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Today's December international trade numbers could easily signal a substantial upward revision to fourth quarter GDP growth. When the GDP data were compiled, the December trade numbers were not available so the BEA had to make assumptions for the missing numbers, as usual.
Brazil's external position continue to improve, but we are sticking to our view that further significant gains are unlikely in the second half, given the stronger BRL. For now, though, we still see some momentum, with the unadjusted trade surplus increasing to USD7.2B in June, up from USD4.0B a year earlier. Exports surged 24% year-over-year but imports rose only 3%.
Yesterday's trade data showed that the Eurozone's external balance continues to improve markedly. The seasonally adjusted trade surplus in the euro area rose to €23.3B in December, a new all-time high, from a revised €21.6B in November.
We are sticking to our view that the Eurozone's trade surplus will fall in the next six months, despite yesterday's upbeat report. The seasonally adjusted trade surplus leapt to a record high of €25.0B in September from revised €21.0B in August, lifted by an increase in exports and a decline in imports.
The euro area's trade surplus slipped further mid- way through the second quarter; falling to a 15-month low of €16.9B in May, from a downwardly-revised €18.0B in April, and extending its descent from last year's peak of nearly €24.0B.
The April foreign trade numbers strongly support our view that foreign trade will make a hefty positive contribution to second quarter GDP growth, after subtracting a massive 1.9 percentage points in the first. The headline April deficit fell further than we expected, thanks in part to an unsustainable jump in aircraft exports and a decline in the oil deficit, but the big story was the 4.2% plunge in non- oil imports.
Mexico's trade balance shrank slightly last year, to USD11B, from USD13B in 2016. The main driver was a big swing in the non- energy balance, to a record USD8.0B surplus, following a USD0.4B deficit in 2016.
Japan's July adjusted trade surplus rebounded to ¥337.4B from ¥87.3B in June, far above consensus. On our seasonal adjustment, the rebound is slightly smaller but only because we saw less of a drop in June.
The Eurozone's trade surplus rebounded slightly over the summer, rising to €16.6B in August from €12.6B in July, helped mainly by a 2.0% month-to- month jump in exports.
Data today likely will show that the seasonally adjusted trade surplus in the Eurozone jumped to €23.0B in March, from €20.2B in February. The headline was boosted, though, by sharp month-to-month falls in German and French imports, partly due to the early Easter.
Markets often pay little attention to the monthly foreign trade numbers, but today's May data are important because they could easily make a big difference to expectations for second quarter GDP growth. The key question is the extent to which exports have recovered since the port dispute on the West Coast, which severely distorted trade flows in the early part of the year.
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.
China's headline trade numbers appear to paint a picture of an economy in rude health but scratch the surface and the story is quite different. The trade surplus rose to$42.8B in June from $40.8B in May, hitting consensus.
The headline Chinese trade numbers are beginning to come into line with the story we have been telling about the more recent trends.
China's export data shows little impact from trade tensions so far.
China's trade surplus tumbled to $20.3B in January, from $54.7B in December, surprising the consensus for little change.
Real GDP in the Eurozone rose 0.4% quarter-on-quarter in Q1, in line with the consensus, but slightly below our expectation for a 0.5% increase. We don't get much detail from the country-specific advance estimates but all evidence indicates that the technical hit from net trade was much larger than we expected.
Korean trade activity is slowing.
Net trade has been a major drag on the economy's growth rate in recent quarters, and February's trade figures, released today, are likely to signal another dismal performance in the first quarter.
The holiday effects are at it again. C hina's trade balance dropped to a deficit of $5.0B in March, from a surplus of $33.5B in February, confounding expectations for a surplus of $27.5B.
China's September trade numbers show that, far from reducing the surplus with the U.S., the trade wars so far have pushed it up to a new record.
Mexico's trade balance shrank slightly last year, to USD13B, from USD14.6B in 2015. An improvement in the non-energy deficit was the main driver, while the energy gap worsened.
The July trade deficit likely fell significantly further than the consensus forecast for a dip to $42.2B from $43.8B in June, despite the sharp drop in the ISM manufacturing export orders index. Our optimism is not just wishful thinking on our p art; our forecast is based on the BEA's new advance trade report. These data passed unnoticed in the markets and the media. The July report, released August 28, wasn't even listed on Bloomberg's U.S. calendar, which does manage to find space for such useless indicators as the Challenger job cut survey and Kansas City Fed manufacturing index. Baffling.
The key data today, covering March durable goods orders and international trade in goods, should both beat consensus forecasts.
need to add docMea culpa: We failed to spot the press release from the Commerce Department announcing the delay of the release of the advance December trade and inventory data, due to the government shutdown.
The uncertainty over the new U.S. administration's economic policies new is clouding the outlook for the Eurozone economy. The combination of loose fiscal policy and tight monetary policy in the U.S. should be positive for the euro area economy, in theory. It points to accelerating U.S. growth--at least in the near term--wider interest rate differentials and a stronger dollar. In a " traditional" global macroeconomic model, this policy mix would lead to a wider U.S. trade deficit, boosting Eurozone exports.
Net foreign trade made a positive contribution of 0.2 percentage points to GDP growth in the second quarter, matching the Q1 performance.
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.
Chinese New Year effects were very visible in Japan's December trade data. Export growth slowed sharply to 9.3% year-over-year in December, from 16.2% in November.
Japan's trade surplus rebounded to ¥522B in April, on our adjustment, from ¥390B in March, around the same level as the official version, though from a higher base.
Colombia's trade deficit continued to narrow in Q3; a postive development now that EM are back in the firing line. Assuming no revisions, the marginal year-over-year dip in the September trade deficit means that the third quarter deficit was USD3.1B, down from US4.6B a year ago.
Korean exports are often a useful gauge of Asian and global trade; the country sits near the beginning of the global supply chain. It also happens to publish early in the data cycle and provides a measure of exports in the first 20 days of the month.
Sterling's depreciation, which began over two years ago, has inflicted pain on consumers but fostered a negligible improvement in net trade.
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.
In our Monitor on January 27 we speculated that the new U.S. administration would see Germany's booming trade surplus as a bone of contention. We were right. Earlier this week, Peter Navarro, the head of Mr. Trump's new National Trade Council, fired a broadside against Germany, accusing Berlin for using the weak euro to gain an unfair trade advantage visa-vis the U.S.
Japan's trade surplus is set to fall in coming months, as domestic demand remains robust, while recent oil price increases will be a drag, lifting imports.
We were a bit surprised to see our forecast for the April trade deficit is in line with the consensus, $44B, down from $51.4B in March, because the uncertainty is so great. The March deficit was boosted by a huge surge in non-oil imports following the resolution of the West Coast port dispute, while exports rose only slightly. As far as we can tell, ports unloaded ships waiting in harbours and at the docks, lifting the import numbers before reloading those ships.
When the advance estimate of first quarter GDP growth is revised, on May 29, we expect the new data to show that net foreign trade subtracted an enormous 1.9 percentage points from growth. With GDP likely to be revised down to -0.7% from +0.2%, that means domestic demand likely will be reported up 1.2%.
On the face of it, trade negotiations have deteriorated in the last week.
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.
Japan's trade surplus has whipsawed recently. Sharp changes are to be expected in January and February, due to the shifting timing of Chinese New Year.
The upturn in Mexico's trade balance in recent months stalled in May, but the underlying trend is still improving. Data yesterday showed that the seasonally adjusted deficit rose to USD700M in May, after a USD15M gap in April. Imports rose 2.9% month-to-month, offsetting a mere 0.7% increase in exports.
Markets often greet the monthly international trade numbers with a shrug.
Germany's external surplus remained resilient at the start of the year. Data on Friday showed that the seasonally adjusted trade surplus rose marginally to €18.5B in January, from a revised €18.3B in December.
In the wake of the May international trade numbers, our hopes that net foreign trade would contribute more than a full percentage point to second quarter GDP growth have taken something of a knock. We're now looking for a 0.7pp contribution.
The German trade surplus increased slightly in May, following weakness in the beginning of spring. The seasonally adjusted surplus rose to €20.3B in May, from €19.7B in April; it was lifted by a 1.4% month-to-month jump in exports, which offset a 1.2% rise imports.
Just two components of first quarter GDP were weak enough together to depress growth by 2.0 percentage points. Net foreign trade subtracted 1.25 percentage points, while falling investment in non-residential structures reduced growth by 0.75pp.
June's trade figures yesterday highlighted that it takes more than just a few months for exchange rate depreciations to boost GDP growth. The trade-weighted sterling index dropped by 9% between November and June as the risk of Brexit loomed large and the prospect of imminent increases in interest rates receded.
It's tempting to conclude from the third quarter's GDP figures, which showed output rising 0.5% quarter-on-quarter, despite a record drag from net trade, that the U.K. economy is comfortably weathering sterling's appreciation. But a closer look at the data shows the net trade drag is the counterparty to some erratic inventory movements. The real net trade hit is still to come.
Long-standing readers will know that we have been downbeat on the potential for net external trade to boost the economy following sterling's 2016 depreciation.
German trade data yesterday added further evidence that net exports likely will wreak havoc with the Q3 GDP report this week. Exports rose 2.6% month-to-month in September, partially rebounding from a 5.2% plunge in August. But imports jumped 3.6%, further adding to the net trade drag on a quarterly basis. Our first chart shows our estimate of real net trade in Q3 as the worst since the collapse in 2008-to-09.
Trade data yesterday added to the downbeat impression of the German economy, following poor manufacturing data earlier in the week. Exports plunged 5.2% month-to-month in August--the second biggest monthly fall ever--pushing the year-over-year rate down to 4.4%, from a revised 6.3% in July. Surging growth in the past six months, and base effects pointed to a big fall in August, but we didn't expect a collapse.
Yesterday's wall of data told us a bit about where the economy likely is going, and a bit about how it started the first quarter. The January trade and inventory data were disappointing, but the February Chicago PMI and consumer confidence reports were positive.
The seasonally adjusted trade surplus in Germany slipped to €19.6B in July, from €21.2B in June, its lowest since April, and we are confident that it has peaked for this cycle.
The sell-off in risky assets intensified while we were away, driven by China's decision to loosen its grip on the currency, and looming rate hikes in the U.S. The Chinese move partly shows, we think, the PBoC is uncomfortable pegging to a strengthening dollar amid the unwinding investment boom and weakness in manufacturing.
Japan's official adjusted surplus rose in October but we think the September figure was an understatement. On our adjustment, the surplus was little unchanged at ¥360B in October.
The Eurozone's current account surplus remains in a firm uptrend, and should continue to rise this year, despite a small dip in the February surplus to €26.4B from a revised €30.4B in January.
The Eurozone's external surplus weakened at the start of Q3.
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.
As promised, Mr. Trump retaliated earlier this week against China's weekend retaliation, after his refusal to back down on the initial tariffs on $50B-worth of imports of Chinese goods, on top of the steel and aluminium tariffs first announced back in March.
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.
A round of recent conversations with investors suggests to us that markets remain quite skeptical of the idea that the recent upturn in capital spending will be sustained.
We expect to learn today that the economy expanded at a 1.7% rate in the fourth quarter. At least, that's our forecast, based on incomplete data, and revisions over time could easily push growth significantly away from this estimate. The inherent unreliability of the GDP numbers, which can be revised forever--literally--explains why the Fed puts so much more emphasis on the labor market data, which are volatile month-to-month but more trustworthy over longer periods and subject to much smaller revisions.
China hit back against the Trump-administration tariffs yesterday, targeting Mr. Trump's electorate.
We are surprised by the EU's reaction to Mr. Trump's announcement that the U.S. will impose tariffs on steel and aluminium.
Following the summer recess, the U.K. Government has turned to the unenviable task of weighing up how much economic pain to endure in order to reduce immigration. The Government's insistence that Brexit "must mean controls on the numbers of people who come to Britain from Europe" suggests it is prepared to sacrifice access to the single market in order to appease public opinion.
Survey data have been signalling a relatively resilient Brazilian economy in the last few months, despite intensified political risk, and hard data are beginning to confirm this story.
Today is all about beans. Specifically, soybeans, and more specifically, just how many of them were exported in August. This really matters, because if soybean exports in August and September remained close to their hugely elevated July level, the surge in exports relative to the second quarter will contribute about one percentage point to headline GDP growth.
If we're right with our forecast that real consumers' spending rose by just 0.1% month-to-month in February -- enough only to reverse January's decline -- then it would be reasonable to expect consumption across the first quarter as a whole to climb at a mere 1.2% annualized rate.
The euro area's external surplus dipped at the start of Q4.
Britain still has nothing to show for sterling's depreciation, even though nearly two years have passed since markets started to price-in Brexit risk, driving the currency lower.
In previous Monitors, we have outlined our base case that the direct impact of tariffs on Chinese GDP will be minimal this year.
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.
Data later today will likely show that the Eurozone's external balance remained firm last quarter at a record 2.5% of GDP. We think the seasonally adjusted current account surplus rose to €20.0B in December from €18.1B in November, with positive momentum in the key components continuing.
We fully expect to learn today that import prices rose in March for the first time since June last year. Our forecast for a 1% increase is in line with the consensus, but the margin of error is probably about plus or minus half a percent, and an increase of more than 1.2% would be the biggest in a single month in four years. Most, if not all, of the jump will be due to the rebound in oil prices.
The U.S. Commerce Department on Tuesday released a list of Chinese imports, with an annual value of $200B, on which it is threatening to impose a 10% tariff, after a two-month consultation period.
Chinese exports grew by just 5.5% in dollar terms year-over-year in August, down from 7.2% in July. Export growth continues to trend down, with a rise of just 0.2% in RMB terms in the three months to August compared to the previous three months, significantly slower than the 4.8% jump at the p eak in January.
At the time of writing, Mr. Trump reportedly is finalising plans to impose tariffs of up to 25% on a further $200B of imports from China.
September's industrial production figures likely will not surprise markets today. We look for a 0.3% month-to-month rise in production, matching the consensus and the ONS assumption in the preliminary estimate of Q3 GDP.
The euro has been one of the main "beneficiaries" of the pound's relentless decline, which took on ridiculous dimensions as the GBP crashed almost 10% in the early hours of Friday. EURGBP briefly touched 0.94, before settling at 0.9, up just shy of 30% since November.
The consensus view that industrial production rose by a mere 0.1% month-to-month in August looks far too low; we expect today's report to reveal a jump of about 1%.
If Brent oil prices remain at their current $41 through the end of the second quarter--a big ask, we know, but you have to start with something--the average price of petroleum products imported into the U.S. will rise at an annualized rate of about 70% from their first quarter level.
Yesterday's sole economic report showed that the Eurozone's external surplus recovered ground over the summer, but we don't think the rebound will last long.
We're expecting a 180K increase in today's May headline payroll number, a bit below the underlying trend--200K or so--for the second straight month.
This is the final report before your Eurozone correspondent dials down for the summer, and heads for the beach. Advance Q2 GDP data next week is the key release while we are away, with the latest Bloomberg consensus--published July 20th--looking for a 0.4% increase quarter-on-quarter. Everything we look at suggests the consensus is right on this one, with risks tilted to the upside due to strong net exports in Germany.
Yesterday's industrial production report was grim reading, with volatility in Greece and the Netherlands, as well as revisions, throwing off our own, and the market's, forecasts. Output fell 0.4% month-to-month in May, well below the consensus and our expectation for a 0.2% rise, pushing the year-over-year rate higher to 1.6%, from a revised 0.9% in April.
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.
Eurozone bond traders of a bearish persuasion are finding it difficult to make their mark ahead of Italy's parliamentary elections next weekend.
The build-up to today's ECB meeting has drowned in the focus on Italy's new political situation and the rising risk of a global trade war.
Today's advance inventory and international trade data for December could change our Q4 GDP forecast significantly.
China's trade data looked more normal in April. The trade balance rebounded to a surplus of $28.8B in April, from a deficit of $5.0B in March. Exports also bounced back, rising 12.9% year-over-year in April, after a 2.7% decline in March.
Brazil's external accounts have recovered dramatically this year, and we expect a further improvement--albeit at a much slower pace--in the fourth quarter. The steep depreciation of the BRL last year, and the improving terms of trade due to the gradual recovery in commodity prices, drove the decline in the current account deficit in the first half.
The PBoC and Ministry of Finance have been locked in a relatively public debate recently over which body should shoulder the burden of stimulating the economy as growth slows and trade tensions take their toll.
EM risk sentiment remains grim as the Trump administration dispenses protectionist trade measures. LatAm's biggest economies, Brazil and Mexico, have been hit the hardest, with their currencies falling 3.3% and 2.2% respectively in the last week, the most in the EM world.
Amid all the trade tensions, it's easy to lose sight of the big picture for China.
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.
Last week's national accounts confirmed that the economy lost momentum abruptly in Q1, with net trade and investment failing to offset weaker growth in households' spending.
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.
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.
We were nervous ahead of the GDP numbers on Friday, wondering if our forecast of a 1.5 percentage point hit from foreign trade was too aggressive. In the event, though, the trade hit was a huge 1.7pp, so domestic demand rose at a 3.5% pace.
It is still premature to make fundamental changes to our core views for the global or LatAm economy, following President Trump's plan to slap hefty tariffs on steel and aluminium imports, potentially escalating into a global trade war.
Sentiment has been improving gradually in Mexico in recent weeks, reversing some of the severe deterioration immediately after the U.S. presidential election. Year-to-date, the MXN has risen 10.3% against the USD and the stock market is up by almost 8%. We think that less protectionist U.S. trade policy rhetoric than expected immediately after the election explains the turnaround.
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 latest Markit/CIPS manufacturing survey has dashed hopes that sterling's depreciation and the pickup in global trade will facilitate strong growth in U.K. production this year. The PMI dropped to 54.2 in March, from 54.6 in February.
Yesterday's detailed EZ GDP report showed that real output rose 0.3% quarter-on-quarter in Q3, the same pace as in Q2. The year-over-over rate rose marginally to 1.7% from 1.6%, trivially higher than the first estimate, 1.6%. The details showed that consumers' spending and public consumption were the key drivers of growth in Q3, offsetting a slowdown in net trade.
Mexico's risk profile and financial metrics have improved in recent days, following news of a preliminary bilateral trade deal with the U.S. on Monday.
In theory, any hit to sentiment and business investment as the E.U. referendum nears could be offset by a better foreign trade performance, due to the Brexit-related depreciation of sterling. But not every cloud has a silver lining.
External demand in France probably weakened in the first quarter. The trade deficit widened sharply to €5.2B in February, from a revised €3.9B in January, pushing the current account deficit to an 18-month high. It is tempting to blame the stronger euro, but that wasn't the whole story.
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.
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.
Net exports in the euro area likely rebounded in Q4. The headline EZ trade surplus rose to €22.7B in November from €19.7B in October. Exports jumped 3.3% month-to-month, primarily as a result of strong data in Germany and France, offsetting a 1.8% rise in imports. Over Q4 as a whole, we are confident that net exports gave a slight boost to eurozone GDP growth, adding 0.1 percentage points to quarter-on-quarter growth.
The Eurozone's trade surplus remained subdued at the end of the second quarter; it dipped to €16.7B in June from €16.9B in May.
China and the U.S. are officially to restart trade talks, according to China's Ministry of Commerce, after previous negotiations stalled in June.
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.
The Chinese trade surplus was reasonably stable on our seasonal adjustment in September, falling to $27.5B from $29.7B in August.
Sterling weakened further yesterday as anxiety grew that PM Theresa May will indicate she is seeking a "clean and hard Brexit" in a speech today. This could mean the U.K. leaves the EU's single market and customs union, in order to control immigration, shake off the jurisdiction of the European Court and have a free hand in trade negotiations with other countries.
External conditions are becoming more demanding for LatAm economies, with global trade tensions intensifying in recent weeks.
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 U.S. reached a trade agreement with Canada on Sunday, adding its northern neighbour to the pact sealed a month ago with Mexico.
Solid trade data for April indicate a strong start to Q2 for the Eurozone's external balance, though a €3.2B fall in German net factor income will weigh on the primary income number.
The Treasury waded in to the Brexit debate yesterday with a 200-page report concluding that U.K. GDP would be 6.2% lower in 2030 than otherwise if Britain left the E.U. and entered into a bilateral trade deal similar to the one recently agreed by Canada. All long-term economic projections should come with health warnings, and the Treasury's precise numbers should be taken with a pinch of salt.
Korea's preliminary export numbers rebounded quite spectacularly in June, with growth at 24.4% year-on-year, compared with just 3.4% in May. This reading is important as it comes early in the monthly data cycle. Korea's position close to the beginning of the global supply chain, moreover, means its exports often lead shifts in global trade.
With plenty of evidence emerging that consumer spending and business investment are set to suffer from a collapse in confidence, attention is turning to whether other sectors of the economy are ready to step up and support growth. But the fruits from reduced fiscal contraction and stronger net trade will be small and will take a long time to emerge.
CHF traders, and the rest of the market, were blindsided yesterday by the decision of the SNB to scrap the 1.20 EURCHF floor. The SNB has already boosted its balance sheet to about 85% of GDP to prevent the CHF from appreciating, and with the ECB on the brink of adding sovereign bonds to its QE program, the peg was simply indefensible.
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.
A year has now elapsed since sterling began its precipitous descent, and the trade data still have not improved. Net trade subtracted 0.9 percentage points from year-over-year growth in GDP in Q3. And while the trade deficit of £2.0B in October was the smallest since May, this followed extraordinarily large deficits in the previous two months. In fact, the trade deficit has been on a slightly deteriorating trend over the last year, as our first chart shows, and we expect today's data to show that the deficit re-widened to about £3.5B in November.
Yesterday's deluge of output and trade data broadly supported our call that quarter-on-quarter GDP growth likely slowed to 0.3% in Q4, from 0.4% in Q3.
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.
German exporters stumbled at the end of last year. The seasonally adjusted trade surplus in Germany dipped to €18.4B in December, from €21.8B in November, hit by a 3.3% month-to-month plunge in exports. Imports were flat on the month. The fall in exports looks dramatic, but it followed a 3.9% jump in the previous month, and nominal exports were up 2.5% over Q4 as a whole. Advance GDP data next week likely will show that net trade lifted quarter-on-quarter growth by 0.2 percentage points, partly reversing the 0.3pp drag in Q3. Real imports were held back by a jump in the import price deflator, due to rebounding oil prices.
Market participants and analysts have gradually softened their cautious stance towards Mexico, as concerns about the new U.S. administration's trade and immigration policies have eased, and risks of a credit rating downgrade have lessened.
Donald Trump's victory casts a shadow of political uncertainty over what had appeared to be a decent outlook for the U.S economy. The U.K.'s trade and financial ties with the U.S., however, are small enough to mean that any downturn on the other side of the Atlantic will have little impact on Britain.
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.
Yesterday's German manufacturing and trade data did little to allay our fears over downside risks to this week's Q4 GDP data. At -1.2% month-to-month in December, industrial production was much weaker than the consensus forecast of a 0.5% increase. Exports also surprised to the downside, falling 1.6% month-to-month. Our GDP model, updated with these data, shows GDP growth fell 0.2%-to-0.3% quarter-on-quarter in Q4, reversing the 0.3% increase in Q3.
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.
Japanese domestic demand probably strengthened in Q2, with both private consumption and fixed investment accelerating. Trade and inventories are the key swing components for GDP growth.
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.
Yesterday's trade data added to the evidence that momentum in the German economy slowed sharply at the start of the year.
Yesterday's German trade data showed that the external surplus recovered in August, following its poor start to Q3. The seasonally-adjusted trade surplus rose to €22.2B, from €19.4B in July.
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 euro area's trade advantage with the rest of the world slipped at the start of the year.
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.
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.
Brazil's current account data last week provided further evidence of stabilisation in the economy, despite the modest headline deterioration. The unadjusted current account deficit increased marginally to USD5.1B in January, from USD4.8B in January 2016, but the underlying trend remains stable, at about 1.3% of GDP. Our first two charts show that the overall deficit began to stabilize in mid-2016, as the rate of improvement in the trade balance slowed, reflecting the easing of the domestic recession.
China reportedly has offered President Trump a $200B reduction in its annual trade surplus with the U.S., engineered by increasing imports of American products, among other steps.
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.
Recent global developments lead us to intensify our focus on trade in LatAm.
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.
Data on Friday showed that the EZ current account surplus fell to €25.3B in September, from a revised €29.2B in August. The trade and services surpluses were unchanged, but the income balance slipped after rising in the previous months.
The US trade deficit unexpectedly widened by 17% to $46.6 billion in December from $39.8 billion in November.
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 plunge in oil prices me ans that U.S. oil imports are set to drop much further over the next few months, flattering the headline trade deficit. The trend in imports has been downwards since early 2013, as our first chart shows, reflecting the surge in domestic production. That surge is now over, but as falling prices become the dominant factor in the oil import story, the trend will remain downwards.
Germany's exporters just broke another record: The trade surplus for Europe's biggest economy is now at its highest on record.........Here's how Germany's recent export history looks, according to Pantheon Macroeconomics
Germany continues to draw fire for its ballooning trade surplus, but momentum in net exports is easing. The seasonally adjusted trade surplus dipped marginally to a three-month low of €19.7B in April, from €19.8B in March, as stronger imports offset a modest rise in exports. The German trade surplus averaged €19.9B in the first four months of 2017, about 10% lower than the cyclical peak, in the middle of 2016.
Germany's external balance was virtually stable at the beginning of the second quarter. The seasonally adjusted trade surplus rose marginally to €23.9B in April from a revised €23.7B in March, mainly due to weakness in imports. Demand for goods abroad fell 0.2% month-to-month, which pushed up the surplus despite amid unchanged exports. Imports fell 1.5% year-over-year in April, up slightly from a 2.5% decline in March.
Of all the regional Fed and PMI business surveys, the Richmond Fed index appears to be the most sensitive to U.S. trade policy.
China's trade surplus has been trending down in the last two years.
Today's trade figures likely will continue to show that the benefits from sterling's depreciation are being outweighed by the costs. Exports still are barely growing, but consumers are about to endure a substantial import price shock. The monthly trade deficit has been extremely volatile over the last year, generating a series of excessively upbeat or gloomy headlines. The truth is that the deficit has been on a slightly deteriorating trend, as our first chart shows. We think the trade deficit likely narrowed to £3.8B in December, from £4.2B in November, bringing it closer to its rolling 12-month average of £3.0B.
Chief U.K. Economist Samuel Tombs Discussing the UK Goods Trade
Chief U.S. Economist Ian Shepherdson on U.S.-China Trade Wars
Due to a technical quirk, Eurostat was not able to publish seasonally adjusted January trade numbers yesterday, so the report is of limited use. The unadjusted trade surplus in the Eurozone plunged to €7.9B in January, from €24.3B in December, driven in part by a collapse in Italy's surplus.
Japan's trade activity slowed sharply in Q1. The yen value of exports fell 0.8% quarter-on-quarter in Q1, after a 5.5% jump in Q4.
EU-Japan free trade: Japan and the European Union agreed on an outline for a massive trade deal this week that will rival the size of NAFTA, the free trade accord that the United States has with Canada and Mexico, currently the largest one in the world. Claus Vistesen, the chief eurozone economist with Pantheon Macroeconomics, assesses what's in the agreement and why it matters (19mins 10 secs).
Ian Shepherdson, Pantheon Macroeconomics, and Said Haidar, Haidar Capital Management, discuss the market, economic and geopolitical impacts of the Trump administration's trade actions.
Chief U.K. Economist Samuel Tombs on U.K. New Car Registrations, July
We're braced for a hefty downside surprise in today's durable goods orders numbers, thanks to a technicality.
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.
Mexican inflation fell sharply in the first two weeks of January, dipping by 0.2% from two weeks earlier, thanks to lower energy prices and a reduction in long-distance phone tariffs. Telecom reform explains about 15bp of the headline reduction.
The second estimate of Q3 GDP last week confirmed that the Brexit vote didn't immediately drain momentum from the economic recovery. But it is extremely difficult to see how growth will remain robust next year, when high inflation will cripple consumers and the impact of the decline in investment intentions will be felt.
The Fed is on course to hike again in December, with 12 of the 16 FOMC forecasters expecting rates to end the year 25bp higher than the current 2-to-21⁄4%; back in June, just eight expected four or more hikes for the year.
The Eurozone PMIs stumbled at the end of Q2. The composite index slipped to a five-month low of 55.7 in June, from 56.8 in May, constrained by a fall in the services index. This offset a marginal rise in the manufacturing index to a new cyclical high. The dip in the headline does not alter the survey's upbeat short- term outlook for the economy.
In a week of important global events, local factors remained in the spotlight in Brazil, with a more benign data flow and the central bank statement reducing the likelihood of an imminent end to the easing cycle.
The verdict from the German business surveys is in; economic growth probably slowed further in Q2.
Banxico's decisions throughout the past year have been guided by external forces, dominated by the persistent decline of the MXN against the USD and its potential impact on inflation. The MXN has fallen by almost 17% year-to-date and has dropped by an eye-watering 37% since 2014.
The two-year budget deal agreed between the administration and the Republican leadership in Congress will avert a federal debt default and appears to constitute a modest near-term easing of fiscal policy. The debt ceiling will not be raised, but the law imposing the limit will be suspended through March 2017, leaving the Treasury free to borrow as much as necessary to cover the deficit. As a result, the presidential election next year will not be fought against a backdrop of fiscal crisis.
Recent political and economic developments in Brazil make us more confidence in our forecast of a gradual recovery. On Wednesday, interim President Michel Temer scored his first victory in Congress, winning approval for his request to raise this year's budget target to a more realistic level. Under the new target, Brazil's government plans to run a budget gap, before interest, of about 2.7% of GDP this year.
BanRep surprised everyone late Friday, moving ahead of the curve by starting a tightening cycle that had been expected to begin later in the year or in Q1. But the seven-board member succumbed in the face of persistent inflationary pressures, and voted unanimously to hike the main interest rate by 25bp to 4.75%, the first move since April 2014.
It seems reasonable to think that manufacturing should be doing better in the U.S. than other major economies.
The publication yesterday of the BCB's second quarterly inflation report under the new president, Ilan Golfajn, revealed that inflation is expected to hit the official target next year, for the first time since 2009. The inflation forecast for 2017 was lowered from 4.7% to 4.4%, just below the central bank's 4.5% target.
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.
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%.
The Mexican economy is recovering gradually, despite many external headwinds. This week, the IGAE economic activity index--a monthly proxy for GDP--rose a solid 2.6% year-over-year in August, up from 2.0% in July. In the first half the economy grew on average 2.4%. The report showed increases in all three sectors, most notably agriculture, up 8.2% year-over-year, followed by services, 3.3%, and industrial activities, with a 1.0% gain.
Since the Party Congress last month, China has made a number of bold moves in multiple policy fields, with a regularity that almost implies the authorities are working through a list.
The U.K.'s political situation is extremely fluid, so it would be risky automatically to assume that the U.K. is heading for Brexit. Although the Prime Minister has resigned, his attempt to hold out until October to begin the formal process of exiting the E.U. signals that he may be seeking to engineer a revised deal, or at least to force his successor to make the momentous decision of whether to trigger Article 50, to begin the leaving process.
We expect today's first estimate of third quarter GDP growth to show that the economy expanded at a 2.4% annualized rate over the summer.
The second estimate of Q1 GDP confirmed that the recovery has lost momentum and revealed that growth would have ground to a halt without consumers. GDP growth likely will slow further in Q2, as Brexit risk undermines business investment.
Everyone needs to take a deep breath: This is not 1930, and Smoot-Hawley all over again.
Money supply growth in the Eurozone rebounded slightly last month, reversing some of the weakness at the start of the year.
The first point to make about today's Q1 GDP growth number is that whatever the BEA publishes, you probably should add 0.9 percentage points.
The decline in headline durable goods orders in May, reported yesterday, doesn't matter.
Federal Reserve Chair Janet Yellen's testimony this week reinforced our view that the first U.S. rate hike will be in June. The transition to higher U.S. rates will require an unpleasant adjustment in asset prices in some LatAm countries.
Korean real GDP growth slumped in Q2 to 0.6% quarter-on-quarter, from 1.1% in Q1, as both the main drivers--construction and exports--ran out of steam simultaneously. Construction investment grew by 1.0%, sharply slower than the 6.8% in Q1 and contributing just 0.2% to GDP growth in Q2, a turnaround from the 1.1 percentage point contribution in the first quarter.
The second estimate of Q1 GDP made for grim reading. Quarter-on-quarter GDP growth was revised down to 0.2%--the joint-slowest rate since Q4 2012--from the preliminary estimate of 0.3%.
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.
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.
Korean real GDP growth rebounded to 1.1% quarter-on-quarter in Q1, after GDP fell 0.2% in Q4. Growth in Q4 was hit by distortions, thanks to a long holiday in October, which normally falls in September.
Brazilian financial assets lately appear to be responding only to developments in the presidential election race and external jitters.
The failure of House Republicans to support Speaker Ryan's healthcare bill has laid bare the splits within the Republican party. The fissures weren't hard to see even before last week's debacle but the equity market has appeared determined since November to believe that all the earnings-friendly elements of Mr. Trump's and Mr. Ryan's agendas would be implemented with the minimum of fuss.
The solid 0.2% increase in January's core CPI, coupled with the small upward revision to December, ought to offer a degree of comfort to anyone worried about European-style deflation pressures in the U.S.
We were wrong about headline durable goods orders in April, because the civilian aircraft component behaved very strangely.
By the close on Friday, the initial reaction in U.S. markets to the U.K. Brexit vote could be characterized as a bad day at the office, but nothing worse. Not a meltdown, not a catastrophe, no exposure of suddenly dangerous fault lines.That's not to say all danger has passed, but the first hurdle has been overcome.
Media reports suggest that the underlying trends in retailing--rising online sales, declining store sales and mall visits--continued unabated over the Thanksgiving weekend.
Fed Chair Powell sounded a lot like Janet Yellen yesterday, at least in terms of substance.
We didn't believe the first estimate of Q1 GDP growth, 0.7%, and we won't believe today's second estimate, either. The data are riddled with distortions, most notably the long-standing problem of residual seasonality, which depressed the number by about one percentage point.
Data to be released this Friday should show that Japan's labour market remains tight, though the unemployment rate likely ticked back up in February, to 2.6%, after the erratic drop to 2.4% in January.
Korean real GDP growth rebounded to 1.4% quarter-on-quarter in Q3, from 0.6% in Q2. The main driver was exports, with government consumption also popping, and private consumption was a little faster than we were expecting.
The Mexican economy shrank by 0.2% quarter- on-quarter in Q2, according to the final GDP report, a tenth worse than the preliminary reading.
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.
The MPC held back last week from decisively signalling that interest rates would rise when it meets next, in May.
Yesterday's final Q2 GDP report in Germany confirmed the initial data showing that the economy slowed less than we expected last quarter. Real GDP rose 0.4% quarter-on-quarter in Q2, after a 0.7% jump in Q1. The working-day adjusted year-over-year rate fell marginally to 1.8%, from 1.9% in Q1.
Economic growth in France has been the key downside surprise in the Eurozone this year.
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.
China's once much-talked-about "Belt and Road Initiative" has gradually disappeared from the headlines over the past twelve months.
Brazil's domestic economic outlook has not changed much recently.
Incoming data confirm our view that the Chilean economy to rebound steadily in the second half of the year, with real GDP increasing 1.5% quarter-on-quarter in Q3, after a relatively modest 0.9% increase in Q2 and a meagre 0.1% in Q1.
ECB growth bears looking for the Fed to move in order to take the sting out of the euro's recent strength were disappointed last week. The FOMC refrained from a hike, referring to the risk that slowing growth in China and emerging markets could "restrain economic activity" and put "downward pressure on inflation in the near term." In doing so, the Fed had an eye on the same global risks as the ECB, highlighting increased fears of deflation risks in China, despite a rosier domestic outlook.
The EU has had a better start to the Brexit negotiations than its counterpart across the Channel. The risk of disagreement within the EU on the details with of the U.K.'s exit is high, but the Continent has presented a united front so far, mainly because Mr. Macron and Mrs. Merkel agree on the broad objectives. They have no interest in punishing the U.K., but they are also keen to show that exiting the EU has costs for a country which leaves.
Brazil's mid-June inflation reading surprised to the downside, falling to 9.0% from 9.6% in May. The reading essentially confirmed that May's rebound was a pause in the downward trend rather than a resurgence of inflationary pressures. A 1.3% increase in housing prices, including services, was the main driver of mid-June's modest unadjusted 0.4% month-to-month rise in the IPCA-15.
The Spanish economy has been living a quiet life recently, amid markets' focus on political risks in Italy and manufacturing slowdowns in Germany and France.
Inflation in Brazil remained subdued at the start of the second quarter, strengthening the odds for an additional interest rate cut next month, and opening the door for further stimulus in June.
April's retail sales figures, due Thursday, likely will show that spending recovered from snow-induced weakness in March.
In recent years only one event has made a material difference to the growth path of the U.S. economy, namely, the plunge in oil prices which began in the summer of 2014. The ensuing collapse in capital spending in the mining sector and everything connected to it, pulled GDP growth down from 2½% in both 2014 and 2015 to just 1.6% in 2016.
Yesterday's ZEW investor sentiment in Germany shows showed no signs that uncertainty over the U.K. referendum is taking its toll on EZ investors. The expectations index surged to 19.2 in June, from 6.4 in May, the biggest month-to-month jump since January last year, when investors were eagerly expecting the ECB's QE announcement.
The day of reckoning in Greece has been continuously postponed in the past three months, but government officials told national TV yesterday that the country cannot meet its IMF payment of €300M June 5th, without a deal with the EU. The urgency was echoed by the joint statement earlier this week by German Chancellor Merkel and French President Hollande that Greece has until the end of this month to reach a deal.
Mexico's central bank last week left its policy rate at 7.0%, the highest level since early 2009.
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.
Media reports that Greece and the EU are putting together "contingency plans" for a Greek default--and perhaps even an exit from the Eurozone--highlight how far the parties remain from each other.
Mr. Trump fired the shot everyone was expecting this week with a 10% tariff on $200B-worth of Chinese goods, and a pledge to lift the rate to 25% on January 1.
The BoJ kept all policy measures unchanged at its meeting yesterday.
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.
Chile's Q2 GDP report, released on Friday, confirmed that the economy gathered momentum in recent months, following an alarmingly weak start to the year.
Chile's Q2 GDP report, released yesterday, confirmed that the economy gathered strength in the first half of the year, consolidating a strong recovery that started in Q3 2017.
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 Eurozone's current account surplus plunged to €18.0B in May from €24.0B, the biggest monthly fall since July 2013, but an upward revision to the April data makes the headline look worse than it is. These numbers are volatile, even after seasonal adjustments, and revisions have been larger than normal this year, so we need to smooth the data to get the true story.
The national accounts, released on Friday, likely will restate that quarter-on-quarter GDP growth picked up to 0.4% in Q3, from 0.3% in Q2.
Catalonia goes to the polls today, and it will be a close call. Surveys point to a hung parliament in which neither the pro-separatists nor the unionist coalition will secure an absolute majority.
The latest balance of payments figures, released Wednesday, look set to show that the current account deficit widened in Q3, underlying the U.K.'s vulnerability to a sudden change in overseas investor sentiment. The risk of a full-blown sterling crisis, however, is lower than the enormous current account deficit would appear to suggest.
Yesterday's detailed Mexican GDP report confirmed that growth was relatively resilient in Q2, despite the lagged effect of external and domestic headwinds.
Sterling will be under the spotlight again today when four members of the Monetary Policy Committee, including Governor Mark Carney, answer questions from the Treasury Select Committee about the recent Inflation Report.
The terrible scenes from Texas will play out in the economic data over the next few weeks.
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.
Economic activity in Mexico during the past few months has been stronger than most observers expected. Growth has certainly moderated from the relatively strong pace recorded during the second half of last year, but data for January and February show that it is still quite strong.
Broad-based inflation pressures in Brazil remain tame despite the sharp BRL depreciation this year, totalling about 7% in the last three months alone.
CPI inflation dropped to 2.4% in April, from 2.5% in March, undershooting the no-change consensus and prompting many commentators to argue that the chances of an August rate hike have declined further.
Yesterday's second estimate of Q3 GDP confirmed that the U.K. economy has underperformed this year.
The latest data from container ports around the country are consistent with our view that imports are still correcting after the surge late last year, triggered by the hurricanes.
The Colombian economy--the star of the previous economic cycle in LatAm--is now slowing significantly, due mostly to strong external headwinds. Exports plunged by 40% year-over-year in January, down from -29% in December, with all of the main categories contracting in the worst performance since 1980.
When you read between the lines of its public statements on Brexit, the Government appears to be prioritising controlling immigration over maintaining unfettered access to the single market, much to the chagrin of the financial sector.
The speed of sterling's rally this month has caught us by surprise.
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.
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.
The FOMC minutes confirmed that most FOMC members were not swayed by the weak-looking first quarter GDP numbers or the soft March core CPI. Both are considered likely to prove "transitory", and the underlying economic outlook is little changed from March.
Brazil has made a convincing escape from high inflation in the past few months, laying the groundwork for a gradual economic recovery and faster cuts in interest rates. Mid-March CPI data, released this week, confirmed that inflation pressures eased substantially this month.
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.
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%.
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.
Venezuela's beleaguered government announced on Tuesday that it had begun the pre-sale of 82.4M coins of a virtual currency, called the "petro", backed by the nation's vast petroleum reserves.
U.K. activity data have consistently surprised to the downside over the last month.
Taken at face value, the GDP data continue to suggest that the Brexit vote has had no adverse consequences for the economy. The official estimate of quarter-on-quarter GDP growth in Q4 was revised up yesterday to 0.7%, from 0.6%. The revision had been flagged earlier this month by stronger industrial production and construction output figures.
The recovery in the French economy since the sovereign debt crisis has been lukewarm. Growth in domestic demand, excluding inventories, has averaged 0.4% quarter-on-quarter since 2012. This comp ares with 0.8%-to-1.1% in the two major business cycle upturns in the 1990s and from 2000s before the crisis.
Yesterday's detailed Mexican GDP report confirmed that growth was resilient in Q1, despite external and domestic headwinds. GDP rose 0.7% quarter-on-quarter in Q1, in line with our expectation, but marginally above the first estimate, 0.6%.
We expect today's second estimate of Q2 GDP to confirm that the U.K. has been the slowest growing G7 economy this year.
In November, existing home sales substantially overshot the pace implied by the pending home sales index.
Growth appears to have accelerated in the first quarter in Mexico, as NAFTA-related uncertainty abated, inflation started to fall, and the MXN rebounded.
Brazil's external deficit fell marginally in October, but most of the improvement is now likely behind us. The unadjusted current account deficit dipped to USD3.3B, from USD4.3B in October 2015. The trend is stabilizing, with the 12-month total rolling deficit easing to USD22B--that's 1.2% of GDP--from USD23B in September.
The monthly new home sales numbers are so volatile that just about anything can happen in any given month.
Inflation in Mexico surprised to the downside in late Q3, supporting our core view that it will continue to fall gradually over the coming months.
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.
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.
The meta game between China and Mr. Trump started as soon as he had any possibility of winning the election in 2016.
Global economic conditions have been improving for LatAm over recent quarters.
The apparently imminent imposition of 25% tariffs on imported steel and 10% on aluminum does not per se constitute a serious macroeconomic shock.
Friday's economic data in Germany suggest that households had a slow start to the year.
China's PMIs point to softening activity in Q3. The Caixin services PMI fell to 52.8 in July, from 53.9 in June.
The odds favor a robust January payroll report today. The key leading indicator--the NIFB hiring intentions index from five months ago--points to a 275K increase, while the coincident NFIB actual employment change index suggests 260K.
German GDP growth likely accelerated in the second quarter, following a disappointing 0.3% quarter-on-quarter expansion in Q1. Growth in the manufacturing sector remains modest, and the trend in consumers' spending remains solid. Industrial production was unchanged in May, pushing year-over-year growth to 2.1% from a revised 1.1% in April.
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
The record 1,178-point drop in the Dow will garner all the headlines today, but a sense of perspetive is in order, despite the chaos. The 113-point, or 4.1%, fall in the S&P 500 was very startling, but it merely returned the index to its early December level; it has given up the gains only of the past nine weeks.
The latest iteration of the Atlanta Fed's GDPNow model of second quarter GDP growth shows the economy expanding at a 4.5% annualized rate.
It will take months, and perhaps years, before markets have any clarity on the U.K.'s new relationship with the EU. In the U.K., the main parties remain shell-shocked. Both leading candidates for the Tory leadership, and, hence, the post of Prime Minister, have said that they would wait before triggering Article 50.
A setback in German manufacturing orders was coming after the jump at the end of 2016, but yesterday's headline was worse than we expected. Factory orders crashed 7.4% month-to-month in January, more than reversing the 5.4% jump in December. The year-over-year rate fell to -0.8% from a revised +8.0%. The decline was the biggest since 2009, but the huge volatility in domestic capital goods orders means that the headline has to be taken with a large pinch of salt.
The ECB made no changes to its policy stance yesterday. The central bank left its refinancing and deposit rates at 0.00% and -0.4%, respectively, and maintained the pace of QE at €60B per month. The program will run until December "or beyond, if necessary."
We often have quite strong views on the balance of risks in the monthly payroll numbers. November is not one of those months. We can generate plausible forecasts between about 50K and 370K, and that's much too wide for comfort. This is probably a payroll release to sit out.
Friday's industrial production report in Germany capped a miserable week for economic data in the Eurozone's largest economy.
Brazilian February industrial production data, released yesterday, were relatively positive. Output rose 0.1% month-to-month, pushing the yearover- year rate down to -0.8% from 1.4% in January. Statistical quirks were behind February's year-over-year fall, though.
This Monitor provides a summary of the main points of interest over the two weeks we were out. The Chinese Caixin manufacturing PMI, published last Friday, confounded expectations for a modest fall, rising to 51.6 in August from 51.1 in July.
Construction in the Eurozone had a decent start in the third quarter. Output rose 0.5% month-to- month in July, pushing the year-over-year rate down to 1.9% from 2.8% in June.
Friday's factory orders report in Germany provided a bit of relief amid the gloom in manufacturing.
We are not political analysts or psephologists, but we note that each of the nine separate election forecasting models tracked by the New York Times suggests that Hillary Clinton will be president, with odds ranging from 67% to greater than 99%.
Inflation pressures are easing rapidly in Colombia, according to October's CPI report, released on Saturday. Inflation fell to 6.5% year-over-year in October, down from 7.3% in September; the consensus expectation was 6.7%.
The MXN came under pressure last week as news broke that Banxico Governor Agustin Carstens plans to resign next year. Mr. Carstens has led the bank since 2010; during his term, Banxico cut interest rates to record low levels and managed to keep inflation under control.
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.
Industrial production in Germany stumbled at the end of Q4. Data yesterday showed that output fell 0.6 month-to-month in December, though this drop has to be seen in light of the downwardly-revised 3.1% jump in November.
Mortgage applications have risen, net, over the past couple of months, despite the 70bp surge in 30-year mortgage rates since the election. Indeed, we'd argue that the increase in applications is a result of the spike in rates, because it likely scared would-be homebuyers, triggering a wave of demand from people seeking to lock-in rates, fearing further increases.
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.
The elevated September ISM non-manufacturing index reported yesterday--it dipped to 56.9 but remains very high by historical standards--again served to underscore the depth of the bifurcation in the economy. The services sector, boosted by the collapse in gasoline prices and the strong dollar, is massively outperforming the woebegone manufacturing sector.
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.
All the signs are that ADP will today report a solid increase in February private payrolls; our forecast is 200K, but if you twist our arms we'd probably say the mild weather last month across most of the country points to a bit of upside risk.
In the absence of market-moving data today, we want to take a closer look at the labor market, and, specifically, the idea that payroll growth is slowing because firms cannot find staff they consider suitably qualified for the jobs available. Every indicator of labor demand, with the sole exception of manufacturing-specific surveys, is consistent with very rapid payroll growth, well in excess of 200K per month.
We would be quite surprised if today's official payroll number exceeded the 135K ADP reading; a clear undershoot is much more likely.
Labor demand appears to have remained strong through August, so we expect to see a robust ADP report today.
Brexit talks have hit an impasse over the Irish border. The Republic of Ireland will veto any deal that creates a hard border with Northern Ireland. This means that Northern Ireland must remain in the EU's customs union.
It would be a mistake to conclude from July's car registrations data that the market finally has turned a corner.
Markets were jolted yesterday by news that the U.S. Fed is mulling ending, or at least slowing, the reinvestment of Treasuries and mortgage-backed securities later this year. Such a move would reduce liquidity in global markets that has underpinned soaring equity prices in recent years.
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
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.
German factory orders probably bounced a modest 0.3% month-to-month in February, equivalent to a 0.5% decline year-over-year. We expect private investment growth to have picked up in the first quarter, but leading indicators for the industrial sector in Germany are sending conflicting signals.
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 0.7% month-to-month rise in industrial production in September marked the sixth consecutive increase, a feat last achieved 23 years ago.
Banxico's likely will deliver the widely-anticipated rate hike this Thursday. Policymakers' recent actions suggests that investors should expect a 50bp increase, in line with TIIE pric ing and the market consensus. The balance of risks to inflation has deteriorated markedly on the back of the "gasolinazo", a sharp increase in regulated gasoline prices imposed to raise money and attract foreign investment.
German manufacturing data are all over the place at the moment. Earlier this week, data showed that new orders jumped toward the end of 2016, but yesterday's industrial production report was a shocker. Output plunged 3.0% month-to-month in December, pushing the year-over-year rate down to -0.7% from a revised +2.3% in November.
The jump in the Caixin services PMI in the past two months looks erratic, with holiday effects playing a role, though there could be more going on here.
We're expecting a 175K increase in December payrolls today. Our forecast has been nudged down from 190K in the wake of the ADP employment report, which was slightly weaker than we expected.
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.
Revisions to the first quarter productivity numbers, due today, likely will be trivial, given the minimal 0.1 percentage point downward revision to GDP growth reported last week.
The fall in the services PMI to 53.8 in May, from 55.8 in April, is a setback for hopes that the slowdown in GDP growth in Q1 will be fleeting. Both business activity and orders rose at their slowest rates since February.
Industrial activity in LatAm, at least in the largest economies, is taking different paths.
Core PPI inflation has risen steadily this year, with month-to-month increases of 0.3% or more in five of the past six months.
German industrial production data were presented by Bloomberg News as signs that the recovery is "gathering momentum", but it is slightly premature to make that call. Narrow money growth is currently sending a strong signal of higher GDP growth this year in the euro area, but the message from the manufacturing sector is still one of stabilisation rather than acceleration.
The Fed pretty clearly wanted to tell markets yesterday that inflation is likely to nudge above the target over the next few months, but that this will not prompt any sort of knee-jerk policy response beyond the continued "gradual" tightening.
The Brazilian economy enjoyed a decent Q2, with GDP rising 0.2% quarter-on-quarter, despite the disruptions caused by the truck drivers' strike, after a 0.1% decline in Q1.
The Markit/CIPS manufacturing PMI shot up to a three-year high of 57.3 in April, from 54.2 in March, bringing an end to the run of downbeat news on the economy. The performance of the U.K. manufacturing sector, however, remains underwhelming, given the magnitude of sterling's depreciation.
In yesterday's Monitor, we laid out the macroeconomic case for moderately higher inflation in the second half of the year. But subdued market based inflation expectations indicate that the ECB will retain its dovish bias for now. The central bank's preferred measure, 5-year/5-year forward inflation expectations, have only increased modestly in response to QE, and have even declined recently on the back of higher market volatility.
Last week's balance of payments showed that the U.K. has made significant progress in reducing its reliance on overseas finance.
China's official PMIs were little changed in August, with the manufacturing gauge up trivially to 51.3, from 51.2 in July and the non-manufacturing gauge up to 54.2, from 54.0.
The deterioration of global risk appetite and, in particular, domestic politics have put the Brazilian real under severe pressure in recent weeks.
Markets will be extremely sensitive to economic data in the run-up to the MPC's next meeting on August 3, following signals from several Committee members that they think the cas e for a rate rise has strengthened.
The biggest single surprise in the second quarter GDP report was the unexpected $28B real-terms drop in inventories.
Six developments over the summer have increased the likelihood that the government will make concessions required to preserve unfettered access to the single market after formally leaving the EU in March 2019.
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.
The Brazilian Central Bank's policy board--the Copom--met expectations on Wednesday, voting unanimously to keep the Selic rate on hold at 6.50%.
Japan's unemployment rate edged back up to 2.5% in February after the drop in January to 2.4%.
LatAm currencies have risen against the USD so far this year, easing the upward pressure on imported good prices and allowing most central banks to cut interest rates. The first direct effects of stronger currencies should be felt by firms which import high-turnover intermediate or final goods.
The national accounts, released today, likely will restate that quarter-on-quarter GDP growth held steady at 0.4% in Q4.
The publication yesterday of the first BCB quarterly inflation report under the new president, Ilan Golfajn, revealed his initial views on inflation, the currency, and monetary policy. Overall, Mr. Golfajn has taken a hawkish approach. We think Brazil's first rate cut will come no earlier than Q4, likely at the final meeting of the year, providing the government continues the fiscal consolidation process and inflation keeps falling.
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.
We learned last week that the U.S. no longer has a coherent dollar policy.
The picture for Korean quarterly real GDP growth in Q4 was unchanged in the final reading, published yesterday, showing a contraction of 0.2%, after the 1.4% jump in Q3.
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.
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" .
The picture of the economy's recent performance will be redrawn today, when the national accounts are published.
With almost two thirds of the nominal data for the third quarter now available, we can make a stab at the contribution of inventories to real GDP growth.
Brazil's current account deficit is stabilizing following an substantial narrowing since early 2015, thanks to the deep recession.
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.
Yesterday's advance inflation data in Germany fell short of forecasts--ours and the consensus--for a further increase. Inflation was unchanged at 0.8% year-over-year in November, but we think this pause will be temporary.
Economic reports released yesterday indicate that the German economy was off to a solid start early in the second quarter. Industrial production rose 0.9% month-to-month in April, equivalent to a 1.4% increase year-over-year, up from a revised tiny 0.2% gain in March. This is the biggest annual jump in production since July last year, but the underlying trend is turning up only slowly, in line with the moderate improvement in survey data this year.
The recovery of some key commodity prices, policy action in China, and stronger expectations that the U.S. Fed will start hiking rates later during the year, have helped reduce volatility in LatAm financial markets. Oil prices have rise by around 20% year-to-date, iron ore prices are up about 60% and copper has risen by 7%.
April's 2.0% month-to-month leap in industrial production was the biggest upside surprise on record to the consensus forecast, which predicted no change. The surge, however, just reflects statistical and weather-related distortions. These boosts will unwind in May, ensuring that industry provides little support to Q2 GDP growth. Make no mistake, the recovery has not suddenly gained momentum.
The industrial sector went from strength to strength in 2017. Year-over-year growth in production picked up to 2.1%--its highest rate since 2010--from 1.3% in 2016.
The failure of the Markit/CIPS services PMI to rebound fully in April, following its fall in March, provides more evidence that the economy is in the midst of an underlying slowdown.
The 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 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.
Friday's industrial production data in Germany added to the manufacturing optimism following the sharp rise in new orders--see here--reported earlier in the week.
We have no reason to think the underlying trend in payroll growth has changed--the 235K average for the past three months is as good a guide as any--but the balance of risks points clearly to a rather lower print for August. Two specific factors, neither of which have any bearing on the trend, are likely to have a significant influence on the numbers, and both will work to push the number below the 217K consensus.
The news-flow in the Eurozone was almost unequivocally bad over the summer.
The recent softening in the ISM employment indexes failed to make itself felt in the June payroll numbers, which sailed on serenely even as tariff-induced chaos intensified at the industry and company level.
Japanese average regular wages increased at an annualised rate of 0.6% in the three months to August compared with the previous three months, matching the rate in July.
The Caixin manufacturing headline was unremarkable, but the input price index signals that PPI inflation is set to rise again in May, to 4.0%-plus, from 3.4% in April.
In yesterday's Monitor we suggested that China's profits surge has been party dependent on developers' risky debt issuance practices.
Our Chief Eurozone Economist, Claus Vistesen, is covering the Italian situation in detail in his daily Monitor but it's worth summarizing the key points for U.S. investors here.
The outlook for Argentina is improving. We expect economic growth to remain quite strong over the next year, despite a relatively soft start to 2017 and increasing external threats in recent weeks. The INDEC index of economic activity--a monthly proxy for GDP--is volatile, rising 1.9% month-to-month in March after a 2.6% drop in February, but the underlying trend is improving.
The national accounts look set to show that GDP growth in the fourth quarter was even stronger than previously estimated. Earlier this month, quarter-on-quarter growth in construction output in Q4 was revised up to 1.2%, from 0.2%. As a result, construction's contribution to GDP growth will rise by 0.07 percentage points.
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.
LatAm, particularly Mexico, has dealt with Donald Trump's presidency better than expected thus far. Indeed, the MXN rose 10.7% against the USD in Q1, the stock market has recovered after its initial post-Trump plunge, and risk metrics have eased significantly.
Friday's German new orders data were sizzling. Factory orders jumped 3.6% month-to-month in August, pushing the year-over-year rate up to a nine-month high of 7.8%, from an upwardly-revised 5.4% in July.
Yesterday's industrial production data in Germany were better than we feared. Output slipped 0.3% month-to-month in August, depressing the year- over-rate to -0.4% from 1.6% in July, a minor fall given evidence of a big hit from weakness in the auto sector ahead of the EU emissions tests.
Friday's Brazilian industrial production data were relatively positive. Output was unchanged month-to-month in May, and April's marginal gain was revised slightly higher. The flat monthly reading pushed year-over-year growth in output up marginally to -8.9% from -9.1%. May production rose month-to-month in two of the four major categories.
Brazil's manufacturing PMI edged down to a six-month low of 45.2 in December, from 46.2 in November. This marks a disappointing end to Q4, following a steady upward trend during the first half of the year, as shown in our first chart. December's new work index fell to 45.2 from 47.7 in November, driving a slowdown in production, purchases of materials, and employment. The new export orders index also deteriorated sharply in December, falling close to its lowest level since mid-2009.
Brazil's external accounts were a bright spot last year, again.
The Q2 GDP figures show that the economy has little underlying momentum.
China's 1.8% downshift in the RMB/dollar reference rate will make only a microscopic difference to the pace of U.S. economic growth and inflation. It will not deter the Fed from raising rates if the domestic labor market continues to tighten, as all the data suggest. The drop in the RMB merely restores the nominal exchange rate to its fall 2012 level, since which time the real exchange rate has risen by some 20%, according to the BIS.
Friday's weekly report on the assets and liabilities of U.S. commercial banks will complete the picture or March and, hence, the first quarter. It won't be pretty. With most of the March data already released, a month-to-month decline in lending to commercial and industrial companies of about 0.7% is a done deal. That would be the biggest drop since May 2010, and it would complete a 1% annualized fall for the first quarter, the worst performance since Q3 2010. The year-over-year rate of growth slowed to just 5.0% in Q1, from 8.0% in the fourth quarter and 10.3% in the first quarter of last year.
EZ investors remain depressed. The headline Sentix confidence index fell to 12.0 in September, from 14.7 in August, and the expectations gauge slid by three points to -8.8.
Japan is the only major advanced economy to have recently experienced an exchange rate depreciation as large as Britain's. Between July 2012 and May 2013, the yen f ell by 24%, matching sterling's depreciation since its peak in August 2015.
The sudden downshift in core inflation at the consumer level since March, clearly visible in the CPI and the PCE, and shown in our first chart, has been accompanied by a steady increase in core producer price inflation.
Hopes that GDP growth might be boosted soon by a pick-up in net exports continue to be undermined by the latest data.
January's consumer price figures, due on Tuesday, likely will show that CPI inflation held steady at December's 3.0% rate.
Mexico's inflation nudged up to a fresh 16-year high in August, but the details of the report confirmed that underlying pressures are easing, in line with our core view.
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.
The popular belief that economists rarely agree about anything is reinforced by the extremely wide dispersion of forecasts for March industrial production. The forecasts range from the wildly optimistic prediction of a 1.9% month-to-month rise, to a downright miserable 0.3% decline. We think production rose by about 0.5% month-to-month, and this likely will be interpreted as a decent result, following the recent run of bad news.
French manufacturing came roaring back at the end of Q1. Industrial production jumped 2.0% month-to- month in March, driving the year-over-year rate higher to +2.0%, from a revised -0.7% in February.
Mexico's inflation remains the envy of LatAm, having consistently outperformed the rest of the region this year. Headline inflation slowed marginally to 2.5% in October, a record low and below the middle of Banxico's target, 2-to-4%, for the sixth straight month. The annual core rate increased marginally to 2.5% in October from 2.4% in September, but it remains below the target and its underlying trend is inching up only at a very slow pace. We expect it to remain subdued, closing the year around 2.7% year-over-year. Next year it will gradually increase, but will stay below 3.5% during the first half of 2016, given the lack of demand pressures and the ample output gap.
French industrial production data surprised to the upside yesterday. Output rose 0.1% month-to-month in September, a solid gain following an upwardly-revised 1.7% rise in August, and also higher than the consensus, forecast for a 0.4% fall. The details, however, were less upbeat than the headline. Transport equipment fell, as expected, following production being pushed forward ahead of the Summer holidays. But this story was overshadowed by a 22.5% month-to-month jump in oil refining-- included in manufacturing--as refineries resumed full production following maintenance over the summer.
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.
Japan's official seasonally adjusted current account surplus rose to ¥2.27T in August from ¥2.03T in July. But we don't trust the seasonals, and our adjustment model shows the surplus fell slightly, to ¥1.91T in August. A further small decline likely is coming in Q4.
Eurozone capital markets have been split across the main asset classes this year. Equity investors have had a nightmare. The MSCI EU ex-UK index is down 10.6% year-to-date, a remarkably poor performance given additional QE from the ECB and stable GDP growth. Corporate bonds, on the other hand, are sizzling.
Predictably, last weekend's G7 meeting in Canada ended in acrimony between the U.S. and its key trading partners.
A dearth of properties for sale has helped to ensure that house prices have continued to rise since the Brexit vote, despite weaker demand. But now, signs are emerging that demand and supply are coming closer to balance
Claims abound that sterling's sharp depreciation since the start of the year--to its lowest level against the dollar since May 2010--partly reflects the growing risk that the U.K. will vote to leave the European Union in the forthcoming referendum. We see little evidence to support this assertion. Sterling's decline to date can be explained by the weakness of the economic data, meaning that scope remains for Brexit fears to push the currency even lower this year.
This week brings a wave of data on all aspects of the economy, bar housing. By the end o f the week, we'll have a better idea of the shape of consumers' spending, the industrial sector and the inflation picture, and estimates of third quarter GDP growth will start to mean something.
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.
The second presidency of Chile's conservative Sebastián Piñera, a billionaire turned politician, began on Sunday, March 11, in favourable economic circumstances.
In her inaugural Monitor, our Chief Asia Economist Freya Beamish plots three scenarios for the Chinese economy. The best-case scenario is that China makes a smooth transition to consumer-led growth.
Mexico has been one of LatAm's highlights in terms of financial markets and currency performance in recent months.
The Spanish economy remains the stand-out performer in the Eurozone, but recent data suggest that growth is slowing.
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.
Last week's official data supported our forecast that GDP growth likely will slow further in Q1, suggesting that a May rate hike is not the sure bet that markets assume.
It often is argued that the MPC will raise interest rates in November--even if the economic data are not pressuring the Committee to tighten--because markets would go into a tailspin if the MPC failed to meet their expectations.
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.
Revisions to Japan's real GDP growth, on Monday, left Q2 blisteringly hot.
The Board of the Bank of Korea will meet again in less than a week's time for this year's penultimate meeting.
Inflation appears no longer to be an issue for Mexican policymakers. The annual headline rate slowed to 3.0% year-over-year in February from 3.1% in January, in the middle of the central bank's target range, for the first time since May 2006.
If the CPI measure of core consumer goods inflation were currently tracking the same measure in the PPI in the usual way, core CPI inflation would now be at 2.3%, rather than the 1.7% reported in November.
March's consumer price figures, released tomorrow, look set to show that inflation's ascent was kept in check by the later Easter this year compared to last. Nonetheless, CPI inflation will take big upward strides over the coming months, and it likely will exceed 3% by the summer.
The distortions in European fixed income markets have intensified following the initiation of the ECB's sovereign QE program. In the market for sovereigns, German eight-year bond yields are within a touching distance of falling below zero, and this week Switzerland became the first country ever to issue a 10-year bond with negative yields.
The Markit/CIPS PMIs for August, slated for release over the next three business days, will be closely watched. They have provided the most resounding indication, so far, that Britain is heading for a recession. In July, the composite PMI--comprised of the manufacturing and services indices--fell to 47.5, from 52.4 in June, its biggest month-to-month fall since records began in 1998.
China's FX reserves were relatively stable in March, with the minimal increase driven by currency valuation effects.
The first of this week's two July inflation reports, the PPI, will be released today. With energy prices dipping slightly between the June and July survey dates, the headline should undercut the 0.2% increase we expect for the core by a tenth or so.
External demand for the Eurozone's largest economy is going from strength to strength. Seasonally adjusted German exports rose 3.4% month-to-month in December, equivalent to a solid 7.5% increase year-over-year.The revised indices show that the annualised surplus rose to an all-time high of €218B, or 7% of GDP, last year, indicating that the level of external savings remains a solid support for the economy.
The German manufacturing sector is showing signs of stabilisation with industrial production rising 0.2% month-on-month in October, equivalent to 0.8% year-over- year. This is consistent with a decent retracement in production this quarter, but growth is still only barely above zero.
The U.K.'s still-large current account deficit makes us nervous that sterling will need to depreciate further over the medium-term and would collapse if Brexit talks fail, causing international investors to take flight.
The political limbo in Italy currently appears to have three possible solutions, in the short term. The 5SM and Lega can try to form a coalition, again.
Markets were on the right side of the argument with economists about the outlook for monetary policy in 2015, but we doubt history will repeat itself this year. The consensus among economists a year ago was for interest rates to rise to 0.75% from 0.5% by the end of 2015, in contrast to the markets' view that an increase was unlikely.
Brazil's economic news this week remained bleak at the headline level, but some of the details were less terrible in than in recent months. Industrial production fell by a worse-than-expected 11.9% year-over-year in December, marginally up from the 12.4% drop in November.
The huge rebound in September's ISM non- manufacturing survey, reported yesterday, strongly supports our view that the August drop was more noise than signal.
The headline 0.9% month-to-month increase in German factory orders--a 1.9% increase year-over-year-- is not enough to change the picture of an overall sluggish first quarter.
External conditions continue to favour Brazil. The recovery in domestic demand in the world's major economies, particularly the rebound in business investment, has driven a gradual revival of global exports.
Yesterday's first estimate of Q2 GDP in Mexico confirmed that the economy lost momentum in recent months.
Yesterday's economic data in Germany were stellar, but base effects mean that the story for Q4 as a whole is less upbeat.
The stagnation of industrial production in October ended a run of six consecutive month-to-month increases, the longest spell of unbroken growth since 1994.
The Mexican economy's brightest spot continues to be private consumption.
Final inflation in the Eurozone was confirmed at 0.0% year-over-year in April, up slightly from -0.1% in March. The recovery since the trough in January has been driven mostly by a reduced drag from lower energy prices, a trend which should continue in the second quarter.
Yesterday's CPI report in Mexico confirmed that headline inflation edged higher, to 5.0% in September from 4.9% in August, as the mid-month inflation index suggested.
Industrial production hit its stride last year, notching up eight consecutive month-to-month gains--the longest run of unbroken growth since May 1994--before a setback in December, which was triggered by the temporary closure of the Forties oil pipeline.
The MPC's asserted its independence in the minutes of December's meeting, firmly stating that there is "no mechanical link between UK policy and those of other central banks". Markets have interpreted this as supporting their view that the MPC won't be rushed into raising interest rates by the Fed's actions. Investors now expect a nine-month gap between the Fed hike we anticipate next week, and the first move in the U.K.
The resilience and adaptability that the Chilean economy has shown over previous cycles has been tested repeatedly over the last year. Uncertainty on the political front, falling metal prices, and growing concerns about growth in China have been the key factors behind expectations of slowing GDP growth.
The 16-page document--see here--detailing the agreement allowing the EU and the U.K. to move forward in the Brexit negotiations is predictably tedious.
The hard data now point to a horrendous Q3 GDP print in Germany, which almost surely will constrain the advance EZ GDP print released on October 30.
Yesterday's economic data in Germany cemented the story of a strong start to the year, despite the disappointing headlines. Industrial production slipped 0.4% month-to-month in March, pushing the year-over-year rate down to +1.9% from a revised +2.0% in February.
Business investment has held up better than most economists--ourselves included--expected after the Brexit vote.
The two major central banks of Asia have chosen hugely divergent policies. The BoJ has chosen to fix interest rates, while the PBoC appears set on preventing a meaningful depreciation of the currency.
China's FX reserves were little changed in June, at $3,112B.
It has been mostly doom and gloom for euro area investors in equities and credit this year.
News yesterday that exports surged to a record high in April was leapt on as "evidence" that sterling's Brexit-related weakness already is having positive side-effects and that therefore the economy would be relatively unscathed by a Brexit. However appealing this explanation may sound, it is nonsense.
Another weekend, another summit, but the sense of urgency is acute this time. Greece, and the rest of the world, will likely have to prepare for Grexit if Mr. Tsipras' final proposal is rebuffed by the EU. We expect a deal, with Greece to remain in the Eurozone, but visibility is limited and uncertainty is high.
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.
Friday was a busy day in the Eurozone economy. The third detailed GDP estimate confirmed that growth was unchanged at 0.4% quarter-on-quarter in Q2, pushing the year-over-year rate down by 0.4 percentage points to 2.1%, marginally below the first estimate,2.2%.
The construction sector in the Eurozone probably stumbled in March. Advance data for the major economies suggest that output fell 1.2% month-to-month, pushing the year-over-year rate down to 1.6% from 2.4% in February.
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.
NAFTA-related news has been mixed over the last few weeks.
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.
A powerful cocktail of cheap money, labour and commodities, allowed to infuse by a hiatus in the government's austerity programme, has reinvigorated the U.K. economy over the last three years. But these supports are now weakening while new headwinds are emerging. The U.K. economy is heading for a pronounced slowdown, one that is under-appreciated by most forecasters and under-priced by markets.
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.
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.
The ECB won't make any major changes to its policy stance today. We think the central bank will keep its main refinancing rate unchanged at 0.00%, and that it will maintain its deposit and marginal lending facility rate at -0.4% and 0.25%, respectively. The central bank also will keep the pace of QE unchanged at €80B per month until March, and at €60B hereafter until December. This is the first ECB meeting for some time in which Mr. Draghi will be able to report significantly higher inflation in the euro area.
Mexico's central bank, Banxico, last night capitulated again, reacting to the depreciation of the MXN by increasing interest rates by 50bp--for the fourth time this year--to 5.25%.
Our forecast that CPI inflation will return to the 2% target by the end of 2018 sets us apart from the MPC and consensus, which expect a more modest decline, to 2.4%.
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.
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.
No subject in the EZ economy is a source of more dispute than Germany's ballooning current account surplus. The Economist recently identified he German surplus as a problem for the world economy.
Data released over the weekend confirm that the Peruvian economy enjoyed a strong second quarter. The economic activity index rose 6.4% year-over-year in May, well above market expectations, and up from 3.2% in Q1.
The half-way point of the quarter is not, alas, the half-way point of the data flow for the quarter.
Chinese residential property prices appear to be staging a comeback, with new home prices rising 1.1% month-on-month in June, faster than the 0.8% increase in May.
Mr. Trump laid out plans yesterday to impose a new 10% tariff on a further $200B-worth of imports from China, to be levied from next week.
In the wake of last week's national accounts release, markets judge that the probability of a Bank Rate hike at the August 2 MPC meeting has increased to about 65%, from 60% beforehand.
EURUSD has been battered in recent months, falling just over 6% since the end of April, but almost all indicators we look at suggest that the it will weake further towards 1.10, in the second half of the year.
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.
Eurozone current account data yesterday provided further evidence of stabilisation in the economy despite a headline deterioration. The adjusted current account surplus fell to €18.1B in November from a revised €19.5B in October, but the decline was mainly driven by an increase in current transfers; the core components remain solid.
Venezuela is on the brink o f economic and social collapse. Looting, food scarcity, power rationing, and other problems have become rampant. This week, Venezuela's government allowed citizens to flock across the Colombian border to shop for food and medicine, for the second time this month. Last year, Venezuela's President Maduro shut the border in a bid to crack down on smuggling of subsidized products.
The Eurozone's current account surplus slipped at the start of Q2, falling to €28.4B in April from an upwardly-revised €32.8B in March.
Japanese PPI inflation continues to be driven mainly by imported metals and energy price inflation. Metals, energy, power and water utilities, and related items, account for nearly 30% of the PPI.
China announced the appointment of key political and financial jobs yesterday.
The euro area's current account surplus stumbled at the end of 2017, falling to €29.9B in December from an upwardly-revised €35.0B 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.
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 253K increase in May private payrolls reported by ADP yesterday was some a bit stronger than our 225K forecast. Plugging the difference between these numbers into our payroll model generates our 210K forecast for today's official number.
Brazil's GDP growth slowed to just 0.1% quarter- on-quarter in Q4, from an upwardly-revised 0.2% in Q3. This pushed the year-over-year rate up to 2.1%, from 1.4%, but this was weaker than market expectations.
Sterling continued to recover last week, hitting its highest level against the dollar since October, despite a series of data releases indicating that the economy is losing momentum. Indeed, sterling was unscathed by the news on Friday that quarter-on-quarter GDP growth slowed to just 0.3% in Q1, from 0.7% in Q4.
Markets tend to ignore Eurozone construction data, but we suspect today's report will be an exception to that rule. Our first chart shows that we're forecasting a 8.5% month-to-month leap in February EZ construction output, and we also expect an upward revision to January's numbers.
China's September PMIs, most of which were released over the weekend, mark out a clear downtrend in activity since late last year.
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.
Demand for new cars in the Eurozone bounced back strongly last month. Accelerating growth in the major economies lifted new registrations by 14.6% year-over-year in February, up from a 6.8% increase in January. Surging growth in Italy was a key driver, with new registrations jumping 27.3%, up from an already sizzling 17.4% in January.
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%.
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.
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.
China's import growth in dollar terms slowed sharply to 4.5% year-over-year in December from 17.7% in November, significantly below the consensus forecast.
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.
Mexico's latest industrial production data were worse than we expected. Output rose just 0.1% month-to-month in September, pushing the year- over-year rate down to -1.3%, from a downwardly revised +0.2% in August.
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 minutes of the September 19/20 FOMC meeting record that "...it was noted that the National Federation of Independent Business reported that greater optimism among small businesses had contributed to a sharp increase in the proportion of small firms planning increases in their capital expenditures."
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.
We are easily excitable when it comes to monetary policy and macroeconomics, but we are not expecting fireworks at today's ECB meetings.
Korean credit markets have begun tentatively to recover after the rise in global interest rates at the end of last year.
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.
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.
The medium-term outlook in most LatAm economies is improving, though economic activity is likely to remain anaemic in the near term. The gradual recovery in commodity prices is supporting resource economies, while the post-election surge in global stock prices has boosted confidence. But country-specific domestic considerations are equally relevant; the growth stories differ across the region.
The EU and Greece finally managed to agree on the framework for a third bailout yesterday, conditional on ratification in the Greek and EU parliaments this week. Mr. Tsipras' capitulation to EU demands will increase tensions within Syriza, but we expect the opposition comfortably to offset any government dissenters in this week's vote.
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.
Investors face a busy EZ calendar today, but the second estimate of Q3 GDP, and the advance GDP data in Germany, likely will receive most attention. Yesterday's industrial production report in the Eurozone was soft, but it won't force a downward GDP revision, as we had feared.
Economic data are telling a story of a strengthening recovery, but downbeat investor sentiment points to a more difficult environment. The headline ZEW expectations index fell to a ten-month low of 12.1 in September, from 25.0 in August. This takes sentiment back to levels not seen before QE was announced, highlighting the increasing worry that deflation risks and low growth in China will derail the recovery. We don't agree, but we can't be sure the ECB thinks the same, and risks of additional stimulus this year have increased.
China's official real GDP growth is absurdly stable, but the risks in Q3 are tilted to the downside.
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.
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.
Leading indicators and survey data in Brazil still suggest a rebound from the relatively soft GDP growth late last year and in Q1.
With Russia and some other emerging economies now in full panic mode, the financial market story is sharply divided between two narratives. Either the plunge in global energy prices acts as positive catalyst by boosting real incomes and allowing most central banks to run easier monetary policy or it is a sign that risk assets are about to hit a deflationary wall.
Your correspondent is headed to the beach for the next couple of weeks, with publication resuming on Tuesday, September 4.
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 strong dollar is pushing down goods prices, but not very quickly. As a result, the sustained upward pressure on rents is gradually nudging core CPI inflation higher. It now stands at 1.9%, up from a low of 1.6% in January, and even relatively modest gains over the third quarter will push the rate above 2% by year-end. We can't rule out core CPI inflation ending the year at a startling 2.3%.
The second round of EZ GDP data on Friday confirmed the resilience of cyclical upturn. Real GDP in the euro area rose 0.5% quarter-on-quarter in Q1, up from 0.3% in Q4, and the fastest pace since the first quarter of last year. But the headline was slightly lower than the initial estimate, 0.6%, and consistent with our forecast before Friday's data.
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.
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.
Mr. Draghi's introductory statement before yesterday's hearing at the European Parliament repeated that the ECB will "review and possibly reconsider its monetary policy stance in March." But it didn't provide any conclusive smoking gun that further easing is a done deal.
China's money and credit data released last Friday reaffirm our impression that the tightening has gone too far.
It's hard for a central bank presiding over an ageing economy to achieve a core inflation target of close to 2%. In yesterday's Monitor, we showed that German core inflation has averaged a modest 1.3% in this business cycle, despite solid GDP growth. The picture isn't much better for the ECB if we look at France.
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.
Eurozone inflation pressures remained subdued in April. Today's final data likely will show that inflation fell to -0.2% year-over-year in April, from 0.0% in March. The main story in this report will be the reversal in services inflation from the March surge, which was due to the early Easter.
To answer the question: Yes, growth could hit 5% in the second quarter.
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.
Yesterday's detailed German GDP report raised more questions than it answered. The headline confirmed that growth accelerated to 0.4% quarteron- quarter in Q4, from 0.1% in Q3, leaving the year-over- year rate unchanged at 1.7%.
Last week's packed political agenda in Europe confirmed that political relations between the U.S. and the major Eurozone economies remain difficult.
The IFO did its part to alleviate the stock market gloom yesterday, with the business climate index rising slightly to 108.3 in August from 108.0 in July. The August reading doesn't reflect the panic in equities, though, and we need to wait until next month to gauge the real hit to business sentiment. The increase in the headline index was driven by businesses assessment of current output, with the key expectations index falling trivially to 102.2 from a revised 102.3 in July. This survey currently points to a stable trend in real GDP growth of about 0.4% quarter-on-quarter, consistent with our expectation of full year growth of about 1.5%.
China's Caixin manufacturing PMI edged down to 50.6 in August, from July's 50.8. This clashed with the increase in the official PMI, though the moves in both indexes were modest.
China's export growth surged to 44.5% year-over- year in February, from 11.2% in January. The timing of this news is unfortunate.
Rising political risks and NAFTA-related threats have put the MXN under pressure last month, driving it down 4.9% against the USD, as shown in our first chart.
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.
Donald Trump's inauguration on Friday might mark the beginning of a new era for both the U.S. and the global economy. For commodity-producing Latam countries, such as Chile, Peru and Colombia, attention will shift to Trump's proposed tax reforms, pro-business agenda and planning infrastructure spending. Mexico, on the other hand, will be grappling with Mr. Trump's trade and immigration policies.
The Prime Minister set out her blueprint for Brexit yesterday, asserting that the U.K. will leave the single market and potentially even the E.U.'s customs union in order to control immigration and regain lost sovereignty. She argued that "no deal is better than a bad deal", suggesting that the U.K. might even fall back on its membership of the World Trade Organisation as the basis for trading with the E.U., if her demands were not met.
All policymaking is about trade-offs; very few government decisions confer only benefits. Someone, or more likely some group, loses. Monetary policy is no exception to the trade-off rule.
The RMB has risen strongly in recent months, initially with the euro and the yen, but China's currency rose on a trade-weighted basis in August.
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.
We can see no hard evidence, yet, that the expanding trade war with China and other U.S. trading partners is hitting business investment.
We expect the BoK to hike this month, believing that it's necessary to curtail household debt growth now, in order to prevent a sharper economic slowdown as the Fed hiking cycle continues, China slows, and trade risks unfold.
Hopes that the economy will not slow over the next year are largely pinned on the idea that net trade will be boosted by the drop in sterling. The pound has tracked sideways over the last two months and is about 15% below its trade-weighted peak in November 2015.
The Eurozone's external surplus is on track for a record-breaking year in 2016. Data yesterday showed that the current account surplus rose to €28.4B in October, from €27.7B in September. The trade surplus in goods fell, but this drag was offset by a higher services and income surplus, and a lower current transfers deficit.
Our new Chief U.K. economist, Samuel Tombs, initiated his coverage yesterday with a sombre, non-consensus, message on the economy. Headwinds from fiscal tightening and net trade will weigh on GDP growth next year, but the BoE will likely have to look through such cyclical weakness, and hike as inflation creeps higher. An intensified drag from net trade in the U.K. will, other things equal, benefit the Eurozone. But a slowdown in U.K. GDP growth still poses a notable risk to euro area headline export growth, especially in the latter part of next year.
More evidence indicating that the recovery in global industrial activity is underway and gaining momentum- has poured in. In particular, trade data from China, one of LatAm's biggest trading partners, was stronger than the market expected last month. Both commodity import and export volumes increased sharply in January, and this suggests better economic conditions for China's key trading partners.
Don't fret over the slowdown in growth in the fourth quarter. The quarterly GDP data are volatile even after several rounds of revisions, and the advance numbers are full of assumptions about missing trade, inventory and capex data, which often turn out to be wrong.
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.
Data on industrial production and trade released last week have fanned hopes that the U.K.'s growth model is moving away from its excessive reliance on household spending, and towards production and exports. But a close look at the underlying drivers of the strong headline figures suggests that it is too soon to hope that the economy is undergoing a major rebalancing.
House purchase mortgage approvals by the main street banks jumped to 40.1K in January, from 36.1K in December, fully reversing the 4K fall of the previous two months, according to trade body U.K. Finance.
German exports had a sluggish start to the fourth quarter, falling 1.2% month-to-month in October. The monthly drop pushed the year-over-year rate down to 3.0% from 4.2% in September, well down from the 5.6% third quarter average and extending the loss of momentum in recent months. Imports fell 3.6%, so net exports rose, but it's too early to make any useful estimates of net trade in the fourth quarter as a whole.
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.
China Takes the Trade High Road..The BOJ will Act Before Markets Expect Unemployment Upshift Rules out 2018 BOK Hike
Trade talk and falling stocks are hurting...but the fed is still on course for four hikes this year
Rising Inflation has ended the consumer boom...Investment and Trade won't fill the void
The last few weeks' action in Eurozone financial markets has shown investors that the QE trade is not a one-way street. Higher short-rates could force the ECB to take preventive measures, but we don't think the central bank will be worried about rising long rates unless they shoot much higher.
The 12-month average German trade surplus continues to set records, rising to €18.2B in January, but exports started the quarter on a weak note, falling 2.1% month-to-month in January, equivalent to a mere 1.9% rise year-over-year.
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.
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.
The euro's spectacular rise against the pound has been the key story in European FX markets recently. But the trade-weighted euro, however, is up "only" 6% year-to-date, as a result of the relatively stable EURUSD.
Yesterday's industrial production, construction output and trade data for November collectively suggest that the economy lost a little momentum in the fourth quarter. GDP growth likely slowed to 0.5% quarter-on-quarter in Q4, from 0.6% in Q3. Growth remains set to slow further this year, as inflation shoots up and constrains consumers.
The first quarter probably saw continued weakness in German net trade, despite the modest February rebound in gross exports. The seasonally-adjusted trade surplus rose to €19.7B from €18.7B in January, lifted by a 1.3% month-to-month rise in exports, which offset a 0.4% increase in imports.
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.
Overall, the Chinese October data paint a picture of continued weakness in trade, with PPI inflation still high but the rate of increase finally slowing.
The Chilean economy improved in the first quarter, growing 2.0% year-over-year, up from 1.3% in the fourth quarter. Net trade led the improvement, with exports rising 2.1% quarter-on-quarter, thanks to the modest rise in metal prices and an increase in exports of services, especially tourism.
The CPI inflation rate for non-energy industrial goods--core goods, for short--has tracked past movements in trade-weighted sterling closely over the last ten years, because virtually all goods in this sector are imported.
One of the key characteristics of this euro area business cycle has been near-zero inflation due to structurally weak domestic demand and depressed prices for globally traded goods and commodities. This has supported real incomes, despite sluggish nominal wage growth.
In theory, June should be a crunch month for Theresa May's Brexit plans. The Prime Minister will meet EU leaders on June 28 and hopes to have found a consensus in cabinet by then for how the U.K. will trade with the EU outside of the customs union.
In trade-weighted terms, sterling finished 2017 just 1% higher than at the start of the year, reversing little of 2016's 14% drop.
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.
Sterling strengthened last week to its highest tradeweighted level since mid-May, amid hopes that the U.K. government will concede more ground to ensure that the European Council deems, at its December 14 meeting, that "sufficient progress" has been made in Brexit talks for trade discussions to begin
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.
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.
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.
The Big Picture on Sino - U.S. Trade Wars...The Immediate Threat and the Medium-Term Risks
China's official manufacturing PMI slipped in June, but the overall picture for Q2 is sound despite the uncertainty posed by rising trade tensions with the U.S.
LatAm assets have done well in recent weeks on the back of upbeat investor risk sentiment, low volatility in developed markets and a relatively benign USD. A less confrontational approach from the U.S. administration to trade policy has helped too.
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.
August's mortgage lending data from the trade body U.K. Finance provided more evidence that the pick-up in housing market activity in Q2 simply reflected a shift from Q1 due to the disruptive weather, rather than the emergence of a sustainable upward trend.
The U.K.'s dysfunctional cabinet will meet at the Prime Minister's country retreat today to agree--finally--on a set of proposals for how Britain will trade outside of the E .U.'s customs union and single market.
An array of data today will be mostly positive, and even the most likely candidate for a downside surprise--the October advance trade numbers--is very unlikely to change anyone's mind on the Fed's December decision. On the plus side, the first revision to third quarter GDP growth should see the headline number dragged up into almost respectable territory, at 2.4%, from the deeply underwhelming 1.5% initial estimate.
Real GDP in Germany grew 0.7% quarter-on-quarter in Q4, thanks mainly to a 0.4% contribution from private consumption, and a 0.2% boost from net trade. Household consumption grew 2.2% annualised in 2014, the best year for German consumers since 2006.
Most LatAm currencies traded higher against the USD yesterday, adding to the gains achieved after Donald Trump's inauguration last Friday. The MXN, which was the best performer during yesterday's session, was up about 0.8%; it was followed by the CLP, and the BRL. The positive performance of most LatAm currencies, especially the MXN, is related to positioning and technical factors.
If the plunge in the stock market last week, and especially Friday, was a entirely a reaction to the slowdown in China and its perceived impact on other emerging economies, then it was an over-reaction. Exports to China account for just 0.7% of U.S. GDP; exports to all emerging markets account for 2.1%. So, even a 25% plunge in exports to these economies-- comparable to the meltdown seen as global trade collapsed after the financial crisis--would subtract only 0.5% from U.S. growth over a full year, gross.
Figures yesterday from U.K. Finance--the new trade body that has subsumed the British Bankers' Association--showed that the mortgage market recovered over the summer.
Korean 20-day exports are volatile and often miss the mark with respect to the full-month print. But these data offer the month's first look at Asian trade, and we often find value in these early signs.
Brazil's external accounts were the bright spot last year, once again, but the ne ws will soon take a turn for the worse. The current account deficit fell to just USD24B last year, or 1.3% of GDP, from USD59B in 2015. The improvement was driven by the trade surplus, which rose to USD48B, the highest since 1992, when the comparable data series begins. A 20% plunge in imports, coupled with a mere 3% dip in exports, explain the rising trade surplus.
The period of surprisingly low inflation following sterling's plunge when the UK left the Exchange Rate Mechanism in September 1992 appears to challenge our view that inflation will overshoot the MPC's 2% target over the next couple of years. As our first chart shows, CPI inflation averaged just 2.5% in 1993 and 2% in 1994, even though trade-weighted sterling plunged by 15% and import prices surged.
It has been difficult to be an optimist about U.S. international trade performance in recent years. The year-over-year growth rate of real exports of goods and services hasn't breached 2% in a single quarter for two years.
Yesterday's figures from trade body U.K. Finance showed that January's pick-up in mortgage approvals was just a blip.
The IFO survey signals that markets shouldn't be too downbeat on the German economy, even as it faces uncertainty from global trade tensions.
We have tweaked our estimate for today's initial estimate of second quarter GDP growth, in the wake of yesterday's advance data on June foreign trade and inventories.
House purchase mortgage approvals by the main street banks jumped to 40.1K in January, from 36.1K in December, fully reversing the 4K fall of the previous two months, according to trade body U.K. Finance.
Mortgage approvals by the main high street banks collapsed to 36.1K in December--the lowest level since April 2013--from 39.0K in November, according to trade body U.K. Finance.
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.
Pantheon Macroeconomics' Chief Economist Dr. Ian Shepherdson provides unbiased, independent economic intelligence to financial market professionals.
Why is the EZ current account surplus rising and net exports falling at the same time?
Chief U.K. Economist Samuel Tombs discussing the devaluation of the GBP
Why is the EZ current account surplus rising and net exports falling at the same time?
With the Mexican Elections on July 1st, our Chief Latam Economist Andres Abadia has received many questions about the possible outcomes and how this will affect the Mexican economy going forward.
Chief U.S. Economist Ian Shepherdson discussing Durable Goods Orders in May
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