leading indicators suggest that the dip will be short-lived.
Strong fundamentals have supported private consumption in Mexico recently, but we now expect a slowdown. Spending will not collapse, though, because consumer credit growth, formal employment, real wage income and remittances will continue to underpin consumption for the next three-to-six months.
China's PMIs surprised the consensus forecasts to the downside for February. The manufacturing PMI dropped to 50.3 in February from 51.3 in January, while the non-manufacturing PMI fell to 54.4 from 55.3 in January.
Yesterday's money supply data in the Eurozone were alarmingly poor.
A rebound in quarter-on-quarter growth in households' spending in Q2, following the slowdown to just 0.2% in Q1, looks less likely following April's money data.
The return of Chinese PPI inflation in 2016 helped to stabilise equities after the boom-bust of the previous year.
The manufacturing sector is much more exposed to external forces--the dollar, and global growth--than the rest of the economy. But much of the slowdown in the sector over the past year-and-a-half, we think, can be traced back to the impact of plunging oil prices on capital spending in the sector.
We're expecting a strong-looking 225K increase in the May ADP measure of private sector payroll growth, due today. The consensus forecast is 180K.
The relatively upbeat message from a plethora of Eurozone data this week remains firmly sidelined by chaos in equity and credit markets. EZ Equities struggled towards the end of last year in the aftermath of the disappointing ECB stimulus package, and now, renewed weakness in oil prices and further Chinese currency devaluation have added pressure, by refocusing attention on already weak areas in the global economy.
The 2.4% depreciation of the yuan over the past month has not been quite as big as the 3.0% move on August 11, and it's not a big enough shift to make a material difference to aggregate U.S. export performance. Market nerves, then, seem to us to be largely a reflection of fear of what might come next. China's real effective exchange rate--the trade-weighted index adjusted for relative inflation rates--has risen relentlessly over the past decade, and to restore competitiveness to, say, its 2011 level, would require a 20%-plus devaluation.
Chile's weak indicators in January confirm that the economy is struggling. Mining output plunged 12.6% year-over-year, down from a modest 0.6% contraction during Q4, due mostly to falling copper production and an unfavourable base effect. This will reverse in February but we still look for a 5% drop.
Inflation data in the Eurozone came in broadly as we expected. Weakness in food and energy prices dampened the headline, but core inflation rose. Inflation was unchanged at 0.2% year-over-year in July, with core inflation rising to 1.0% year-over-year, a 15-month high, up from 0.8% in June.
The European financial sector was in the news again on Friday, propelled by further weakness in Deutsche Bank's share price. In our Monitor of September 27, we said that worries of a European "Lehman Moment" were overblown.
The upward revisions to real consumers' spending in the fourth quarter, coupled with the likelihood of a hefty rebound in spending on utility energy services, means first quarter spending ought to rise at a faster pace than the 2.2% fourth quarter gain. Spending on utilities was hugely depressed in November and December by the extended spell of much warmer-than-usual weather.
Data this week clearly hint at a cyclical trough in Eurozone inflation in the first quarter. The advance estimate for April shows year-over-year inflation rising slightly to zero, up from -0.1% in March.
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.
The Eurozone is back in headline deflation, increasing the pressure on the ECB to deliver further easing when it meets next week. Inflation fell to -0.2% in February, from +0.3% in January, depressed by energy and food prices.
Today's September ISM manufacturing survey is one of the most keenly-awaited for some time. Was the unexpected plunge in August a one-time fluke--perhaps due to sampling error, or a temporary reaction to the Gulf Coast floods, or Brexit--or was it evidence of a more sustained downshift, possibly triggered by political uncertainty?
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.
Long-time readers will be aware of our disdain fro the ADP employment report, which usually tells us nothing more than that the monthly changes in payrolls tend to mean-revert. That's because the published ADP employment number for each month is generated by regressions which incorporate lagged official payroll data, as well as information from companies which use ADP for payroll processing.
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.
We are wary of a downside surprise in today's German orders, due to weak advance data from the engineering organisation, VDMA. We think factory orders fell 0.5% month-to-month, pushing the year-over-year rate slightly lower to 4.5% in June from 4.7% in May. This is noticeably worse than the market expects, but the consensus forecast for a 0.3% rise implies a jump in the year-over-year rate, which is difficult to reconcile with leading indicators.
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.
Yesterday's EZ producer price data showed that deflationary pressures in the manufacturing sector are fading. The headline PPI index fell 0.2% month- to-month in August, pushing the year-over-year up to -2.1%, from a revised -2.6% July.
We're expecting the April ISM report today to bring yet more evidence that the manufacturing cycle is peaking, though we remain of the view that the next cyclical downturn is still some way off.
Industrial output in Chile struggled late in the third quarter, falling 1.3% month-to-month in September. The year-over-year rate, calendar and seasonally adjusted, rose 2.4% in September, down from a revised 5.3% in August.
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%.
The German trade data on Friday completed a poor week for economic reports in the Eurozone's largest economy. The seasonally adjusted trade surplus fell to €22.1B in May, from €24.1B in April, mainly due to a 1.8% month-to-month fall in exports. Imports, on the other hand, were little changed.
The latest evidence of firming economic momentum comes from France, where industrial production rose 0.4% month-to-month in January, equivalent to a 0.6% increase year-over-year. Combined with strong consumer spending data in January, this points to a solid first quarter for the French economy.
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.
Core PPI inflation has risen relentlessly, though not rapidly, over the past two-and-a-half years.
The medium-term trend in the volume of mortgage applications turned up in early 2015, but progress has not been smooth. The trend in the MBA's purchase applications index has risen by about 40% from its late 2014 low, but the increase has been characterized by short bursts of rapid gains followed by periods of stability.
Industrial production and trade data on Friday ended last week on a downbeat note, amid otherwise solid economic reports. In Germany, industrial output fell 0.3% month-to-month in November, pushing the year-over-year rate down to 0.1% from a revised 0.4% in October. The details, however, were better than the headline. Production was hit by a 3.3% plunge in capital goods output, offsetting gains in all other key sectors, and net revisions added 0.3% to the October data.
Brazil's headline CPI has been well above the upper limit of the BCB's target zone since January 2015. We expect this situation will continue for some time, due to the lagged effect of last year's sharp increases in regulated prices, El Niño, the BRL's sell-off in 2015, and, especially, widespread price indexation.
Germany's nominal external surplus rebounded smartly over the summer, but real net trade looks set to be a drag on Q3 GDP growth, again. The seasonally adjusted trade surplus increased to €21.6B in August from a revised €19.3B in July.
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.
The key question for the MPC at this week's meeting is whether it is prepared to tolerate the consequences for inflation of sterling's further depreciation since its last meeting in August.
If you had only the NFIB survey of small businesses as your guide to the state of the business sector, you'd be blissfully unaware that the economic commentariat right now is obsessed with the potential hit from the trade tariffs, actual and threatened.
The stagnation of GDP in August, following five consecutive month-to-month gains, confirms that the economy's momentum in prior months was simply weather-related.
Base effects were the key driver of yesterday's upbeat industrial production headline in Italy.
Today's JOLTS survey covers August, which seems like a long time ago. But the report is worth your attention nonetheless.
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.
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.
Japan's labour cash earnings rose by 1.5% year-over- year in July, a strong result in the Japanese context, if it hadn't been preceded by the 3.6% leap in June.
Yesterday's aggregate economic data for the euro area showed that inflation rose slightly in August. The headline rate rose to a four-month high of 1.5% in August from 1.3% in July. The rate was lifted mainly by energy inflation, rising to 4.6% from 2.2% in July, but we think the rebound will be short-lived.
Chinese PPI inflation was unchanged at 5.5% in July; it had been expected to rise modestly. Officially, inflation peaked at 7.8% in February, but we think this peak was artificially high, thanks to seasonal effects. The slowing in PPI inflation since the peak appears to suggest that monthly price gains have slowed sharply. We find little evidence to support this.
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.
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.
The case for believing that August's unexpected 14-year high in the ISM manufacturing index was a fluke is pretty straightforward, and it has both short and medium-term elements.
A firmer picture is emerging of how Japan's economy fared in Q3, in light of the latest slew of data for August.
Bond investors in Italy voted with their feet on Friday with news that the government has agreed a 2019 budget deficit of 2.4%.
For some time now we have argued that collapse in capital spending in the oil sector was the source of most of the softening of activity in the manufacturing and wholesaling sectors last year.
Mexico's underlying inflation pressures and financial conditions are gradually stabilizing. Eventually, this will open the door for rate cuts in order to ease the stress on the domestic economy, particularly capex.
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.
Some commentators have asserted that the Monetary Policy Committee won't raise interest rates until all its members agree and investors have fully priced in an increase, arguing that an earlier move would create excessive market turmoil and muddy the Committee's message. But a look back to previous turning points in the interest rate cycle suggests that the Monetary Policy Committee--MPC--hasn't paid much heed to those considerations before.
The MPC was relatively bullish on the outlook for households' spending when it signalled its view, in February's Inflation Report, that the case for raising interest rates before the end of this year had strengthened.
We have been rigorous in using the word nascent whenever referring to Japan's wage-price spiral.
For some time now, we have puzzled over the softness of small firms' capital spending intentions, as measured by the monthly NFIB survey.
The French manufacturing sector slowed more than we expected in Q1.
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.
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.
January's money and credit data provided another warning sign that the economy has started 2017 on a weak footing. For a start, the three-month annualised growth rate of M4, excluding intermediate other financial corporations--the Bank's preferred measure of the broad money supply-- declined to 1.8% in January, from 3.1% in December.
The failure of the core CPI to mean-revert in April, after the unexpected March drop, does not mean that the Fed can relax.
January's money and credit data broadly support our view that the economy still lacks momentum.
If recent labor market trends continue, the four employment reports which will be released before the June FOMC meeting will show the economy creating about 1.1M jobs, pushing the unemployment rate down to 5.3%, almost at the bottom of the Fed's estimated Nairu range, 5.2-to-5.5%.
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.
Inflation in the Eurozone increased slightly last month, and probably will rise a bit more in coming months.
The manufacturing sector's recovery has sped up since Q1, according to Markit's latest survey, but growth still looks too weak to prevent the overall economy from struggling again in Q2.
Eurozone inflation pressures snapped back in April. Friday's advance report showed that headline inflation rose to 1.9% year-over-year, from 1.5% in March, lifted by a jump in the cor e rate to 1.2% from 0.7% the month before.
Argentina's central bank unexpectedly hiked its main interest rate, the 7-day repo rate, by 300bp to 30.25% last Friday, in an unscheduled decision.
The industrial sector in the EZ slowed further at the end of Q3.
Chile's activity numbers at the beginning of Q3 were mediocre, suggesting that the economy remains sluggish. The industrial production index--comprising mining, manufacturing, and utility output--fell by 1.7% year-over-year in July, reversing a 1.6% expansion in June. A disappointing 4.5% year-over-year contraction in mining activity depressed the July headline index, following a 1.4% increase in June. The moderation in output growth was due to maintenance-related shutdowns at key processing plants, and disruptions from labor strikes, especially a three-week strike by contract workers at Codelco--the state-owned mining firm--which badly hit production.
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.
The inevitable--more or less--correction from August's 14-year high is no big deal.
Friday's inflation data in the Eurozone added a dovish twist to the story ahead of the key ECB meeting later this month.
The Fed will do nothing and say little that's new after its meeting today. The data on economic activity have been mixed since the March meeting, when rates were hiked and the economic forecasts were upgraded, largely as a result of the fiscal stimulus.
We can't recall a time when we have disagreed so strongly with the consensus narrative, in both the media and the markets, about the state of the U.S. economy. We think both investors and the commentariat are too bearish on growth and too complacent about inflation risks, and as a result, insufficiently worried about the speed with which interest rates will rise over the next couple of years.
Most of the data were consistent with the idea that fourth quarter growth will be a two-part story, with real strength in domestic final demand partly offset by substantial drags from net foreign trade and inventories.
The ECB moved ahead of the curve this month with its QE program of €60B per month, starting in March. But still-abysmal inflation data will prompt journalists to ask Mr. Draghi, at the next ECB meeting, about the conditions under which the central bank plans to do more.
Housing rents account for some 41% of the core CPI and 18% of the core PCE, making them hugely important determinants of the core inflation rate.
The June Banxico minutes restated that the U.S Fed's first interest rate increase is the main event awaited by Mexican central bank. Banxico's five member board of governors voted unanimously on June 4th to keep the overnight lending rate target at a record-low 3%, but showed again that board members are fretting over when to hike, as at previous meetings.
A sharp increase in unsecured borrowing has played a big role in supporting consumers' spending over the past year. The stock of unsecured credit, excluding student loans, increased by 8.2% year-over-year in September--the fastest growth since February 2006--boosting the funds available for households to spend by around 1%.
Markets are reacting to Colombia's disappointing activity figures, released Friday, by pulling forward expectations for the country's first rate cut to December. The data certainly looked weak--especially upon close examination--and we expect growth to slow further. But we think that inflation is still too high to expect rate cuts this year.
June's consumer price figures threw a last minute curve-ball at the MPC ahead of its key meeting on August 2.
China is a collection of hugely disparate provinces and cities. Managing all these cities with one interest rate is always difficult but in this cycle it is proving to be nearly impossible.
The closer we look at the data, the more convinced we become that the rollover in CPI physicians' services prices, which has subtracted nearly 0.1% from core CPI inflation since January, is a response to sharply higher Medicare part B premiums, especially for new enrollees.
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.
Sunday 28th will bring closure to an extraordinary presidential election campaign in Brazil.
Brazil's economy surprised to the upside in early Q3, despite downbeat data released in recent days.
The Fed's strategic view of the economy and policy has not changed since last December, when it first said that "The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.
The September NAHB survey, released yesterday, shows, that the housing market took a knock from the hurricanes but the damage, so far at least, appears to be contained.
Our view that the economy is slowing sharply appears, superficially, to be challenged by the surge in the money supply. Year-over-year growth in the value of banknotes and coins in circulation has shot up this year, to 8.3% in August, from 5.5% in December 2015.
Rising mortgage rates appear to have triggered the start, perhaps, of a tightening in lending standards, even before Treasury yields spiked this month and stock prices fell.
Construction data in the Eurozone usually don't attract much attention, but today's July report will provide encouraging news, compared with recent poor manufacturing data. We think construction output leapt 2.1% month-to-month, pushing the year-over-year rate up to 2.3%, from 0.7% in June. This strong start to the third quarter was due mainly to a jump in non-residential building activity in France and Germany.
FOMC pronouncements are rarely unambiguous; policymakers like to leave themselves room for maneuver. But when the statement says that "Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point" and that only "some" further improvement in labor market conditions is required to trigger action, it makes sense to look through the blizzard of caveats and objections--none of which were new--from the perma-doves.
BanRep surprised the markets on Friday with a 25bp interest rate cut, bringing rates to 7.50%. We expected the Colombian central bank to start easing in January, due to the uncertainties surrounding the tax reform package and the ongoing minimum wage negotiations.
The recent sharp, if not startling, upturn in the regional manufacturing surveys should continue today with the release of the Philadelphia Fed report. The survey is constructed in the same way as the more volatile Empire State, which has rocketed in the past few months, and the headline indexes follow similar trends, as our first chart shows.
We see no compelling reason to expect a significant revision to the third quarter GDP numbers today, so our base case is that the second estimate, 3.3%, will still stand.
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.
The BoJ kept all policy measures unchanged at its meeting yesterday.
In the wake of the unexpectedly weak September Empire State survey, released Monday, we are now very keen to see what today's Philadelphia Fed survey has to say.
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 FOMC won't raise rates today, but we expect that the announcement of the start of balance sheet reduction will not be interrupted by Harvey and Irma.
Colombia is one of the few larger economies in Latin America to have enjoyed solid, positive economic growth over the past two years. But lower commodity prices and last year's central bank tightening, to curb high inflation generated by strong growth, have started to become visible in the main economic data.
The startling jump in the Philly Fed index in May, when it rose 11.2 points to a 12-month high, seemed at first sight to be a response to fading tensions over global trade.
We previewed the FOMC meeting in detail yesterday -- see here -- but to recap briefly, we expect a 25bp rate hike, with no significant changes in the statement, and a repeat of the median forecasts of three rate hikes this year.
It's much too soon to have a very firm view on fourth quarter GDP growth, not least because almost half the quarter hasn't happened yet.
Colombia's industrial and retail sectors surprised to the upside in August, suggesting that the domestic economy has been resilient during most of the third quarter, despite the hit from an array of external headwinds. Industrial production increased by a solid 2.6% year-over-year in August, up from an upwardly revised 0.6% expansion in July, and above its recent trend. In the first half of the year, industrial activity fell on average by 1.1%, the worst performance since 2013, due mainly to the oil hit and ex tended works at Reficar, the country's second biggest oil refinery. But Colombia's manufacturers appear to have shrugged off part of the oil pain in recent months.
February's consumer price figures give the MPC reason to doubt the case for raising interest rates again as soon as May.
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.
Producer prices in Germany rose 0.4% month-to-month in May, stronger than the consensus expectation of a 0.3% gain, and we think further upside surprises are likely in coming months. The headline was boosted by a 0.7% jump in energy prices, but food and manufacturing goods prices also rose.
Back in the dim and increasingly distant past the semi-annual Monetary Policy Testimony--previously known as the Humphrey-Hawkins--used to be something of an event. Today's Testimony, however, is most unlikely to change anyone's opinion of the likely pace and timing of Fed action.
The recent jobless claims numbers have been spectacularly good, with the absolute level dropping unexpectedly in the past two weeks to a 43-year low. The four-week moving average has dropped by a hefty 14K since late August.
Recent economic indicators in Brazil have undershot consensus in recent weeks, but the economy nonetheless continues to recover.
Commodity prices have started the year under further downward pressure. This is yet more negative news for LatAm, as most of the countries have failed to diversify, instead relying on oil or copper for a large share of exports and, critically, tax revenue. Venezuela is the biggest loser in the region from the oil hit, and, together with the worsening political and economic crisis, it has pushed the country even closer to the verge of collapse, threatening its debt payments. Venezuela's central bank last week released economic data for the first time since 2014, showing that inflation spiralled to 141% and that the economy shrank 4.5% in the first nine months of last year.
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.
We would like to be able to argue with conviction that the surge in June housing starts and building permits represents the beginning of a renewed strong upward trend, but we think that's unlikely.
Construction in the euro area stumbled at the end of last year. Output fell 0.2% month-to-month in December, but the year-over-year rose to 2.4%, from a revised 1.6% in November.
Colombia's oil industry--one of the key drivers of the country's economic growth over the last decade--has been stumbling over recent months, raising concerns about the country's growth prospects. But the recent weakness of the mining sector is in stark contrast with robust internal demand and solid domestic production.
The single most important number in the housing construction report is single-family permits, because they lead starts by a month or two but are much less volatile.
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.
The initial pace of the Fed's balance sheet run-off, which we expect to start in October, will be very low. At first, the balance sheet will shrink by only $10B per month, split between $6B Treasuries and $4B mortgages.
The White House Budget for fiscal 2018, released last week, has no chance of becoming law in anything like its current form, so we don't propose to spend much time dissecting it. But we do need to set out our view on what might actually happen to fiscal policy over the next few months, because it potentially could make a material difference to the pace, and ultimate extent, of Fed tightening.
The current account surplus in the Eurozone is well on its way to stabilising above 3% of GDP this year. The seasonally adjusted surplus rose to €29.4B in September from a revised €18.7B in August, lifted by a higher trade surplus, thanks to rebounding German exports. The services balance was unchanged at €4.5B in September, while the primary income balance edged higher to €4.8B from €4.0B. The improving external balance has been driven mostly by a surging trade surplus with the U.S. and the U.K., as our first chart shows.
On the official gauge, China's real GDP growth fell minimally to 6.8% year-on-year in Q3, from 6.9% in Q2. Growth edged down to 1.7% quarter-on-quarter from an upwardly revised 1.8% in Q2.
If you gave us $100, we'd put $90 on inflation, headline and core, being higher a year from now than it is today. Our view, however, is not universally shared, and some commentators continue to argue that the U.S. faces deflation risks. Exhibit one for this view is our first chart, which shows a high correlation between the PPI for finished goods prices and the CPI inflation rate, ex-shelter.
The FOMC's statement on April 29 mentioned the winter--"...economic growth slowed during the winter months"--but did not explicitly blame any of the first quarter's weakness on the extended cold and snowy weather. That was a change from the March statement, which made no mention of the weather and gave the distinct impression that policymakers had no firm view on why growth had "moderated".
We would be astonished if the FOMC meeting starting today does not end with a 25bp rate hike.
Colombia, the third largest economy in LatAm, has not been immune to the headwinds of the global economy since the financial crisis in 2008, though it remains one of the fastest growing economies in the region. GDP growth slowed sharply to just 1.7% in 2009, but that was still much better than the 1.2% contraction of the region as a whole.
To paraphrase recent correspondence: "How can you possibly believe, given the terrible run of economic data and the turmoil in the markets, that the Fed will raise rates in March/June/at all this year?" Well, to state the obvious, if markets are in anything like their current state at the time of the eight Fed meetings this year, they won't hike. That sort of sustained downward pressure and volatility would itself prevent action at the next couple of meetings, as did the turmoil last summer when the Fed met in September. And if markets were to remain in disarray for an extended period we'd expect significant feedback into the real economy, reducing--perhaps even removing--the need for further tightening.
This week has seen a huge wave of data releases for both January and February, but the calendar today is empty save for the final Michigan consumer sentiment numbers; the preliminary index rose to a very strong 99.9 from 95.7, and we expect no significant change in the final reading.
The acceleration in real consumption over the past year reflects the upturn in real after-tax income growth. This, in turn, is mostly a story of falling gasoline prices, which have depressed the PCE deflator. Gross nominal incomes before tax rose 4.2% year-over-year in the three months to September, exactly matching the pace in the three months to September 2014. But real income growth, after tax, accelerated to 3.3% from 2.5% over the same period, as our first chart shows.
The average month-to-month increase in the core CPI in the past three months is a solid 0.20, much firmer than the 0.05% average over the previous five months, stretching back to the first of the run of downside surprises, in March.
Falling demand for utility energy, thanks to yet another very warm month, relative to normal, will depress the headline industrial production number for October, due today. We look for a 21⁄2% drop in utility energy production, enough to subtract a quarter point from total industrial output.
Economic data released yesterday underscored that Brazil emerged from recession in the first quarter, but further rate cuts are needed. Indeed, the monthly economic activity index--the IBC-Br--fell 0.4% monthto- month in March, though this followed a strong 1.4% gain in February.
The over-hyped mystery of the gap between the hard and soft data in the industrial economy has largely resolved itself in recent months.
The MPC almost certainly will keep interest rates on hold today and likely won't give a strong steer on the outlook for policy in the minutes of its meeting, which are released at mid-day. On the whole, surveys of economic activity have been weak, indicating that GDP growth has slowed sharply in the second quarter.
Two key points can be extracted from the minutes of the last BCB meeting, when policymakers increased the Selic interest rate by 50bp to 12.75%. First, the bank recognized that the balance of risks to inflation has deteriorated, due to the huge adjustment of regulated prices and the BRL's depreciation, but it specifically referred only to "this year" in the communiqué.
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.
The September core CPI was held down by prescription drug prices, which fell by 0.6%, and vehicle prices, which fell by 0.4%.
The elevated readings from the ISM manufacturing survey this year have not been followed by rapid growth in output. The headline ISM averaged 55.8 in the second quarter, a solid if unspectacular reading. But output rose by only 1.2% year-over-year, and by 1.4% on a quarterly annualized basis.
Your correspondent is headed to the beach for the next couple of weeks, with publication resuming on Tuesday, September 4.
Consumers' demand for cars slowed in the Eurozone at the end of the second quarter. New car registrations in the euro area rose 3.0% year-over-year in June, slowing dramatically from a 10.3% rise in May.
Over the past 18 months, the year-over-year rate of growth of manufacturing output has swung from minus 2.1% to plus 2.5%.
The Eurosystem's position on Greece, echoed by Mr. Draghi earlier this week, is that progress on a deal is up to the Syriza-led government. But recent comments by German officials have added to the speculation that a Grexit is getting closer.
Economic activity in Mexico during the past few months has been improving gradually, as external and domestic threats appear to have diminished.
Without tying its hands, the MPC--which voted unanimously to keep interest rates at 0.25% and to continue with the £60B of gilt purchases and £10B of corporate bond purchases authorised last month--gave a strong indication yesterday that it still expects to cut Bank Rate in November.
Net exports should come roaring back as a driver of Eurozone GDP growth in the second quarter. The euro area trade surplus leapt to €24.3B in April, a new all-time high, up from a revised €19.9B in March. A 1.7% month-to-month fall in imports--mean-reversion from a 3.9% increase in March--was a big contributor to the higher surplus.
We were surprised by the weakness of the April housing starts report; we expected a robust recovery after the March numbers were depressed by the severe snowstorms across a large swathe of the country. Instead, single-family permits rose only trivially and multi-family activity--which is always volatile--fell by 9% month-to-month.
Industrial production data yesterday indicate manufacturers in the Eurozone enjoyed a decent start to Q3, thanks to strength in Germany, Italy and Spain, which offset weakness in France. Production ex-construction rose 0.6% month-to-month in July, boosted in part by a 3% jump in energy output. If production is unchanged in August and September, output will rise 0.3% quarter-on-quarter in Q3, but this estimate is uncertain, and we look for an increase of about 0.4%-to-0.5%.
Brazil's July economic activity index, released yesterday, showed that the economy started the second half of the year strongly. The IBC-Br index, a monthly proxy for GDP, rose 0.4% month-to-month, pushing the year-over-year rate up to 1.4%, from -0.4% in June.
The Chinese activity data published yesterday were much weaker than expected; growth rates fell resoundingly. Did analysts really get it wrong, or is this just another example of erratic Chinese data?
A 45bp rise in long-term interest rates--the increase between mid-August and last week's peak--ought to depress stock prices, other things equal.
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.
Consumption has been a serious weak spot in Brazil over the past year. After reaching record growth rates in 2010, it has gradually slowed to its lowest pace in more than ten years.
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.
Yesterday's Q2 GDP report in Germany was solid, but the headline disappointed slightly. GDP growth slowed to 0.6% quarter-on-quarter from an upwardly- revised 0.7% rise in Q1. The year-over-year rate, however, rose to 2.1% from a revised 2.0% in Q1.
Colombian activity data released this week were weak, but mostly better than we expected. Real GDP rose 0.7% quarter- on-quarter in Q2, in contrast to the 0.3% fall in Q1, when the economy was hit by the lagged effect of last year's monetary tightening and the one-off VAT increase.
The euro area's external surplus remained resilient toward the end of 2017, in the face of a stronger currency. The seasonally adjusted trade surplus rose to €22.5B in November, from €19.0B in October, lifted primarily by a jump in German exports.
We can see no hard evidence, yet, that the expanding trade war with China and other U.S. trading partners is hitting business investment.
The French labour market improved much more than we expected in Q4. The headline unemployment rate plunged to 8.9%, from a downwardly-revised 9.6% in Q3.
Normal service was resumed in the euro area with Friday's GDP reports pointing to solid growth in Germany amid weakness in Italy and France. Real GDP in the Eurozone grew 0.3% quarter-on-quarter in the final three months of last year, up from 0.2% in Q3.
It has been clear for some months now that China's housing market is refusing to quit, and July's data showed the phoenix rising strongly from the ashes.
Slower growth in households' spending was the main reason why the economy lost momentum last year.
Chinese real GDP growth reportedly edged down to 6.7% year-over-year in Q2, from 6.8% in Q1.
Yesterday's wave of data suggested that a good part of the strength in final demand in the second quarter was sustained into the first month of this quarter, and perhaps the second too.
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.
Chinese official headline data paint a picture of a strengthening economy in Q2. Our analysis shows a sharply contrasting picture. China's nominal GDP, real GDP and deflators are often internally inconsistent.
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 growing perception that the U.K. MPC will lag further behind the U.S. Fed in this tightening cycle than previously has pushed sterling down to $1.49, a long way below its post-recession peak of $1.72 in mid-2014. But this has done little to enhance the overall competitiveness of U.K. exports, and net trade still looks likely to exert a major drag on real GDP growth in 2016.
The new Argentinian president has started to clean up the mess left by his predecessor, Cristina Fernandez de Kirchner. President Mauricio Macri lifted capital controls, and let the ARS float freely yesterday. The peso tumbled about 30%, getting close to 14 ARS per USD, where it had been trading in the black market. The government also announced that it is on track to receive about USD 12-to-15B, to build up the battered foreign reserves, and to contain any overshooting. This money will come through many channels, for example, grain producers have announced that they will sell about USD400M a day over the coming weeks.
Mortgage applications appear to have recovered from their reported February drop, which was due mostly to a very long-standing seasonal adjustment problem
It's easy to claim from yesterday's labour market data that the economy is weathering the uncertainty caused by the E.U. referendum. Employment rose by 172K, or 0.5%, between Q1 and Q2, and the claimant count fell by 7K month-to-month in July. These numbers, however, flatter to deceive.
The slowdown in households' real incomes has taken a swift toll on the housing market this year. Measures of house prices from Nationwide, Halifax, LSL and Rightmove essentially have flatlined since the end of 2016, following four years of rapid growth, as our first chart shows.
Markets usually ignore the monthly import price data, presumably because they are far removed, especially at the headline level, from the consumer price numbers the Fed targets.
Economic news in Europe continues to take a back-seat to volatility in politics. Yesterday's announcement by U.K. Prime Minister Theresa May that she is seeking a snap general election on June 8th cast further doubt over what exactly Brexit will look like.
If clarity is the first test of written English, the FOMC failed miserably yesterday. "Considerable time" is gone, but the new formulation--"the Committee judges that it can be patient in beginning to normalize the stance of monetary policy"--was not clearly defined, though the FOMC did say it is "consistent with its previous statement".
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.
Headline inflation in the EZ remained elevated in September, rising by 0.1 percentage point to 2.1%, while the core rate was unchanged at 0.9% in August; both numbers are in line with the initial estimates.
Today brings the September housing construction report, which likely will show that activity was depressed by the hurricanes.
The imposition of 25% tariffs on $50B-worth of imports from China, announced Friday, had been clearly flagged in media reports over the previous couple of weeks.
The half-way point of the quarter is not, alas, the half-way point of the data flow for the quarter.
We can't afford the luxury of believing China's year-over-year growth rates. Real GDP growth was 6.8% year-over-year in Q1, matching the rate in Q4 and Q3, and hitting consensus.
Fed Chair Powell delivered no great surprises in his semi-annual Monetary Policy Testimony yesterday, but he did hint, at least, at the idea that interest rates might at some point have to rise more quickly than shown in the current dot plot: "... the FOMC believes that - for now - the best way forward is to keep gradually raising the federal funds rate [our italics]."
The spectacular 1.3% rebound in manufacturing output last month -- the biggest jump in seven years, apart from an Easter-distorted April gain -- does not change our core view that activity in the sector is no longer accelerating.
The Fed's insistence this week that U.S. rates will rise only twice more this year helped to ease pressures on LatAm markets this week, particularly FX. The way is now clear for some LatAm central banks to cut interest rates rapidly over the coming months, even before U.S. fiscal and trade policy becomes clear. We expect the next Fed rate hike to come in June, as the labor market continues to tighten. If we're right, the free-risk window for LatAm rate cuts is relatively short.
Yesterday's CPI report in the Eurozone confirmed that inflation pressures remain subdued, even as GDP growth is accelerating.
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%.
The minutes of March's MPC meeting were more newsworthy than we--and the markets--expected. Kristin Forbes broke ranks and voted to raise Bank Rate to 0.50%, from 0.25%.
Yesterday's economic reports confirmed that the Eurozone economy had a strong start to 2017. Real GDP rose 0.5% quarter-on-quarter in Q1, similar to the pace in Q4, and consistent with the first estimate. The year-over-year rate fell marginally to 1.7%, from 1.8% in Q4, mainly due to base effects.
The winds of global politics are changing, and the major Eurozone countries could be forced to take heed. Donald Trump's foreign policy position remains highly uncertain. Our Chief Economist, Ian Shepherdson, expects the U.S. to increase defence spending next year; see the U.S. Monitor of October 20.
The first October survey evidence from the industrial economy, in the form of the Empire State report, is remarkably strong.
We expect August's consumer price figures, released on Wednesday, to show that CPI inflation declined to 2.4%, from 2.5% in July, matching the consensus and the Bank of England's forecast.
As we reach our deadline on Sunday afternoon, eastern time, Tropical Storm Florence continues to dump vast quantities of rain on the Carolinas, and is forecast to head through Kentucky and Tennessee, before heading north.
The headlines of China's August activity data are missing the real story in recent months.
Evidence of slowing growth in Brazil consumers' spending continues to mount.
Recent data in Argentina confirm the resilience of cyclical upturn.
The median of FOMC members' estimates of longer run nominal r-star--the rate which would maintain full employment and 2% inflation--nudged up by a tenth in September to 3.0%, implying real r-star of 1%.
Today's headline durable goods orders number for January is likely to blast through the consensus forecast, +2.7%. We expect a 6.5% jump, comfortably reversing December's 5.0% drop.
The key labor market numbers from today's February NFIB report on small businesses--hiring intentions and the proportion of firms with unfilled job openings--were released last week, as usual, ahead of the official jobs report.
Demand for new cars in the Eurozone rebounded last month. New car registrations jumped 10.3% year-over-year in May, reversing the 5.1% decline in April. The headline was boosted by solid growth in all the major economies.
Car manufacturers have been at the sharp end o f the slowdown in consumers' spending this year. In response, several brands have launched generous scrappage schemes, giving buyers a big discount when they trade in their old vehicle.
Chief U.K. Economist Samuel Tombs on U.K. New Car Registrations, July
Colombia's retail sector surprised to the upside once again in December, despite a number of domestic headwinds. Sales jumped 6.2% year- over-year, up from 4.9% in November, marking an impressive end to the quarter. The underlying trend improved significantly in Q4, as shown in our first chart. A double-digit rise in auto sales was the main driver, offsetting weakness in other key components.
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.
Industrial data released this week showed that the Mexican economy stumbled during the second quarter. Private consumption, however, continues to rise, albeit at a more modest pace than in recent months. The ANTAD same store sales survey rose 5.3% year-over-year in June, up from 2.8% in May, but this is misleading.
We have argued consistently since oil prices first began to fall that U.S. consumers would spend most of their windfall, so real spending would accelerate even as nominal retail sales growth was dragged down by the drop in the price of gas and other imported goods. At the same time, we argued that capital spending in the oil business would collapse, and that exports would struggle in the face of the stronger dollar.
Activity in Colombia cooled at the end of the first quarter, in the face of many domestic and external headwinds. Retail sales, for example, plunged 2.9% in March after a 4.6% leap in February. The headline likely was depressed by the early Easter, as March had one fewer trading day than February.
It is very difficult to be positive about the Brazilian economy in the short term, with every indicator of confidence at historic lows. The industrial business confidence index fell 9.2% month-to-month in March alone. Capacity use dropped to 79.7% from 81.5% in February, the lowest level in six years, and inventories rose, presumably because businesses over-estimated the strength of sales.
Recent data have added to the evidence that the Colombian economy stumbled in July. Retail sales plunged 3.3% year-over-year, from an already poor and downwardly revised 0.9% decline in June. The underlying trend is negative, following two consecutive declines, and July's data were the weakest since September 2009.
Yesterday's retail sales data in Brazil surprised to the downside. Consumers are still being squeezed by high interest rates and a deteriorating labour market. Retail sales declined 0.6% month-to-month in August, leaving the year-over-year rate little changed at -5.5%.
Retail sales data released yesterday for Brazil confirmed that weakness in private consumption remains a key challenge for the economy. Retail sales plunged 0.9% month-on-month in May, equivalent to a 4.5% fall year-over-year, the lowest rate since late 2003. On a quarterly basis, sales are headed for a 2% contraction in Q2, pointing to a -0.5% GDP contribution from consumer spending.
Ian Shepherdson comments on Retail Sales data for June
Chief U.K. Economist Samuel Tombs on U.K. Retail Sales
German Q4 GDP data this week will give little comfort to investors searching for signs of a resilient economy in the face of increased market volatility. The consensus expects unchanged GDP growth of 0.3% quarter-on-quarter, consistent with solid and stable survey data. But downbeat industrial production and retail sales data point to notable downside risk.
None of today's four monthly economic reports will tell us much new about the outlook, and one of them--ADP employment--will tell us more about the past, but that won't stop markets obsessing over it. We have set out the problems with the ADP number in numerous previous Monitors, but, briefly, the key point is that it is generated from regression models which are heavily influenced by the previous month's official payroll numbers and other lagging data like industrial production, personal incomes, retail and trade sales, and even GDP growth. It is not based solely on the employment data taken from companies which use ADP for payroll processing, and it tends to lag the official numbers.
Chile's economic sector survey, released on Monday, provides further evidence that the cyclical recovery in the economy continues, albeit at a moderate pace. On the demand side, the rebound is still in place, with retail sales jumping 2.0% month-to-month in February and the underlying trend firm.
If the only things that mattered for the housing markets were the obvious factors--the strength of the labor market, and low mortgage rates--the sector would be booming. Activity is picking up, with new and existing home sales up by 23% and 9% year-over-year respectively in the three months to May, but the level of transactions volumes remains hugely depressed. At the peak, new home sales were sustained at an annualized rate of about 1½M, but May sales stood at only 546K. Adjusting for population growth, the long-run data suggests sales ought to be running at close to 1M.
In the absence of an unexpected surge in auto sales or a sudden burst of unseasonably cold weather, lifting spending on utilities, fourth quarter consumption is going to struggle to rise much more quickly than the 2.1% annualized third quarter increase.
Last week's consumption releases were the first data from the real economy in the second quarter. In Germany, retail sales jumped 1.7% month-to-month in April, equivalent to a 1.0% rise year-over-year, an impressive start to the quarter. But our first chart shows that this still points to a moderate slowdown in Q2, consistent with mean-reversion following rapid gains in Q4 and Q1.
Industrial production data yesterday confirmed downside risks to today's GDP data in the Eurozone. Output fell 0.3% month-to-month in September, pushing the year-over-year rate down to 1.7% from a revised 2.2% in August. Weakness in Germany was the main culprit, amid stronger data in the other major economies. A GDP estimate based on available data for industrial production and retail sales point to a quarterly growth rate of 0.4% quarter-on-quarter, but we think growth was rather lower, just 0.2%, due to a drag from net trade.
December's money data likely will bring further signs that the U.K. economy's growth spurt late last year was paid for with unsecured borrowing. Retail sales fell by 1.9% month-to-month in December, so we doubt that unsecured borrowing will match November's £1.7B increase, which was the biggest since March 2005.
The models which generate the ADP measure of private payrolls will benefit in May from the strength of the headline industrial production, business sales and jobless claims numbers.
The retail sales data, released yesterday, underline the struggle that Japanese consumers are facing against rising inflation.
February's money and credit figures supported recent labour market and retail sales data suggesting that consumers are increasingly financially strained. Households' broad money holdings increased by just 0.2% month-to-month in February, half the average pace of the previous six months.
We have to pinch ourselves when looking at economic data in Spain at the moment. Real GDP rose a dizzying 0.9% quarter-on-quarter in Q1, driven by solid gains of 0.7% and 1.1% in consumer's spending and investment respectively. Retail sales and industrial production data indicate GDP growth remained strong in Q2, even if survey data lost some momentum towards the end of the quarter. We will be looking for signs of further moderation in Q3, but surging private deposit growth indicate the cyclical recovery will continue.
This week's March economic activity reports in Chile have been relatively strong, with the industrial sector expanding briskly and retail sales solid.
The trade-off between the timeliness and accuracy of the data is fundamental to macroeconomic analysis. Coincident data such as GDP, industrial production and retail sales are the most direct measures of economic activity, but their first estimates don't always tell the full story.
We aren't much interested in the headline ISM non- manufacturing index, which tends to track the rate of growth of nominal retail sales. In other words, it is not a leading indicator of broad economic activity. We were happy to see the November index rise yesterday, to 57.2 from 54.8, but it doesn't change our core views about anything.
Chile's economy is showing the first reliable signs of improvement, at last. December retail sales rose 1.9% year-over-year, up from 0.4% in November, indicating that household expenditure is starting to revive, in line with a pick-up in consumer confidence and the improving labor market.
Barely a day passes now without an email asking about "evidence" that the U.S. economy is slowing or even heading into recession. The usual factors cited are the elevated headline inventory-to-sales ratio, weak manufacturing activity, slowing earnings growth and the hit from weaker growth in China. We addressed these specific issues in the Monitor last week, on the 23rd--you can download it from our website--but the alternative approach to the end-of-the-world-is-nigh view is via the labor market.
Evidence is mounting that the cyclical recovery in the Eurozone accelerated further in the first quarter. The Composite PMI in the euro area rose to 54.1 in March, up from 53.3 in February, taking the quarterly average to 53.3, its highest level since the second quarter of 2011. Combined with latest available retail sales and industrial production data, this is consistent with real GDP growth in the euro area accelerating to about 0.4-to-0.5% quarter-on quarter in the first quarter, from 0.3% in Q4.
Mexico's economy continues to withstand several headwinds, especially the sharp currency depreciation--shown in our first chart--falling commodity prices, and the tough external environment. The country is still one of the economic bright spots in the region, thanks to its resilient domestic demand. June retail sales rose 5.4% year-over-year, well above expectations, and up from 4.1% in May. The underlying trend is positive, averaging 4.8% in the second quarter, well above its 2014 pace.
Survey data point to a very strong headline, 0.6%-to-0.7% quarter-on-quarter, in today's Q1 advance Eurozone GDP report. But the hard data have been less ebullient than the surveys. A GDP regression using retail sales, industrial production and construction points to a more modest 0.4% increase, implying a slowdown from the upwardly-revised 0.5% gain in Q4.
The German statistical office will supply a confidential estimate to Eurostat for this week's advance euro area Q2 GDP data. Our analysis suggests this number will be grim, and weigh on the aggregate EZ estimate. Our GDP model, which includes data for retail sales, industrial production and net exports, forecasts that real GDP in Germany contracted 0.1% quarter-on-quarter in the second quarter, after a 0.7% jump in Q1.
the past few observations make clear. Real spending jumped by 0.5% in March, rebounding after its weather-induced softness in February, before stalling again in April. Then, in May, the s urge in new auto sales to a nine-year high lifted total spending again, driving a 0.6% real increase.
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.
Reports yesterday indicated that a deal has finally been struck between the European Commission and the Italian government to start dealing with bad loans in the banking system. The initial details suggest the government will be allowed to guarantee senior tranches on non-performing loans, supposedly making them easier to sell to private investors. In order to avoid burdening government finances as part of the sales--not allowed under the new banking union rules--the idea is to price the guarantees based on the credit risk of similar loans.
Consumers' spending in Mexico was relatively resilient at the end of Q1, but we think it will slow in the second quarter. Data released this week showed that retail sales rose a strong-looking 6.1% year-over-year in March, well above market expectations, and up from 3.6% in February.
Ian Shepherdson's mission is to present complex economic ideas in a clear, understandable and actionable manner to financial market professionals. He has worked in and around financial markets for more than 20 years, developing a strong sense for what is important to investors, traders, salespeople and risk managers.
Payroll growth rebounded to 223K in May, after two sub-200K readings, and we're expecting today's June ADP report to signal that labor demand remains strong.
Pantheon Macroeconomics' Chief Economist Dr. Ian Shepherdson provides unbiased, independent economic intelligence to financial market professionals.
Chief U.S. Economist Ian Shepherdson on ISM Non-Manufacturing
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