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China's current account surplus grew further in the final quarter of 2018, more than doubling to $54.6B, from $23.3B in Q3.
We would like to be able to argue with conviction that the surge in June housing starts and building permits represents the beginning of a renewed strong upward trend, but we think that's unlikely.
The recent increases in single-family housing construction are consistent with the rise in new home sales, triggered by the substantial fall in mortgage rates over the past year.
This week economic data highlighted the severity of Brazil's economic recession and the huge challenges it will face next year to return to growth. The recession further deepened in the third quarter with the economic activity index--a monthly proxy for GDP--surprising, once again, to the downside in September. The index fell 0.5% month-to-month, pushing the year-over-year rate down to 6.2%, the steepest fall on record. The series is very volatile on a monthly basis, but the underlying trend remains grim.
At the headline level, much of the recent U.S. macro dataflow has been disappointing. January retail sales, industrial production, housing starts, and both ISM surveys--manufacturing and non-manufacturing-- undershot consensus, following a sharp and unexpected drop in December durable goods orders.
One of the most surprising features of the economic recovery has been that households have not responded to the surge in house prices by releasing housing equity to fund consumption. Housing equity rose to 4.2 times annual disposable incomes in 2015, up from 3.7 in 2012. It has more than doubled over the last two decades.
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.
Brazil's lower house of Congress on Sunday voted to start impeachment proceedings against President Dilma Rousseff, who is accused of tampering with the public accounts to help secure her re-election in 2014. Ms. Rousseff's opponents obtained 367 votes, exceeding the two-thirds majority, needed to send the motion to the Senate.
The EZ's current account surplus is solid as ever, despite falling slightly in February to €35.1B, from an upwardly-revised €39.0B in January.
The INSEE business sentiment data in France continue to tell a story of a robust economy.
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.
The media and markets are waking up to the idea that the housing market has peaked in the face of higher mortgage rates and slightly--so far--tighter lending standards.
Politics are once again encroaching on the economic story in the Eurozone. At the ECB, this week has so far been a tumultuous one.
The Eurozone's current account surplus almost surely fell further in Q4.
If the only things that mattered for the housing markets were the obvious factors--the strength of the labor market, and low mortgage rates--the sector would be booming. Activity is picking up, with new and existing home sales up by 23% and 9% year-over-year respectively in the three months to May, but the level of transactions volumes remains hugely depressed. At the peak, new home sales were sustained at an annualized rate of about 1½M, but May sales stood at only 546K. Adjusting for population growth, the long-run data suggests sales ought to be running at close to 1M.
The MPC's unanimous decision to keep Bank Rate at 0.75% and the minutes of its meeting left little impression on markets, which still see a higher chance of the MPC cutting Bank Rate within the next 12 months than raising it.
January's public finance data, released today, take on particular importance because they are the last to be published before the Chancellor delivers his first Budget on March 8. The public finances nearly always swing into surplus in January, primarily because the deadline for individuals to submit self-assessment--SA--tax returns for the previous fiscal year is at the end of the month. Firms also pay their third of four payments of corporation tax for their profits in the current fiscal year.
Brazil's current account data last week provided further evidence of stabilisation in the economy, despite the modest headline deterioration. The unadjusted current account deficit increased marginally to USD5.1B in January, from USD4.8B in January 2016, but the underlying trend remains stable, at about 1.3% of GDP. Our first two charts show that the overall deficit began to stabilize in mid-2016, as the rate of improvement in the trade balance slowed, reflecting the easing of the domestic recession.
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.
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.
We have been asked several times in recent days whether a pick-up in stockbuilding, as part of businesses' contingency planning for a no-deal Brexit, could cause the economy to gather some pace in the run-up to Britain's scheduled departure from the EU in March 2019.
Brazil's September industrial production report, released yesterday, confirmed the message from survey data that the sector stabilized towards the end of summer. Output rose 0.5 month-to-month, and August output was revised up by 0.3 percentage points.
Investors moved rapidly last week to price-in renewed easing by central banks around the world, in response to the rapid growth in coronavirus cases outside China and the resulting sell-off in equity markets.
We expect August's retail sales figures, released on Thursday, to surprise modestly to the upside, supporting the MPC's view--which it will reaffirm later that day--that no fresh monetary stimulus is required any time soon.
The Eurozone's external surplus weakened at the start of Q3.
It would be a serious mistake to conclude from July's retail sales figures that consumers' spending will be immune to the fallout of the Brexit vote. Households have yet to endure the hiring freeze and pay squeeze indicated by surveys of employers, or the price surge signalled by sterling's sharp depreciation. The real test for consumers' spending lies ahead.
CPI inflation held steady at 1.5% in November, marking the fourth consecutive below-target print, though it was a tenth above both the MPC's forecast and the consensus.
Today brings the September housing construction report, which likely will show that activity was depressed by the hurricanes.
The declines in headline housing starts and building permits in September don't matter; both were driven by corrections in the volatile multi-family sector.
The slowdown in households' real incomes has taken a swift toll on the housing market this year. Measures of house prices from Nationwide, Halifax, LSL and Rightmove essentially have flatlined since the end of 2016, following four years of rapid growth, as our first chart shows.
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.
Japan's trade deficit has bottomed out. The unadjusted shortfall narrowed to -¥833B in May,
Historical evidence suggests that we should be worried about the relative weakness in the Eurozone's manufacturing sector. Industrial production ex-construction has historically been a key indicator of the business cycle, despite accounting for a comparatively modest 19% of total value-added in the euro area. In all three previous major downturns, underperformance in the manufacturing sector sounded the alarm six-to-nine months in advance that the economy was about to slip into recession.
House prices are on course to rise only by around 2% this year, the smallest increase for five years.
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.
Japan's adjusted trade balance flipped back to a modest surplus of ¥116B in February, after seven straight months of deficit.
Japan's economy contracted by 0.9% quarter-on- quarter in Q1, following a downwardly-revised 1.9% plunge in the previous quarter.
The Caixin manufacturing PMI rebounded to 51.1 in July from 50.4 in June, soundly beating the consensus for no change. The PMIs are seasonally adjusted but the data are much less volatile on our adjustment model. On our adjustment, the headline has averaged 50.9 so far this year, modestly higher than in the second half of last year.
We're reasonably happy with the idea that business sentiment is stabilizing, albeit at a low level, but that does not mean that all the downside risk to economic growth is over.
The gradual reopening of the major EZ economies continues, a process which is now accompanied by the inevitable concern that the virus is regaining a foothold.
We can't finalize our forecast for residential investment in the second quarter until we see the June home sales reports, due next week, but in the wake of yesterday's housing starts numbers we can be pretty sure that our estimate will be a bit below zero.
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.
Manufacturing does not consistently lead the rest of the economy. Neither does it consistently lag. On average, turning points in the rates of growth of manufacturing output and GDP are coincident, as our first chart clearly shows. But coincidence is not causality.
Slower growth in households' spending was the main reason why the economy lost momentum last year.
Global current account imbalances are back on the agenda. In the U.S., economic policies threaten to blow out the twin deficit, while external surpluses in the euro area and Asia are rising.
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.
Chancellor Sunak looks set to announce more fiscal stimulus next month to reinforce the economic recovery, despite recent record levels of public borrowing.
Political turmoil in Brazil continues to undermine President Dilma Rousseff's leverage over the economy. On Friday, the Lower House of Congress voted to start impeachment proceeding against Ms. Rousseff. She has until early April to present her defense against charges that she doctored government accounts and used graft proceeds to fund the 2014 electoral campaign.
The Eurozone's total external surplus hit the skids at the start of the year. Yesterday's report showed that the seasonally adjusted current account surplus plunged to a two-year low of €24.1B in January, from a revised €30.8B in December.
The Eurozone's external surplus rebounded further over the summer.
The Eurozone's current account surplus extended its decline in May, falling to a nine-month low of €22.4B, from €29.6B in April.
We see considerable downside risk to the consensus forecast that GDP increased by 0.4% quarter-on-quarter in Q4, the same as in Q3.
Today's market attention will be focused on the advance August PMI data in the major EZ economies. We think the composite PMI in the euro area was unchanged at 53.2 in August, consistent with stable GDP growth of 0.3%-to-0.4% quarter-on-quarter in Q3. The signal of "stability" in the Eurozone business cycle has been consistently relayed by the PMI since the beginning of the year.
The Mexican economy shrank by 0.2% quarter-on-quarter in Q2, according to the final GDP report, a tenth better than the preliminary reading. The year-over-year rate rose marginally to 2.5% from 2.4% in Q1. But the year-over-year data are not seasonally adjusted, understating the slowdown in the first half of the year, as shown in our first chart.
Whether the economy enters recession will hinge more on corporate behaviour than on consumers. Household spending accounts for about two thirds of GDP, but it is a relatively stable component of demand. By contrast, business investment and inventories--which are often overlooked--are prone to wild swings.
Today's data likely will show that EZ households' sentiment remained close to a record high at the start of the year.
All the regional PMIs and Fed business surveys are volatile in the short-term, so observations for single months need to be viewed with due skepticism.
We think of recessions usually as processes; namely, the unwinding of private sector financial imbalances.
Japan's CPI inflation jumped to 1.3% in August, from 0.9% in July.
Yesterday's barrage of French business surveys contains hundreds of indicators, but its central story is comfortably simple.
July's mortgage approvals data from the BBA brought clear evidence that households have held off making major financial commitments as a result of the Brexit vote. Following a 5% month-to-month fall in June, approvals fell a further 5.3% in July, leaving them at their lowest level since January 2015 and down 19% year-over-year.
On the face of it, the potential for a tangible boost to GDP growth from a revival in business investment after a no-deal Brexit has been averted appears modest.
Our base case remains that the slowdown in quarter-on-quarter GDP growth to about zero in Q2 is just a blip, and that the economy will regain momentum in Q3 and sustain it well into 2020.
You could be forgiven for being alarmed at the 1.5% decline in the stock of outstanding bank commercial and industrial lending in the fourth quarter, the first dip since the second quarter of 2017.
The proportion of households' annual incomes absorbed by servicing debt has declined steadily this decade, providing a powerful boost to spending. Indeed, the proportion of annual incomes accounted for by interest payments--mainly on mortgages--edged down a record low of 4.6% in Q1, less than half the share in 2008.
The flash readings of the Markit/CIPS surveys in February provide reassurance that GDP is on track to rebound in Q1, despite disruption to the global economy caused by the COVID-19 outbreak and bad weather in the U.K. this month.
While we were out last week, market nervousness over the Covid-19 outbreak intensified, though most key indicators of the spread of the infection continued to improve.
Yesterday's public finance figures showed that the public sector, excluding public sector banks, ran a surplus of £0.2B in July, a modest improvement on borrowing of £0.4B a year ago.
New home sales performed better during the winter than any other indicator of economic activity. At least, we think they did. The mar gin of error in the monthly numbers is enormous, typically more than +/-15%.
The national accounts for the third quarter, released on Wednesday, are likely to show that households are saving a very small proportion of their incomes. Low unemployment, subdued inflation and the healthier condition of households' balance sheets suggests that very low saving is more sustainable than in the past. Nonetheless, the low rate underlines that household spending can't grow at a faster rate than incomes for a sustained period again.
Whatever today's report tells us about existing home sales in January, the underlying state of housing demand right now is unclear. The sales numbers lag mortgage applications by a few months, as our first chart shows, so they're usually the best place to start if you're pondering the near-term outlook for sales. But the applications data right now are suffering from two separate distortions, one pushing the numbers up and the other pushing them down. Both distortions should fade by the late spring, but in they meantime we'd hesitate to say we have a good idea what's really happening to demand.
After a disappointing run of monthly data, the huge surplus on the main "PSNB ex ." measure of borrowing in January must have been greeted with relief at the Treasury.
The data tell an increasingly convincing story that the Eurozone's external surplus rose further in the second half of last year.
Fed Chair Yellen said in her press conference last week that she has "...been surprised that housing hasn't recovered more robustly than it has. In part I think it reflects very tight credit--continuing tight credit conditions for any borrower that doesn't have really pristine credit... my hope is that that situation will ease over time".
To imagine an unstoppable macroeconomic policy disaster and desperate improvisation, just think of Venezuela.
The Eurozone's external surplus remains solid, despite hitting a wall in August. The seasonally adjusted current account surplus fell to €17.7B in August from €25.6B in July, due to a €7B fall in the goods component. A 5.2% month-to-month collapse in German exports -- the biggest fall since 2009 -- was the key driver, but we expect a rebound next month. The 12-month trend in the Eurozone's external surplus continues to edge higher, rising to 3% of GDP up from 2.1% in August last year.
If the economy is to enter recession, falling business investment probably will have to be the main driver. Growth in consumer spending likely will slow sharply over the next year as firms become more cautious about hiring new workers and inflation begins to exceed wage growth again.
August's retail sales figures create a misleading impression that consumers can be relied upon to pull the economy through the next six months of heightened Brexit uncertainty unscathed.
The trend in public borrowing has improved significantly over recent months, but it is far too soon to conclude that the Chancellor is on track to meet his goal of running a budget surplus by the end of this decade. The recent economic slowdown has not impacted the public borrowing numbers, yet.
With Fed officials now in pre-FOMC meeting blackout mode, this week will not bring a repeat of Friday's confusion, when the New York Fed felt obligated to issue a clarification following president William's speech on monetary policy close to the zero bound.
A round of recent conversations with investors suggests to us that markets remain quite skeptical of the idea that the recent upturn in capital spending will be sustained.
Yesterday's barrage of survey data in France suggests that business sentiment in the industrial sector remained soft mid-way through Q4, but the numbers are more uncertain than usual this month.
The euro area's record-high external surplus has prompted commentators to suggest that the zone has room to loosen fiscal policy to support growth, or at least relax the deficit reduction rules.
October's surprise jump in public borrowing is not a material setback for the Chancellor, who will stick to his new Budget plans for modest fiscal stimulus next year.
The Eurozone's external surplus rebounded over the summer, reversing its sharp decline at the start of Q3.
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.
Even the most bullish estate agent in Britain would struggle to put a positive spin on the latest housing market news. The latest levels of the official, Nationwide, and Halifax measures of house prices all are below their peaks.
We advise strongly against concluding from the above-consensus rebound in retail sales in May that the economy is embarking on a healthy, V-shaped recovery, from Covid-19.
We pointed out in yesterday's Monitor that Fed Chair Yellen appears to be putting a good deal of faith in the idea that the recent upturn in core inflation is temporary. She argued that "some" of the increase reflects "unusually high readings in categories that tend to be quite volatile without very much significance for inflation over time".
The recent revival in housing market activity reflects more than just a temporary boost provided by imminent tax changes. The current momentum in market activity and lending likely will fade later this year, but we think this will have more to do with looming interest rate rises than a lull in activity caused by a shift in the timing of home purchases.
Hot on the heels of yesterday's news that the NAHB index of homebuilders' sentiment and activity dropped by two points this month -- albeit from December's 18-year high -- we expect to learn today that housing starts fell last month.
The idea that the ECB will use its forthcoming strategic policy review to include a measure of real estate prices in its inflation target has been consistently brought up by readers in recent meetings.
The record 0.4% drop in the core CPI in April would have looked even worse had it not been for favorable rounding; it was just 0.002% away from printing at -0.5%.
Analysis of the economy's potential to recover later this year from extreme weakness in Q2 has focussed largely on the extent to which virus-related restrictions will be lifted.
The recession in Brazilian consumers' spending continues, but the severity of the pain is easing. Retail sales plunged 0.9% month-to-month in March, pushing the year-over-rate down to -5.7%, from a revised -4.2% in February. The March headline likely was depressed by the early Easter.
The consensus forecast for the October core CPI, which will be reported today, is 0.2%. Take the over. Nothing is certain in these data, but the risk of a 0.3% print is much higher than the chance of 0.1%.
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.
Industrial production in the Eurozone fell a disappointing 0.1% month-on-month in January, driven by low output in Italy and Germany, as well as a large drop in Finland. But December production was revised up to 0.3% month-to-month, from the initially estimated 0.0%.
November production data in Mexico, released Monday, showed that the industrial economy remained quite soft in the last part of last year. The collapse in capital spending in the oil sector, slowing public spending, and weaker growth in EM and the U.S. manufacturing sector have combined to hit Mexican industrial output quite hard. Total production rose just 0.1% year-over-year in November, down from an already weak 0.5% in October, and below the 1.3% average increase in Q3. Output fell 0.5% month-to-month, the biggest drop since May, reflecting broad-based weakness.
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
Mexico's latest industrial production figures, released on Friday, showed that the recovery is stuttering. May output fell 0.9% year-over-year, down from the 1.2% gain in April. Total production was depressed by a 1.5% month-to-month drop in construction output, after two consecutive increases.
LatAm governments and policymakers are bracing for a more dramatic and longer virus-led downturn than initially expected.
Mexican manufacturing data continue to offer a counterweight to strong consumers' spending and services numbers. Output in the key manufacturing sector contracted by 0.2% month-to-month in September, due mainly to severe external headwinds. But the year-over-year rate was unchanged at 3.3%, with a flat underlying trend. Total industrial output, by contrast, rose 0.4% month-to-month in September, pushing the year-over-year rate up to 1.7%, from an upwardly-revised 1.1% gain in August.
Households remain the key driver of the cyclical recovery in the Eurozone. We have seen, so far, little sign that investment will be able convincingly to take over the baton if momentum in consumers' spending slows. The average rate of growth of investment since 2013 has been 0.5%, about two-thirds of the pace seen in previous cyclical upturns. Weakness in construction--about 50% of total euro area investment--has been one of the key factors behind of the under performance.
On Monday we highlighted the grim state of the Brazilian industrial sector, where output fell by a huge 5.8% year-over-year in November. By contrast, the outlook for Mexico's industrial sector is much brighter.
Japan's unadjusted current account surplus fell sharply in November, to ¥757B, from ¥1,310B in October.
Last week's evidence of still-strong wage growth in the EZ at the start of the year almost surely has gone unnoticed as markets focus on the prospect of rate cuts, not to mention more QE, by the ECB.
We're expecting to see the sixth straight drop in initial jobless claims this week, though we think the 2,500K consensus forecast is too ambitious.
Industrial production in India turned around sharply in November, rising by 1.8% year-over-year, following October's 4.0% plunge and beating the consensus forecast for a trivial 0.3% uptick.
We argued earlier this week that the data on the consumer economy are likely to be rather stronger than the industrial numbers.
Yesterday EZ industrial production report confirmed the message from advance country data that manufacturing rebounded towards the end of summer. Output, ex-construction, jumped 1.6% month-to-month in August, and the July data were revised up by 0.4 percentage points.
The housing market appears to be emerging gradually from the coma induced by Brexit uncertainty at the start of the year.
We argued a couple of weeks ago that the stock market could suffer a relapse, on the grounds that valuations hadn't fallen far enough from their peak to reflect the extent of the hit to the economy; that hopes for an early re-opening were likely to prove forlorn; and that investors were likely to be spooked by the incoming coronavirus data.
December's consumer prices report looks set to show that CPI inflation was stable at 1.5%--in line with the consensus--though the risks are skewed to the downside.
Today's industrial production report in the Eurozone will be poor.
Mexico's latest industrial production figures, released yesterday, showed that growth is stabilizing, but it likely will not accelerate any time soon. June output rose 1.4% year-over-year, rebounding from the 1.0% contraction in May, and matching April's gain. The increase in output was relatively broad-based, with solid gains in mining and utilities.
Brazil's benchmark inflation index, the IPCA, rose 0.5% unadjusted month-to-month in July, pushing the year-over-year rate down marginally to 8.7%, from 8.8% in June. Overall inflation pressures in Brazil are easing, especially in regulated prices, which have been the main driver of the disinflation trend this year. But market-set prices are still causing problems.
Yesterday's Mexican industrial data painted a downbeat picture of the sector at the end of last year, and highlighted the downside risks facing the economy in the first half of this year. Industrial output fell 0.1% month-to-month and was flat year over-year in December, with weakness in all sectors except manufacturing. Overall, industrial activity expanded by only 0.2% year-over-year in the fourth quarter, the slowest pace since late 2013.
June's RICS Residential Market Survey brings hope that the housing market already is over the worst.
Yesterday's industrial production report in Mexico added weight to the idea that the sector improved marginally in the first quarter, despite many external threats. Industrial output rose 0.1% month-to-month in February, following a similar gain in January. The calendar-adjusted year-over-year rate rose to -0.1%, after a modest 0.3% contraction in January.
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.
The stagnation of GDP in August, following five consecutive month-to-month gains, confirms that the economy's momentum in prior months was simply weather-related.
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.
The August NFIB survey of activity and sentiment at small businesses was soft, but it could have been worse.
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.
Mexico's industrial production report released yesterday brought encouraging news about the state of the economy, helping relieve some doubts about its health.
Eurozone manufacturing probably stalled at the start of the second quarter. We think industrial production rose a mere 0.1% month-to-month in April, lower than the 0.4% consensus forecast, and equivalent to a 0.8% increase year-over-year. Output ex-construction was up 0.8% in Germany, but this is likely to be offset by declines in France and Italy, and a hefty 3.2% fall in Greece.
Japan's GDP growth came roaring back in Q2, thanks to a strong rebound in private consumption, and an acceleration in business capex.
Industrial production in Mexico remained under pressure at the start of Q4. Output rose just 0.1% month-to-month in October, leaving the year-over-year rate unchanged at -1.4%, down from an average of -0.8% in Q3.
Today's industrial production data will confirm that EZ manufacturing suffered a slow start to Q4. Advance country data signal a 0.2% month-to-month fall in October, slightly worse than the consensus, 0.0%.
Japan's money and credit data have shown signs of life in recent months, but that's all set to change quickly, due to the disruptions caused by the outbreak of the coronavirus.
Mexico's February industrial production report was weaker than markets expected. Output expanded by 0.7% year-over-year, below the consensus, 1.2%, and slowing from 0.9% in January.
The key piece of evidence supporting our view that housing market activity has peaked for this cycle is the softening trend--until recently--in applications for new mortgages to finance house purchase.
One critical point emerged from last week's otherwise uneventful BoJ meeting: Governor Kuroda said that the BoJ might "adjust" rates before hitting the 2% inflation target.
Mexico's industrial sector did relatively well in Q3, due mainly to the resilience of the manufacturing sector, and the rebound in construction and oil output, following a long period of sluggishness.
LatAm economies this year have faced a tough external environment of subdued commodity prices, weaker Chinese growth, the rising USD, and the impending Fed lift-off. At the domestic level, lower public spending, low confidence, and economic policy reform have clashed with above-target inflation, which has prevented central bankers from loosening monetary policy in order to mitigate the external and domestic headwinds. In these challenging circumstances, LatAm growth generally continues to disappoint, though performance is mixed.
Korea's unemployment rate was unchanged in April, at 3.8%, beating even our below-consensus forecast for only a minor uptick, to 3.9%.
Collapsing energy prices continue to weigh on the headline inflation rate in the Eurozone's largest economy. Final September CPI data in Germany confirmed that inflation fell to 0.0% year-over-year from 0.2%, due to a 9.3% plunge in energy prices -- down from a 7.6% fall in August--mainly a result of a collapse in petrol price inflation. This comfortably offset an increase in food inflation to 1.1% from 0.8%, due to surging vegetable and fruit prices.
Brazil's government announced on Monday spending cuts and new tax increases, aiming to generate a 0.7% of GDP primary surplus, and so restore market confidence and avoid further credit rating downgrades. The plan is to reduce expenditure by BRL26B next year--or 0.4% of GDP--mainly through freezing public sector salaries and slashing social projects. These measures, especially the latter, will likely meet strong resistance in Congress. The salary freeze has more of a chance of passing, but reducing or closing some Ministries is a cost-cutting exercise with an extremely high political price.
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.
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.
Data on air quality in China provide some useful insights into the economic disruptions--or lack thereof--caused by the outbreak of the coronavirus from Wuhan and the government's aggressive containment measures.
Industrial production growth in China appears to be stabilising, following the slowdown in Q2.
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 House passage of a stimulus bill last Friday, seeking to ameliorate some of the damage done by the coronavirus outbreak, will not be nearly enough.
Today brings yet another broad array of data, with new information on housing construction, industrial production, consumer sentiment, and job openings.
We see downside risk to the housing starts numbers for April, due today. Our core view on housing market activity, both sales and construction activity, is that the next few months, through the summer, will be broadly flat-to-down.
Mexico's domestic conditions don't warrant an imminent rate hike in the near term. Headline inflation continues to fall, reaching an all-time low of 2.5% in October. It should remain below 3% in the coming months. And core prices remain wellbehaved, increasing at a modest pace, signalling very little pass-through of the MXN's depreciation. Economic activity gained some momentum in Q3-- this will be confirmed on Friday's GDP report--but demand pressures on inflation are absent and the output gap is still ample. Under these conditions, policymakers should not be in a rush to hike, but they have signalled once again that they will act immediately after the Fed.
If the collapse in oil sector capex and the strong dollar were going to push the industrial economy into recession, it probably would have started by now
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.
As warned--see our Monitor April 7--economic data in the Eurozone disappointed while we were away. Industrial production, ex-construction, in the euro area slipped 0.3% month-to-month in February, and the January month-to-month gain was revised down by 0.6 percentage point to +0.3%.
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 euro area's external surplus dipped at the start of Q4.
Our forecast that CPI inflation will return to the 2% target by the end of 2018 sets us apart from the MPC and consensus, which expect a more modest decline, to 2.4%.
The headlines of China's August activity data are missing the real story in recent months.
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.
Last week, the MBA's measure of the volume of applications for new mortgages to finance house purchase rose 1.7%.
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.
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 were surprised by the weakness of the April housing starts report; we expected a robust recovery after the March numbers were depressed by the severe snowstorms across a large swathe of the country. Instead, single-family permits rose only trivially and multi-family activity--which is always volatile--fell by 9% month-to-month.
We can see no hard evidence, yet, that the expanding trade war with China and other U.S. trading partners is hitting business investment.
Eurozone investors should by now be accustomed to direct intervention in private financial markets by policymakers.
The weekly jobless claims numbers are due Thursday, as usual, but in the wake of a flood of emails from readers, all asking a variant of the same question-- should we be worried about the rise in continuing jobless claims?--we want to address the issue now.
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.
Mexico's industrial recession deepened in April, though some leading indicators suggest that the worst is over as the economy gradually reopens. But downside risks have increased dramatically in recent weeks, as the pandemic seems to be gathering renewed strength.
China's trade surplus jumped to a six-month high of $46.8B in December, from $37.6B in November, on the back of a strong increase in exports.
Industrial production in Eurozone had a decent start to the fourth quarter. Output ex-construction rose 0.6% month-to-month in October, pushing the year-over-year rate up to 1.9% from a revised 1.3% in September. Production was lifted by gains in the major economies, and surging output in the Netherlands, Portugal and Lithuania. Across sectors, increases in production of capital and consumer goods were the main drivers, but energy output also helped, due to a cold spell lifting demand and production in France.
The hard economic data in Brazil were relatively solid while we were off last week, supporting our view that the economy was experiencing a good spell at the start of the year just before the coronavirus hit.
Today's advance Q2 GDP report in Germany will add evidence that the EZ economy performed strongly in the first half of 2017. We can be pretty sure that the headline will be robust. The German statistical office reports a confidential number to Eurostat for the first estimate of EZ GDP--two weeks ahead of today's data--which was a solid 0.6%.
Japanese real Q2 GDP growth surprised analysts, increasing sharply to a quarterly annualised rate of 4.0%, up from 1.0% in Q1 and much higher than the consensus, 2.5%. But its no coincidence that the jump in Japanese growth follows strong growth in China in Q1.
Last week's industrial report confirmed that the Mexican economy softened at the end of the second quarter. Industrial production was unchanged year- over-year in June, calendar-and seasonally adjusted, down marginally from +0.1% in May.
Industrial production bounced back in February. These data point to a reprieve for old-guard dirty industry, after stringent anti-pollution curbs were put in place in Q4.
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.
Markets expect RPI inflation--which still is used to calculate index-linked gilt payments, negotiate wage settlements, and revalue excise duties--to rise to only 2.7% a year from now, from 1.6% in June. By contrast, we expect RPI inflation to leap to 3.5%. As we outlined in yesterday's Monitor which previewed today's numbers, CPI inflation likely will shoot up to 3% from 0.5% over the next year.
You'd have to be very brave to take the weakness of yesterday's Empire State survey more seriously than the strong official industrial report published 45 minutes later. The hard data showed industrial production up 1.3% month-to-month, and only two tenths of that gain was explained by the cold weather, which drove up utility energy output.
The remarkable recent strength in retail sales continued into November, with total sales volumes rising by 0.2% and sales ex-motor fuels up by 0.5%. Those numbers aren't spectacular but they have to be seen in the context of October's huge 1.9% jump in sales ex-motor fuel; usually, after such a big gain we'd expect a correction the following month.
The 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.
Yesterday's wave of data suggested that a good part of the strength in final demand in the second quarter was sustained into the first month of this quarter, and perhaps the second too.
It has been clear for some months now that China's housing market is refusing to quit, and July's data showed the phoenix rising strongly from the ashes.
We expect September's consumer prices report, released on Wednesday, to show that CPI inflation held steady at 1.7%, below the 1.8% consensus.
The industrial production trajectory in Mexico looked strong going into Q3, but Friday's report for August threatens to change that picture.
"Is EZ fiscal stimulus on the way?" is a question that we receive a lot these days.
Data this week look set to emphasise that heat is returning to the housing market, again. The Financial Policy Committee--FPC--still has additional tools it could deploy to cool housing demand. But the root cause of surging house prices remains very cheap debt. Alongside the inflation risk posed by the labour market, the case for the MPC to begin to raise interest rates to prevent a widespread debt problem is becoming compelling.
We've seen some alarming estimates of the potential impact on inflation of the House Republicans' plans for corporate tax reform, with some forecasts suggesting the CPI would be pushed up as much as 5%. We think the impact will be much smaller, more like 1-to-11⁄2% at most, and it could be much less, depending on what happens to the dollar. But the timing would be terrible, given the Fed's fears over the inflation risk posed by the tightness of the labor market.
The headline NFIB index of small business activity and sentiment in July likely will be little changed from June--we expect a half-point dip, while the consensus forecast is for a repeat of June's 94.5--but what we really care about is the capex intentions componen
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.
China's trade surplus tumbled to $20.3B in January, from $54.7B in December, surprising the consensus for little change.
Brazil's industrial sector is still struggling, despite recent signs of better economic and financial conditions.
China's trade numbers for July surprised to the upside, with both exports and imports faring better than consensus forecasts in year-over-year terms.
The recovery in small business sentiment since the fourth quarter rollover has been extremely modest, so far.
Mortgage lender Halifax reported yesterday that the rate of increase in house prices has picked up since the summer.
National accounts data released last week rewrote the recent history of households' saving.
We planned to write today about the rebound in housing market activity over the past few months, arguing that it is about to run out of steam in the face of the recent flat trend in mortgage applications. The Mortgage Bankers Associations' purchase applications index rocketed in the spring, but then moved in a narrow range from mid-April through late September. Then, out of the blue, the MBA reported a 27% leap in applications in the week ended October 2, taking the index to its highest level in more than five years.
Evidence that households are not benefiting much from the Monetary Policy Committee's easing measures mounted yesterday, after the release of August data on advertised borrowing rates. Our first chart shows the drop in swap rates and average quoted mortgage rates since the end of last year.
Traders looking for a sustained move in the euro have been left disappointed in the past six-to-12 months, but it is now teasing investors with a break to the upside against the dollar.
We expected a consensus-beating ADP employment number for February, but the 298K leap was much better than our forecast, 210K. The error now becomes an input into our payroll model, shifting our estimate for tomorrow's official number to 250K; our initial forecast was 210K.
Focus on Japan's job-to-applicant ratio, not the unemployment rate
Japan's wage growth bounces back on volatile bonuses; distortions still at play? Korea's current account surplus has bottomed out, but pressure on the won will continue to rise in the S/T.
China's see-sawing trade surplus is likely to continue in the short run, but it mostly has peaked. Japan's unadjusted current account surplus slipped to ¥1,211B in June, from ¥1,595B in May, marginally surpassing the consensus, ¥1,149B.
In one line: Not pretty in manufacturing; the remaining details were robust.
Mr. Trump's partial U-turn on September tariffs shows some semblance of an understanding of reality...that's a good thing. China's industrial production crushes June hopes of a swift recovery. Chinese consumers struggle. Chinese FAI: the infrastructure industry growth slowdown is especially worrying. Japan's strong core machine orders rebound in June probably faded in recent weeks. Korea's jobless rate will soon creep back up after remaining steady in July.
We expect August's GDP figures, released on Wednesday, to show that month-to-month growth slowed to 0.1%, from 0.3% in July.
Britain's housing market appears to be going from bad to worse.
We look for August's GDP report, released on Thursday, to show that output held steady, following July's 0.3% month-to-month jump.
Japan's current account surplus has been broadly stable in absolute terms in the last couple of years, though it has retreated as a share of GDP.
China's current account dropped sharply in Q1, to a deficit of $28.2B, from a surplus of $62.3B in Q4.
House prices continue to struggle for momentum, instilling caution among households. Admittedly, Halifax reported yesterday that its index jumped by 1.5% month-to-month in May.
...The Fed did nothing, surprising no-one; the labor market tightened further; the housing market tracked sideways; survey data mostly slipped a bit; and oil prices jumped nearly $4, briefly nudging above $50 for the first time since May.
Recent market turmoil and concerns on the outlook for global growth have re-awakened talk of stimulus. For the BoJ, this inevitably raises the question of what could possibly be done, given that policy already appears to be on the excessively loose side of loose.
Nobody knows the damage China's virus- containment efforts will have on GDP, and we probably never will, for sure, given the opacity of the statistics.
Evidence that mounting concerns about Brexit have caused the economy to slow to a near-halt continued to accumulate last week.
Japanese average cash earnings posted a surprise drop of 0.4% year-over-year in June, down from 0.6% in May and sharply below the consensus for a rise of 0.5%. The decline was driven by a fall in the June bonus, by 1.5%.
Manufacturing orders in Germany recovered some ground in the middle of Q1, following the plunge at the beginning of the year. Factory orders rose 3.4% in February, pushing the year-over-year rate up to +4.6% from a revised 0.0% in January.
Yesterday's minutes of the October 31 COPOM meeting, at which the Central Bank cut the Selic rate unanimously by 50bp at 5.00%, reaffirmed the committee's post-meeting communiqué, which signalled that rates will be cut by the "same magnitude" in December.
Brazil's industrial sector continues to suffer, despite September's report surprising marginally on the upside. Output contracted 1.3% month-to-month in September, after a 0.9% fall in August, pushing the year over-year rate down to -10.9% down from -8.8% in August. This is the biggest drop since April 2009. Output has fallen an eye-popping -7.4% year-to-date, and in the third quarter alone activity contracted by 3.2% quarter-on-quarter, in line with our vie w for a 1.2% contraction in real GDP for the third quarter.
Brazil's industrial sector came roaring back at the start of Q3, following a poor end to Q2. Industrial production jumped 0.8% month-to-month in July, driving the year-over-year rate higher to 2.5%, from 0.5% in June and just 0.1% on average in Q2.
If the current rate of contraction continues, the U.S. onshore oil industry will cease to exist in the third week of January next year. Over the past six weeks, the number of operating rigs has dropped by an average of 8.5, and 362 rigs were running last week. At the peak, in early October 2014--just 18 months ago--the rig count reached 1,609.
Monday will see 5% tariffs going into effect on Mexican exports to the U.S.--which totalled about USD360B last year--unless President Trump steps back from the brink.
Brazil's industrial sector was off to a soft-looking start in Q1, but the fall in January output was chiefly payback for an especially strong end to 2017.
German industrial output was off to a sluggish start in the fourth quarter. Production eked out a marginal 0.2% month-to-month gain in October, pushing the year-over-year rate down to 0.0% from a revised 0.4% in September. Manufacturing output rose 0.6%, led by a 2.7% jump in production of capital goods, but the underlying trend in the sector overall is flat. On a more positive note, construction output rose 0.7% month-to-month in October, and leading indicators suggest this could be the beginning of a string of gains, lifting investment spending in coming quarters.
The MPC's interest rate cut in August, and the continued willingness of banks to lend, bolstered the housing market immediately after the referendum. But the latest indicators suggest that the market is slowing again, as the financial pressures on households' incomes intensify.
The housing market perhaps is where the adverse impact of Brexit uncertainty can be seen most clearly.
Many observers hoped that the silver lining of a slowdown in house price growth this year would be that more first-time buyers could step onto the first rung of the housing ladder. Instead, purchasing a first home has become even harder for FTBs with modest deposits.
Economists failed to foresee the U.K.'s growth spurt in 2013 partly because they underestimated the positive impact of the Funding for Lending Scheme, launched in mid-2012. In fact, the FLS was so successful at stimulating mortgage lending that it had to be "refocussed" to apply solely to business lending in January 2014.
While we were out, Brazil's economic and political position continued to improve. The recession eased in the second quarter and into July. Industrial production, for example, increased in June for the fourth consecutive month, rising by 1.1% month-to-month.
The Monetary Policy Committee of the Reserve Bank of India voted unanimously on Friday to cut interest rates at a fifth straight meeting, as expected.
Make no mistake, business investment has been depressed by Brexit uncertainty over the last year.
If you had asked us in the spring where the action would be in capital spending over the summer, we would have said that the housing component was the best bet. Right now, though, the opposite seems more likely, with housing likely to be the weakest component of capex.
No change; overall robust.
In one line: Robust, but base effects are challenging for manufacturing in Q2.
In one line: Probably understating the coronavirus hit.
In one line: More evidence of a strong pre-virus recovery.
In one line: Stimulus from lower mortgage rates is starting to filter through.
In one line: Further evidence that the housing market already had regained momentum before the election.
April's RICS Residential Market survey confirmed that housing market activity collapsed to negligible levels during the lockdown, which prohibited property viewings, depleted the work forces of lenders and prompted many people to defer big financial decisions.
In one line: Ominous, in more ways than one.
In one line: U.S. testing hits new highs, but cases still falling, just.
In one line: Mixed messages warn against coming to strong conclusions.
In one line: Still implausibly strong.
In one line: No cause for alarm.
In one line: London prices had begun to outperform before the virus shock.
In one line: Spectacular but unsustainable.
In one line: Worse to come in housing; Philly Fed near the bottom.
In one line: Don't worry about the undershoot; housing is strengthening rapidly.
In one line: A sustained surge is underway.
Topic: Coronavirus means a Contraction in Chinese GDP in Q1 Growth should rebound sharply thereafter, but the recovery will be uneven Reducing tariffs is a smart move What measures will the authorities take to cushion demand
In one line: Spectacular but clearly unsustainable.
In one line: Housing construction likely has hit bottom.
In one line: Details are wose than the consensus-beating headline.
In one line: Rising stock prices lift small business sentiment; labor market still tight.
In one line: Core inflation was stable--maybe nudging up a bit--before the virus. Expect it to slow over the next few months.
In one line: Disappointing U.S. data yesterday, but not disastrous; Florida's uptick is disconcerting.
In one line: Disappointing U.S. numbers yesterday no cause for alarm; Germany has almost beaten Covid-19.
In one line: The modest industrial recovery continues, but Covid-19 will make things worse.
In one line: A good start to the year, but the virus will be a big drag.
In one line: A decent start to Q4 for the industrial sector.
In one line: Ignore the un-adjusted headline; production did well at the start of Q2.
In one line: Good industrial production numbers; the labour market is still struggling.
In one line: Soft industrial data, and external conditions for EM economies are becoming increasingly challenging
In one line: Solid across the board; still no virus hit.
In one line: Not pretty, but partly mean reversion from the previous month.
In one line: German unemployment is now rising; about that fiscal stimulus?
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In one line: A mixed industrial picture; manufacturing output is weakening, but other sectors seem to be reviving.
A decent start to the year, but the coronavirus hit to the economy is looming.
In one line: Expect more U.S. reopenings to pause as cases and hospitalizations soar.
In one line: Infection rate data no longer reliable; death rates don't lie, and they are accelerating as the virus spreads.
In one line: Fewer non-China cases overall than previous day, but the trend is still rising and the outbreak is accelerating outside the big four.
In one line: U.S. Cases are falling, and it's not just a New York story.
The U.S. Curve is a Week Behind Austria's; Can it Stay on Track?
In one line: The U.S. meat industry is the source of most new infection hotspots.
In one line: Inflation edged lower in August, leaving the door open for further interest rate cuts.
In one line: New U.S. cases per million will soon be at the levels which prompted easing lockdowns in Italy, Spain and Austria.
In one line: Is the U.S. on the brink of a sustained drop in new Covid-19 cases?
Efforts to contain the coronavirus outbreak severely dented industrial activity in Brazil.
Yesterday's industrial production report in Brazil was sizzling. Headline output jumped 0.8% month- to-month in April--well above the 0.4% consensus-- pushing the year-over-year rate up to 8.9%, a five- year high.
Households' saving decisions will play a key role in determining whether the economy slips into recession over the next year. Indeed, all of the last three recessions coincided with sharp rises in the household saving rate, as our first chart shows. Will households save more in response to greater economic uncertainty?
The 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.
Korea's business survey index rose for a second straight month in March, to 75 from 73 in February, on our adjustment.
Industrial profits in China dropped 3.7% year-over- year in April, after surging 13.9% in March, according to the officially reported data.
China's industrial profits data for December showed continued weakness in the sector, with no clear signs that a turnaround is in the offing.
Brazil's economic outlook is gradually improving following a challenging Q2, which was hit by political risk, putting business and consumer confidence under pressure.
Taken at face value, the preliminary estimate of Q2 GDP suggests that the economic recovery weathered Brexit risk well. But growth received support from some unsustainable sources, and also probably was boosted by a calendar quirk. Meanwhile, with few firms or consumers expecting a vote for Brexit prior to the referendum, Q2's brisk growth tells us little about how well the economy will cope in the current climate of heightened uncertainty.
This year has been a story of two halves for EZ equities. The MSCI EU ex-UK jumped 11% in the first five months of 2017, but has since struggled to push higher.
We have been asked how we can justify raising our growth forecasts but at the same time arguing that the housing market is set to weaken quite dramatically, thanks to the clear downshift in mortgage applications in recent months. Applications peaked back in June, so this is not just a story about the post-election rise in mortgage rates.
Housing market data yesterday fostered the view that prices are vulnerable to a fall following April's increase in stamp duty--a transactions tax-- and before the E.U. referendum in June. Political uncertainty, however, has rarely had a pervasive or sustained impact on prices in the past.
Monetary policy usually is the first line of defence whenever a recession hits.
Brazil's February industrial production numbers, labour market data, and sentiment indicators are gradually providing clarity on the underlying pace of activity growth, pointing to some red flags.
We expect China's quarterly real GDP growth in the second quarter to edge down from Q1, but only because Q1 growth was unsustainable. The official data shows real GDP growth at 1.3% quarter-onquarter in Q1.
The second quarter is over but it is too early to give a reliable forecast of the pace of Brazilian GDP growth. However, an array of leading and coincident indicators points to a steep contraction in Q2 and a bleak second half of the year. Unemployment is leaping higher, along with inflation and household debt, and the ongoing monetary and fiscal tightening will further hurt the real economy ahead.
Brazil industrial production continues to edge lower, falling 1.2% month-to-month in April, a 7.6% year-over-year drop. In March, output was down only 3.4% year-over-year, but the data are volatile in the short-term. The trend is about -7%, down from -3.8% in the second half of last year.
It has been a nasty start to the year for LatAm as markets have been hit by renewed volatility in China, triggered by the coronavirus.
Brazil's Q4 industrial production report, released Wednesday, confirmed that the recovery remained sluggish at the end of last year. December's print alone was relatively strong, though, and the cyclical correction in inventories--on the back of improving demand--lower interest rates, and the better external outlook, all suggest that the industrial economy will do much better this year.
In our Monitor on January 27 we speculated that the new U.S. administration would see Germany's booming trade surplus as a bone of contention. We were right. Earlier this week, Peter Navarro, the head of Mr. Trump's new National Trade Council, fired a broadside against Germany, accusing Berlin for using the weak euro to gain an unfair trade advantage visa-vis the U.S.
The Redbook chainstore sales survey today is likely to give the superficial impression that the peak holiday shopping season got off to a robust start last week.
The official PMIs suggest that the January survey data have escaped the worst of the hit from the virus.
The number of coronavirus cases continues to increase, but we're expecting to see signs that the number of new cases is peaking within the next two to three weeks.
Equity prices for companies dependent on the U.K.'s residential property market tumbled yesterday as several companies reported poor results for the first half of 2017. Most companies blamed a decline in housing transactions for falling profits.
Housebuilders were one of the biggest winners from the post-election relief rally in U.K. equity prices.
Today's second estimate of Q2 GDP likely will restate the preliminary estimate that quarter-onquarter growth picked up to 0.6%, from 0.4% in Q1. Over the last two decades, the second estimate of GDP has differed from the preliminary estimate just 38% of the time.
News that the Covid-19 virus has spread to more countries frayed investors' nerves further yesterday, with the FTSE 100 eventually residing 5.3% below its Friday close.
Brazil's external accounts continue to be the country's bright spot, having improved considerably in recent quarters. The unadjusted current account deficit for January, USD4.8B, was lower than expected and much smaller than the USD12.2B shortfall a year earlier.
Friday's PMI data in the Eurozone added to the evidence that GDP growth is slowing, after a cyclical peak last year. The composite PMI in the euro area slipped to a 21-month low of 52.6 in September, from 52.9 in August.
According to Brazil's mid-August inflation reading, which is a preview of the IPCA index, overall inflation pressures are easing. But some price stickiness remains, due to inertia and temporary shocks, despite the severity of the recession and the rapid deterioration of the labour market in recent months.
In recent months we have argued that housing market activity has peaked for this cycle, with rising mortgage rates depressing the flow of mortgage applications.
The huge drop in the March Markit services PMI, reported yesterday, and the modest dip in the manufacturing index, are the first national business survey data to capture the impact of the Covid-19 outbreak.
We have argued over the past couple of years that if you want to know what's likely to happen to U.S. manufacturing over the next few months, you should look at China's PMI, rather than the domestic ISM survey, which is beset by huge seasonal adjustment problems.
Mortgage approvals by the main high street banks dropped to a five-month low of 38.5K in September, from 39.2K in August, according to trade body U.K.Finance.
If you're looking for points of light in the economy over the next few months, the housing market is a good place to start.
Low-income households will feel the full force of the Covid-19 downturn and will have to slash their expenditure aggressively.
The squeeze on real wages has just ended and GfK's consumer confidence index hit a 11-month high in March.
House prices look set for another growth spurt, pushing the house price-to-earnings ratio--the most widely used measure of valuation sustainability--close to levels seen shortly before the late-2000s crash. But we don't place much store by the price-to-earnings ratio. Better, more reliable indicators suggest that a higher level of house prices will prove sustainable.
We're revising down our forecast for quarteron-quarter GDP growth in Q3 to 0.3%, from 0.4%, in response to signs that the rebound in industrial production is shaping up to b e smaller than we had anticipated.
The further decline in mortgage approvals in August shows that housing market activity remains very subdued. The recent fall in mortgage rates likely will prop up demand soon, but the poor outlook for households' real incomes suggests that both activity and prices will revive only modestly over the next year.
We argued yesterday that the August payroll number is unlikely to be a blockbuster, thanks to a combination of problems with the birth/death model and the strong tendency for this month's jobs number to be initially under-reported and then revised substantially higher. But these arguments don't apply to the unemployment rate, which is derived from the separate household survey.
Japan's flash Nikkei manufacturing PMI report for November was abysmal, putting the chances of a recovery this quarter into serious doubt.
Political uncertainty is starting to dampen housing market activity again.
In yesterday's Monitor, we laid out the prime causes of China's weekend announcement, cutting the reserve requirement ratio.
The coronavirus pandemic looks set to spread rapidly throughout LatAm.
Yesterday's figures from trade body U.K. Finance showed that January's pick-up in mortgage approvals was just a blip.
Colombia's Central Bank is facing a short-term test. The recent fall in inflation was interrupted in August--data due on Thursday will show another increase in September--while economic growth, particularly consumption, is struggling, at least for now.
Korean industrial production surprised to the upside in August, according to data released yesterday.
Households' decision to reduce their saving rate sharply was the main reason why economic growth exceeded forecasters' expectations in the aftermath of the Brexit vote.
Brazil's December industrial production report, released yesterday, confirmed that the recovery was stuttering at the end of last year.
We've previously highlighted the pro-cyclical elements of the BoJ's framework, but it's worth repeating, when an economic shock comes along.
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.
China's current account surplus was revised down last week to $46.2B in Q2, from $57.0B in the preliminary data, marking a dip from $49.0B in Q1.
Thursday and Friday were busy days for LatAm economy watchers. In Brazil, the data underscored our view that the economy is on the mend, but the recent upturn remains shaky, and external risks are still high.
The economy would have ground to a halt last year had households not reduced their saving rate sharply.
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.
Covid-19 has taken a large and immediate toll on house prices, but bigger damage likely lies ahead.
We are revising down our forecasts for quarteron-quarter GDP growth in Q1 and Q2 to 0.3% and 0.2%, respectively, from 0.4% in both quarters previously, to account for the likely impact of the coronavirus outbreak.
Wednesday's industrial production report in Brazil was terrible, despite overshooting market expectations.
Wednesday's Brazilian industrial production data were worse than we expected but the details were less alarming than the headline. Output slipped 1.8% month-to-month in March, the biggest fall since August 2015, setting a low starting point for Q2.
Korea's trade data for January provided the first real glimpse of the potential hit to international flows from the disruptions caused by the outbreak of the coronavirus.
Yesterday's news that the business activity index of the Markit/CIPS services survey fell again in January, to just 50.1--its lowest level since July 2016--has created a downbeat backdrop to the MPC meeting; the minutes and Q1 Inflation Report will be published on Thursday.
Yesterday's Brazilian industrial production data continue to tell a story of a slow business cycle upturn. Output rose 0.2% month-to-month in November, after a downwardly revised 1.2% plunge in October. The year-over-year rate, though, jumped to -1.1%, from -7.3% in October. The underlying trend is now on the mend, following weakness in Q3 and early Q4. Output rose in November three of the four major categories and in 13 of the 24 sectors.
Industrial activity in LatAm, at least in the largest economies, is taking different paths.
Friday's Brazil industrial production data were surprisingly upbeat. Output rose 0.1% month-to-month in July, slightly better than the consensus forecast for no change. July's modest gain was the fifth consecutive increase, confirming that industrial output in Brazil is stabilizing, and it paints a less grim picture of GDP growth at the start of Q3.
We had hoped that the statistical problems which have plagued the initial estimates of August payrolls in recent years had faded, but Friday's report suggests our judgement was premature.
The surge in the broad money supply in March, as the U.K.'s lockdown began, suggests that businesses are in relatively good shape to survive a multi-month period of greatly depressed demand.
The 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.
Labor demand, as measured by an array of business surveys, clearly slowed from the cycle peak, recorded late last year.
Yesterday's PMI data confirmed that the EZ manufacturing sector is in rude health. The manufacturing PMI in the euro area rose to a cyclical high of 57.4 in June, from 57.0 in May, slightly above the first estimate. New orders and output growth are robust, pushing work backlogs higher and helping to sustain employment growth.
Brazil's December industrial production and labour reports, released late last week, confirmed that the recovery was struggling at the end of last year.
Yesterday's FOMC , announcing a unanimous vote for no change in the funds rate, is almost identical to December's.
Chile's economy is showing the first reliable signs of improvement, at last. December retail sales rose 1.9% year-over-year, up from 0.4% in November, indicating that household expenditure is starting to revive, in line with a pick-up in consumer confidence and the improving labor market.
Tokyo inflation surprised us on Friday, rising to 0.9% in July, from 0.6% in June.
Industrial profits in China collapsed by 38.3% year- over-year in the first two months of 2020, making December's 6.3% fall look like a minor blip.
Japan is one of the countries most exposed to economic damage from the coronavirus.
In the wake of the robust July data and the upward revisions to June, real personal consumption--which accounts for 69% of GDP--appears set to rise by at least 3% in the third quarter, and 3.5% is within reach. To reach 4%, though, spending would have to rise by 0.3% in both August and September, and that will be a real struggle given July's already-elevated auto sales and, especially, overstretched spending on utility energy.
We are all for ambitious economic targets, but the ECB's pledge to drive EZ core inflation in the Eurozone up to "below, but close to" 2% is particularly fanciful.
News that the U.K.'s departure from the E.U. has been delayed by six months, unless MPs ratify the existing deal sooner, appears to have done little to revive confidence among businesses.
The recent spate of manufacturing business survey indices from Korea show that sentiment is deteriorating in the wake of its trade spat with Japan and the re-intensification of U.S.-China tensions.
Yesterday's 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.
The summer usually is a quiet time for business, but seemingly not for CFOs this year. Yesterday's money and credit figures from the Bank of England showed that borrowing by private non-financial corporations has rocketed. Net finance raised by PNFC's from all sources increased by £8.9B in July, compared to an average increase of just £2.5B in the previous 12 months.
Households' willingness to save a smaller fraction of their incomes goes a long way to explaining why the U.K. economy hasn't lost too much momentum since the Brexit vote.
Housing market activity has weakened sharply over the last two months. Indeed, figures this week likely will reveal that mortgage approvals plunged in April and that house price growth slowed in May. The increase in stamp duty for buy-to-let purchases at the start of April and Brexit risk, however, entirely explain the slowdown.
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.
Implied volatility on the euro is now so low that we're compelled to write about it, mainly because we think the macroeconomic data are hinting where the euro goes next.
Covid-19 has cut short a nascent recovery in housing market activity.
A pair of closely-watched reports today will confirm that business and consumer confidence is tanking in the face of the coronavirus outbreak.
Inflation pressures in the Eurozone probably firmed slightly in August. Data yesterday showed that inflation in Germany and Spain rose by 0.1 percentage points to 1.8% and 1.6% year-over-year respectively, and we are also pencilling-in an increase in French inflation today, ahead of the aggregate EZ report.
We are expecting a hefty increase in the August ADP employment number today--our forecast is 225K, above the 175K consensus --but we do not anticipate a similar official payroll number on Friday. Remember, the ADP number is based on a model which incorporates lagged official employment data, the Philly Fed's ADS Business Conditions Index, and data from firms which use ADP for payroll processing.
December's money and credit figures suggest that households are in no fit state to step up and drive the economy forwards this year.
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.
In one line: Another positive housing market signal.
The outlook for Brazil's industrial economy is better than at any time since before the crisis. But data released this week highlighted that the recovery will be slow and bumpy.
On Tuesday, Brazil's Special Committee presented its recommendation for a constitutional amendment capping spending. Currently it is being voted in the Lower House Committee.
Investors currently think that official interest rates are more likely to fall than rise this year. Overnight index swap markets are factoring in a 30% chance of a rate cut by December, but just a 1% chance of an increase by year-end. The case for expecting looser monetary policy, however, remains unconvincing.
Brazil's industrial sector had a relatively good start to the year. Data on Wednesday showed that production fell 0.1% month-to-month in January, less than markets expected, and the year-over-year rate rose to 1.4%, after a 0.1% drop in December.
A looming rate lift-off at the Fed, chaos in Greece, and a renewed rout in commodities have given credit markets plenty to worry about this year. The Bloomberg global high yield index is just about holding on to a 0.7% gain year-to-date, but down 2.5% since the middle of May. The picture carries over to the euro area where the sell-off is worse than during the taper tantrum in 2013.
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.
China's trade surplus bounced back strongly in May, rising to $40.1B on our adjustment, from $35.7B previously.
The domestic business cycle doesn't matter, yet: Global Growth and the Trade War are driving the Fed
Business investment has been resilient to the slowdown in the wider economy so far, with year-over-year growth in the first three quarters of 2015 averaging a very respectable 6.2%. Outside the oil sector, firms are generating healthy profits and can borrow cheaply.
German industrial output rebounded strongly at the beginning of the Q1. Production surged 3.3% month-to-month in January, pushing the year-over-year rate up to 2.2%, from a revised -1.2% in December
The latest money and credit data highlight that the financial fortunes of firms and households have begun to differ markedly. Private non- financial corporations--PNFCs--are enjoying strong growth in their broad money holdings. The 1.2% month-to-month increase in PNFC's M4 was the largest rise since August 2016, and it lifted the year- over-year growth rate to 9.3%, from 9.0% in May.
Surveys released over the last week have suggested that the housing market might be past the worst.
Brazil's retail sales ended the second quarter on a less-bad footing. Sales volumes increased 0.1% month-to-month in June, pushing the year-over-year rate up to -5.3%, from -9.0% in May. Smoothed year-over-year growth in retail sales has improved to -7% from its cyclical trough of around -9% in the end of last year.
The reported 225K jump in payrolls in January was even bigger than we expected, but it is not sustainable. The extraordinarily warm weather last month most obviously boosted job gains in construction, where the 44K increase was the biggest in a year
Leading indicators all point to a solid August payroll number. Survey-based measures of the pace of hiring signal a 200K-plus increase, and jobless claims--a proxy for the pace of gross layoffs--are at a record low as a share of the workforce.
Industrial output in Chile struggled late in the third quarter, falling 1.3% month-to-month in September. The year-over-year rate, calendar and seasonally adjusted, rose 2.4% in September, down from a revised 5.3% in August.
Yesterday's EZ data showed that French households came out swinging as the economy reopened. Consumers' spending, ex-services, jumped by 36.6% month-to-month in May, driving the year-over-year rate up to -8.3%, from -32.7% in April.
China's economy looks to have shrugged off the supposed "second wave" of Covid-19, sparked by a cluster in Beijing's largest wholesale market for fruit and veg, looking at June's PMIs.
If you apply a seasonal adjustment to a seasonally adjusted series, it shouldn't change. When you apply a seasonal adjustment to the U.S. GDP numbers, they do change. First quarter growth, reported Friday at just 0.7%, goes up to 1.7%, on our estimate.
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.
China's trade surplus has been trending down in the last two years.
China's trade surplus appears modestly to be rebuilding, edging up to $34.0B in November, on our adjustment, from $33.3B in October. The recent trough was $24.B, in March.
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.
Recent retail surveys have indicated that consumers are not suffering yet from Brexit blues. The BRC reported that year-over-year growth in total sales values picked up to 1.9% in July, from 0.2% in June. After adjusting for falling prices, this measure suggests that year-over-year growth in official retail sales volumes held steady at about 4% last month.
Before last November's election, movements in the headline NFIB index of activity and sentiment among small businesses could be predicted quite reliably from shifts in the key labor market components, which are released in advance of the main survey.
The next few months, perhaps the whole of the first quarter, are likely to see a clear split in the U.S. economic data, with numbers from the consumer side of the economy looking much better than the industrial numbers.
Japanese PPI inflation rose sharply to 2.6% in July from 2.2% in June, well above the consensus for a modest rise.
Chancellor George Osborne has invested considerable personal capital in attaining a budget surplus by the end of this parliament, and he has passed a 'law' to ensure he and his successors achieve this goal. But the current fiscal plans, which will be reviewed in the Budget on March 16, make a series of optimistic assumptions on future tax revenues and spending savings.
The plunge in Russia's financial markets, in response to targeted U.S. sanctions--see here--against Russian oligarchs and government officials, was the main EU news story yesterday.
The upturn in the new monthly measure of GDP in May, released yesterday, was strong enough--just--to suggest that the MPC likely will raise Bank Rate at its next meeting on August 2.
The CPI report due today will be released on schedule, because the Bureau of Labor Statistics, which compiles the data, remains open during the partial government shutdown.
Investors and market observers of a relatively bearish persuasion argued over the weekend that the details of the October employment report were less encouraging than the headline, principally because the household survey showed that all the job growth, net, was among older workers, defined as people aged 55-plus. This, they argue, suggests that most of the increased demand for labor was concentrated in low-paid service sector jobs, where older workers are concentrated, perhaps reflecting retail hiring ahead of the holidays. Such a wave of hiring is unlikely to be repeated over the next few months, so payroll growth won't be sustained at its October pace.
The economy's recovery from the 2008/09 recession has been weaker than after the previous two downturns partly because households have not depleted housing equity to fund consumption.
October industrial production data in France surprised to the upside yesterday, with headline output rising 0.5% month-to-month, well above the consensus estimate and our own forecast for a monthly fall. Production was lifted by a 5.1% month-to-month jump in energy output, due to unusually cold weather, offsetting a 0.5% decline in manufacturing output, the fifth drop in the past six months.
Yesterday's Sentix investor sentiment survey provided the first glimpse of conditions on the ground in the EZ economy in the wake of the coronavirus scare.
The clear threat to demand posed by the coronavirus and China's efforts at containment have sent a shock wave through commodities markets.
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.
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.
We expect the Budget today to underwhelm investors who are eager to see a quick and powerful government response to the coronavirus outbreak.
We're now starting to see clear signs in unofficial data that households are slashing their expenditure on discretionary services, in order to minimise their chances of catching the coronavirus.
Inflation data in Brazil, Mexico and Chile last week reinforced our view that interest rates will remain on hold, or be cut, over the coming meetings. The recent fall in oil prices, and the weakness of domestic demand, will offset recent volatility caused by the FX sell-off, driven mostly by the coronavirus story.
It's very tempting to look at the upturn in the participation rate in recent months and extrapolate it into a sustained upward trend. If the trend were to rise quickly enough, it conceivably could prevent any further fall in the unemployment rate, preventing it falling below the bottom of the Fed's estimated Nairu range.
Yesterday's French industrial production data were worse than we expected. Output slipped 1.1% month-to-month in September, pushing the year-over-year rate down to -1.1% from a revised +0.4% in August. Mean-reversion was a big driver of the poor headline, given the upwardly-revised 2.4% jump in August.
The headline index in today's NFIB small business survey probably won't quite converge with the ISM manufacturing index, but it will come v ery close. To close the gap completely, for the first time since the crash, the NFIB needs to rise to just over 102, from 100.4.
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.
Business investment has held up better than most economists--ourselves included--expected after the Brexit vote.
After wobbling immediately after the referendum, house prices appear to be back on a rising trajectory. The Halifax measure of house prices, which is based on the lenders' mortgage offers, rose by 1.4% month-to-month in October, following a 0.3% increase in September.
Yesterday's industrial production report in Germany was much better than implied by the poor new orders data--see here--released earlier this week.
Friday's industrial production reports in the Eurozone were sizzling. In Germany, headline output rose 1.2% month-to-month in May--after a downwardly-revised 0.7% rise in April--which pushed the year-over-year rate up to a six-year high of 4.9%.
It's hardly surprising that the consensus forecast for month-to-month growth in November GDP, released on Friday, is a mere 0.1%, given the flow of downbeat business surveys.
Chief U.S. Economist Ian Shepherdson on the U.S. Housing Sector
Samuel Tombs on U.K. House Prices
Samuel Tombs on Halifax House Price Index in May
Chief Asia Economist Freya Beamish on the Coronavirus effect on the Chinese Economy
Chief Asia Economist at Pantheon Macroeconomics Freya Beamish discusses her views on the Chinese economy.
Chief Eurozone Economist at Pantheon Macroeconomics Claus Vistesen discusses his views on the path forward for the ECB and Eurozone.
Fed tightening is deferred, not cancelled...Expected a December hike after robust fall data
Chief U.S. Economist Ian Shepherdson discussing the latest from the Fed
Chief U.K. Economist Samuel Tombs on U.K. Halifax House Prices
Chief U.K. Economist Samuel Tombs on the Coronavirus effect on the U.K. economy
In the latest Invesco Podcast Ben Gutteridge, Director of Model Portfolio Services , speaks to Ian Shepherdson, the founder and Chief US Economist of Pantheon Economics
Claus Vistesen discussing the German PMI's
Chief Eurozone Economist Claus Vistesen discussing Germany's economy
Chief U.S. Economist Ian Shepherdson on U.S. Housing starts
Chief Eurozone Economist Claus Vistesen on the latest data from the Eurozone
Cheif Eurozone Economist Claus Vistesen discussing the Coronavirus response in Europe and the upcoming ECB meeting this week
Chief Eurozone Economist Claus Vistesen on the German economy
Chief Eurozone Economist Claus Vistesen on the German Labour Market
Chief U.K. Economist Samuel Tombs on U.K House Prices
Samuel Tombs on U.K. House Prices
Chief U.S. Economist Ian Shepherdson on U.S. the impact of the Coronavirus on the U.S. Economy
Chief Asia Economist Freya Beamish on the impact of the Coronavirus on the Chinese Economy
Chief U.S. Economist Ian Shepherdson discussing U.S. Durable Goods Orders
Ian Shepherdson, chief economist at Pantheon Macroeconomics, joins "Squawk Box" to discuss what he thinks about Georgia's plan to reopen its economy and how the state's situation compares to some countries in Europe.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said investors shouldn't "downplay" the coronavirus.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, discusses the economic impact of the coronavirus outbreak.
Freya Beamish, chief Asia economist at Pantheon Macroeconomics, and Christian Schulz, economics team director at Citigroup, discuss President Donald Trump's trade tariffs and their impact on the Chinese and U.S. economies.
he services sector is seeing "job losses that will not be quickly recovered," says Ian Shepherdson, chief economist at Pantheon Macroeconomics, as he examines the impact of the coronavirus pandemic on the U.S. labor market. He speaks with Bloomberg's Francine Lacqua on "Bloomberg Surveillance."
Freya Beamish, Chief Asia economist at Pantheon Macroeconomics, discusses the U.S.-China trade deal
Chief Asia Economist Freya Beamish discussing the impact of the Coronavirus on the Chinese Economy
Ellen Hazen, portfolio manager at F.L. Putnam Investment Management, and Ian Shepherdson, chief economist at Pantheon Macroeconomics, join "Squawk Box" to discuss the markets and the economy as the Fed gets set to kick off its two-day meeting on rates.
Freya Beamish, Chief Asia Economist at Pantheon Macroeconomics, discusses the economic impact of coronavirus on China.
Freya Beamish, chief Asia economist at Pantheon Macroeconomics, discusses how policymakers are responding to the coronavirus crisis.
Data released yesterday confirmed that the Mexican economy ended Q4 poorly; policymakers will take note.
News websites are emblazoned with the headline that retail sales are falling at their fastest rate since the 2008-to-09 recession.
Today's preliminary estimate of Q3 GDP looks set to indicate that the Brexit vote has had little detrimental impact on the economy so far.
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.
Data from trade body U.K. Finance show that mortgage lending has remained unyielding in the face of heightened economic and political uncertainty.
Yesterday's ECB meeting was comfortably uneventful for markets.
The official data lag developments in the real economy even at the best of times, but on this occasion the gap has turned into a chasm.
In yesterday's Monitor, we laid out how conditions last year were conducive to Chinese deleveraging, and how the debt ratio fell for the first time since the financial crisis.
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.
Concern over individual freedoms was the spark for Hong Kong's recent demonstrations and troubles, and protesters' demands continue to be political in nature.
Recent export performance has been poor, but the export orders index in the ISM manufacturing survey-- the most reliable short-term leading indicator--strongly suggests that it will be terrible in the fourth quarter.
MPs will be asked today to approve the PM's motion, proposed in accordance with the Fixed-term Parliaments Act--FTPA--to hold a general election on December 12.
The terrible scenes from Texas will play out in the economic data over the next few weeks.
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.
Money supply data in the EZ continue to suggest that headline GDP growth will slow soon.
The extent of shut downs within China is now reaching extreme levels, going far beyond services and threatening demand for commodities, as well as posing a severe risk to the nascent upturn in the tech cycle.
The Fed will do nothing to the funds rate or its balance sheet expansion program today.
The outlook for French consumers' spending improved this month, at the margin. The headline consumer sentiment index was unchanged at 98 in November, but most forward-looking indicators rose. Consumers' spending in was flat in Q2 and Q3, following a 1.1% jump in the first quarter.
The latest profits data out of China were grim, as we had expected.
The E.C.'s Economic Sentiment Indicator for the U.K., released yesterday, painted an upbeat picture of the economy's recent performance. The ESI picked up to 109.4 in February from 107.1 in January; its average level since 1990 is 100. February's reading was the highest since December 2015, and it slightly exceeded the E.U.'s average of 108.9.
The German economy finished last year on the back foot.
Money supply dynamics in the Eurozone continue to signal a solid outlook for the economy. Headline M3 growth eased marginally to 4.9% year-over-year in January, from 5.0% in December; the dip was due to slowing narrow money growth, falling to 8.4% from 8.8% the month before. The details of the M1 data, however, showed that the headline chiefly was hit by slowing growth in deposits by insurance and pension funds.
The decline in headline durable goods orders in May, reported yesterday, doesn't matter.
Difficult though it is to tear ourselves away from Britain's political and economic train-wreck, morbid fascination is no substitute for economic analysis. The key point here is that our case for stronger growth in the U.S. over the next year is not much changed by events in Europe.
Mexico's political panorama seems to be becoming clearer, at least temporarily. This should dispel some of the uncertainty that has been hanging over the economy in recent months.
The early damage in India from Covid-19 and the nationwide lockdown likely was significant enough to hammer the GDP report for the first quarter, due tomorrow.
Friday's detailed GDP data in Germany confirm that the euro area's largest economy performed strongly in the second quarter.
October likely was the peak in Japanese CPI inflation, at 1.4%, up from 1.2% in September. The uptick was driven by the non-core elements, primarily food.
Yesterday's data were mixed, though disappointment over the weakening in the Richmond Fed survey should be tempered by a quick look at the history, shown in our first chart.
As we write, the Commons appears to be on the verge of voting for the Withdrawal Agreement Bill--WAB--at its second reading but then voting against the government's "Programme Motion", which sets out a very tight timetable for its passage through parliament, in a bid to meet the October 31 deadline and to minimise parliamentary scrutiny.
Korea's government is mulling a further tightening of borrowing rules to mitigate the risks of an overheated property market.
Eurozone investors are fixed on Mr. Draghi's speaking schedule this week, looking for hints of the ECB's future policy path.
We expect today's second estimate of Q2 GDP to confirm that the U.K. has been the slowest growing G7 economy this year.
Mexico's economy continues to withstand several headwinds, especially the sharp currency depreciation--shown in our first chart--falling commodity prices, and the tough external environment. The country is still one of the economic bright spots in the region, thanks to its resilient domestic demand. June retail sales rose 5.4% year-over-year, well above expectations, and up from 4.1% in May. The underlying trend is positive, averaging 4.8% in the second quarter, well above its 2014 pace.
Yesterday's PMI data in the Eurozone economy were a mixed bag.
Hot on the heels of yesterday's grim-looking-- temporarily--existing home sales numbers for May, we see upside risk for today's new sales data.
Korea's preliminary Q4 GDP report was stronger than nearly all forecasters, including ourselves, expected.
The level of new home sales is likely to hit new cycle highs over the next few months, with a decent chance that today's July report will show sales at their highest level since late 2007.
The performance of Italy's economy in the first half of 2017 proves that the strengthening euro area recovery is a tide lifting all the r egion's boats.
The beginning of the electoral campaign last week in Brazil bodes uncertain results and a very close competition for the presidential elections on October 7.
U.K. activity data have consistently surprised to the downside over the last month.
In April last year, something odd happened in the FX market.
Yesterday's national surveys in the EZ confirmed the downbeat message from the PMIs and consumer sentiment data earlier this week.
The sell-off in risky assets intensified while we were away, driven by China's decision to loosen its grip on the currency, and looming rate hikes in the U.S. The Chinese move partly shows, we think, the PBoC is uncomfortable pegging to a strengthening dollar amid the unwinding investment boom and weakness in manufacturing.
The public finances are in better health than appeared to be the case a few months ago.
Yesterday was a watershed moment for investors.
The Monetary Policy Board of the Bank of Korea is likely to keep its benchmark base rate unchanged, at 1.25%, at its meeting this week.
Brazil's inflation rate remained well under control over the first half of February.
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.
French manufacturing confidence soared at the start of Q2. The headline INSEE index jumped to a six-year high of 108 in April, from an upwardly revised 105 in March. The headline was flattered by a big increase in the "past activity" index, but the survey's leading indicators also improved.French manufacturing confidence soared at the start of Q2. The headline INSEE index jumped to a six-year high of 108 in April, from an upwardly revised 105 in March. The headline was flattered by a big increase in the "past activity" index, but the survey's leading indicators also improved.
The Eurozone economy ended the third quarter on a strong note, according to the PMIs.
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.
This week's key data releases in Mexico likely will reaffirm that growth remains below trend, while inflation continues to ease.
A grim-looking headline durable goods orders number for April seems inevitable today, given the troubles at Boeing.
On the face of it, the trend in public borrowing deteriorated sharply late last year. In the three months to December, borrowing on the main "PSNB ex ." measure, which excludes banks owned by the public sector, was a trivial £0.3B, or 1.6%, lower than in the same months of 2017.
A less rapid tightening of monetary policy in the U.K. than in the U.S. should ensure that gilt yields don't move in lockstep with U.S. Treasury yields over the coming years. But the outlook for monetary policy isn't the only influence on gilt yields. We expect low levels of market liquidity in the secondary market, high levels of gilt issuance and overseas concerns about the possibility of the U.K.'s exit from the E.U. to add to the upward pressure on gilt yields.
Yesterday's second estimate of Q3 GDP confirmed that the U.K. economy has underperformed this year.
Korea's preliminary GDP report for Q3 will be released tomorrow.
Consumer confidence in the Eurozone rose marginally at the start of Q4, though it is still down since the start of the year.
LatAm currencies and stock markets have suffered badly in recent weeks, but Monday turned into a massacre with the MSCI stock index for the region falling close to 4%. Markets rebounded marginally yesterday, but remain substantially lower than their April-May peaks. Each economy has its own story, so the market hit has been uneven, but all have been battered as China's stock market has crashed. The downward spiral in commodity prices--oil hit almost a seven-year low on Monday--is making the economic and financial outlook even worse for LatAm.
Colombia's GDP growth hit a relatively solid 2.8% year-over-year in Q4, up from 2.7% in Q3, helped by improving domestic fundamentals, which offset the drag from weaker terms of trade.
The slump in the Markit/CIPS services PMI in November to its lowest level since July 2016 provides the clearest indication yet that uncertainty about Brexit has driven the economy virtually to a stand-still.
Brazilian data strengthened early in Q4, supporting the case for the COPOM to slow the pace of rate cuts. We expect the SELIC policy rate to be lowered by 50bp today, to 7.0%.
Yesterday's detailed Q3 growth data in the Eurozone offered no surprises in terms of the headline.
Late last year, China said it would scrap residency restrictions for cities with populations less than three million, while the rules for those of three-to-five million will be relaxed.
Colombia started the second quarter strongly, with the ISE economic activity indicator--a monthly proxy for GDP--expanding a solid and surprising 3.6% year-over-year in April, up from 2.9% in March. The rate of growth is well above the 2.8% gain in Q1, con firming the country's resiliency in the face of lower oil prices. Still, growth has slowed sharply since the 4.4% increase in activity in 2014, as our first chart shows.
It would be astonishing if the May and June payroll numbers looked much like April's strong data, at least in the private sector.
Chile's IMACEC economic activity index rose 2.4% year-over-year in January, down from 2.6% in December, and 3.3% on average in Q4, thanks mostly to weak mining production.
October payrolls were stronger than we expected, rising 128K, despite a 46K hit from the GM strike.
The MPC's view that the economy likely will grow at an above-trend rate over the coming quarters was challenged immediately last week by the PMIs.
The ECB took another big step yesterday in assuring markets that it won't waver in the fight against Covid-19.
The Caixin services PMI ticked down to 53.6 in January, from 53.9 in December.
It will take a while for the economic data in the euro area fully to reflect the Covid-19 shock, but the incoming numbers paint an increasingly clear picture of an improving economy going into the outbreak.
The meta game between China and Mr. Trump started as soon as he had any possibility of winning the election in 2016.
We are not worried, at all, by the slowdown in headline payroll growth to 157K in July from an upwardly-revised 248K in June.
China's PMIs point to softening activity in Q3. The Caixin services PMI fell to 52.8 in July, from 53.9 in June.
October's Markit/CIPS services survey added to evidence that the economy has started Q4 on a very weak footing.
A growing number of economists have marked down their forecasts for Chinese growth next year to below the critical 6% year-over-year rate, required to ensure that the authorities meet their implicit medium- term growth targets.
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.
Markets expect the MPC to shelve November's guidance--that interest rates need to rise only twice in the next three years--at today's meeting.
We hadn't expected the scorching 3.6% year-over- year growth rate in Japan's June average wages
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.
Consumer sentiment in Mexico continues to improve, consistent with tailwinds from the relatively strong labour market and the president's rising approval ratings.
September PMI surveys in Mexico continued to bolster our argument for a subpar recovery in the second half of the year.
Demand for German manufacturing goods slipped at the end of Q3. Yesterday's report showed that factory orders fell 0.6% month-to-month in September, constrained by weakness in domestic demand and falling export orders to other EZ economies.
February's GDP report, released on Thursday, likely will show that the economy continued to struggle for momentum, despite the fillip to sentiment stemming from the general election.
In the wake of yesterday's ADP report, which showed private payrolls rising by only 163K, we have pulled down our forecast for today's official number to 170K.
While we were out, Brazil's economic and political situation continued to improve, allowing the BCB to cut the Selic rate by 100bp to 9.25% at its July 26th meeting, matching expectations.
There are only two stories that matter for EZ investors at the moment, and neither of them is related to the economic data.
We were a bit disappointed by the November ADP employment report, though a 190K reading in the 102nd month of a cyclical expansion is hardly a disaster.
Chile's central bank, the BCCh, held its reference rate unchanged at 2.75% on Tuesday, in line with the majority of analysts' forecasts.
Upbeat PMIs, the MPC's abandonment of its easing bias and the High Court ruling that only a parliamentary vote--and not the Prime Minister--can trigger Article 50, all helped sterling to make up some lost ground last week.
December's GDP report, released next Monday, likely will maintain the flow of negative news on the U.K. economy.
Brazil's key data flow started Q4 on a soft note, but we still believe that the economic recovery will gather strength over the next three-to-six months.
The President's threat to impose tariffs on imported Chinese consumer goods on September 1 might yet come to nothing.
Yesterday's economic numbers in the Eurozone were mixed, but we are inclined to see them through rose-tinted glasses.
Last week's preliminary estimate of Q1 GDP has extinguished any lingering chance that the MPC might raise interest rates at its next meeting on May 10.
U.K. manufacturers are benefiting from rapid growth in the Eurozone, but increasingly they are being held back by weak domestic demand.
Recently data from Argentina continue to signal a firming cyclical recovery. According to INDEC's EMAE economic activity index, a monthly proxy for GDP, the economy grew 4.0% year-over-year in June, up from an already-solid 3.4% in May.
Money supply data in the euro point to a cyclical peak in GDP growth this year. Headline M3 growth fell to 4.8% year-over-year in July, from 5.0% in June, chiefly due to a slowdown in narrow money. M1 growth declined to 8.4%, from 8.7%, as a result of weaker momentum in overnight deposits and currency in circulation.
The biggest single surprise in the second quarter GDP report was the unexpected $28B real-terms drop in inventories.
China's official PMIs for January, due out tomorrow, will give the first indications of how the economy started the year.
The Bank of England issued a statement yesterday that it is "working closely with HM Treasury and the FCA--as well as our international partners--to ensure all necessary steps are taken to protect financial and monetary stability".
Data released this week in Brazil underscored the effect of weaker external conditions. This adds to the poor domestic demand picture, which has been hit by high, albeit easing, political uncertainty.
Friday's consumer sentiment data in the two main Eurozone economies were mixed.
The Monetary Policy Board of the Bank of Korea will tomorrow hold its final meeting for the year.
The picture of the economy's recent performance will be redrawn today, when the national accounts are published.
China's manufacturing PMIs put in a better performance in November, with the official gauge ticking up to 50.2 in November, from 49.3 in October, and the Caixin measure little changed, at 51.8, up from 51.7.
The startling jump in supplier delivery times in the June ISM manufacturing survey, to a 14-year high, was due--according to the ISM press release--to disruptions to steel and aluminum supplies, transportation problems and "supplier labor issues".
Argentina's economic data released last week confirm that the economy is improving. Our core view, for now, is that the economy will continue to defy rising political uncertainty, both domestic and external.
BanRep cut Colombia's key interest rate by 25 basis points last Friday, to 6.25%. We were expecting a bolder cut, as economic activity has been under severe pressures in recent months.
The stage is set for the Fed to ease by 25bp today, but to signal that further reductions in the funds rate would require a meaningful deterioration in the outlook for growth or unexpected downward pressure on inflation.
BanRep accelerated the pace of easing last Friday, cutting Colombia's key interest rate by a bold 50 basis points, to 5.75%. Economic activity has been under severe pressure in recent months. The economy expanded by only 1.1% year-over-year in Q1, following an already weak 1.6% in Q4.
Where to start with the January employment report, where all the key numbers were off-kilter in one way or another?
The near-term performance for EZ manufacturing will be a tug-of-war between positive technical factors, and a still-poor fundamental outlook.
Data yesterday showed that Momentum in the EZ retail sector stumbled through middle of Q2.
India's GDP report for the fourth quarter surprised to the upside, with the economy growing by 4.7% year-over-year, against the Bloomberg median forecast of 4.5%.
The BoJ has no good options, and its leeway for changes to existing policy instruments is limited.
Investors looking for more QE and rate cuts will be disappointed by ECB inaction today. We think the Central Bank will keep its main interest rates unchanged, and also maintain the pace of asset purchases at €60B a month. We do, however, look for a slight change in language, hinting that QE is likely to continue beyond September next year.
The PBoC yesterday cut its 7-day and 14-day reverse repo rate by 10bp, to 2.40% and 2.55% respectively, while injecting RMB 1.2T through open market operations.
Colombia's central bank has found a relatively sweet spot.
Data released yesterday show that the Chilean economy had a weak start to the second half of the year.
Today's balance of payments figures for the second quarter likely will underline that the U.K. has financed strong growth in domestic consumption by amassing debts with the rest of the world at a breakneck pace.
The Bank of Korea's two main monthly economic surveys were very perky in January.
The further depreciation of sterling yesterday, to its lowest level against the dollar and euro since March 2017 and September 2017, respectively, signified deepening pessimism among investors about the chances of a no-deal Brexit.
Today's Sentix survey of Eurozone investor sentiment likely will remain downbeat. We think the headline index rose only trivially, to 6.0 in April from 5.5 in March, and that the expectations index was unchanged at 2.8. Weakness in equities due to global growth fears and negative earnings revisions likely is the key driver of below-par investor sentiment.
Today's advance EZ CPI report likely will show that inflation pressures eased in May. We think inflation slipped to 1.5% year-over-year, from 1.9% in April, as the boost to the core rate from the late Easter faded.
May's E.C. Economic Sentiment survey was a blow to hopes that the six-month stay of execution on Brexit would facilitate a recovery in confidence.
Don't bet the farm on today's October payroll numbers, which will be hopelessly--and unpredictably-- compromised by the impact of hurricanes Florence and Michael.
Macroeconomic data in the euro area were mixed in our absence.
The rate of deterioration in the labour market remains gradual enough for the MPC to hold back from cutting Bank Rate over the coming months.
PM Abe last week asked the cabinet to put together a package of measures in a 15-month budget aimed at bolstering GDP growth through productivity enhancement, in addition to the shorter-term goal of disaster recovery.
Last week, while we were taking our spring break at home, markets behaved relatively well in LatAm.
While we were away, the advance Q2 GDP report in the Eurozone confirmed our expectations of a strong first half of the year for the economy. Real GDP rose 0.6% quarter-on-quarter, the same pace as in Q1, lifting the year-over-year rate to a cyclical high of 2.1%.
Turkey has all the problems you don't want to see in an emerging market when the U.S. is raising interest rates.
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.
With rates now certain to rise this week, the real importance of the employment picture is what it says about the timing of the next hike. To be clear, we think the Fed will raise rates again in June, and will at that meeting add another dot to the plot, making four hikes this year.
Yesterday's ECB meeting was a tragedy in two acts. Markets were initially underwhelmed by the concrete measures unveiled, and they were then shell-shocked by Ms. Lagarde's performance in the press conference.
We expect July's consumer prices report, due on Wednesday, to reveal that CPI inflation dropped to 1.8% in July, from 2.0% in June.
Today's ECB meeting is supposed to be a slam-dunk.
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.
While we were out, most of the action was on the political front, while the economic data mostly were unexciting.
Thursday's CPI report in Mexico showed that inflation is edging lower. We are confident that it will continue to fall consistently during Q1, thanks chiefly to the subpar economic recovery, low inertia and the effect of the recent MXN rebound.
The core CPI rose only 0.1% in May, marking the fourth straight soft reading.
Investors in Eurozone banks continue to face uncertain times, despite the ECB's best efforts to prop up the economy and financial markets via QE. The latest hit to confidence comes from the bail-in of selected senior debt in Portugal's Banco Espirito Santo. When the troubled lender was restructured in mid-2014, the equity and junior debt were left in a "bad" bank--and were virtually wiped out--while the deposits and senior debt went into the "good" bank Novo Banco. Senior debt holders expecting to recoup their money, however, were startled earlier this month by the decision to "re-assign" five selected bonds with total face value of €2B from Novo Banco to the bad bank, in effect wiping out the investors.
Chancellor Javid's resignation, only eight months after assuming the role, is the clearest sign yet that the Johnson-led government wants fiscal policy to play a bigger part in stimulating the economy over the next couple of years.
The January durable goods numbers, viewed in isolation, were not terrible.
The trend in retail sales no longer looks quite so flat, following yesterday's May report. The level of sales volumes in April was revised up by 0.3%.
Downbeat sectoral data and weakening consumer spending numbers indicate that the Mexican economy remains in bad shape.
Manufacturers in the Eurozone stood tall mid-way through Q2, despite still-subdued leading indicators.
The consequences of the collapse in oil prices continue to reverberate through the sector. The number of rigs in operation is still falling rapidly, but the rate of decline is slowing. According to data from Baker Hughes, Inc., an average of 23 rigs per week have ceased operation over the past four weeks, the slowest decline since December.
Today's wave of data will be mixed, but most of the headlines are likely to be on the soft side, so the reports are very unlikely to trigger a wave of last minute defections to the hawkish side of the FOMC. As always, though, the headlines don't necessarily capture the underlying story, and that's certainly been the case with the retail sales data this year. Plunging prices for gas and imported goods, especially audio-video items, have driven down the rate of growth of nominal retail sales, but real sales have performed much better.
Yesterday's Q2 GDP report in Germany was solid, but the headline disappointed slightly. GDP growth slowed to 0.6% quarter-on-quarter from an upwardly- revised 0.7% rise in Q1. The year-over-year rate, however, rose to 2.1% from a revised 2.0% in Q1.
The surge in July core retail sales was flattered by the impact of the Amazon Prime Event, which helped drive a 2.8% leap in sales at nonstore retailers.
LatAm economies are being battered by high inflation triggered by currency sell-offs and El Niño supply shocks, so rates have had to rise despite the challenging global environment. Peru's central bank, the BCRP, was forced to increase interest rates by 25bp to 4.25% last Thursday, the fourth hike in six months, as inflation is far above the central bank's 1-to-3% target range.
Last week, Banxico, the BCCh and the BCRP all left their reference rates on hold. Their currencies have remained relatively stable in recent months and inflation pressures are under control. In Mexico, Banxico has adopted a more discretionary approach, following two 50bp hikes this year.
Peru's central bank, the BCRP, capitulated to the sharp PEN depreciation this year--and acceleration of inflation--and unexpectedly increased interest rates by 25bp to 3.50% last Thursday, for the first time since January. This was a brave step, showing that policymakers are extremely worried about the pace of inflation, despite activity still running below potential. The BCRP argues, though, that activity will accelerate during the coming quarters, so they need now to control inflation by anchoring expectations.
Manufacturing in the EZ was held above water by Ireland at the end of Q3.
The ECB's key message was unchanged yesterday. The main refinancing and deposit rates were maintained at zero and -0.4%, respectively, and they are expected "to remain at their present levels at least through the summer of 2019."
Today brings an astonishing eight economic reports, so by the end of the wave of numbers we'll have a pretty good idea of how the economy performed in the first month of the third quarter.
The first wave of domestic third quarter data crashes ashore this morning.
Yesterday's second EZ Q2 GDP report was slightly more upbeat than the advance estimate.
The Mexican economy gathered strength in Q3, due mainly to the strength of the services sector, and the rebound in manufacturing, following a long period of sluggishness, helped by the solid U.S. economy and improving domestic confidence.
Financial assets of all stripes are, by most metrics, expensive as we head into year-end, but for some markets, valuations matter less than in others. The market for non-financial corporate bonds in the euro area is a case in point.
The continued modest rate of increase in unit labor costs makes it hard to worry much about the near-term outlook for core inflation.
China's CPI inflation rose to 2.1% in July, from 1.9% in June.
Chinese PPI inflation was unchanged at 5.5% in July; it had been expected to rise modestly. Officially, inflation peaked at 7.8% in February, but we think this peak was artificially high, thanks to seasonal effects. The slowing in PPI inflation since the peak appears to suggest that monthly price gains have slowed sharply. We find little evidence to support this.
Slowly but surely, it is becoming respectable to argue that central bank policy in the developed world is part of the problem of slow growth, not the solution. We have worried for some time that the signal sent by ZIRP--that the economy is in terrible shape--is more than offsetting the cash-flow gains to borrowers.
Fed Chair Yellen today needs to strike a balance between addressing investors' concerns over the state of the stock market and the risks posed by slower growth in Asia, and the tightening domestic labor market.
Yesterday's economic data in Germany were stellar, but base effects mean that the story for Q4 as a whole is less upbeat.
Survey data have been signalling a resilient Brazilian economy in the last few months, despite the broader challenges facing LatAm and the global economy in 2019.
The 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.
Britain is indisputably beyond the peak of the first wave of Covid-19 infections, though the descent in new cases, hospitalisations and deaths has been shallower than the ascent.
We're inclined to place little weight on July's E.C. Economic Sentiment Survey, which showed that consumers' confidence has picked up to its highest level since October 2016; see our first chart.
The Q4 national accounts show that the economy lost further momentum at the end of last year, in the face of unprecedented levels of political uncertainty.
Yesterday's first estimate of Q2 GDP in Mexico confirmed that the economy lost momentum in recent months.
The BoJ had two tasks at its meeting yesterday.
A quick rebound in growth, after the slowdown to a reported 2.6% in the fourth quarter, is unlikely.
Money supply data in the euro area disappointed yesterday. Growth in M3 fell to 4.6% year-over-year in April, from 5.0% in March, due to an accelerated fall in the pace of narrow money growth. M1 rose 9.7% year-over-year, down from 10.1% in March. It was hit by lower growth in both overnight deposits and currency in circulation.
For some time now, we have puzzled over the softness of small firms' capital spending intentions, as measured by the monthly NFIB survey.
Our base case remains a 10bp cut in the deposit rate, to -0.5%, in September.
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.
Manufacturing in France rebounded only modestly at the start of Q3, despite favourable base effects.
The Easter effect depressed services inflation more than markets expected in April, but the main downside surprise was the tepid rebound in non-energy goods inflation.
Yesterday's minutes of the February 4-to-5 COPOM meeting, at which Brazil's central bank, the BCB, cut the benchmark Selic rate by 25bp to 4.25%, reaffirmed the committee's post-meeting communiqué.
China's State Administration of Foreign Exchange-- SAFE--yesterday refuted claims, made earlier in the week, that senior government officials had recommended slowing or halting purchases of U.S. Treasuries.
Core machine orders in Japan collapsed in April, as expected, falling by 12.0% month-on-month, worse than the minor 0.4% slip in March.
In March, CPI rents--the weighted average of primary and owners' equivalents rents--rose by 0.35% month- to-month.
In three of the past four months, new home sales have been reported above the 460K top of the range in place since early 2013. Sales dipped below this mark in November, when the weather across the country as a whole was exceptionally cold, relative to normal.
This has been a very complicated week for LatAm policymakers, who are particularly uneasy about the performance of the FX market.
Mexico's headline inflation fell to a record low of 2.9% in May, down from 3.1% in April and below the middle of Banxico's inflation target, 2-to-4%, for the first time since May 2005. C ore inflation was unchanged at 2.3% in May; higher services prices were offset by a slowing in the rate of increase of goods prices to 2.4% from 2.7% in April, confirming that the pass-through effect from the MXN's depreciation has been very limited.
Friday's data provided the first bit of evidence that manufacturing in the Eurozone is headed for a slowdown in Q2, partly reversing the strength in Q1.
Japan's labour cash earnings rose by 1.5% year-over- year in July, a strong result in the Japanese context, if it hadn't been preceded by the 3.6% leap in June.
Inflation pressures in Brazil are now well- contained, with the headline rate falling to a decade low in July. We think inflation is now close to bottoming out, but the current benign rate strengthens our base case forecast for a 100bp rate cut at the next policy meeting, in September.
The bad news in German manufacturing keeps coming thick and fast.
Wage growth in Japan accelerated to a six-month high in December, inching up to 1.8% year-over-year, from November's 1.7%.
CPI inflation is on track to fall back to 2.0% in the winter and below the MPC's target thereafter, despite rising to 2.5% in July, from 2.4% in June.
Italy's political leadership faces its first biggest test in autumn, when it has to deliver its first budget.
In the wake of the unexpectedly weak September Empire State survey, released Monday, we are now very keen to see what today's Philadelphia Fed survey has to say.
Leading indicators are giving conflicting signals regarding the outlook for core goods CPI inflation.
CPI inflation in India jumped to 4.6% in October, from 4.0% in September, marking a 16-month high and blasting through the RBI's target.
Covid-19 has finally showed up in Japan's exports, which plunged 11.7% year-over-year in March, after falling a mere 1.0% in February.
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.
The construction sector remains a stand-out performer in the Eurozone economy, despite stumbling at the end of Q2.
Hard data released in Argentina over the last month showed that the economy was struggling in early Q1, even before the Covid-19 hit.
Mexico's recent rebound in inflation and a more volatile financial environment, due to increasing global trade tensions, forced Banxico to keep its policy rate unchanged at 8.25% last Thursday.
The MPC likely will raise interest rates today, but as we explained here, it probably will revise down its medium-term inflation forecast, signalling that it is content with the further 35bp tightening currently priced-in by markets for 2018.
GDP growth currently is subdued by historical standards, but at least it is not debt-fuelled.
In broad terms, the euro has followed the EZ economy in the past 12-to-18 months.
China has a nuclear option in the face of pressure from U.S. tariffs, namely, to devalue the currency.
The U.S. reached a trade agreement with Canada on Sunday, adding its northern neighbour to the pact sealed a month ago with Mexico.
The euro area's trade advantage with the rest of the world slipped at the start of the year.
The Eurozone's external accounts were extremely volatile at the end of Q4.
Greece's exit from eight years of near constant bail-out programs raises as many questions as it answers.
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.
The closer we look at the Fed's new forecasts, the stranger they seem. The FOMC cut its GDP estimate for this year and now expects the economy to grow by 1.9%--the mid-point of its forecast range--in the year to the fourth quarter. Growth is then expected to pick up to 2.6% next year, before slowing a bit to 2.3% in 2017. Unemployment, however, is expected to fall much less quickly than in the recent past.
The MPC was more hawkish than we and most investors expected yesterday. The vote to keep Bank Rate at 0.50% was split 6-3, f ollowing Andy Haldane's decision to join the existing hawks, Ian McCafferty and Michael Saunders.
On the face of it, the latest public finance data suggest that the economy has lost momentum.
So much has changed in China over the last six months that we are taking the opportunity in this Monitor to step back and gain an overview of where the economy is going in the long term.
China's growth can be decomposed into the structural story and the mini-cycle, which is policy- driven.
The public finances are in better shape than October's figures suggest in isolation. Public sector net borrowing excluding public sector banks--PSNB ex.--leapt to £11.2B, from £8.9B a year earlier.
President Nicolás Maduro has "won' another six-year term, as expected, even as millions of Venezuelans boycotted the election.
November's labour market report provided timely reassurance, after last week's downside data surprises, that the economy did not grind to a halt at the end of last year.
Brazil's economic performance has improved marginally in recent months, with inflation falling and economic activity and sentiment data stabilizing, or even increasing modestly. The latest regional economic activity report, for instance, showed that although overall output declined again on a sequential basis in March-to-May, three of the five regions expanded.
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.
Colombia is one of the few larger economies in Latin America to have enjoyed solid, positive economic growth over the past two years. But lower commodity prices and last year's central bank tightening, to curb high inflation generated by strong growth, have started to become visible in the main economic data.
If the only manufacturing survey you track is the Philadelphia Fed report, you could be forgiven for thinking that the sector is booming.
The French economy has suffered from weakness in manufacturing this year, alongside the other major EZ economies.
The latest public finance figures continue to imply that the Chancellor will be able to change course later this year in the Autumn Budget so that fiscal policy doesn't drag on GDP growth next year.
LatAm's economies are gradually rebounding, boosted by easier monetary policy in most countries, falling inflation, and a relatively calm external backdrop.
Japan's labour data threw another January curve ball this year--last year it was wages--with a change in the standards for job openings.
The ECB moved ahead of the curve this month with its QE program of €60B per month, starting in March. But still-abysmal inflation data will prompt journalists to ask Mr. Draghi, at the next ECB meeting, about the conditions under which the central bank plans to do more.
Colombia is more vulnerable to falling oil prices than most other LatAm economies. That's why the COP has dropped by 20% since June, outpaced only by the rouble, which has problems beyond falling oil prices.
Equity prices for U.K. retailers have performed woefully since the E.U. referendum. The FTSE All-Share Index for general retailers has underperformed the overall All-Share Index by nearly 30% since the Brexit vote.
The elevated readings from the ISM manufacturing survey this year have not been followed by rapid growth in output. The headline ISM averaged 55.8 in the second quarter, a solid if unspectacular reading. But output rose by only 1.2% year-over-year, and by 1.4% on a quarterly annualized basis.
Over the past 30 years China's role in LatAm and the global economy has increased sharply. Its share of world trade has surged, and its exports have gained significant market share in LatAm.
Upbeat survey data and relatively resilient consumer spending numbers indicate that the Mexican economy is in good shape, despite a marginal slowdown in most of Q2.
Some of the recent labor market data appear contradictory. For example, the official JOLTS measure of the number of job openings has spiked to an all-time high, and the number of openings is now greater than the number of unemployed people, for the first time since the data series begins, in 2001.
At first glance, the latest labour market data appear to be contradictory.
China's property market looks to be turning the corner, going by the stronger-than-expected March report.
Prime Minister Shinzo Abe last Tuesday finally declared a state of emergency for a month in parts of Japan, after weeks of dithering.
The "Phase One" China trade deal announced late last week is a step in the right direction, but a small one. With no official text available as we reach our deadline, we're relying on media reporting, but the outline of the agreement is clear.
Core CPI inflation plunged in the aftermath of the crash, reaching a low of 0.6% in October 2010. It then rebounded to a peak of 2.3% in the spring of 2012, before subsiding to a range from 1.6-to-1.9%, held down by slow wage gains and the strengthening dollar, until late last year. Faster increases in services prices and rents lifted core inflation to 2.3% in February, matching the 2012 high, but it has since been unchanged, net.
The market-implied probability that the MPC will cut Bank Rate at its meeting on January 30 jumped to 63%, from 44%, following the release of December's consumer prices report.
Fed Chair Yellen said nothing very new in the core of her Monetary Policy Testimony yesterday, repeating her view that rates likely will have to rise this year but policy will remain accommodative, and that the labor market is less tight than the headline unemployment rate suggests. The upturn in wage growth remains "tentative", in her view, making the next two payroll reports before the September FOMC meeting key to whether the Fed moves then.
Data released last week in Argentina reaffirm that President Macri remains in a challenging position ahead of the October 27 presidential election.
We are not worried about the reported drop in April manufacturing output, which probably will reverse in May.
The median of FOMC members' estimates of longer run nominal r-star--the rate which would maintain full employment and 2% inflation--nudged up by a tenth in September to 3.0%, implying real r-star of 1%.
Manufacturing is in recession, with few signs yet that a floor is near, still less a recovery.
Peru's April supply-side monthly GDP data confirm that the economic rebound lost momentum at the start of the second quarter.
The headline employment numbers masked an otherwise sub-par December labour market report.
Data this week confirmed that private spending in Colombia stumbled in June. Retail sales fell 0.7% year-over-year, from an already poor -0.4% in May. The underlying trend is negative, following two consecutive declines, for the first time since late 2009. Domestic demand remains subdued as consumers are scaling back spending due to weaker real incomes, lower confidence and tighter credit and labor market conditions.
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 People's Bank of China cut its seven-day reverse-repo rate yesterday, to 2.50% from 2.55%.
The past two days have seen a slew of data that should keep the hawks in the Bank of Korea at bay during the Board's meeting at the end of this month.
As the impeachment hearings gather momentum, we have been asked to provide a cut-out-and-keep guide to the possible outcomes.
A big picture approach to the China trade war, from the perspective of Mr. Trump, is reasonably positive. The president very clearly wants to be re-elected, and he knows that his chances are better if the economy and the stock market are in good shape.
In September last year, headline CPI inflation stood at exactly zero. Today, we expect to see a 1.5% print, thanks mostly to the fading impact of falling energy prices.
Consumer confidence surveys have risen since the elections to levels consistent with very rapid growth in real spending.
Inflation data are known to defy economists' forecasts, but it should in principle b e straightforward to predict the cyclical path of EZ core inflation. It is the longest lagging indicator in the economy, and leading indicators currently signal that core inflation pressures are rising.
The BoJ is likely to stay on hold this week for all its main policy settings.
Today's labour market report looks set to be a mixed bag, with growth in employment remaining strong, but further signs that momentum in average weekly wages has faded.
The April FOMC statement dropped the March assertion that "global economic and financial developments continue to pose risks" to the U.S. economy, even though growth "appears to have slowed". Instead policymakers pointed out that "labor conditions have improved further", perhaps suggesting they don't take the weak-looking March data at face value. We certainly don't.
The drop in CPI inflation to 0.5% in May, from 0.8% in April, brought it another big step closer to the near-zero rate we foresee in the second half of this year.
Public sector borrowing still is on course to greatly undershoot the March Budget forecasts this year, despite October's poor figures.
In one line: Soft, but still consistent with decent GDP growth.
In one line: If it bleeds, it leads: Alarmist media are missing the continued slowdown in U.S. case growth.
In one line: U.S. case growth now well below the pace at the time Germany announced lockdown easing.
In one line: Germany is headed for near-zero new cases by the end of May.
In one line: Falling U.S. deaths are a good sign as increased testing reveals more cases.
In one line: Most U.S. states seeing slower case growth, despite increased testing.
In one line: Flat in Q1, but scope for modest gains ahead.
In one line: Covid-19 outbreaks fading in China, Korea; Elsewhere, not.
In one line: Europe outside Italy is in trouble; more days like yesterday will result in broad lockdowns.
In one line: The overall U.S. picture is improving slowly, but hotspots are worrying.
In one line: Test data anomalies make it hard to see case trends; deaths are falling.
In one line: U.S. Deaths set to reach 100K by late May, even as case numbers fall.
In one line: The downward trend in U.S. cases continues, but at a slower pace.
In one line: Favorable trends across DM; no sign of rebounds after reopenings.
In one line: Better news from Florida, but daily new cases still rising in some states.
In one line: If the uptick in U.S. new cases is real, deaths will follow; don't bet on it.
In one line: U.S. data likely distorted by holiday lags, but a second wave may be emerging in parts of the South.
In one line: More testing = more cases; evidence of a second wave is scant.
In one line: A mediocre month, but a lasting slowdown isn't likely.
In one line: Surprisingly strong.
In one line: Brace for a general election and a weaker pound.
In one line: Still misleadingly upbeat.
In one line: Irreconcilable with all other evidence.
In one line: No longer insulated from Brexit uncertainties.
In one line: The downturn is deepening, through a rapid rebound will emerge if no-deal Brexit risk subsides.
In one line: Consistent with steady, if unspectacular, GDP growth.
In one line: Don't take the PMI's recession signal literally.
In one line: Pre-Brexit preparations offering little support, so far
In one line: Starting to converge with other weaker measures.
In one line: Slower growth reported following methodological improvements.
In one line: No sign of a turnaround yet.
In one line: Slumping as firms run down inventories.
In one line: Another weak survey, but production will rebound in Q3.
In one line: Dire, even after accounting for seasonal quirks.
In one line: Pre-Brexit preparations providing no relief this time.
In one line: Undermining the case for a rate cut.
In one line: The inflation outlook still does not warrant lower interest rates.
In one line: Positive U.S. tests dip below 5% as new case numbers start to tumble.
In one line: U.S. Case growth is slow and slowing; what will reopening bring?
Little Evidence that Italy's Lockdown is Working, Yet
In one line: Drastic action is coming in Europe, soon.
In one line: Global cases aren't accelerating, but Italy's nightmare deepens.
In one line: Hoping for Seasonality.
In one line: Italian data confirm that aggressive testing and distancing measures work.
In one line: It's beatable: No new domestic China cases yesterday.
In one line: The rate of growth of new cases in Italy has levelled off; soon to decline?
In one line: Lockdowns ought to slow case growth by early April.
In one line: U.S. hospitalizations still falling steadily post-reopening, so far.
In one line: A second wave is underway in parts of the South, and it's not all due to rising testing.
In one line: The second U.S. wave is spreading, and accelerating.
In one line: U.S. Hospitalizations up 5% Yesterday; Further Big Increases are Inevitable
In one line: New U.S. cases up an astounding 55% yesterday; hospitalizations rising.
In one line: The proportion of positive U.S. tests may be flattening; good news, if it persists.
In one line: Hospitalizations are falling steadily despite noisy case data, but parts of the south are seeing cases jump.
In one line: More testing = more cases, but some southern states have real outbreaks.
In one line: New U.S. cases are rising rapidly, but has the rate of increase peaked?
In one line: New cases outside the major four outbreaks are accelerating.
New Asian Cases Ticking Higher; European Growth Steady, but Rapid
In one line: Case growth is slowing in the U.S. and Europe, but Big Risks Remain
In one line: A slight slowing in the rate of increase outside China; Iran is the key exception.
In one line: NYC making real progress, but rapid increases continue in several large states.
In one line: Better news across most of Europe and the U.S., but some states stil face uncontained case growth.
In one line: Outside the big four outbreaks, new cases are rising steadily; they aren't accelerating.
In one line: U.S. cases are falling, outside the meat-packing hotspots.
In one line: New global cases rising steadily, not exponentially, but Europe and U.S. outbreaks worsening.
In one line: Bending curves in NY, WA offset by rapid increases in other states; Italy continues to improve.
In one line: No slowdown yet in U.S. case growth; risk of explosive outbreaks in NJ, FL, LA.
First Signs of a Turning Point in Europe as Case Growth Slows?
Possible Slowdowns in New Cases in NYC and Some European Countries
Still Waiting for Results from Europe's Lockdowns; U.S. Cases Soaring
European Covid-19 Case Growth Appears to be Slowing
Two Straight Days of Better News from Italy; U.S. Still Deteriorating
In one line: U.S. case growth is rapid but seems to be slowing, and beware the risk of explosive new hotspots.
In one line: The U.S. Covid-19 Curve isn't bending yet.
In one line: Lower mortgage rates are limiting the damage from Brexit uncertainty.
In one line: Maintaining its composure; tightening still likely, if no-deal is averted.
In one line: Survey's poor construction means it is always too gloomy at the start of recoveries.
In one line: Continued weakness reflects the survey's construction and timing.
In one line: Understating the recovery, due to its poor construction.
In one line: Cash positions were built up rapidly heading into the crisis.
In one line: Recovery primarily driven by lower mortgage rates.
In one line: Starting to shift down; weak confidence points to further falls.
In one line: Two large consecutive falls aren't a fluke.
In one line: Expect the market to continue to strengthen.
In one line: Another positive sign, though the survey is not a precise guide to the PMI.
In one line: Consistent with falling manufacturing output and a small drop in the PMI.
In one line: Spending growth is slowing; expect hefty Q3 GDP forecast markdowns.
In one line: Small firms don't like the trade war.
In one line: The trend in sales is rising, and inventory is falling.
In one line: Core services prices jump, but it's noise not signal.
In one line: Core sales have surged in Q3, but expect a much weaker Q4.
In one line: Ending the year on a very weak note.
In one line: Going big and early.
In one line: Weakness reflects pre-election nerves; Covid-19, however, has re-written the post-election script.
In one line: Lower mortgage rates are working their magic.
In one line: Very bad, but worse to come.
In one line: Manufacturing is still stagnating.
In one line: More ancient history.
In one line: Manufacturing beginning to recover, but a long way to go.
In one line: GM drives up production; core manufacturing is stagnant.
In one line: Could have been a great deal worse.
In one line: Worst month ever, but this is the floor.
In one line: Disappointing, but not a change in the trend.
In one line: Decent core manufacturing hidden by weather-driven utility plunge.
In one line: Great, but not for much longer.
Today brings only the preliminary Michigan consumer sentiment data for January so we want to take some time to look at how recent changes to Medicare Part B premiums, which cover doctors' fees, are likely to affect inflation over the next few months.
The run of soft core CPI numbers is over. The average 0.18% increase over the past two months probably is a good indication of the underlying trend -- the prints would have been close to this pace in both months had it not been for wild swings in the lodging component -- and the other one-time oddities of recent months' have faded.
In one line: Weighed down by political uncertainty.
In one line: Whatever it takes.
In one line: Grim, but no worse than implied by other data.
In one line: Better, but still bad.
In one line: News from another planet.
In one line: Better, and scope for further gains.
In one line: Not as good as it looks.
In one line: Depressed, but not knocked out, by Brexit uncertainty.
In one line: Looser fiscal targets will have to be adopted in response to methodological changes and sluggish growth in tax revenues.
In one line: Falling mortgage rates are bolstering prices.
In one line: No sign of stockpiling ahead of the October deadline.
In one line: Solid, but it won't last.
In one line: Manufacturing is enduring a mild recession, but it probably won't deepen much further.
In one line: Much better, but still soft, and downside risks ahead.
In one line: The calm before the export storm?
In one line: Near-flat trend in prices unlikely to improve soon.
In one line: Treading water, but falling mortgage rates will help soon.
In one line: Still flat, but lower mortgage rates point to gains ahead.
In one line: Still flat, but the trend should improve modestly later this year.
In one line: Still essentially flat, but the impending fall in mortgage rates will help.
In one line: Still broadly flat, as Brexit risk offsets support from solid wage growth.
In one line: Flat for six months, but modest growth likely ahead.
In one line: Close to the nadir.
In one line: No longer slowing; lower mortgage rates are helping.
In one line: Policy uncertainty is not lifting layoffs.
In one line: Trade wars have consequences.
In one line: Calendar quirks explain the drop in manufacturing output; expect a rebound in May.
In one line: Ignore the headline declines; core picture is improving.
In one line: Strong, and further gains coming.
In one line: Looks great but it won't last.
In one line: Wrecked by the GM strike, but the underlying picture is soft too.
In one line: Grim; no sign of hitting bottom despite better regional surveys.
In one line: Depressed by the GM strike, but the underlying picture is grim too, and still deteriorating.
In one line: Homebuilders still wary, but construction activity will rise over the summer.
In one line: Headlines are misleading; core activity stable.
In one line: Soft, but the outlook is for a much worse numbers in Q4 and beyond.
In one line: Looks bad, but the trend is not--yet--running at 0.3% per month.
In one line: Both better than expected, but downside risk is not over.
In one line: A decent month, but much better to come later in the year.
In one line: Starts have further to rise, given the rebound in new home sales.
In one line: Ignore the headline; what matters is the emerging rising trend in single-family permits.
In one line: Headlines flattered massively by multi-family surge, but core single-family numbers decent too.
In one line: More states now having rising cases than falling.
In one line: Broad improvement hidden by data changes, but wave 2 is emerging in the south.
In one line: Terrible; Q4 GDP growth set for downward revision later this week.
In one line: Not bad, but Q3 as a whole likely was soft.
In one line: Terrible, but not worth dwelling on.
In one line: Before Covid-19 everything looked o.k.
In one line: Another poor performance is underway in Q3.
In one line: The next few months will be better, but Q4 as a whole looks grim.
In one line: Great, but probably not enough to salvage the Q2 number.
In one line: Grim, but the numbers are already factored-in by the advance GDP data.
In one line: Not terrible, but outlook for Q2 as a whole is grim.
In one line: A bit better in German manufacturing; the setback in exports was expected.
In one line: Soft; blame Ireland and the Netherlands.
In one line: Germany's recession all but confirmed.
In one line: More solid pre-Covid 19 data in Germany; French trade growth is still slowing.
In one line: Horrible manufacturing data, but an upward revision to Q4 net trade looms.
In one line: The perfect storm; weak manufacturing and a crash in construction.
In one line: So-so, but downside risks to the Q2 GDP headline linger.
In one line: Solid, but ancient, news.
In one line: We'll take any increase here, but the trend still looks grim.
In one line: Terrible; now we wait for the rebound.
In one line: Ugly, German manufacturing can't catch a break.
In one line: Not pretty; construction will be revised lower.
In one line: Great, but it won't last.
In one line: Not pretty, but light at the end of the tunnel; we hope.
In one line: Ugly activity data; temporary employment is crashing.
In one line: Not bad at all.
In one line: Grim, but the details are more encouraging.
In one line: What strikes?
In one line: A bit better, but Q3 as a whole was weak.
In one line: Terrible, but the worst is over.
In one line: Soft, and the outlook for Q2 isn't great.
In one line: Decent, but Q3 as a whole doesn't look good.
In one line: Stung by weakness in output of electronics and pharmaceuticals.
In one line: Outstanding.
In one line: Decent, but we think production slipped in December.
In one line: Back to reality?
In one line: Not terrible, but Q4 as a whole will be soft.
In one line: Manufacturing output has stalled; trade data point to downward Q3 GDP revision.
In one line: Solid start to the year for manufacturing in France; every little helps.
In one line: Still no recovery.
In one line: Some improvement in retails sales, which now face renewed headwinds; infrastructure growth driver sputters.
The FOMC minutes showed both sides of the hike debate are digging in their heels. As the doves are a majority--rates haven't been hiked--the tone of the minutes is, well, a bit do vish. But don't let that detract from the key point that, "Most participants continued to anticipate that, based on their assessment of current economic conditions and their outlook for economic activity, the labor market, and inflation, the conditions for policy firming had been met or would likely be met by the end of the year." Confidence in this view has diminished among "some" participants, however, worried about the impact of the strong dollar, falling stock prices and weaker growth in China on U.S. net exports and inflation.
In one line: A rate cut is needed.
China's homes market faces fundamental headwinds.
In one line: Solid, but the underlying trend still points to very difficult conditions.
Chinese profits show signs of stabilisation, but headwinds will continue
Both China and U.S. look for good will on opposite side and find none; political and economic constraints will soon kick in. BoJ QE remains neutralised by negative yields
We're among a small minority of economists forecasting that GDP rose by 0.1% month-to-month in March.
January's GDP report, released on Wednesday, was set to be one of the most important data releases of this year, due to its role in providing the first official steer on the economy's post-election performance.
London has been the U.K.'s growth star for the last two decades. Between 1997 and 2014, yearover-year growth in nominal Gross Value Added averaged 5.4% in London, greatly exceeding the 4% rate across the rest of the country. Surveys since the referendum, however, indicate that the capital is at the sharp end of the post-referendum downturn.
China's export data shows little impact from trade tensions so far.
Investors with long sterling positions should not pin their hopes on Friday's GDP report to reverse some of the losses endured over the last week.
The release of October's GDP report on Tuesday likely will be overshadowed by campaigning ahead of Thursday's general election.
Mark Carney revealed last week that recent data had given him "greater confidence" that the weakness of Q1 GDP was almost entirely due to severe weather.
A third wave of Covid-19 outbreaks is now underway. The first, in China, is now under control, and the rate of increase of cases in South Korea has dropped sharply. The other second wave countries, Italy and Iran, are still struggling.
Andean inflation remains under control, due to subpar growth, modest pressures on prices for nontradeables, and broadly stable currencies.
In one line: Marginally better in manufacturing; upturn in consumer sentiment halted, for now.
In one line: Stable, but the core rate probably fell a bit.
In one line: Don't extrapolate low EZ inflation; both the headline and core will rise into year-end.
In one line: Not pretty; the slowdown intensified in Q3.
In one line: Solid production data in Q1, but setback looms in Q2.
In one line: Deflation in manufactured goods is still a big drag.
In one line: Hit by lower inflation in energy and clothing.
In one line: An altogether more positive picture.
In one line: Small rebound confirmed, but still overall weak.
In one line: Europe is moving on the fiscal front.
In one line: Surprisingly strong, but too soon to cheer.
In one line: The French economy is bucking the trend, to the upside.
In one line: Settling.
In one line: Soft; we still don't know what is going on with the core rate.
In one line: Weak, but not recessionary.
In one line: EZ construction is stalling.
In one line: The ECB make amends.
In one line: Solid!
In one line: Relief; but manufacturing is not out of the woods yet.
In one line: Much better than the PMIs.
In one line: The jump in U.S. cases yesterday looks like an outlier... we hope.
In one line: Easing lockdowns in the southern U.S. likely will trigger faster case growth.
In one line: Stubborn case growth and low testing makes U.S. re-opening risky.
In one line: U.S. cases rising steadily but should drop next week; Europe improving but Spanish case growth is stubborn.
In one line: U.S. testing finally gathering pace, but still behind the best in Europe.
In one line: U.S. deaths are falling, but the rise in testing seems to have stalled.
In one line: More U.S. testing but falling positive rate is good news.
In one line: Vastly increased testing is finding more U.S. cases, but deaths are falling.
In one line: U.S. deaths rocketing; Italy's are falling, with other western Europe not far behind.
In one line: Progress has slowed in the U.S. and Europe; Japan is miles behind.
New U.S. Case have Peaked but Europe and ANZ Doing Much Better
In one line: As U.S. testing increases, the rate of growth of confirmed cases could rise again for a time.
In one line: The labor market is gradually deteriorating.
Daily U.S. Deaths Should Drop Clearly this Week
Cases and Deaths Falling; U.S. Testing Still Inadequate
In one line: Vigilance will be needed as lockdowns are eased; Covid-19 can spring back.
Trends in U.S. Cases and Deaths are Falling, Despite Yesterday's Jumps
More Testing = More Cases, but the True Rate of Spread Likely is Slowing
Case Growth Slowing Across DMs as Lockdown Effects Work Through
In one line: The southern U.S. Covid picture is deteriorating rapidly.
In one line: Surging cases in parts of the U.S. south are straining hospitals; restrictions are coming.
In one line: Steady overall new U.S. cases hide two very different stories.
In one line: Rising southern cases offsetting declines elsewhere.
In one line: The Memorial Day Covid wave is spreading across the South.
In one line: Rising southern U.S. cases easily outweighing declines elsewhere.
In one line: Southern U.S. hospitalizations are far below the NY peak, but there's no plan in place to stop them rising.
In one line: U.S. regional split deepens; Germany reports rising cases.
In one line: Hotspots on the U.S. Coasts, and the South; elsewhere, mostly improving.
Florida Dodges the Covid Bullet; Curves Bending in most States
Case Growth Slowing but Still Rapid in the U.S. and Much of Europe
Slowing Growth in Cases Across the U.S.; Exceptions are PA, LA
Case Growth Slowing, but the U.S. Need to do Much More Testing
In one line: New cases outside China accelerating rapidly.
In one line: Disappointing U.S. data yesterday, but the rate of spread of Covid has peaked.
In one line: The rate of increase of U.S. cases is slowing; daily new cases to dip in late July?
In one line: The slow recovery of the Brazilian labor market continues.
In one line: Stronger than expected, but threats persist.
In one line: A soft start to Q2, following an ugly Q1.
In one line: Political uncertainty will weigh on the economy in Q4.
In one line: A marginal improvement in manufacturing, offset by poor mining activity.
In one line: Terrible data, and the near-term outlook is grim.
In one line: A strong m/m increase, but downside threats remain.
In one line: An ugly end to the first quarter, but output likely will stabilize in Q2.
In one line: A soft start to the quarter, but leading indicators point to a decent Q3 as a whole.
In one line: Struggling, and external conditions point to challenging times ahead.
In one line: Early signs of stabilisation, but the rebound remains fragile.
In one line: Poor capex in Q3, and consumer confidence is deteriorating.
In one line: Horrible.
In one line: French net exports likely fell sharply in Q3.
In one line: Any more or this, and we'll have to upgrade our 2020 GDP growth forecasts.
In one line: Inflation falling rapidly as the economy comes under severe strain.
In one line: Inflation falls close to target, allowing Banxico to cut rates.
In one line: A surprising rebound in activity.
In one line: The modest uptrend continues.
In one line: Terrible, and more pain is coming.
In one line: Still terrible, but a slow upturn is emerging.
In one line: Grim, due to Covid-19, but a modest recovery likely will emerge in Q3.
In one line: Manufacturing remains resilient, but downside risks looms.
In one line: A poor start to the fourth quarter, due to broad-based weakness.
In one line: Weak, but the full hit will come in April.
In one line: A modest upturn is underway, but the overall picture remains bleak.
In one line: A modest increase, but an uptrend is consolidating.
In one line: A modest increase, but underlying inflation is stable.
In one line: A weak headline, but the details are not as grim.
In one line: Ugly, and worse is to come.
In one line: Terrible, but this is possibly the bottom.
In one line: Sluggish, but production rose in Q3.
In one line: Weak, but expect better data ahead.
In one line: A soft end to the year, but the underlying trend is stabilizing.
In one line: Resilient manufacturing output offsets weakness elsewhere.
In one line: Manufacturing gain fails to offset weakness elsewhere.
In one line: Undershooting expectations, but we expect a modest rebound in Q3.
The headline Chinese trade numbers are beginning to come into line with the story we have been telling about the more recent trends.
The sovereign debt crisis in the euro area was a macroeconomic horror story
The final June inflation report from Germany yesterday confirmed that pressures are rising. Inflation rose to 0.3% year-over-year in June, up from 0.1% in May, mainly due to higher energy prices. Household energy prices--utilities--fell 4.9% year-over-year, up from a 5.7% decline in May, while deflation in petrol prices eased to -9.4%, up from -12.1% in May.
The fundamentals underpinning our forecast of solid first half growth in consumers' spending remain robust.
The resolution of tensions in Italy and aboveconsensus U.K. PMIs for May last week persuaded investors that the MPC likely will press on and raise interest rates soon.
The recovery in the Markit/CIPS manufacturing PMI to 53.1 in November, from 51.1 in October, propelled it well above the consensus, and the equivalent reading for the Eurozone, 51.8, for only the second time in the last 19 months.
A cluster of surveys suggest that the manufacturing sector finished 2016 with a flourish, after a dismal performance for most of the year. But momentum will drain away from the sector's recovery in 2017, as higher oil prices make low value-added work unprofitable again and resurgent inflation causes domestic consumer demand to crumble.
Let's say we are right, and global yields go up this year. Somewhere in the world, imbalances will be exposed, causing financial ructions and damaging GDP growth.
British firms have adopted a cautious mindset since the Brexit vote and are saving a huge share of their earnings, even though high profit margins make a strong case for investing more. Firms likely will run down their cash stockpiles when they become more confident about the medium-term economic outlook, potentially boosting GDP growth powerfully.
In recent years we have argued consistently that investors and the commentariat overstate the importance of the dollar as a driver of U.S. inflation. Only about 15% of the core CPI is meaningfully affected by shifts in the value of the dollar, because the index is dominated by domestic non-tradable services.
The 15% fall in the FTSE 100 since its May 2018 peak undoubtedly is an unwelcome development for the economy, but past experience suggests we shouldn't rush to revise down our forecasts for GDP growth.
Following the much-anticipated meeting between Presidents Xi and Trump over the weekend, the U.S. will now leave existing tariffs on $200B of Chinese goods at 10%, rather than increasing the rate to 25% in January, as previously slated.
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
The EU's negotiations with the U.K. over Brexit are off to a bad start. The position in Brussels is that negotiations on a new relationship can't begin before the bill on the U.K.'s existing membership is settled. But this has been met with resistance by Westminster; the U.K. does not recognise the condition of an upfront payment to leave.
The French manufacturing data delivered another upside surprise last week, following the solid numbers in Germany; see here. French industrial production rose slightly in November, by 0.3% month-to-month, extending the gains from an upwardly-revised 0.5% rise in October.
Here's the bottom line: U.S. businesses appear to have over-reacted to the impact of the trade war in their responses to most surveys, pointing to a serious downturn in economic growth which has not materialized.
All the main surveys of business activity in Q1 now have been released and they present a uniformly downbeat picture.
Data released yesterday confirm that Brazil's recovery has continued over the second half of the year, supported by steady capex growth and rebounding household consumption.
Yesterday's data showed that industrial production in the Eurozone accelerated at the end of spring. Output, ex-construction, jumped 1.3% month-to-month in May, much better than the downwardly-revised 0.3% rise in April; the rise pushed the year-over-year rate up to a six-year high of 4.0%.
Yesterday's labour market data gave sterling a shot in the arm on t wo counts. First, the headline, three-month average, unemployment rate fell to just 4.5% in May, from 4.6% in April.
Industrial production data yesterday confirmed downside risks to Q4's GDP data in Brazil. Output fell 0.7% month-to-month in October, the fifth consecutive decline, pushing the year-over-year rate down to -11.2%, from -10.9% in September. This was the biggest drop since April 2009, when output collapsed by 14.2% during the global financial crisis. The October details were even worse than the headline, as all three broad-measures fell sharply.
Activity in the Mexican industrial sector cooled marginally at the start of the second quarter, but the drop was not as dramatic as the headlines suggested. Output fell 4.4% year-over-year in April, after a 3.4% increase in March.
Mexico's industrial recovery, which began in late Q4, lost momentum at the start of the second quarter.
The NY Fed's announcement yesterday restarts QE. The $60B of bill purchases previously planned for the period from March 13 through April 13 will now consist of $60B purchases "across a range of maturities to roughly match the maturity composition of Treasury securities outstanding".
We're hearing a lot about permanent changes to the economy in the wake of Covid-19, but that might not be the right description. Not much is permanent, and assuming permanence in just about anything, therefore, is risky.
LatAm data in recent days have confirmed that efforts to contain the coronavirus, plunging global trade, and the collapse in oil prices, are dealing a severe economic and financial blow.
We have spent the past few weeks shifting our story on the EZ economy from one focused on slowing growth and downside risks to a more balanced outlook. It seems that markets are starting to agree with us.
The unexpectedly robust 128K increase in October payrolls--about 175K when the GM strikers are added back in--and the 98K aggregate upward revision to August and September change our picture of the labor market in the late summer and early fall.
The MPC surprised markets and ourselves yesterday by the extent to which it abandoned its previous stance and is now emphasising inflation over growth risks.
The current momentum in house prices partly reflects a dearth of homes offered for sale by existing homeowners. This scarcity reflects a series of constraints, which we think will ease only gradually. Further punchy gains in house prices therefore look sustainable and we expect average prices to rise by about 8% next year.
The latest IPCA inflation data in Brazil show the year-over-year rate fell to 8.8% in June from 9.3% in May. This is the slowest pace since May 2015, with inflation pulled lower by declines across all major components, except food. Indeed, food prices were the main driver of the modest 0.4% unadjusted monthto-month increase, rising by 0.7%, following a 0.8% jump in May. The year-over-year rate rose to 12.8% in June from 12.4%.
April payroll growth likely will be reported at close to 200K. Overall, the survey evidence points to a stronger performance, but they don't take account of weather effects, and April was a bit colder and snowier than usual. We're not expecting a big weather hit, but some impact seems a reasonable bet.
This week's March economic activity reports in Chile have been relatively strong, with the industrial sector expanding briskly and retail sales solid.
Chile's economic outlook is still clouded, due mostly to the slowdown in China and low copper prices. But the steady, slow increase in the Imacec index, a monthly proxy for GDP, supports our view of a sustained but modest economic recovery this year. The index increased 1.8% year-over-year in November, marginally up from the meagre 1.5% gain in October, but below the 2.2% average seen during Q3 as a whole. November's gain was driven by an increase in services activity, offsetting weakness in mining. Services have been the key engine of growth in the current cycle and likely will remain so in H1.
India's consensus-beating GDP report for the first quarter wasn't much to write home about.
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.
We aren't in the business of trying to divine the explanation for every twist and turn in the stock market at the best of times, and these are not the best of times.
Markets were left somewhat disappointed yesterday by the G7 statement that central banks and finance ministers stand ready "to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks."
The measures to support the economy through the coronavirus crisis, unveiled by policymakers on Budget day, exceeded expectations.
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.
Brazil is now paying the price of President Rousseff's first term, which was characterized by unaffordable expansionary policies. As a result, inflation is now trending higher, forcing the BCB to tighten at a more aggressive pace than initially intended--or expected by investors--depressing business and investment confidence.
The odds favor--just--an end to the three-month streak of solid 0.2% increases in the core CPI with the release of today's January report.
April's GDP data give a grim firs t impression, though the details provide reassurance that the economy isn't on the cusp of a recession.
Britain looks set for a general election during the week commencing December 9, now that all main parties are pushing for a pre-Christmas poll.
October's money data show that households and firms have regained the appetite for borrowing that they lost immediately after the referendum. But the recent rise in swap rates and the deterioration in consumers' confidence likely will cut short the revival in consumer lending, while persistent Brexit uncertainty likely will continue to subdue firms' investment intentions.
We have witnessed a dramatic shift in just a few weeks in perceptions of Mexico as an investment destination.
Yesterday's labour market data showed that growth in households' income has slowed significantly in recent months. Firms are both hiring cautiously and restraining wage increases, due to heightened uncertainty about the economic outlook and rising raw material and non-wage labour costs. Consumers' spending, therefore, will support GDP growth to a far smaller extent this year than last.
The latest evidence of firming economic momentum comes from France, where industrial production rose 0.4% month-to-month in January, equivalent to a 0.6% increase year-over-year. Combined with strong consumer spending data in January, this points to a solid first quarter for the French economy.
China's industrial profits data for August were a mixed bag.
We have no way of knowing what will be the final outcome of the impeachment inquiry now underway in the House of Representatives, but we are pretty sure that the first key stage will end with a vote to send the President for trial in the Senate.
Chinese industrial profits continue to surge, rising 27.7% year-over-year in September, up from 24.0% in August.
Yesterday's November inflation reports from Germany and Spain suggest that today's data for the Eurozone as a whole will undershoot the consensus.
The resilience of the U.K. financial system will be in focus this week. On Tuesday, the Bank of England's Prudential Regulation Authority, the PRA, will publish the results of stress tests of the U.K.'s seven largest banks. Concurrently, the Bank's Financial Policy Committee, the FPC, will publish its semi-annual Financial Stability Report and announce whether it will deploy any of its macroprudential tools.
Leading indicators for consumers' spending in France are sending conflicting signals. Survey data suggest that households are in a spendthrift mood. Data yesterday showed that the headline consumer sentiment index was unchanged in March at 100, the cycle high.
Mexico's central bank left its main interest rate unchanged last week, citing the need for cautious monetary policy as the economy has lost some momentum during the first months of the year, despite the risk of inflation pass-though effects from the weaker MXN.
The economic downturn and the Chancellor's unprecedented fiscal measures mean that public borrowing likely will be about four times higher, in the forthcoming fiscal year, than anticipated in the Budget just over two weeks ago.
Fiscal stimulus, partly financed by a border adjustment tax, and Fed rate hikes, were supposed to be a powerful cocktail driving a stronger dollar in 2017. But so far only the Fed has delivered--we expect another rate hike next month--while Mr. Trump has disappointed in the White House.
Industrial activity in Mexico had a very poor start to the third quarter. Output plunged 1.0% month-to- month in July, the biggest drop since May 2015, pushing the year-over-year rate down to -1.5%, from -0.2% in June.
Colombia's peso has been one of the most battered currencies in LatAm this year, due mainly to the sharp fall in oil prices, the country's primary export. The COP has dropped about 23% this year against the USD. At the same time, other temporary factors, most notably the impact of El Niño on food prices, have done a great deal of inflation damage too. October's food prices increased 1.4% month-to-month, pushing the year-over-year rate up to 8.8% from an average of 6.6% in the first half of the year. Overall inflation has jumped to 5.9% in October from 3.8% in January, forcing BanRep's board to act aggressively.
It's tempting to conclude that the pick-up in year over-year growth in average weekly wages, excluding bonuses, to a three-year high of 3.1% in July, from 2.8% in June, signals that employees' bargaining power has strengthened and that a sustained wage recovery now is under way.
The 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.
November's consumer price report likely will show that October's dip in CPI inflation was just a blip against a strong upward trend. We think that CPI inflation picked up to 1.1% in November, from 0.9% in October, in line with the consensus.
It's just not possible to forecast the reaction of businesses and consumers to the coronavirus outbreak.
The widespread view, which we share, that GDP will rebound in Q2 following the disruption caused by bad weather in Q1, was supported yesterday by the E.C.'s Economic Sentiment survey.
French manufacturing cooled at the end of 2016. Industrial production slipped 0.9% month-to-month in December, partially reversing an upwardly revised 2.4% jump in November. The main hits came from declines in oil refining and manufacturing of cars and other transport equipment.
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.
Our argument that rates could rise as soon as March has always been contingent on two factors, namely, robust labor market data and a degree of clarity on the extent of fiscal easing likely to emerge from Congress. On the first of these issues, the latest evidence is mixed.
Storm clouds gathered over Eurozone financial markets last week. The sell-off in equities accelerated, pushing the MSCI EU ex-UK to an 11-month low.
We are struggling to make sense of the third quarter GDP numbers. The reality is that the massive surge in soybean exports--which we estimate contributed 0.9 percentage points, gross, to GDP growth--mostly came from falling inventory, because the soybean harvest mostly takes place in Q4.
Mexico's financial markets and risk metrics plunged early this week, following the AMLO government's decision to cancel the construction of the new airport in Mexico City, after a public consultation held in the previous four days.
Chinese monetary conditions remain tight. Systemic tightening through higher interest rates last year is playing a role, but intensified and ever- more public regulatory enforcement is becoming the primary driver of tightening credit conditions for businesses.
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 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.
China's October activity data showed signs of the infrastructure stimulus machine sputtering into life. Consensus expectations appear to hold out for a continuation into November, but we think the numbers will be disappointing.
Swings in energy output continue to add volatility to French manufacturing data. Industrial production fell 0.9% month-to-month in April, equivalent to a 0.1% fall year-over-year. This was a weak report, even if we factor in the 0.3% upward revision to the March numbers,but it was also he avily tainted by a 10.8% month-to-month collapse in oil refining.
Mexican industrial activity started the fourth quarter badly. Industrial production fell 0.1% month- to-month in October, pushing the year-over-year rate slightly up to -1.1% from -1.2% in September and -0.7% in Q3.
We suspect that today's ECB meeting will be a sideshow to the political chaos in the U.K., but that doesn't change the fact that the central bank's to-do list is long.
The underlying trend in the core CPI is rising by just under 0.2% per month, so that has to be the starting point for our January forecast.
The virus outbreak has been relatively limited so far in Argentina, with 820 confirmed cases, but the numbers are rising rapidly.
Over the last few months we have started to see hard evidence of Brazil's deceleration, and, as we have argued in previous Monitors, the slowdown is now set to become more visible. Over the coming weeks, markets will focus on whether Brazil is already in recession, its likely severity, and how the country will get out of this mess.
Brazil's economic news remained grim at the headline level last week, but some of the details were less bad than in recent months. Industrial production fell by 13.8% year-over-year in January, down from the 12.1% drop in December and the worst performance on this basis since mid-2009.
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.
Whatever you might think about the state of the U.S. economy, it is not as volatile as implied by the past few months' payroll numbers. Assuming steady productivity growth in line with the recent trend, the payroll data suggest the economy swung from bust to boom in one month, with not even a pause for breath.
Data released earlier this week show that Japan's current account surplus continued its downtrend in October, falling to ¥1,404B, on our seasonal adjustment, from ¥1,494B in September.
Headline GDP growth in Korea was revised down, to a seasonally-adjusted 0.6% quarter-on-quarter in Q2, from 0.7% in the preliminary report.
Yesterday's Brazilian industrial production data were relatively upbeat.
August's Markit/CIPS services survey, released today, likely will show that the economy's biggest sector is continuing to slow. We think that the PMI fell to just 53.0--its lowest level since it plunged immediately after the Brexit vote--from 53.8 in July, below the consensus, 53.5.
Brazil's consumer recession finally eased in November. Retail sales jumped 2.0% month-to- month, following an upwardly-revised 0.3% drop in October, and the year-over-year rate rose to -3.5% from -8.1%. November's astonishing performance probably reflects seasonal adjustment problems related to Black Friday discounting. Sales have climbed in the last four Novembers, suggesting that consumers' pre-Christmas spending patterns have shifted permanently.
It was no surprise that Banxico cut its policy rate by 25bp to 7.00% yesterday, following similar moves in August, September, November and December.
Today's Eurozone data will provide further details on what happened in Q4. Advance data suggest that industrial production rose a modest 0.1% month- to-month, lifting the year-over-year rate to 4.3% in December, from 3.9% in November.
We have no real argument with the consensus forecasts for the January CPI, with the headline likely to rise by 0.3%, with the core up 0.2%.
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.
Yesterday's survey data tell a story of resilient manufacturing in the Eurozone. The headline EZ PMI rose to 52.6 in September, from 51.7 in August, lifted by a rise in new orders to a three-month high.
Today's labour market figures likely will bring further signs that firms are recruiting more cautiously and limiting pay awards, due to still-elevated economic uncertainty.
Factory orders in Germany probably jumped in September, following a string of losses in the beginning of Q3. We think new orders rose 1.0% month-to-month, pushing the year-over-year rate slightly lower, to 1.8% from 2.0% in August. A rebound in non- Eurozone export orders likely will be the key driver of the monthly gain, following a 14.8% cumulative plunge in the previous two months. The rise will be concentrated in capital and consumer goods, and should be enough to offset a fall in export orders within the euro area. Our forecast is consistent with new orders falling 2.0% quarter-on-quarter in Q3, partly reversing the 3.0% surge in the second quarter, and raising downside risks for production in Q4.
Barclays hit the headlines yesterday with an announcement that it is bringing back no-deposit mortgages for first-time buyers and raising its maximum loan-to-income ratio for borrowers with an income of more than £50K to 5.5, from 4.4. With other lenders likely to follow suit and the supply of homes for sale still extremely low, house price inflation likely will remain brisk this year.
Peru's central bank, the BCRP, admitted defeat again in the face of the inflationary effects of the PEN's depreciation and El Niño, increasing interest rates by 25bp to 3.75% last Thursday, following its 25bp increase in September. Peru is the third LatAm economy in the last few months to raise rates in response to currency weakness, despite sluggish economic growth. The key problem for Peru is that inflation has been trending higher since early 2013 and has remained stubbornly high, above 2.8% all this year. "Temporary" factors just keep on coming.
Brazil's consumer recession seems never-ending. Retail sales fell 0.8% month-to-month in October, pushing the headline year-over-year rate down to -8.2% in October, from -5.7% in September. Recent financial market volatility, credit restrictions and the ongoing deterioration of the labour market continue to hurt consumers.
Brazil's economic and fiscal outlook has worsened in recent months, and economic activity will likely contract even further in the short-term. Some of last week's economic reports, however, were a bit less bad than of late. The latest industrial production data were less bad than expected in August, but the picture is still very grim. Industrial output plunged 1.2% month-to-month, above the consensus, and allowing the annual rate to stabilize at -9% year-over-year.
Japan's Nikkei services PMI dropped to 51.0 in September from 51.6 in August, continuing the downtrend since June. For Q3 as a whole, the headline averaged 51.5, down from 52.8 in Q2; that's a clear loss of momentum.
Yesterday's economic reports in the Eurozone will rekindle the debate on hard versus soft data. The final composite PMI rose to 56.7 in September, from 55.7 in August, in line with the first estimate.
German inflation pressures were unchanged last month. The CPI index rose 0.8% year-over-year, matching the increase in October, and in line with the consensus and initial estimate. Energy deflation intensified marginally, as a result of lower prices for household utilities.
Brazil's industrial sector is on the mend, but some of the key sub-sectors are struggling.
Consumers' spending in the Eurozone stalled at the start of Q4. Retail sales slid 1.1% month-to-month in October, pushing the year-over-year rate down to a four-year low of 0.4%, from an upwardly-revised 4.0% jump in September.
EZ survey data were solid in the fourth quarter, pointing to robust GDP growth, but numbers from the real economy have so far not lived up to the rosy expectations. Data yesterday showed that industrial production fell 0.7% month-to-month in November, pushing the year-over-year rate down to 1.1% from a revised 2.0% in October. Italian data today likely will force marginal revisions to the headline next month, but they are unlikely to change the big picture.
Data yesterday suggest Eurozone consumers' spending rebounded towards the end of Q4. Retail sales rose 0.3% month-to-month in December, pushing the year-over-year rate down to 1.4%, from a revised 1.6% in November. A +0.3 percentage point net revision to the month-to-month data added to the optimism, but was not enough to prevent a slowdown over the quarter as a whole.
The European Court of Justice, ECJ, will not likely pour fuel on the slumbering fire later today by ruling that OMT is in violation of EU law.
German exports flatlined for most of 2018, driving the trade surplus down by 7.3% amid still-solid growth in imports.
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.
Business surveys released over the last week have made us more confident in our call that quarter-on- quarter GDP growth will recover to about 0.4% in Q2, from Q1's weather-impacted 0.1% rate.
The 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.
The shock of the weak May payroll report means that the June numbers this week will come under even greater scrutiny than usual. We are not optimistic that a substantial rebound is coming immediately. The headline number will be better than in May, because the 35K May drag from the Verizon strike will reverse.
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.
November's monetary indicators provide an upbeat rebuttal to the swathe of downbeat business surveys. Year-over-year growth in the MPC's preferred measure of broad money--M4 excluding intermediate other financial corporations--rose to a 19-month high of 4.0% in November, from 3.5% in October.
The post-election run of upbeat business surveys was extended yesterday, with the release of the final Markit/CIPS services PMI for January.
The final EZ PMI data for November yesterday confirmed that the composite index in the Eurozone rose to an 11-month high of 53.9, from 53.3 in October. The key driver was an improvement in services, boosted by stronger data in all the major economies. Manufacturing activity also improved, though, and the details showed that new business growth was robust in both sectors.
Behind all the talk of slowdowns and Fed pauses, we see no sign that the labor market is loosening beyond a very modest uptick in jobless claims, and even that looks suspicious.
Chilean GDP growth hit bottom in August, but activity is now picking up and will gather speed over the coming quarters. The tailwinds from lower oil prices and fiscal stimulus will soon be visible in the activity data.
The EZ calendar has been extremely busy in the first few weeks of the year, making it virtually impossible to see the forest for the trees.
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.
We are not concerned by the very modest tightening in business lending standards reported in the Fed's quarterly survey of senior loan officers, published on Monday.
Our base case is that the core CPI rose 0.2% in December, but the net risk probably is to the upside. We see scope for significant increases in sectors as diverse as used autos, apparel, healthcare, and rent, but nothing is guaranteed.
We're very comfortable with the idea that the coronavirus is a broad deflationary shock to the U.S. economy.
It's easy to read the January minutes as the dovish counterpart to a clear hawkish shift in the meeting. The statement, remember, upgraded the growth view to "solid" from "moderate"; it reiterated that the downward inflation shock from energy prices will be "transitory" and it said that the the pace of job growth is now "strong", having previously been "solid".
Momentum in French manufacturing eased slightly in November, but the setback was modest. Industrial production dipped 0.5% month-to-month, only partially reversing the revised 1.7% jump in October.
Over the summer, both Chancellor Javid and PM Johnson appeared to be repositioning the Conservatives, claiming that the era of austerity was over and that higher levels of spending and investment were justified.
Brazilian February industrial production data, released yesterday, were relatively positive. Output rose 0.1% month-to-month, pushing the yearover- year rate down to -0.8% from 1.4% in January. Statistical quirks were behind February's year-over-year fall, though.
The 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.
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 Budget on March 11 will be the first time that the new government's ambition and bluster collide with reality.
The sharp currency sell-off in Q2 and Q3, the financial crisis and tighter monetary and fiscal policies have pushed the Argentinian economy under stress since Q2.
The key data originally scheduled for today--ADP employment and the ISM non-manufacturing survey, and the revised Q3 productivity and unit labor costs-- have been pushed to Thursday because the federal government will be closed for the National Day of Mourning for president George H. W. Bush.
Activity in the Eurozone industrial sector cooled at the end of the first quarter. Manufacturing production declined 0.8% month-to-month in March, pushing the year-over-year rate down to 0.2% from a revised 1.0% in February. Over Q1 as a whole, though, the story was positive.
Survey data in EZ manufacturing remain soft. Yesterday's final PMI report for August confirmed that the index dipped to 54.6 in August, from 55.1 in July, reaching its lowest point since the end of 2016.
The Brazilian economy has been recovering at a decent pace in recent months. The labor market is on the mend, with the unemploymen t rate falling rapidly to 12.5% in August from 14% at the end of Q1.
The rapidity with which the BoJ's QE programme has been scaled back is dramatic. Growth in the monetary base slowed to 15.6% year-over-year in September from 16.3% in August.
We continue to distrust the suggestion from the Markit/CIPS PMIs that the economy is in recession.
Yesterday's Brazilian industrial production data were downbeat.
The core CPI inflation rate rose in April to 2.1% from 2.0%, thanks to unfavorable rounding, despite the below consensus 0.14% month-to-month print.
Activity data from Colombia over the past quarter have been strong. Real GDP expanded by a relatively robust 2.8% year-over-year in Q2, and is on track to post a 3.2% increase in Q3.
The US employment data last week reduced further the likelihood of a June Fed rate increase. In turn, this changes the likely timing of the normalization process in some LatAm economies. Our Chief Economist, Ian Shepherdson, expects the Fed to start its normalization process in July or September; the strength of the employment data will prevent any postponement beyond the third quarter.
External and domestic shocks in Mexico over the last two years, including the "gasolinazo", NAFTA renegotiation and the presidential election, have put the country's financial metrics under severe stress and pushed inflation to cyclical highs.
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.
The manufacturing sector likely was the primary driver of Q3 GDP growth in the Eurozone. Data yesterday showed that industrial production rose 1.4% month-to-month in August, pushing the year-over-year rate up to 3.8%, from a revised 3.6% in July.
The flow of downbeat business surveys continued yesterday, with the release of the Markit/CIPS construction survey.
If you were looking just at investor sentiment in the Eurozone, you would conclude that the economy is in recession.
Mexico's structural reforms, robust fundamentals, and its close ties to the U.S. should have conferred a degree of protection from the turmoil in EMs over the past year. But its markets have been hit as hard as other LatAm countries by the sell-off in global markets in recent weeks. The MXN fell about 5% against the USD in January alone, and has dropped by 20% over the last year.
Our judgement that April was the low point for economic activity was challenged yesterday by the publication of results of the fifth wave of the Business Impact of COVID-19 Survey, conducted by the ONS between May 4 and 17.
Eurozone industrial production data today will confirm that economic growth likely accelerated in the first quarter. We think output rose 0.7% month-to-month in February, equivalent to a 0.8% increase year-over-year.
Industrial production in the euro area dipped in February. Output fell 0.8% month-to-month pushing the year-over-year rate down to 0.8% from a revised 2.9% in January. This indicates that Eurozone manufacturing continues to lag the pace seen in previous business cycle upturns.
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.
The Conservatives' opinion poll lead continued to decline over the last week, suggesting that a landslide victory on Thursday no longer is likely. Indeed, the Tories' average lead over Labour in the 10 most recent opinion polls has fallen to just 6%, down from a peak of nearly 20% a month ago.
We have argued consistently for some time that the next year will bring a clear acceleration in U.S. wage growth, because the unemployment rate has fallen below the Nairu and a host of business survey indicators point to clear upward wage pressures. Nominal wage growth has been constrained, in our view, by the unexpected decline in core inflation from 2012 through early 2015, which boosted real wage growth and, hence, eased the pressure from employees for bigger nominal raises.
The Caixin services PMI jumped sharply to 53.9 in December from 51.9 in November. All the PMIs picked up significantly, but we find this hard to believe and suspect seasonality is to blame, though the adjustment is tricky.
LatAm financial markets have performed solidly in the first sessions of the year, with most regional currencies trading more strongly against the USD.
On the face of it, the slowdown in bank loan growth to commercial and industrial companies over the past two years looks alarming. In the year to November, the stock of loans outstanding rose by 8.0%, the smallest gain since January 2014. A further decline in the year-over-year rate, taking it below the rate of growth of nominal GDP--we expect 4.7% in the first quarter--for the first time in six years, is now a fair bet. The three- and six-month annualized growth rates of C&I lending in November were just 6.2% and 4.7% respectively, and still falling.
December's Markit/CIPS surveys for the manufacturing, construction and services sectors suggest that the economy ended 2017 on a lacklustre note.
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%.
Korea's jobs report for August was a stonker, with unemployment plunging to 3.1%, from 4.0% in July, marking the lowest rate in more than five years.
Currency markets often make a mockery of consensus forecasts, and this year has been no exception. Monetary policy divergence between the U.S. and the Eurozone has widened this year; the spread between the Fed funds rate and the ECB's refi rate rose to a 10-year high after the Fed's last hike.
The slowdown in quarter-on-quarter growth in households' real spending to 0.4% in Q1--just half 2016's average rate--was driven entirely by a 0.1% fall in purchases of goods. Households' spending on services, by contrast, continued to grow briskly. Indeed, the 0.8% quarter-on-quarter rise in households' real spending on services exceeded 2016's average 0.5% rate.
The U.S. coronavirus outbreak is not slowing. The curve is not bending much, if at all. Confirmed cases continue to increase at a steady rate, averaging 23% per day over the past three days.
The coronavirus outbreak, by definition, will fade eventually, but we suspect the measures to combat it will be more long-lasting. In terms of sheer scale, EZ governments and the ECB are throwing the kitchen sink at the virus, but that's only half the story.
Inflation in Brazil remained subdued at the start of the second quarter, strengthening the odds for an additional interest rate cut next month, and opening the door for further stimulus in June.
The risk posed by consumer borrowing was once again the focus of the Financial Policy Committee's discussion last week.
Yesterday's money supply data in the Eurozone were solid across the board. Growth in headline M3 rose to 5.1% year-over-year in August, up from a 4.9% increase in July. A rebound in narrow money growth was the key driver of the gain, with seasonally- and calendar-adjusted M1 rising 8.9% year-over-year, up from July's 8.4%.
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.
We expect to learn today that first quarter GDP fell at a 4.3% annualized rate, but the margin of error here is bigger than usual. Under normal circumstances we're disappointed if our quarterly GDP estimate is out by more than a few tenths, but this time around, the uncertainties are huge. Anywhere between -2% and -6% wouldn't be a big surprise.
Yesterday's French INSEE consumer confidence data provided a fascinating glimpse into the reality for households during these strange times. The headline index fell by "just" eight points in April, to 95 from 103 in March, comfortably beating the consensus for a crash to 80.
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.
Brazil's macroeconomic scenario is becoming easier to navigate for the central bank. Both actual inflation and expectations are slowing rapidly, as shown in our first chart. And since the March BCB monetary policy meeting, the BRL has appreciated about 10% against the USD, while commodity prices and EM sentiment have also improved markedly.
Household sentiment in France continues to improve, consistent with tailwinds from low energy prices and accommodative monetary policy. INSEE's measure of consumer confidence rose to 94 in April, up from 93 in March, the highest since November 2010.
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.
Chinese industrial profits growth officially edged down to 25.1% year-over-year in October, from 27.7% in September. This is still very rapid but we think the official data are overstating the true rate of growth.
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.
okThe weekend's election result in Spain provided relief for investors anxiously looking for another "surprise." Exit polls on Sunday showed a big majority for the anti-establishment party Podemos, but in the end Spanish voters opted for safety. The incumbent Partido Popular, PP, was the election's big winner compared with the elections six months ago, gaining 15 seats.
The latest E.C. survey shows the gap between firms' and households' confidence levels has remained substantial.
Business surveys coming out of the Eurozone have been remarkably strong recently. The composite PMI for the Eurozone jumped to 56.7 in March--its highest level since April 2011--from 56.1 in February. Germany's IFO business climate index leaped to a 67-month high in March.
China's industrial profits tanked in January/ February, falling 14.0% year-to-date year-over-year, after a 1.9% drop year-over-year in December.
China's abysmal industrial profits data for October underscore why the chances of less- timid monetary easing are rising rapidly.
The trade war with China is a macroeconomic event, whose implications for economic growth and inflation can be estimated and measured using straightforward standard macroeconomic tools and data.
The Prime Minister's resignation and the stillborn launch of the Withdrawal Agreement Bill last week has forced us to revise our Brexit base case, from a soft E.U. departure on October 31 to continued paralysis.
German data yesterday indicate that inflation pressures have, so far, been resilient in the face of the recent collapse in oil prices. Inflation rose to 0.5% year-over-year in January from 0.3% in December, partly due to base effects pushing up the year-over-year rate in energy prices, but core inflation rose too. The detailed state data indicate that almost all key components of the core index contributed positively, lead by leisure and recreation and healthcare.
Votes in the House of Commons to day likely will mark the start of MPs stamping their collective will on the Brexit process, following the Prime Minister's botched attempt at getting the current Withdrawal Agreement--WA--and Political Declaration through parliament earlier this month.
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.
While businesses--and farmers--fret over the damage already wrought by the trade war with China and the further pain to come, consumers are remarkably happy.
The recent cyclical upturn in the EZ began in the first quarter of 2013. GDP growth has accelerated almost uninterruptedly for the last two years to 1.5% year-over-year in Q3, despite the Greek debt crisis and slower growth in emerging markets. Overall we think the recovery will continue with full-year GDP growth of about 1.6%. But we also think the business cycle is maturing, characterised by stable GDP growth and higher inflation, and we see the economy slowing next year.
We were expecting the pandemic in the Andes to reach a plateau over the coming weeks, given the quick response of regional governments to fight the virus.
As far as we can tell, most forecasters expect the impact of fiscal stimulus this year to be gradual, with perhaps most of the boost to growth coming next year. At this point, with no concrete proposals either from the new administration or Congress, anything can happen, and we can't rule out the idea of a slow roll-out of tax cuts and spending increases.
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.
The emergence last month of a new E.U. Withdrawal Agreement that has a strong chance of being ratified by MPs appears to have given a small boost to business confidence.
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.
The newly-revised data on capital goods orders, released on Friday, support our view that sustained strength in business capex remains a good bet for this year.
November's industrial production figures, released today, look set to surprise the consensus to the downside, underscoring our view that the economic recovery is continuing to lose momentum. Moreover, with sterling remaining uncompetitive, despite depreciating over recent weeks, and lower oil prices making extracting oil from the North Sea unprofitable, the industrial sector likely will impede the economic recovery further in 2016.
The big story in global macro over the past 18 months or so has been the gigantic transfer of income from oil producers to oil consumers. The final verdict on the net impact of this shift--worth nearly $2T at an annualized rate--is not yet clear, because the boost to consumption takes longer than the hit to oil firms ' capex, which began to collapse just a few months after prices began to fall sharply. But our first chart, which shows oil production by country as a share of oil consumption, plotted against the change in real year-over-year GDP growth between Q2 2014 and Q2 2015, tells a clear story.
Today's Eurozone data schedule is very hectic, but attention likely will focus on advance Q2 GDP data. France, Austria and Spain will report advance data separately ahead of the EZ aggregate estimate, which is released 11.00 CET. This report will include a confidential number from Germany.
In the last few weeks markets have been treated to the news that euro area industrial production crashed towards the end of Q4, warning that GDP growth failed to rebound at the end of 2018 from an already weak Q3.
The MPC's hawks are framing the interest rate increase they want as a "withdrawal of part of the stimulus that the Committee had injected in August last year", arguing that monetary policy still would be "very supportive" if rates rose to 0.5%, from 0.25%.
In previous Monitors, we have outlined our base case that the direct impact of tariffs on Chinese GDP will be minimal this year.
Economic growth in Brazil is not likely to improve significantly this year. Our pessimism was underscored by the November industrial production data last week, showing a contraction of 0.7%, and pushing output to its lowest level since June.
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.
Mexico's economy hit a sticky patch in the first quarter, with confidence slipping, employment growth slowing and the downward trend in unemployment stalling. Indeed, the headline unemployment rate rose to 4.5% in May from 4.3% in April. The seasonally adjusted rate, though, was little changed at 4.4%, with a stable participation rate.
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.
Chinese industrial profits growth rose to 16.7% year-on-year in May, from 14.0% in April. But this headline is highly misleading. Profits growth data are about as cyclical as they come so taking one point in the year and looking back 12 months is very arbitrary. Moreover, the data are very volatile over short periods.
The BRL remains under severe stress, despite renewed signals of a sustained economic recovery and strengthening expectations that the end of the monetary easing cycle is near.
Mark Carney's assertion that "...some monetary policy easing will likely be required over the summer" is a clear signal that an interest rate cut is in the pipeline. But easing likely will be modest, due to the much higher outlook for inflation following sterling's precipitous decline.
Japan's all-industry activity index dropped by 3.8% month-on-month in March, worse than the 0.7% slip in February.
We are happy to report that the laws of gravity have been temporarily suspended in the German survey data.
Yesterday's consumer confidence report in Germany was soft, in contrast to surging business sentiment data earlier in the week.
RPI inflation has declined in importance as a measure of U.K. inflation and was stripped of its status as a National Statistic in 2013. Yet it is still used to negotiate most wage settlements, calculate interest payments on index-linked gilts, and revalue excise duties. We have set out our above-consensus view on CPI inflation several times, including in yesterday's Monitor. But the potential for the gap between RPI and CPI inflation to widen over the coming years also threatens the markets' view that the former will remain subdued indefinitely.
All eyes today will be on the core PCE deflator for August, which we think probably rose by a solid 0.2%.
Banxico cut its policy rate by 25bp to 7.75% yesterday, as was widely expected, following August's 25bp easing.
The mortgage market still is defying gravity. U.K. Finance initially reported yesterday that house purchase mortgage approvals by the main high street banks collapsed to 35.3K in February, from 39.6K in January.
Yesterday's advance EZ CPI report bolstered the ECB doves' case for only marginal adjustments to the language on forward guidance at next week's meeting. Inflation in the euro area fell to 1.4% in May, from 1.9% in April, constrained by almost all the key components.
We expect to learn today that the economy expanded at a 1.7% rate in the fourth quarter. At least, that's our forecast, based on incomplete data, and revisions over time could easily push growth significantly away from this estimate. The inherent unreliability of the GDP numbers, which can be revised forever--literally--explains why the Fed puts so much more emphasis on the labor market data, which are volatile month-to-month but more trustworthy over longer periods and subject to much smaller revisions.
The landslide victory by anti-austerity party Syriza in Greece this weekend will increase uncertainty in coming months. The coalition between Syriza and the Independent Greeks will prove a tough negotiating partner for the EU as both parties are strongly in favor of pushing the Troika to significant concessions on any future bailout terms this year.
On Friday last week, the Chinese authorities suspended sales of domestic and international tours, in an effort to contain the spread of the coronavirus, which started in Wuhan.
The preliminary estimate of GDP showed that the economy finished 2016 on a strong note. Output increased by 0.6% quarter-on-quarter, the same rate as in the previous two quarters. The year-over-year growth rate of GDP in 2016 as a whole--2.0%--was low by pre-crisis standards, but it likely puts the U.K. at the top of the G7 growth leaderboard. We cannot tell how well the economy would have performed had the U.K. not voted to leave the EU in June, but clearly the threat of Brexit has not loomed large over the economy.
U.S. President Trump on Wednesday signed an executive order aimed at delivering on his campaign pledge to build a wall on the U.S.-Mexico border. The executive order also includes measures to boost border patrol forces and increase the number of immigration enforcement officers. As previous U.S. presidents have discovered, however, signing an executive order is one thing and fulfilling it is something else. President Obama, for instance, signed an executive order to close the Guantanamo detention facility on his second day in office.
The speculation is over: 3.283 million people filed a new claim for unemployment benefits last week, nearly double the 1.7M consensus forecast, which looked much too low.
April's money and credit figures suggest that GDP growth has remained sluggish in Q2. Households' broad money holdings increased by just 0.3% month-to-month in April.
GDP rose by 0.3% quarter-on-quarter in Q2, according to the ONS' preliminary estimate, confirming that the economy has fundamentally slowed since the Brexit vote. The modest growth has reduced further the already-small risk that the MPC will raise interest rates at its next meeting on August 3.
French business sentiment cooled marginally at the end of Q3. The headline manufacturing confidence index dipped to 110 in September, from 111 in August, though the overall business sentiment gauge was unchanged at 110.
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.
As the situation with the coronavirus develops, and we gain more information on the authorities' response, it's becoming clear that the damage to Q1 GDP is going to be nasty.
Japan's industrial production data for May carried more evidence that the economy is getting a lift--at least temporarily--from the front-loading of activity ahead of the scheduled sales tax increase in October.
Retail sales in Mexico plunged at the end of Q4, but we think households' spending will continue to contribute to GDP growth in the first quarter.
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.
We expect today's preliminary estimate of Q4 GDP growth to surprise the consensus to the downside, underscoring our view that the economic recovery has shifted down to a much slower gear.
The headline in yesterday's EZ money supply report gave the illusion that monetary conditions are stable, but the details tell a different story. M3 growth accelerated marginally to 5.0% year-over-year in June, from 4.9%, but momentum in narrow money fell further. M1 growth slowed to 8.5% year-over-year, from 9.0% in May due to a fall in overnight deposits and currency in circulation.
December's money data brought clear signs that the economy's growth spurt in the second half of 2016 is about to come to an abrupt end. Growth in households' money holdings and borrowing slowed sharply in December, and the pick-up in corporate borrowing shortly after the MPC cut interest rates and announced corporate bond purchases, in August, has run out of steam already.
This is the final report before your scribe disappears into the Scottish Highlands for a few weeks, and we are leaving you with a Eurozone economy in fine form. The calendar will be relatively light in our absence and will tell us what we already know; namely that the euro area economy maintained its strong momentum in Q2.
It seems pretty clear from press reports that the White House budget, which reportedly will be released March 14, will propose substantial increases in defense spending, deep cuts to discretionary non- defense spending, and no substantive changes to entitlement programs. None of this will come as a surprise.
Retail sales in Mexico fell in Q4, but we think households' spending will continue to contribute to GDP growth in the first quarter, at the margin.
The Fed meeting today is unlikely to bring any significant policy shifts, mostly because the Fed has done everything we thought would be necessary once it became clear how badly the economy would be hit by Covid-19.
In contrast to surveys of manufacturing activity and sentiment, the Conference Board's measure of consumer confidence rose sharply in August, hitting an 11-month high. People were more upbeat about both the current state of the economy and the outlook, with the improving job market key to their optimism. The proportion of respondent believing that jobs are "plentiful" rose to 26%, the highest level in nine years.
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 main way monetary easing can support an economy swiftly during a recession, when few people want to take on new debt, is to boost households' cashflow by reducing interest payments.
The Mexican industrial sector is struggling. December industrial output fell 0.4% month-to-month, the third consecutive drop, driven mainly by a similar decline in mining/oil output.
Today brings a raft of data with the potential to move markets, but we're far from convinced that the two most closely-watched reports--ADP employment and the ISM manufacturing survey--will tell us much about the future.
The preliminary estimate of Q1 GDP looks set to show that the economy started 2017 on a weak footing. We share the consensus view that quarter-on-quarter GDP growth slowed to 0.4%, from 0.7% in Q4.
Brazil's recovery has been steady in recent months, and Q1 likely will mark the end of the recession. The gradual recovery of the industrial and agricultural sectors has been the highlight, thanks to improving external demand, the lagged effect of the more competitive BRL, and the more stable political situation, which has boosted sentiment.
Yesterday's October labour market data in Mexico showed that the adjusted unemployment rate rose a bit to 3.4%, from 3.3% in September.
Our analysis of the Q3 activity and GDP data in yesterday's Monitor strongly suggests that China's authorities will soon ready further stimulus.
Brazil's industrial production surprised to the downside in August, suggesting that manufacturing is struggling to gather momentum over the second half of the year.
One of the more disheartening aspects of the Q2 national accounts, released last week, was the downward revision to business investment. Quarteron-quarter growth was revised to -0.7%, from +0.5% previously.
Manufacturing in the Eurozone remained a strong driver of GDP growth in the third quarter. The headline EZ manufacturing PMI rose to 58.1 in September, from 57.4 in August, only a tenth below the initial estimate 58.2.
The fall in the Markit/CIPS manufacturing PMI to 47.4 in August--its lowest level since July 2012--from 48.0 in July suggests that pre-Brexit stockpiling isn't countering the hit to demand from Brexit uncertainty and the global industrial slowdown.
After a week--yes, a whole week!--with no significant new developments in the trade war with China--it's worth stepping back and asking a couple of fundamental questions, which might give us some clues as to what will happen over the months ahead.
China's unadjusted trade surplus collapsed in February, to just $4.1B, from $39.2B in January.
China's PMIs show no sign of a recovery yet, but the authorities are sticking to the playbook; they've done the bulk of the stimulus and are waiting for the effects to kick in, but are recognising that they need to make some adjustments.
Yesterday's final EZ manufacturing PMIs for August provided little in the way of relief for the beleaguered industrial sector.
The headline figures from yesterday's GDP report gave a bad impression. September's 0.1% month-to- month decline in GDP matched the consensus and primarily reflected mean-reversion in car production and car sales, which both picked up in August.
Markets are pricing-in just a 10% chance of the MPC cutting interest rates again within the next six months, odds that look too low given the strong likelihood that the economic recovery loses more pace.
The pressure on Theresa May from Brexiteers within her own party intensified yesterday, when 60 Conservative MPs signed a letter arguing that they could not back a proposal for a "customs partnership".
Survey data point to a very strong headline, 0.6%-to-0.7% quarter-on-quarter, in today's Q1 advance Eurozone GDP report. But the hard data have been less ebullient than the surveys. A GDP regression using retail sales, industrial production and construction points to a more modest 0.4% increase, implying a slowdown from the upwardly-revised 0.5% gain in Q4.
Yesterday's industrial production numbers in Germany were similar to Friday's confusing new orders data.
Brazil's April CPI data this week showed that inflation pressures remain weak, supporting the BCB's focus on the downside risks to economic activity. Wednesday's report revealed that the benchmark IPCA inflation index rose 0.1% unadjusted month-to-month in April, marginally below market expectations.
We have downgraded our 2019 and 2020 China GDP forecasts on previous occasions because monetary conditions have been surprisingly unresponsive to lower short-term rates.
Brazil's industrial sector continued to support the economy in Q3. The underlying tr end in output is rising and leading indicators point to further growth in the near term.
The two major central banks in Asia currently have hugely different aims, causing a policy divergence that won't survive the 2018 rise in external yields.
If the Phase One trade deal with China is completed, and is accompanied by a significant tariff roll-back, we'll revise up our growth forecasts, but we'll probably lower our near-term inflation forecasts, assuming that the tariff reductions are focused on consumer goods.
This week's hard data confirmed the bleak situation of Brazil's industrial sector, signalled over the last few months by key leading indicators such as the PMI manufacturing and the CNI business confidence surveys. March industrial production fell by 0.8% month-to-month and 3.5% year-over-year, following a downwardly-revised 9.4% contraction in February.
Our forecast for a 0.3% increase in the September core PPI, slightly above the underlying trend, is even more tentative than usual.
Japan returned the ruling LDP coalition to power in an upper house election over the weekend.
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.
China's money and credit numbers were once again unspectacular in August. M2 growth edged up to 8.2% year-over-year, from 8.1% in July.
The alarming pace at which the Government is marching towards the Brexit cliff edge still shows no sign of instilling panic among households or firms.
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 seasonal adjustment problems which tend to drive up the national ISM manufacturing survey in late spring and summer are more or less absent from the Chicago PMI, which will be released today. As far as we can tell, the biggest short-term influence on the Chicago number is variations in the order flow for Boeing aircraft; the company moved its headquarters to the city from Seattle in 2001.
May's money and credit data show that Covid-19 has not pushed many businesses immediately over the edge.
Brazil's unadjusted current account surplus soared to USD2.9B in May, its highest level since 2006, from USD1.1B in May 2016.
Markets' expectations for official interest rates have shifted up over the last fortnight, and the consensus view now is that the MPC will hike rates before the end of this year. As our first chart shows, the implied probability of interest rates breaching 0.25% in December 2017 now slightly exceeds 50%.
The business cycle upturn in the Eurozone likely will remain resilient in the first half of 2017. Friday's money supply data showed that headline M3 growth increased to 5.0% in December, from 4.9% in November.
Argentina's financial markets and embattled currency have been under severe pressure in recent weeks, with the ARS hitting a new record low against the USD and government bonds sinking to distress levels.
Japan's Q1 is coming more sharply into focus.
The Fed's statement yesterday was unsurprising, acknowledging a "sharp" decline in economic activity and a significant tightening of financial conditions, which has "impaired the flow of credit to U.S. households and businesses."
The imposition of 10% tariffs on $200B-worth of Chinese imports is not a serious threat either to U.S. economic growth--the tariffs amount to 0.1% of GDP--or inflation.
The Chancellor argued in a speech on Thursday that the U.K.'s economic recovery is threatened by a "dangerous cocktail" of overseas risks, including slowing growth in the BRICs--Brazil, Russia, India, and China--and escalating tensions in the Middle East. Exports are set to struggle this year, but the strong pound, not weakness in emerging markets, will be the main drag.
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.
Households have been a rock of stability over the last two years, increasing their real spending at a steady rate of 1.8% year-over-year, while the rest of the economy collectively has ground to a halt.
Investors will increase their focus on exchange rates as the US presidential election and the Fed's next rate hike approach. Markets are becoming concerned that a surge in the USD could trigger another spike in LatAm currency volatility, depressing the good year- to-date performance of most local market assets.
Friday's industrial production headlines in the Eurozone were weak, but the details tell a more nuanced story.
Something of a debate appears to be underway in markets over the "correct" way to look at the coronavirus data.
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.
The national accounts for the fourth quarter showed that the economy relied on households slashing their saving rate to a record low in order to spend more. Now, growth in consumer spending will have to fall back in line with real incomes, which will increasingly be impaired by rising inflation.
We fear that private spending in the EZ slowed in Q1, despite rocketing survey data. This fits our view that household consumption will slow in 2017 after sustained above-trend growth in the beginning of this business cycle.
President Trump tweeted yesterday that he wants to re-introduce tariffs on steel and aluminium imports from Brazil and Argentina, after accusing these economies of intentionally devaluing their currencies, hurting the competitiveness of U.S. farmers.
Monthly core CPI prints of 0.3% are unusual; June's was the first since January 2018, so it requires investigation.
Brazilian political risk remains high but, as we have argued in previous Monitors, it is unlikely to deter policymakers from further near-term monetary easing. The political crisis, however, does suggest that the COPOM will act cautiously, waiting until the latest storm passes before acting more aggressively, despite ongoing good news on the inflation front.
Households' inflation expectations have fallen again over the last few months, but we doubt they will constrain the forthcoming rebound in actual inflation. Past experience shows that inflation expectations are more of a coincident than a leading indicator of inflation. In addition, inflation is weakest right now in sectors where demand is relatively insensitive to price changes, so, when retailers' costs rise, they won't pay much heed to households' expectations.
Judging from our inbox, economy bulls are pinning a great deal of hope on the idea that the collapse in the Help Wanted Online index is misleading, because the index is subject to distortions caused by shifts in pricing behavior in the online job advertising business. These distortions were analyzed in a recent Fed paper--click here to read on the Fed's website-- which makes a convincing case that at least some of the decline in the HWOL over the past half-year represents a change in recruiters' behavior rather than slowing in labor demand.
China's economic targets are AWOL this year, thanks to Covid-19 disruptions to the legislative calendar... and because policymakers seem unsure of what targets to set in such uncertain times.
The debate about the ECB's policy trajectory is bifurcated at the moment. Markets are increasingly convinced that a rapidly strengthening economy will force the central bank to make a hawkish adjustment in its stance.
The defeat in the House of Lords of the Government's plans to cut spending on tax credits by £4.4B next year is not a barrier to their implementation. But it has prompted speculation that the Chancellor will reduce the size of the fiscal consolidation planned for next year. The plans may be tweaked in the Autumn Statement on 25 November, but we think the economy will still endure a major fiscal tightening next year.
Japanese M2 growth increased trivially in June to 3.9% year-on-year from 3.8% in May, significantly higher than the 3.2% rate in August, before the BoJ began targeting the yield curve.
We aren't convinced by the idea that consumers' confidence will be depressed as a direct result of the rollover in most of the regular surveys of business sentiment and activity.
Today's Case-Shiller report on existing home prices will likely show that August prices were little changed, month-to-month, for the fourth straight month. The slowdown in the pace of price gains since the first quarter, when price gains averaged 1.0% per month, has been startling. In all probability, though, the apparent stalling is a reflection of the quality of the data rather than the underlying reality in the housing market.
Survey data in the Eurozone were mixed yesterday. In Germany, the advance GfK consumer sentiment index slipped to 10.0 in October, from 10.2 in September, marginally below consensus forecasts. The details, reported for September, also were soft.
The limited data available on the state of the labour market, since the government forced businesses to close two weeks ago, paint a disconcerting picture.
China is set to ease reserve requirements for banks lending to small businesses. In a statement after the State Council meeting yesterday, Premier Li Keqiang said that commercial banks would receive a cut in their RRR , from 17% currently, based on how much they lend to businesses run by individuals.
The estimate of services output for the first month of the current quarter usually gets lost among the deluge of national accounts and balance of payments data released for the previous quarter.
Data released last week confirm that Brazil's recovery has continued over the second half of the year, supported by steady household consumption and rebounding capex.
Chile's stronger-than-expected industrial production report for December, and less-ugly-than- feared retail sales numbers, confirmed that the hit from the Q4 social unrest on economic activity is disappearing.
The MPC's pause for breath last week disappointed a majority of investors, who thought that it would at least tweak aspects of the support programmes put in place in March.
Chile's near-term economic outlook is still negative after a sharp resurgence of coronavirus cases.
We're expecting ADP today to report a 10M drop in private payrolls in May, but investors should be braced for surprises, in either direction, because ADP's methodology is not clear.
Chancellor Sunak's "temporary, timely and targeted" fiscal response to the Covid-19 outbreak, and the BoE's accompanying stimulus measures, won't prevent GDP from falling over the next couple of months.
Industrial production in the Eurozone was probably unchanged in January equivalent to a 0.2% fall year-over-year. This is slightly below the consensus for a 0.2% rise month-to-month, mainly due to the downside surprises in m/m data in Italy and Germany released previously.
Yesterday's final manufacturing PMIs confirmed that all remained calm in the EZ industrial sector through February.
German Q4 GDP data this week will give little comfort to investors searching for signs of a resilient economy in the face of increased market volatility. The consensus expects unchanged GDP growth of 0.3% quarter-on-quarter, consistent with solid and stable survey data. But downbeat industrial production and retail sales data point to notable downside risk.
The undershoot in the April core CPI wasn't a huge surprise to us; the downside risk we set out in yesterday's Monitor duly materialized, with used car prices dropping by a hefty 1.6% month-to-month, subtracting 0.05% from the core index.
President Trump's volatile diplomatic style is one of the biggest risks facing the Mexican economy in the near term, as we have discussed in previous Monitors.
We have drawn attention over the past couple of weeks in our daily Coronavirus Update to the rising trend in new cases in some states, mostly in the South.
In a surprise move, Peru's central bank, BCRP, succumbed to the current weakness of the economy and cut interest rates by 25bp to 3.25% last Thursday, for the first time since August last year. The board also lowered the interest rates on lending and deposit operations between the central bank and financial institutions.
December's money and credit data support the MPC's decision last week to hold back from providing the economy with more stimulus.
Data released this week in LatAm are the last calm before the coronavirus storm.
Hideous though the official April payroll numbers were, the chances are that they'll be revised down.
China's Caixin manufacturing PMI doused hopes of turning over a January new leaf; it dropped to 49.7 in November, from 50.2 in December.
Today brings an array of economic data, including the jobless claims report, brought forward because July 4 falls on Thursday.
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.
Brazilian political risk remains high, due mainly to President Bolsonaro's gross mismanagement of the Covid-19 crisis, but, as we have argued in previous Monitors, it is unlikely to deter policymakers from further near-term monetary easing.
The pushback from within the President's own party against the proposed tariffs on Mexican imports has been strong; perhaps strong enough either to prevent the tariffs via Congressional action, or by persuading Mr. Trump that the idea is a losing proposition.
Data yesterday showed that industrial production in the Eurozone stumbled in May. Production fell 1.2% month-to-month, driven by weakness in all major economies and falling output in all sub-industries. The poor headline follows an upwardly revised 1.4% jump in April, which means that production rose marginally in the first two months of the second quarter.
Judging by the solid advance data in the major economies, yesterday's EZ industrial production report should have hit desks with a bang, but it was a whimper in the end.
Yesterday's labour market data delivered a further blow to hopes that consumers' spending will retain enough momentum for the MPC to press ahead and raise interest rates this year. The most striking development is the decline in year-over-year growth in average weekly wages to just 1.9% in December, from 2.9% in November.
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.
Yesterday's euro area PMI data continue to tell a story of a firm business cycle upturn. The composite PMI was unchanged at 53.9 in December; an increase in the manufacturing index offset a decline in the services PMI.
The IBC-Br index, a monthly proxy for Brazil's GDP--rose 0.5% month-to-month in November, pushing the year-over-year rate down to 2.8%, from an upwardly-revised 3.1% in October.
The recent surge in equity prices is not a game- changer for the outlook for households' spending. Like last year, slowing growth in real disposable incomes and house prices will have a far greater impact on spending than rising paper wealth.
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.
Wednesday's money data confirmed that Chinese households have continued to borrow into Q2 but at a slower rate than in 2016. The slowdown will really set in during the second half, and into 2018. Households have done a sterling job of taking over the borrowing baton from corporates, but they can't do everything.
Last week's hard data in Colombia were upbeat, confirming that economic growth accelerated in the first half. Retail sales rose 5.9% year-over-year in May, overshooting consensus.
Rapid growth in labour supply has enabled the U.K. economy to grow quickly over the last three years without generating excessive wage or inflation pressure. The rise in the participation rate--the proportion of those aged over 16 in or looking for work--has been critical to this revival. But the rise in the participation rate largely has reflected cyclical factors rather than a sustainable upward trend, and the downward pressure on participation from demographic factors will build over the coming years.
Friday's sole economic report showed that wage growth in France remained robust mid-way through the year. The non-seasonally adjusted private wage index, ex-agriculture and public sector workers, published by the Labour Ministry, rose by 0.3% quarter-on-quarter in Q3.
China's trade surplus probably has peaked. Chinese FX reserves jump in May, thanks primarily to valuation effects. Chinese FX reserves jump in May, thanks primarily to valuation effects. April should be the low of Japan's current account surplus.
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 exporters fulfil old orders; new orders have plunged; Caixin survey underlines that smaller firms are still sputtering; An unsurprisingly modest start for "unlimited QE" in Japan; Expect much more trade damage to Korea's current account surplus in April
Rebound in Chinese trade will be hampered in the short run by virus disruptions around the world. PBoC leant against Covid-19 pressures on the RMB... a far cry from January's Phase One rally. Japan's Q4 GDP nose-dive downgraded on weaker private and public investment. Japan's current account surplus is facing strong crosscurrents.
Not giving up on China's stimulus yet. China's PPI inflation will head higher this month. China's CPI inflation will peak soon.
Markets greatly cheered the Conservatives' landslide victory on Friday, but remained cautious on the potential for the MPC to return to the tightening cycle it started in 2017.
Markets rightly placed little weight on October's below-consensus GDP report yesterday, and still think that the chances of the MPC cutting Bank Rate within the next six months are below 50%.
China's trade surplus falls unexpectedly in April, thanks partly to a bump in imports. Japan's services PMI falls despite holiday boost. The BoJ remains in a holding pattern. Korea's current account surplus rose in March, but its overall downtrend remains intact.
China's post-lockdown recovery broadly has surprised this quarter, particularly in the industrial sector.
The two marquee economic reports today, covering May retail sales and industrial production, will capture the initial rebound after the economy hit bottom sometime in mid-April.
The average month-to-month increase in the core CPI in the past three months is a solid 0.20, much firmer than the 0.05% average over the previous five months, stretching back to the first of the run of downside surprises, in March.
Eurozone GDP data on Friday were better than we expected, but were still soft compared to upbeat market expectations. Real GDP rose 0.3% quarter-onquarter in the third quarter, down slightly from 0.4% in Q2, and lower than the consensus forecast for another 0.4% gain. These data are not a blank check for ECB doves, but they probably are enough to push through further easing in December. This looks odd given growth in the last four quarters of an annualised 1.6%--the strongest since 2011--and probably slightly above the long-run growth rate.
Official industrial production growth in China plunged to 5.4% year-over-year in April, from 8.5% in March.
The consensus view that today's retail sales data will show volumes increased by 0.2% month-to-month in October is too sanguine.
Lacklustre economic data and persistent no deal Brexit risk mean that the MPC won't rock the boat at this week's meeting.
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%.
Falling demand for utility energy, thanks to yet another very warm month, relative to normal, will depress the headline industrial production number for October, due today. We look for a 21⁄2% drop in utility energy production, enough to subtract a quarter point from total industrial output.
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 over-hyped mystery of the gap between the hard and soft data in the industrial economy has largely resolved itself in recent months.
Brazil is back on global investors' radar screens. Financial market metrics capture a relatively robust bullish tone, especially since the presidential election.
The sharply increased virus spread outside China has lead to a serious downgrade in the global GDP growth outlook.
Another month, another sluggish performance in the manufacturing sector. Even a third straight big jump in auto output was unable to rescue the May numbers, and aggregate output fell by 0.2%. The trend in output has been broadly flat over the past six months or so, and we see little prospect of any sustained near-term recovery.
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.
Brace for the Fed's Pushback...But only when Fiscal Easing is in front of Congress
The coronavirus outbreak and its associated movements in asset prices have radically changed the outlook for CPI inflation, which ultimately the MPC is tasked with targeting.
Colombia's economy defied rising political uncertainty at the start of the year. Retail sales growth jumped to plus 6.2% year-over-year in January, up from -3.8% in December and -1.8% in Q4.
Two key points can be extracted from the minutes of the last BCB meeting, when policymakers increased the Selic interest rate by 50bp to 12.75%. First, the bank recognized that the balance of risks to inflation has deteriorated, due to the huge adjustment of regulated prices and the BRL's depreciation, but it specifically referred only to "this year" in the communiqué.
Consumers' spending has staged an impressive recovery in the Eurozone, and remains the key driver of accelerating GDP growth. Outside Germany, however, households have struggled, and are still faced with tight credit conditions.
More evidence emerged yesterday of the fading impact of the severe winter on the data, in the form of the strength of the NAHB survey and the weakness of the headline industrial production number.
Japan's bonus drop is dictating spending in Q3
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.
Further weakness to come for Japan's manufacturing PMI. First services hit from the coronavirus is damning. Japan's all-industry activity index suggests the 2019 tax hike was as bad as 2014. A drop in food inflation was enough to offset lagged oil pressures in Japan's January CPI. Ignore the headline; the coronavirus is now hurting Korean exports.
Yesterday's industrial production report was poor, but the headline was better than we, and the market, feared. Output fell 0.5% month-to-month in August, but the July data were revised up 0.2%, pushing the year over-year rate--using the seasonally- and working day-adjusted index--higher to 1.9% from 1.4% in July. Bloomberg reported the year-over-year rate fell to 0.9% from 1.7% in July, but they used an index which is only working day-adjusted.
An upbeat third quarter for GDP growth in France and slightly better sentiment data have offered at least some hope that the economy could stage a comeback into year-end. But yesterday's disappointing industrial production data poured cold water on that idea.
Japan will be in deflation in a few months. Stimulus fails to buoy Japan's construction sector. China's smaller TMLF injection means the facility has been superseded, while interbank rates already are low.
March was painful, but Japan's all-industry index likely was hit much harder in April.
April should be as bad as it'll get for Japan's all-industry index.
Non-core items drive Japan's CPI inflation higher, with energy also indirectly pushing up core inflation. Sino-U.S. Phase One trade deal gives Japan's manufacturing PMI a boost. Japan's services PMI levels look unsustainable.
China PMI chimes with our GDP downgrade last week. China's non-manufacturing PMI weakest on construction. Japan's MoF capex numbers point to Q4 GDP downgrade. Ignore the consensus-beating headline, Korean exports were abysmal in February, calendar effects aside. The virus now has infected Korea's PMI; expect business surveys to get a lot worse.
BoJ signals a package is coming in October. Waning construction tarnishes July's all-industry activity report. No PBoC move, for now, but it's coming.
China's housing recovery faces headwinds.
China's house price rises should continue slowing
Steady Q4 GDP growth in China masks respectable q/q rebound. Signs of recovery in China's industrial complex, but for how long? China's households continue to struggle. China's FAI growth shows rebuilding confidence around the Phase One deal. Japan's November tertiary index suggests October plunge was more tax than typhoon. January sees the first of many BoK "holds" this year.
Chinese quarterly GDP growth was dire. China's industrial production was due an upward correction. China's retail sales data suggest that households took a Q3 battering. China's FAI growth shows no signs of turning. Japan's CPI avoids deflation.
China's September imports missed expectations, but commentators and markets tend to focus on the year-over-year numbers.
CPI deflation in Japan is looming, due to the collapse in global oil prices. January will be as good as it gets for Japan's all-industry activity index
The headline CPI inflation rate almost certainly dipped below zero in September, barring a startling and deeply improbable surge in the core. We look for a 0.4% month-to-month headline drop, driven by an 11% plunge in gasoline prices, pushing the year-over-year rate to -0.3%. This is of no real economic significance, not least because hugely unfavorable base effects mean the year-over-year rate almost certainly will rise sharply over the next few months, reaching about 1¾% as soon as January.
The New York Times called the China trade agreement reached Friday "half a deal", but that's absurdly generous.
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.
Horrendous Chinese profits plummet should spur the authorities into further stimulus. No signs yet of persistent discounting in Tokyo, but a lockdown would change things overnight.
China's manufacturing PMI was poised for major disappointment... the trade war impact is clear. Don't be fooled by the relative stability of China's non-manufacturing PMI. Japan's March unemployment uptick was early; April was payback. Japan's CPI inflation has peaked. Japan's industrial production ticks up after extreme weakness; don't hold your breath for the recovery. Japan's consumers in poor shape, but maybe it's not that bad. The upswing in Korean industrial production likely to take a breather this month. The BoK holds firm, despite rising calls for a rate cut.
Consensus-beating March PMI merely underscores how bad February was... the economy isn't out of the woods. The non-manufacturing bounce was broad-based, but construction led the way. Japan's job openings plunge shows the direction of travel for unemployment. Japan's retail sales suggest Q1 pain to be concentrated in March. Japan inc granted a last month of reprieve before the Covid-19 storm hits. Korean carmakers' sourcing woes largely to blame for February hit.
China's PMIs are not yet fully picking up the coronavirus; China's non-manufacturing PMI lifted by local government spending; not yet hit by the virus; Japan's job postings still suggest the unemployment rate is unsustainably low; Japan's national inflation has less far to fall than Tokyo's; The coronavirus will delay the return of Japanese retail sales to pre-tax hike levels; Investment goods drive Japan's IP rebound in December; no real support now for consumer goods production; December probably is as good as it will get for Korean industrial production, for now
BoJ remains in an alternate reality in order to avoid a rate cut, underlining its concerns over damage to the financial sector. Chances of a serious PBoC blunder are rising. No "Phase 1" sentiment lift for Chinese manufacturers. A sharp fall in China's official services gauge was due. This probably is as good as it'll get for Japanese industrial production. Korean industrial production remains volatile, but the trend is decisively up.
The Chinese activity data published yesterday were much weaker than expected; growth rates fell resoundingly. Did analysts really get it wrong, or is this just another example of erratic Chinese data?
A sizeable drop in China's year-over-year GDP in Q1 is now the consensus view, after 6.0% growth in Q4.
Korea's current account surplus rebounded on a smaller services deficit in July
Let's not get carried away with the Japanese fiscal stimulus. Korea's current account surplus rebounded in October, as the services gap returned to its narrowing trend.
China's manufacturing PMIs suggest the private sector is recovering ahead of SoEs. China's non-manufacturing PMI again masks construction/services cross currents. Japan's industrial production continues to languish. OK so now Japanese households are front-loading spending. Korean IP corrects from the bumper July; the momentum from the Q2 recovery is waning.
Chinese manufacturing powers through Beijing's partial lockdown. The hot construction sector in China took a small breather in June. Unemployment in Japan is on track to breach the 3% mark for the first time since 2017. No immediate relief for Japanese industry from the withdrawal of the state of emergency. There is light at the end of the tunnel for the downturn in Korean industry.
Japan's firms are done hiring. Tokyo inflation points to uptick in national gauge, driven by non-core effects. Japan's start to Q4 goes from bad to worse, as industrial production tanks in October. Still far too soon to call time on Korea's IP recovery, despite the October setback. Governor Lee attempts to manage 2020 expectations, as the BoK stands pat after the October cut.
Japanese labour data show early signs of virus hit. Japan's industrial production in a slow recovery... pre-virus. Japan's retail sales still trying to make up lost ground after the tax hike. Tokyo prices already showing signs of virus hit? Korean industrial production wobbles before virus hit.
Tokyo inflation had further to fall in September than the national gauge. Some positive stories in Chinese industrial profits despite the gloomy headline.
Industrial production data yesterday indicate manufacturers in the Eurozone enjoyed a decent start to Q3, thanks to strength in Germany, Italy and Spain, which offset weakness in France. Production ex-construction rose 0.6% month-to-month in July, boosted in part by a 3% jump in energy output. If production is unchanged in August and September, output will rise 0.3% quarter-on-quarter in Q3, but this estimate is uncertain, and we look for an increase of about 0.4%-to-0.5%.
PBoC rate cut still on the tame side but more is coming, China's Caixin manufacturing PMI yet to see virus damage, China's profits better than the headline suggests going into the coronavirus hit, Early signs of coronavirus damage in Korea's trade data, Surge in Korea's manufacturing PMI comes to a stop in January
BoJ snubs the doves. Japan's unemployment rate downtick was minimal. The weak external backdrop dominates Japan's pre-tax front-loading industrial activity.
China's manufacturing PMI highlights supply-demand mismatch. China's non-manufacturing PMI reveals struggling services and rebounding construction. Retail sales in Japan started to turn sour before the state of emergency, but the overall picture for Q1 isn't bad. The worst is yet to come for Japanese industrial production.
Yesterday's State of the Union address by EC president Jean-Claude Juncker commanded more attention than usual, but contained little news on the key talking points for investors.
The Chinese trade surplus was reasonably stable on our seasonal adjustment in September, falling to $27.5B from $29.7B in August.
The Mexican peso and spreads have recently come under severe pressure. Last week, for instance, the MXN plummeted 2% against the USD to 18.9, the weakest level since May, as our first chart shows.
Media reports allege that the Chancellor's Budget pared back the fiscal squeeze planned for the next couple of years. The Director of the Office for Budget Responsibility, Robert Chote, even compared the Chancellor to Saint Augustine, who supposedly said "make me pure, but not yet."
Japan's inflation target came under heavy fire yesterday, as Finance Minister Taro Aso suggested that "things will go wrong if you focus too much on 2%."
Growth in new EZ car sales remained brisk last month, growth slowed in Q3. New registrations rose 9.4% year-over-year in September, marginally lower than the 9.6% increase in August. Growth in France fell most, sliding to 2.5% from 6.7% in August, but sales in Germany picked up to 9.4%, from 8.3%.
Hard data on Mexico's industrial sector for the last couple of months have highlighted major divergences across sectors.
In the wake of the September retail sales report, we can be pretty sure that real consumers' spending rose at a 2¾% annualized rate in the third quarter, slowing from the unsustainable 4.3% jump. That would mean consumption contributed 1.9 percentage points to headline GDP growth.
Barring a disaster, the four-year cyclical upturn in the euro area will continue in the coming quarters. Inflation is a lagging indicator and therefore should rise, and investors should be adjusting their mindset to higher interest rates. But the reality today looks very different. Final inflation data confirmed that the Eurozone inflation slipped to -0.2% year-over-year in February, from 0.2% in January.
The labour market was pretty robust before the coronavirus crisis.
The global coronavirus pandemic is hitting the LatAm economy at a particularly vulnerable time, following last year's stuttering economic recovery, temporary shocks in key economies and the effect of the global trade war.
Wage growth in the euro area slowed slightly last year, consistent with the rapid deceleration in economic growth since the end of 2017, though it remained robust overall.
"Disappointing" is probably the word that most EZ equity investors would use to describe their market so far this year.
The stand-out news from August's labour market report was the pick-up in the headline three-month average rate of year-over-year growth in average weekly wages, excluding bonuses, to 3.1%--its highest rate since January 2009--from 2.9% in July.
The first October survey evidence from the industrial economy, in the form of the Empire State report, is remarkably strong.
The case for the MPC to hold back from implementing more stimulus was bolstered by September's consumer prices figures.
The GM strike will make itself felt in the September industrial production data, due today.
Colombia's worrying inflation picture suggests the Central Bank will likely hike rates at least once more before the end of the year, attempting to anchor expectations. The October 30th BanRep minutes, in which the board surprised the market by hiking the main rate by 50bp to 5.25%--consensus was a 25bp increase--made it clear that the decision was based on fear of increased inflation risks, coupled with an improving domestic demand picture. The 50bp hike was not agreed unanimously, with dissenters arguing that the bank should adopt a more gradual approach due the high degree of uncertainty over the global economy. In addition, those favoring a 25bp hike argued that it would be better to move at a predictable pace to avoid possible market turmoil.
Some shoes never drop. But it would be unwise to assume that the steep plunge in manufacturing output apparently signalled by the ISM manufacturing index won't happen, just because the hard data recently have been better than the survey implied.
Downward revisions to Japan's Q4 real GDP growth, published on Wednesday, lead us to revisit our main worry over the durability of the recovery; namely, that monetary conditions appear to be signalling a slowdown.
China's two-tier post-lockdown economic revival continued in April. Industrial production beat expectations easily, rising by 3.9% year-over-year, after slipping by 1.1% in March.
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.
The imposition of 25% tariffs on $50B-worth of imports from China, announced Friday, had been clearly flagged in media reports over the previous couple of weeks.
Polls suggest that Ivan Duque has comfortably beat Gustavo Petro to become Colombia's president.
We've continuously warned that Japan's national accounts weren't sitting easily with the underlying signals from survey data, and monetary conditions, through last year.
The question of what's really happening to the pace of layoffs is still unanswered, despite the apparent upturn over the past couple of months. The weekly jobless claims numbers are only just emerging from the fog of the usual holiday season chaos. The pattern of pre-holiday hiring and post-holiday layoffs is broadly the same each year, but Christmas and New Year's Day fall on a different day each year, making seasonal adjustment difficult.
We have argued consistently since oil prices first began to fall that U.S. consumers would spend most of their windfall, so real spending would accelerate even as nominal retail sales growth was dragged down by the drop in the price of gas and other imported goods. At the same time, we argued that capital spending in the oil business would collapse, and that exports would struggle in the face of the stronger dollar.
The shortfall in nominal wage growth, relative to measures of labor market tightness, remains the single biggest mystery of this business cycle.
Brazil's December economic activity index, released last week, showed that the economy ended the year on a relatively weak footing. The IBC-Br index, a monthly proxy for GDP, fell 0.3% month- to-month, pushing down the adjusted year-over- year rate to 0.3%, from a downwardly-revised 0.7% increase in November.
AMLO unveiled on Saturday Mexico's budget plan for 2019, calling for a moderate increase in spending, focused mainly on social programs, without raising taxes or the country's debt.
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.
German manufacturing snapped back at the end of summer. Industrial production jumped 2.6% month-to-month in August, pushing the year-over- year rate up to 4.7% from a revised 4.2% in July.
The new Argentinian president has started to clean up the mess left by his predecessor, Cristina Fernandez de Kirchner. President Mauricio Macri lifted capital controls, and let the ARS float freely yesterday. The peso tumbled about 30%, getting close to 14 ARS per USD, where it had been trading in the black market. The government also announced that it is on track to receive about USD 12-to-15B, to build up the battered foreign reserves, and to contain any overshooting. This money will come through many channels, for example, grain producers have announced that they will sell about USD400M a day over the coming weeks.
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.
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.
Mortgage applications appear to have recovered from their reported February drop, which was due mostly to a very long-standing seasonal adjustment problem
Colombia's economic activity surprised to the upside in February, despite the challenging domestic environment. Private spending rose more than expected, but leading indicators suggest that household consumption will remain weak in Q2. Retail sales jumped 4.6% year-over-year in February, up from a 2.1% increase in January, and the fastest pace since August 2015.
China's real GDP growth was unchanged at 6.4% year-over-year in Q1, above the consensus for a slowdown to 6.3%.
The Central Bank of Argentina surprised markets on Tuesday, raising its main interest rate by 100bp to 28.75% to cap inflation expectations and push core inflation down at a faster pace.
The consensus forecast for retail sales in December has been consistently too upbeat in recent years and we think most analysts are too sanguine yet again.
Inflation in Mexico fell significantly in September. Data yesterday showed that the CPI rose just 0.3% month-to-month, pushing the year-over-year rate down to 6.4% from 6.7% in August, its highest level in 16 years.
The monthly industrial production numbers are collected and released by the Fed, rather than the BEA, so today's December report will not be delayed by the government shutdown.
New business in German manufacturing ended the first quarter on a strong note. Factory orders rose 1.9% month-to-month in March, above the consensus 0.6%, and net revisions to the February data were +0.4 percentage points. The rise in new orders was exclusively due to a 4.3% increase in export orders, which offset a 1.2% fall in domestic orders. These are strong numbers, but the details suggest that mean reversion will push the headline down next month.
You'd be hard-pressed to read the minutes of the September FOMC meeting and draw a conclusion other than that most policymakers are very comfortable with their forecasts of one more rate hike this year, and three next year.
To avoid rocking the 2020 boat, the Phase One trade deal needed to be sufficiently vague, so that neither side, and particularly Mr. Trump, would have much cause to kick up a fuss around missed targets.
The trend in manufacturing output probably is about flat, with no real prospect of any serious improvement in the near term.
The consensus forecast for a 0.6% month-to month rise in retail sales volumes in December--data released today--is far too timid.
Yesterday's economic activity data from Peru signalled that the relatively firm business cycle continues. The monthly GDP index accelerated to 3.6% year-over-year in November, rising from 2.1% in October, but marginally below the 4.4% on average in Q3. Growth continued to be driven by mining output, including oil and gas, which rose 15% year-over- year. The opening of several new mines explains the upturn, and we expect the sector to remain key for the Peruvian economy this year.
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.
June's headline CPI, due this morning, will be boosted by the rebound in gasoline prices, but market focus will be on the core, in the wake of the startling, broad-based jump in the core PPI, reported Wednesday. Core PPI consumer goods prices jumped by 0.7% in June, with big incr eases in the pharmaceuticals, trucks and cigarette components, among others. The year-over-year rate of increase rose to 3.0%, up from 2.1% at the turn of the year and the biggest gain since August 2012. Then, the trend was downwards.
Labour costs are rising so quickly that the MPC cannot justify an "insurance" cut in Bank Rate to counteract the impending damage from Brexit uncertainty in the run-up to the October deadline.
At the end of last year, U.S. homebuilders were more optimistic than at any time in the previous 18 years, according to the monthly NAHB survey.
The rate of growth of real personal incomes is under sustained downward pressure, slowing to 2.1% year-over-year in December from 3.4% in the year to December 2015. In January, we think real income growth will dip below 2%, thanks to the spike in the headline CPI, reported Wednesday. Our first chart shows that the 0.6% increase in the index likely will translate into a 0.5% jump in the PCE deflator, generating the first month-to-month decline in real incomes since January last year.
CPI inflation surprises look set to trigger larger- than-usual market reactions over the coming months, given that the MPC emphasised last month that it wants to see domestically-generated inflation rebound swiftly, after falling suddenly late last year, in order to justify keeping Bank Rate on hold.
LatAm currencies fell sharply in Q1 but the hit hasn't yet pushed inflation higher.
The Mexican peso and the Mexican stock market were hit this week after a poll showed that the Republican presidential candidate, Mr. Donald Trump, is leading in Ohio, a bellwether state in US presidential elections. After the poll's release, the MXN, which has been trading at about 18.9 to the USD, shot up to around 19.2.
We look for yet another unanimous vote by the MPC to keep Bank Rate at 0.75% on Thursday, with no new guidance on the near-term outlook.
Over the past 18 months, the year-over-year rate of growth of manufacturing output has swung from minus 2.1% to plus 2.5%.
The likely dip in the headline NFIB index of small business sentiment and activity today will tell us that business owners are unhappy and nervous about the potential impact of the latest China tariffs on their sales and profits.
Friday' second Q4 GDP estimate revealed that the EZ economy barely grew at the end of 2019. The report confirmed that GDP rose by 0.1% quarter-on-quarter in Q4, slowing from a 0.3% rise in Q3, but the headline only narrowly avoided downward revision to zero, at just 0.058%
The U.S. faces greater uncertainty now than at the start of any previous year in recent memory...
The November industrial production numbers will be dominated by the rebound in auto production following the end of the GM strike.
When economic historians look back at the bizarre trade war of 2018-to-19, we think they will see Tuesday June 4 as the turning point, after which the threats of fire and brimstone were taken much less seriously, and markets began to ponder life after tariffs.
The tone of today's FOMC statement likely will be different to the gloomy April missive, which began with a list of bad news: "...economic growth slowed during the winter months, in part reflecting transitory factors. The pace of job gains moderated... underutilization of labor resources was little changed. Growth in household spending declined... Business fixed investment softened, the recovery in the housing sector remained slow, and exports declined."
Final October inflation data surprised to the upside yesterday, consistent with our view that inflation will rise faster than the market and ECB expect in coming months. Inflation rose to 0.1% year-over-year in from -0.1% in September, lifted mainly by higher food inflation due to surging prices for fruits and vegetables. This won't last, but base effects will push the year-over-year rate in energy prices sharply higher into the first quarter, and core inflation is climbing too. Core inflation rose to 1.1% in October from 0.9% in September, higher than the consensus forecast, 1.0%.
The upturn in core CPI inflation this year has passed by almost unnoticed in the markets and media. In the year to September, the core CPI rose 1.9%, up from a low of 1.6% in January. But that's still a very low rate, and with core PCE inflation unchanged at only 1.3% over the same period, it's easy to see why investors have remained relaxed. In our view, though, things are about to change, because a combination of very adverse base effects and gradually increasing momentum in the monthly numbers, is set to lift both core inflation measures substantially over the next few months.
The 21K rise in the headline, three-month average, unemployment rate between November and February confirmed last month that the U.K.'s period of fantastically strong growth in employment has ended. Timelier indicators, however, suggest unemployment is stabilising, not on the cusp of a major increase.
October's retail sales figures confirm that consumers have adopted a more cautious mindset since the summer, when retail sales increased at a faster rate than incomes.
The first estimate of retail sales growth in August was weaker than implied by the Redbook chainstore sales survey, but our first chart shows that the difference between the numbers was well within the usual margin of error.
Higher gasoline prices will lift today's headline October CPI, which should rise by 0.3%. Unfavorable rounding could easily push it to 0.4%, though, and year-over-year headline inflation should rise to 1.6% or 1.7%, from 1.5% in September and just 0.2% a year ago.
We'd be very surprised to see anything other than a 25bp rate cut from the Fed today, alongside a repeat of the key language from July, namely, that the Committee "... will act as appropriate to sustain the expansion".
On the face of it, our forecast of higher core inflation by the end of this year is seriously challenged by the recent data.
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.
We have been rigorous in using the word nascent whenever referring to Japan's wage-price spiral.
In the short-term, all the housing data are volatile. But you can be sure that if the recent pace of new home sales is sustained, housing construction will rise.
The February industrial production numbers were flattered by an enormous 7.3% jump in the output of electricity and gas utility companies, thanks to a surge in demand in the face of the extraordinarily cold weather. February this year was the coldest since at least 1997, when comparable data on population weighted heating degree days begin.
The market for new cars in the Eurozone remained red-hot last month. New registrations surged 18.4% year-over-year in May, up from a 9.4% rise in April, and pushing the 12-month average level of registrations to a post-crisis high of 843K units. Accelerating growth in Italy and France was the key driver.
The Chancellor chose in his Budget to increase the total size of the forthcoming fiscal consolidation, to ensure that the Office for Budget Responsibility continues to forecast that a budget surplus will be obtained in 2019/20.
The latest survey evidence strongly supports our view that momentum is building in the industrial economy, but the official production data continue to lag. Yesterday's March Philly Fed survey was remarkably strong, with the correction in the headline sentiment index -- inevitable, after February's 33-year high -- masking increases in all the subindexes.
The year-over-year rate of core CPI inflation rose steadily from a low of 1.6% in January 2015 to 2.3% in February this year. At that point, the three-month annualized rate had reached a startling 3.0%. You could be forgiven, therefore, for thinking that the dip in core inflation back to 2.2% in March was an inevitable correction after a period of unsustainably rapid gains, and that the underlying trend in core inflation isn't really heading towards 3%.
The next couple of rounds of business surveys will capture firms' responses to the Phase One trade deal agreed last week, though the news came too late to make much, if any, difference to the December Philly Fed report, which will be released today.
Mexico's central bank likely will pause its monetary tightening on Thursday, keeping the main rate at 6.5%. A hike this week would follow five consecutive increases, totalling 350bp since December 2015, when policymakers were first overwhelmed by the MXN's sell-off.
Japan's GDP plunge: damning across the board, though with some modest potential for upward revision. China's rate cut was mainly a housekeeping move. China's housing market starts to feel the pinch from the virus.
China's industrial production growth downtrend worsens. China's retail sales dragged down by autos but boosted as people spend more at home. China's fixed asset investment growth slows despite greater support from infrastructure.
Wednesday's Mexican industrial production report was upbeat for manufacturing, but it revealed that the oil and public construction sectors remain under severe strain.
Growth momentum in Mexico has improved marginally over the last few months after the soft patch during the first quarter, with business and households gaining confidence in the economic recovery. But the upswing has been rather modest, due to the volatility in global financial markets and the challenging external environment. The outlook for the global economy has deteriorated over recent months due to China's problems, and commodity prices remain under pressure. All these factors are now weighing on investors' confidence and hurting EM across asset classes.
Serious downside risks to growth are mounting...but the fed can't ignore rising inflation risks
Recently released data in Mexico are sending weak signals for the business outlook, and the Texcoco airport saga won't help.
Italy's long-term challenges--chiefly, structurally high government debt and deteriorating demographics--remain daunting, but the cyclical picture is improving steadily. Final GDP data last week revealed that growth in the first half of the year was 0.2% better than initially estimated, taking the annualised growth rate to 1.4%, the highest in five years. This is the first sign of a durable business cycle upturn since the sovereign debt crisis crashed the economy in 2012.
Brazil's benchmark inflation index, the IPCA, fell 0.1% month-to-month unadjusted in August, below market expectations.
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.
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 recent less-bad growth and inflation data in Brazil are encouraging news and are setting the stage for easing in October. The minutes of the Copom's August 31 monetary policy meeting, released yesterday, were less hawkish than in previous months, indicating that policymakers are gauging the possibility of cutting rates.
China's unadjusted current account surplus widened to $16.0B in the preliminary report for Q3, from $5.3B in Q2.
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.
It's hard to know what to make of the October CPI data, which recorded hefty increases in healthcare costs and used car prices but a huge drop in hotel room rates, and big decline in apparel prices, and inexplicable weakness in rents.
Today's consumer credit report for April likely will show that the stock of debt rose by about $15B, a bit below the recent trend. The monthly numbers are volatile, but the underlying trend rate of increase has eased over the past year-and-a-half, as our first chart shows. The slowdown has been concentrated in the non-revolving component, though the rate of growth of the stock of revolving credit--mostly credit cards--has dipped recently, perhaps because of weather effects and the late Easter.
The fall in CPI inflation to just 1.5% in October-- its lowest rate since November 2016--from 1.7% in September, isn't a game-changer for the monetary policy outlook.
It says a lot about investor expectations that markets' reaction to yesterday's policy announcement by the ECB was marked by slight "disappointment," with EURUSD rallying and EZ bond yields rising.
Mexico's economy lost some momentum in Q4, due mainly to weakness in industrial and agricultural activity, but this was partly offset by the strength of the services sector as consumers' spending again carried the economic recovery. Real GDP rose 0.6% quarter-on-quarter in Q4, after a 0.8% expansion in Q3, the tenth consecutive increase. Year-over-year growth dipped marginally to 2.5% from 2.6% in Q3, but the underlying trend remains stable. In 2015 as a whole the economy expanded by 2.5%, up from 2.3% in 2014.
The French industrial sector ended last year on an upbeat note, but the underlying trend in activity is still weak. Industrial production rose 1.5% month-to-month in December, equivalent to a 0.1% fall year-over-year.
Soft September data in Germany and Italy suggest that today's industrial production report in the Eurozone will be poor. Our first chart shows that data from the major EZ economies point to a 0.8% month-to- month fall in September.
The Italian economy slowed at the end 2017, and it continues to underperform other major EZ economies. Real GDP rose 0.2% quarter-on-quarter in Q4, a bit slower than the 0.3% gain in Q3, pushing full-year growth up to a modest 1.0%. This compares poorly, though, with growth of 1.6% in the euro area as a whole.
The point when businesses and households can breathe a sigh of relief about Brexit looks set to be delayed again this week.
We were right about the below-consensus inflation numbers for June, but wrong about the explanation. We thought the core would be constrained by a drop in used car prices, while apparel and medical costs would rebound after their July declines.
We have had a modest rethink of our June payroll forecast and have nudged up our number to 150K, still below the 180K consensus. Our forecast has changed because we have re-estimated some of our models, not because of the 172K increase in the ADP measure of private payrolls. ADP is a model-based estimate, not a reliable survey indicator.
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.
Data released last week confirmed that Mexico's economy stumbled in the first half of the year, hurt by a temporary shocks in both the industrial and services sectors, and heightened political uncertainty, due to policy mistakes at the outset of AMLO's presidency.
Favourable inflation conditions in Mexico remain in place with June consumer prices increasing just 0.1% month-to-month, unadjusted, better than expected. A modest gain in core prices was largely offset by falling non-core prices, so year-over-year inflation edged down to 2.5% from 2.6% in May.
German net exports were treading water at the start of the fourth quarter. The seasonally adjusted trade surplus slipped to €17.4B in October, from a revised €17.7B in September, constrained by a 1.3% month-to-month rise in imports, which offset a 0.7% increase in exports.
Eurozone manufacturers had an underwhelming start to Q4. Data yesterday showed that production fell 0.1% month-to-month in October, pushing the year-over-year rate down to 0.6%, from a revised 1.3% in September. Output was constrained mostly by weakness in France and a big month-to-month fall in Ireland, which offset marginal gains in Germany and Spain.
So far, the MPC has been more timid with unconventional stimulus than other central banks. At the end of May, central bank reserves equalled 29.7% of four-quarter rolling GDP in the U.K., compared to 32.7% in the U.S. and 46.7% in the Eurozone.
Economic conditions remain challenging in Mexico, despite a modest improvement in leading indicators. The usual surveys currently are not well-suited to capture the economy's upturn from the Covid-19 collapse.
Odds-on, the consensus forecast for May's GDP report, released on Wednesday, will miss the mark.
The ink has hardly dried on economists' and the ECB's inflation projections for 2020, but we suspect that some forecasters are already considering ripping up the script.
The 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 0.7% month-to-month rise in industrial production in September marked the sixth consecutive increase, a feat last achieved 23 years ago.
The MPC surprised nobody yesterday by voting unanimously to keep Bank Rate at 0.75% and to maintain the stocks of gilt and corporate bond purchases at £435B and £10B, respectively.
China's unadjusted March trade balance rebounded to a surplus of $20B, from a combined deficit of -$7B in the first two months of the year.
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.
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.
The minutes of yesterday's MPC meeting indicate that it is not going to be panicked into cutting interest rates in the run-up to the E.U. referendum in June. The Committee voted unanimously again to keep Bank Rate at 0.5%, and dovish comments were conspicuously absent.
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.
We have argued frequently that the ADP employment report is not a reliable advance payroll indicator--see our Monitor of May 4, for example-- so for now we'll just note that it is generated by a regression model which includes a host of nonpayroll data and the official jobs numbers from the previous month. It is not based solely on reports from employers who use ADP for payroll processing, despite ADP's best efforts to insinuate that it is.
British households are back to their old ways and are piling on debt again. With borrowing costs still falling, consumer confidence high and banks willing to lend, indebtedness will only increase unless the Bank of England acts.
We've written in previous Monitors about the stabilisation of China's debt ratio. In this Monitor we look at whether this stabilisation is cyclical or a sign that China really has managed to change the structure of its economy to be less reliant on debt.
The wave of May data due for release today likely will go some way to countering the market narrative of a seriously slowing economy, a story which gained further momentum last week after the release of the May employment report.
German manufacturing data continues to offer a sobering counterbalance to strong services and consumers' spending data. New orders plunged 1.7% month-to-month in September, well below the consensus, pushing the year-over-year rate down to a 1.0% fall from a revised 1.7% increase in August. These data are very volatile, and revisions probably will lift the final number slightly next month, but the evidence points to clear risks of a further decline in the underlying trend of production.
Chile's growth dynamics were robust in August, according to the latest data. Production rose and consumption remained strong during most of Q3. Indeed, industrial output increased 5.1% year-over- year, up from an already strong 3.1% increase in July, and contrasting sharply with the 2% fall in Q2.
The services sector in China is notoriously difficult to track, with the major aggregate statistics published only on a quarterly or even annual basis.
Pedro Kuczynski, the centre-right candidate of the Peruvians for Change party, won the presidential election held in June 5th. Mr. Kuczynski, a former finance minister and World Bank economist, defeated Ms. Keiko Fujimori, the candidate of the conservative Fuerza Popular party, and the daughter of jailed former leader Alberto Fujimori. Mr. Kuczynski's margin of victory over Ms. Fujimori was fewer than 43K votes, or just 0.2%.
Last Friday's August auto sales numbers were overshadowed by the below-consensus payroll report and the six-year high in the ISM manufacturing index, but they are the first data to reflect the impact of Hurricane Harvey.
Data today likely will show that manufacturing in the Eurozone was off to a strong start to the second quarter. Advance country data suggest that industrial production jumped 1.1% month-to-month in April, pushing the year-over-year rate up to 1.9% from 0.1% in March. The rise in output was driven mainly by Germany and France, but decent month-to-month gains in Ireland, Portugal and Greece also helped.
Korea watchers appear to be hanging on Governor Lee Ju-yeol's every word, searching for any sign that he'll drop his hawkish pursuit of more sustainable household debt levels and prioritise short-term growth concerns.
The revival in the construction sector is slowing on all fronts as the fiscal squeeze intensifies, business confidence fades and the recovery in housebuilding loses momentum. These headwinds are likely to ensure that construction output only holds steady this year, thereby contributing to the broader economic slowdown.
We think today's February payroll number will be reported at about 140K, undershooting the 175K consensus.
In today's Monitor, we'll let the economy be, and focus instead on what are fast becoming the two defining political issues for the EU and its new Commission, namely migration and climate change.
Brazil's interim government has been trying to put the kibosh on the vicious circle of recession, capital outflows, and political pandering that has dogged the country for so long. In his first few weeks at the helm, despite the political turmoil, Mr. Temer has started to tackle Brazil's fiscal mess, the country's biggest headache.
The Brazilian industrial sector started this year on a very downbeat note, despite a 2% month-to-month jump in output. The underlying trend in activity is still very weak. Production fell 5.2% year-over-year.
CPI inflation increased to 2.9% in May, from 2.7% in April, exceeding the no-change expectation of both the consensus and the MPC, as well as our own 2.8% forecast.
In a busy week in Brazil, ongoing signals of feeble economic activity have strengthened our forecast for GDP growth of just 1.0% this year, below the 1.3% consensus forecast.
The collapse in global demand last month will have derailed China's trade recovery, causing exports to drop unpleasantly month-on-month after the bounce of around 45% in March; the January/February breakdown is not provided, so we can't be sure of the extent of the March rebound.
Today's September ISM manufacturing survey is one of the most keenly-awaited for some time. Was the unexpected plunge in August a one-time fluke--perhaps due to sampling error, or a temporary reaction to the Gulf Coast floods, or Brexit--or was it evidence of a more sustained downshift, possibly triggered by political uncertainty?
The Caixin services PMI fell to 51.5 in August, from 52.8 in July.
Chile's economy remains under pressure, at least temporarily. After signs of recovery in Q1, activity deteriorated in Q2 and at the start of the third quarter. The sluggish global economy--especially China, Chile's main trading partner--is exacerbating the domestic slowdown, hit by low business and consumer confidence.
Following the publication of Korea's preliminary Q4 GDP report last month--see here--we said the consensus-beating print would be susceptible to downgrades, unless the economy had a miraculous end to 2018
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.
October's GDP report, released on Monday, might just manage to break through the wall of noise coming from parliament ahead of the key Brexit vote on Tuesday.
Data released last week in Brazil reinforced our view of a modest, final, interest rate cut this week, despite the recent strength of the USD and volatility in global markets.
Hopes that GDP growth will strengthen following the general election, which has eliminated near- term threats of a no-deal Brexit and a business- hostile Labour government, were bolstered yesterday by the release of December's Markit/ CIPS services survey.
We take little comfort from the fact that the 2.0% quarter-on-quarter drop in Q1 GDP was a bit smaller than the consensus forecast, 2.5%, and the 3.0% fall pencilled-in by the MPC in its Monetary Policy Report.
Chile's economic outlook is still positive, but clouds have been gradually gathering since mid-year, due mostly to the slowdown in China, low copper prices and falling consumer and business confidence.
Germany's newly-appointed finance minister, Olaf Scholz, proudly announced earlier this month that his country would be running a budget surplus of €63B over the next four years--about 1.9% of GDP between now and 2022--some €14B more than initially estimated.
The consumer in Brazil was off to a strong start to the first quarter, and we expect household spending will continue to boost GDP growth in the near term.
Markets are becoming more sensitive to rumours about changes in ECB policy. The euro and yields jumped on Friday after a Bloomberg report that the central bank has discussed raising rates before QE ends.
Yesterday's German industrial production data were poor, but better than we expected. Output fell 0.5% month-to-month in February, pushing annual growth down to 1.3% from a revised 1.8% in January. In addition, net revisions to the month-to-month data were a hefty -1.0%, but this is not enough to change the story of a Q1 rebound in industrial production.
The improvement in the August services PMI has generated hyperbolic headlines suggesting the U.K. is on a tear despite the Brexit vote. Taken literally, however, the PMIs suggest that the revival in business activity in August only partially reversed July's decline. Meanwhile, the impact of sterling's sharp depreciation on the purchasing power of firms and consumers has only just begun to be felt.
Over the past six months, payroll growth has averaged exactly 150K. Over the previous six months, the average increase was 230K. And in the six months to August 2015--a fairer comparison, because the fourth quarter numbers enjoy very favorable seasonals, flattering the data--payroll growth averaged 197K.
Yesterday's German ZEW investor sentiment survey provided the first clear evidence of the coronavirus in the EZ survey data.
We expect today's consumer prices figures to show that CPI inflation picked up to 0.5% in May, from 0.3% in April, exceeding the 0.4% rate anticipated by both the consensus and the MPC, in last month's Inflation Report. We expect the increase to be driven by a jump in the core rate to 1.4%, from 1.2% in April.
India's industrial production data last week are the last set of key economic indicators for the fourth quarter, before next week's Q4 GDP report.
Small businesses remain extremely positive about the economy, but some of the post-election gloss appears to be wearing off. To be clear, the headline composite index of small business sentiment and activity in February, due this morning, will be much higher than immediately before the election, but a modest correction seems likely after January's 12- year high.
Always expect the unexpected in a bonus month for Japanese wages.
Brazil's interim government has been trying to put the kibosh on the vicious circle of recession, capital outflows, and political pandering that has dogged the country for so long. In his first few weeks at the helm, despite the political turmoil, Mr. Temer has started to tackle Brazil's fiscal mess, the country's biggest headache.
The third estimate of euro area growth in the first quarter provides clear evidence that measuring GDP is not an exact science. Real GDP rose 0.6% quarter-on-quarter in Q1, accelerating from 0.4% in Q4. This latest estimate is higher than the previous estimate, 0.5%, but in line with the first calculation. Eurostat and all the large Eurozone economies now provide early estimates of GDP, before data for the full quarter is available.
The verdict is not yet definitive, but prudence dictates we must now assume victory for Donald Trump. The immediate implication of President Trump is global risk-off, with stocks everywhere falling hard, government bonds rallying, alongside gold and the Swiss franc. The dollar is the outlier; usually the beneficiary when fear is the story in global markets, it has fallen overnight because the risk is a U.S. story.
A flawed theory still is circulating that the economy might outperform over the next two quarters because firms will stockpile goods due to the risk of a no-deal Brexit.
Friday's industrial production data capped another dreadful week for German manufacturing. Output fell 1.1% month-to-month in September, pushing the year-over-year rate lower to 0.2%, from a revised 2.9% in August. The 0.6% upward revision of the previous month's data makes the data slightly less awful than the headline, but the details showed weakness across all core sectors. The underlying trend in production is stable at about 1.2% year-over-year, but downbeat new orders suggest it will weaken in the fourth quarter.
The collapse in capital spending in the oil sector and poor construction spending have constrained aggregate Mexican industrial output in recent months, despite the strength of the manufacturing sector. Total production fell 0.1% year-over-year in January, though note this was a clear improvement after the 0.6% drop in December, and better than the average 0.4% contraction over the second half of 2016.
Recent inflation numbers across LatAm have surprised, in both directions. On the upside, Brazil's IPCA index rose 0.2% month-to-month in September, above the market consensus forecast of 0.1%.
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 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.
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.
China's trade surplus collapsed unexpectedly in April, to $13.8B, from a trivially-revised $32.4B in March.
Industrial production data in Germany continued to defy the signal of doom and gloom from leading indicators.
The second estimate of Eurozone GDP confirmed that the economy grew 0.3% quarter-on-quarter in the final three months of last year, up slightly from 0.2% in the third quarter. Gross fixed capital formation and household consumption both rose 0.4%, but the improving trend in euro area GDP growth is almost exclusively driven by consumer spending.
Italy's economy was in trouble before the Covid-19 hammer-blow. The new government's ill-fated threat in 2018 to leave the Eurozone, unless Brussels allowed a looser budget, threw the economy into a technical recession, from which it never made a convinicing recovery.
The coronavirus outbreak has pushed inflation lower in the Andean economies as the shock drives them into the deepest recession on record.
The surge in Covid-19 case and hospitalizations-- and, in due course, deaths--in some southern states since they began to reopen probably is not a sign of what is likely to happen as the populous states in the Northeast and Midwest reopen too.
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.
We just can't get away from the deeply vexed question of wages; specifically, why the rate of growth of nominal hourly earnings has risen only to just over 2.5%, even though the historical relationship between wage gains and the tightness of the labor market points to increases of 4%-plus.
China's trade data looked more normal in April. The trade balance rebounded to a surplus of $28.8B in April, from a deficit of $5.0B in March. Exports also bounced back, rising 12.9% year-over-year in April, after a 2.7% decline in March.
The Prime Minister has argued repeatedly during the general election campaign that Britain will prosper under a "strong and stable" Conservative government with a large majority. "Division in Westminster," she argued when calling the election last month, "...will risk our ability to make a success of Brexit and it will cause damaging uncertainty and instability to the country."
Payroll growth in September and October probably won't be materially worse than August's meager 96K increase in private jobs.
Brazil's industrial sector keeps losing momentum, despite interest rates at record lows and improving confidence.
Japan's trade surplus deterioration not as bad as official stats suggest, but more to come
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.
The first real glimpse of India's economic performance early this quarter is grim, adding weight to our below-consensus GDP forecast.
Slowing FAI growth underscores the urgency for more PBoC easing October was painful and the slowdown in Chinese IP growth is far from over and no, households in China won't come to the economy's rescue. Japan sneaks in a tax hike; GDP data unfazed. Japan's tertiary index jars with the GDP data.
Short-term trends in Chinese industry continued to soften in May, with catch-up growth fading, No noticeably May Day lift, as retail sales in China continue to fall behind, Chinese investment looks to have taken a breather in May, Don't put too much stock into the stronger increase in Chinese home prices, Japan's tertiary index should rebound from April, but Q2 is a write-off
Few Eurozone investors are going blindly to accept the rosy premise of last week's relief rally in equities that both a Brexit and a U.S-China trade deal are now, suddenly, and miraculously, within touching distance. But they're allowed to hope, nonetheless.
Judgement pending on Chinese industrial production. Chinese retail sales buoyed by inflation. Chinese FAI growth stable through Q4; local government spending better managed this year. China's housing market still not reached a bottom. Japan's tertiary index plunge is more tax hike than typhoon. Japan's PMIs underline damage from tax hike.
Our caution over China's March industrial production spike was justified. Chinese retail sales growth hits lows. Chinese FAI growth suggests private sector policy loosening isn't working. Japan's M2 growth upturn is a welcome break, but needs to be sustained. Korean unemployment jumps in April, showing the limits of the government's hiring spree.
Japan's monetary and credit trends were looking better, but now stand to be damaged by... the virus scare. Virus hit still to come for Japanese machine tool orders? Korea's jobless rate is back to its pre-August one-off plunge.
Covid-19 efforts in Korea, plus Q1 front-loading of jobs budget, result in February surprise.
LatAm assets did well in Q1, on the back of upbeat investor risk sentiment, low volatility in developed markets and a relatively benign USD.
Mexican industrial production is slowly improving, and further good numbers are likely in coming months.
Recent industrial data for Mexico point to renewed upside risks for GDP growth, despite the likely headwind to consumption from high inflation and depressed confidence.
The Tankan survey reinforces our conviction in a c.2% y/y Q1 contraction in Japanese GDP. Caixin suggests March was as bad as February... that's bad. Ignore the headline, Korean exports rebounded strongly in March, salvaging Q1. Korean business sentiment is sinking to GFC territory.
Tankan suggests downside risks to our -6% y/y Q2 GDP forecast. Private manufacturers in China continue to play catch-up. Expect a bumpy recovery for Korean exports in Q3. Korean business sentiment is finally recovering.
Our current base-case forecast for the second quarter is a 30% annualized drop in GDP, based on our assessment of the hit to discretionary spending by both businesses and consumers.
Mexican policymakers stuck to the script yesterday and voted unanimously to cut the main rate by 50bp to 5.50%, its lowest level in more than three years.
Japan's labour market remains tight but will face persistent slackening from here. Caixin manufacturing on a tear. In the end, CPI deflation in Korea lasted just one month. October probably was the y/y trough in Korea's export slump. Business sentiment in Korea is recovering... albeit only slowly.
China's trade surplus jumped to a record high in May, defying expectations for a fall by spiking to $69.2B.
April's GDP report probably will be the worst any of us will see in our lifetime.
February's COPOM meeting minutes again signalled that Brazil's central bank will stick with its cautious approach to monetary policy.
Fed Chair Yellen delivered no great surprises in her semi-annual Monetary Policy Testimony, though she certainly was clear on her attitude to the balance sheet. The Fed does not want to "...use the balance sheet as an active tool of monetary policy."
It would be a mistake to conclude much about the economic impact of the Brexit vote from today's official industrial production figures for September, and the British Retail Consortium's figures for retail sales in October.
Japan's average monthly labour earnings growth tumbled to 0.9% year-over-year in August, from 1.6% in July. This is not a disaster.
Industrial production in Germany had a decent start to the third quarter. Output rose 0.7% month-to-month in July, less than we and the consensus expected, but the 0.5% upward revision to the June data brings the net headline almost in line with forecasts. Rebounds of 2.8% and 3.2% month-to-month in the capital goods and construction sectors respectively were the key drivers of the gain, following similar falls in June. A 3.2% fall in consumer goods production, however, was a notable drag.
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 consensus that industrial production increased by just 0.2% month-to-month in July looks too cautious.
The 62K jump in jobless claims for the week ended September 2 is a hint of what's to come. Claims usually don't surge until the second week after major hurricanes, because people have better things to do in the immediate aftermath, so we are braced for a further big increase next week.
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 Economy Is Past The Covid Low, Just...But The Way Back Will Be Long And Painful
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.
Markets have been positively surprised by Brazil's rapid disinflation, the efforts at fiscal reform, and the prospect of growth in the economy this year. The Ibovespa index is now above its pre-crisis high and the real has approached the key level of three per USD in recent months. But the latest GDP report, released yesterday, showed that the economy struggled in Q4. Real GDP fell 0.9% quarter-on-quarter, worse than the revised 0.7% drop in Q3.
April's production data, released today, look set to indicate that the industrial sector's recession--its third in the last eight years--deepened in the second quarter. We think the consensus expectation that industrial production held steady in April is too upbeat. We look for a 0.3% month-to-month drop.
The sharp 0.4% month-to-month fall in GDP in December and the slump in the Markit/CIPS PMIs towards 50 have created the impression the economy is on the cusp of recession.
Our below-consensus 125K forecast for today's February payroll number is predicated on two ideas.
In our Friday Monitor, we came to the conclusion that prescriptions arising from Modern Money Theory have been designed primarily with the U.S. in mind.
Brazil's consumer spending data yesterday appeared downbeat. Retail sales fell 2.1% month-to-month in December, pushing the year-over-year rate down to 4.9%, from -3.8% in November. This is a poor looking headline, but volatility is normal in these data at this time of the year, and the underlying trend is improving.
Brazil's March industrial production report, released on Thursday last week, was weaker than we and the markets were expecting, while the recent deterioration in sentiment surveys highlights the downside risks to the rather fragile economic recovery.
France just about avoided slipping into deflation in December, with the CPI rising 0.1% year-over-year, down from 0.3% in November. The 4.4% drop in the energy component should have pushed inflation below zero, but a seasonal increase in tourism services was enough to offset the drag from oil prices.
Yesterday's preliminary full-year GDP data in Germany tell a cautionary tale of the dangers in taking national accounts at face value. The headline data suggest real GDP growth rose to 1.7% in 2015, up slightly from 1.6% in 2014, but these data are not adjusted for calendar effects. The working-day adjusted measure buried in the press release instead indicates that growth slowed marginally to 1.5% from 1.6% in 2014.
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.
When the dust settles after today's wave of data, we expect to have learned that core retail sales continued to rise in June, core inflation nudged back up to its cycle high, and manufacturing output rebounded after an auto-led drop in May. None of these reports will be enough to push the Fed into early action, but they will add to the picture of a reasonably solid domestic economy ahead of the U.K. Brexit referendum.
The slew of EZ economic data on Friday supports our view that the economy ended 2016. The Commission's economic sentiment index jumped to 107.8 in December from a revised 106.6 in November. The headline strength was due to a big increase in "business climate indicator" and higher consumer sentiment. In individual countries, solid numbers for German construction and French services sentiment were the stand-out details.
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.
Small business sentiment and activity, as reported by the NFIB survey, has recovered exactly half the drop triggered by the rollover in stock prices in the fourth quarter. This matters, because most people work at small firms, which are responsible for the vast bulk of net job growth.
China's industrial production grew at an annualised 7.2% rate by volume in Q1, according to our estimates, up from an average 5.9% rate in the six quar ters through mid-2016.
The rollover in bank lending to commercial and industrial companies probably is over. On the face of it, the slowdown has been alarming, with year-over-year growth in the stock of lending slowing to just 2.6% in April, from a sustained peak of more than 10% in the early part of last year.
Yesterday's headline economic data in Germany were decent enough. Industrial output edged higher by 0.3% month-to-month in May, lifted primarily by rising production of capital and consumer goods.
For the MXN, last year was especially harsh. The currency endured extreme volatility, plunging 17% against the USD. So far, this year is off to a rocky start too. The MXN fell close to 2.5% during the first week of 2017.
The German manufacturing sector appears to have settled into an equilibrium of sustained misery.
China's import growth in dollar terms slowed sharply to 4.5% year-over-year in December from 17.7% in November, significantly below the consensus forecast.
We aren't convinced that China's recovery is in train just yet.
Friday's industrial production report in Germany capped a miserable week for economic data in the Eurozone's largest economy.
Economic activity data in Chile have been soft and uneven this year, due mainly to the hit from low commodity prices and uncertainty surrounding the reform agenda, which has badly damaged consumer and investor sentiment. The latest Imacec index, a proxy for GDP, increased just 1.7% year-over-year in October, down from the 2.7% gain in September, and below the 2.2% average seen during Q3 as a whole.
Last week's horrible manufacturing data in the major EZ economies had already warned investors that yesterday's industrial production report for the zone as a whole would be one to forget.
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.
Figures due on Friday likely will show that the increase in industrial production in December was much smaller than the 0.6% month-to-month assumed by the ONS in its preliminar y Q4 GDP estimate. We expect a 0.2% rise, which would leave production down 0.1% quarter-on-quarter, rather than up 0.1% as the ONS initially estimated.
Treasury Secretary Mnuchin's five-line letter to House Speaker Pelosi on last Friday--copied to other Congressional leaders--which said that "there is a scenario in which we run out of cash in early September, before Congress reconvenes", introduces a new element of uncertainty to the debt ceiling story.
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.
Friday's economic data added to the evidence that the German economy stumbled in July. The seasonally adjusted trade surplus slipped to €19.4B, from a revised €21.4B in June.
The recent run of grim sales and earnings numbers from major national retailers, including Kohl's, Nordstrom, and Macy's, reflects two major trends. The first is obvious; the rising market share of internet sales is squeezing brick and mortar retailers, as our first chart shows. We have no idea how far this trend has yet to run but it shows no signs yet of peaking.
The details of next year's Japanese budget are not yet official and the Chinese budget remains unknown. But the main figures of the Japanese budget are available, while China's Economic Work Conference, which concluded yesterday, has set out the colour of the paint for the budget, if not the actual brush strokes.
Sterling is well below its $1.57 average of the last five years, despite rallying this month to about $1.45, from a low of $1.38 in late February. But hopes that cable will bounce back to its previous levels, after a vote to remain in the E .U., likely will be dashed.
Our forecast of a solid 190K increase in headline December payrolls ignores our composite employment indicator, which usually leads by about three months and points to a print of just 50K or so.
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.
We expect the flash reading of Markit's composite PMI, released today, to print at 52.4 in February, below the consensus, 52.8, and January's final reading, 53.3, albeit still in line with last month's flash.
Yesterday's barrage of survey data were a mixed bag. The composite EZ PMI edged higher in May to 51.6, from 51.5 in April, but the details were less upbeat, and also slightly confusing.
Today's housing market data likely will look soft, but will probably not be representative of the underlying story, which remains quite positive.
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.
Once again, Chinese January data released so far suggest that the Phase One trade deal was the dominant factor dictating activity for the first two- thirds of the month, with the virus becoming a real consideration only in the last third.
Today's advance EZ PMIs will be watched more closely than usual.
The PMIs are telling an increasingly upbeat story for the EZ economy in Q4. The composite PMI in the euro area rose to an 11-month high of 54.1 in November, from 53.3 in October. The uptick was driven by strong new business growth across all private sectors, and employment also increased in response to higher work backlogs.
The PBoC's reformed one-year Loan Prime Rate was published yesterday at 4.25%, compared with 4.31% on the previous LPR, and below the benchmark lending rate, 4.35%.
China's official manufacturing PMI edged down to 50.8 in April, from 52.0 in March. The output sub- index stayed relatively high, inching down only to 53.7 from 54.1, and chiming with our initial take on the industrial production data for March.
The big difference between economic cycles in developed and emerging markets is that recessions in the former tend to be driven by the unwinding of imbalances only in the private sector, usually in the wake of a tightening of monetary policy.
Theresa May doubled down on her Brexit stance last week, despite European Council President Donald Tusk stating clearly that her proposed framework for economic cooperation "will not work" because it risks undermining the single market.
Evidence of slowing economic activity in Colombia continues to mount. Retail sales fell 2.0% year- over-rate in April, down from a revised plus 3.0% in March; and the underlying trend is falling. This year's consumption tax increase, low confidence, tight credit conditions, and rising unemployment continue to put private consumption under pressure.
EU negotiations tend to go down to the wire; and last week's summit in Salzburg, and Theresa May's statement on Friday, suggest that the Brexit negotiations will do just that.
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.
In his opening speech at the Party Congress, President Xi received warm applause for his comment that houses are "for living in, not for speculation".
It is often argued that the average weekly earnings--AWE--figures exaggerate the severity of the squeeze on households' incomes.
After a 15 year hiatus, Argentina returned to the global credit markets yesterday with the sale of a USD16.5B sovereign bonds, the largest ever dollar offering by a developing country. Argentina boosted the size of its offering to USD16.5B from USD15B after attracting orders worth USD70B. The country sold four tranches: 10-year debt at 7.5%, three- and five year yielding 6.25% and 6.875%, respectively, and 30-year paper at 8.0%.
Under normal circumstances, the boost to consumption from the astonishing collapse in oil prices would act as a substantial--though not complete--offset to the hit to capital spending in the shale business.
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.
Today's data dump will deliver the advance PMIs and the French INSEE business sentiment indices for February, all of which will be examined closely for signs of stabilisation in the wake of recent evidence that EZ growth is slowing quicker than markets and the ECB have been expecting.
The drop in jobless claims to 3,839K in the week ended April 25, from 4,442K in the previous week, leaves the data still terrible, but markedly less terrible than at the 6,867K peak in late March.
GDP data for Q2 are due July 26; we expect the report to show a marginal dip in growth, to a seasonally adjusted 0.8% quarter-on-quarter, from 1.0% in Q1.
The apparent softness of business capex is worrying the Fed.
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.
LatAm investors' concerns about U.S. monetary policy expectations and the broad direction of the USD should on the back burner until the Fed hikes again, likely in September. This will leave room for country-specific drivers to take centre stage. That should support Mexico's MXN, which already has risen 14% year-to-date against the USD, erasing its losses after the US election last November.
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.
Friday's industrial production data in the core EZ economies, for December, were startlingly poor. In Germany, industrial production plunged by 3.5% month-to-month, comfortably reversing the revised 1.2% rise in November.
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.
The Eurozone's external surplus fell further at the end of Q1, and has now fully reversed the jump at the start of the year.
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.
One of the arguments we hear in favor of an endless Fed pause--in other words, the cyclical tightening is over--is that GDP growth is set to slow markedly this year, to only 2% or so.
A very light week for U.S. data concludes today with four economic reports, which likely will be mixed, relative to the consensus forecasts. The recent run of clear upside surprises and robust-looking headline numbers is likely over, for the most part.
Both business surveys and unconventional activity indicators suggest that the recovery from the Covid-19 shock has sped up in June, after a shaky start in May.
So far, the surge in retail spending promised by the plunge in gasoline prices has not materialized. The latest Redbook chain store sales numbers dipped below the gently rising trend last week, perhaps because of severe weather, but the point is that the holiday season burst of spending has not been maintained.
Robust demand in the ECB's final TLTRO auction was the main story in EZ financial markets yesterday. Euro area banks--474 in total-- took up €233.5B in the March TLTRO, well above the consensus forecast €110B. To us, this strong demand is a sign that EZ banks are taking advantage of the TLTROs' incredibly generous conditions.
Inflation pressures in Brazil are still easing rapidly. The mid-May unadjusted IPCA- 15 index rose just 0.2% month-to-month, much less than the 0.6% historical average for the month. Base effects pushed the year-over-year rate down to 3.8% from 4.1% in April. Food prices, healthcare and personal costs were the main drivers of the modest month-to-month increase.
Just as we turned more positive on the labor market, following three straight months of payroll gains outstripping the message from an array of surveys, the Labor Department's JOLTS report shows that the number of job openings plunged in November.
Mexico's CPI rose just 0.1% in the first half of March, due to higher core prices. The increase was broadbased within this component, with goods prices increasing by 0.2% and core services 0.4%. Core services prices were driven by temporary factors, including vacation packages and higher airfare tickets. Non-core prices, meanwhile, fell 0.5%, due mainly to falling fresh food prices.
December's industrial production figures, released today, look set to surprise the consensus to the downside, pushing down the pound and increasing the chances that the preliminary estimate of a 0.5% quarter-on-quarter increase in fourth quarter GDP will be revised down.
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.
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.
All the evidence indicates that growth in Eurozone consumers' spending is slowing. We think data today will show that the advance GfK consumer sentiment index in Germany was unchanged at 9.5 in April, but the headline index does not correlate well with spending. The "business expectations" index is better, and while it likely will increase slightly, our first chart shows that it continues to signal a slowdown in consumers' spending growth.
On the face of it, June's retail sales figures suggest that households have splurged in Q2, re-energising GDP growth after its slowdown in Q1. Sales volumes rose by 0.6% month-to-month in June, completing a 1.5% quarter-on-quarter jump in Q2.
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.
The consensus expectation that industrial production rose by 1.0% month-to-month in November is far too low; we expect Wednesday's data to show a jump of 2.0% or so. The rebound, however, should not be interpreted as another sign that the economy has been revitalised by the Brexit vote. Instead, we expect the rise chiefly to reflect volatility in oil production and heating energy supply.
The CBI's Industrial Trends Survey, for July and Q3, supplied encouraging evidence yesterday that the manufacturing upswing still has momentum.
The vote in the House of Commons today on whether MPs should effectively take control of Brexit negotiations, if Theresa May can't strike a deal by mid-January, looks finely balanced.
The recent pick-up in mortgage approvals is another sign that households are unperturbed by the risk of a no-deal Brexit.
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.
Mexican policymakers voted unanimously last Thursday to hike the main rate by 25bp to 7.75%, the highest since early 2009.
Yesterday's PMIs kicked off a busy week for Eurozone data on a downbeat note. The composite EZ PMI fell to a five-month low of 55.8 in July, from 56.3 in June; it was constrained by a 0.6 point dip in the manufacturing index to 56.8.
MPs look set to take a decisive step next Tuesday towards removing the risk of a calamitous no-deal Brexit at the end of March.
The White House Budget for fiscal 2018, released last week, has no chance of becoming law in anything like its current form, so we don't propose to spend much time dissecting it. But we do need to set out our view on what might actually happen to fiscal policy over the next few months, because it potentially could make a material difference to the pace, and ultimate extent, of Fed tightening.
Friday's data force us to walk back our recession call for Germany. The seasonally adjusted trade surplus rose in September, to €19.2B from €18.7B in August, lifted by a 1.5% month-to-month jump in exports, and the previous months' numbers were revised up significantly.
We have been on the ECB's case recently. The action taken at last week's official meeting--see here--fell short of market expectations, but more importantly, Ms. Lagarde's communication around the decisions was disastrous.
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.
Today brings more housing data, in the form of the May existing home sales numbers.
House price inflation in tier-one cities has been crushed by China's most recent monetary tightening. This is a sharp turnaround from the overheating mid-way through last year. Unlike in previous cycles, interest rates are probably more important for house prices than broad money growth.
Are there any signs of a Chinese recovery yet? Freya Beamish discusses
LatAm governments and central banks have been busy implementing additional measures to contain the spread of the virus, and acting rapidly to ease the effect on the economy.
If Japan's flash PMIs for March are a sign of things to come, then the government really should get moving on fiscal stimulus.
Brazilian inflation is off to a good start this year, and we think more good news is coming. The January mid-month IPCA-15 index rose an unadjusted 0.3% month-to-month, a tenth less than expected. This was the smallest gain for January since 1994 and the sixth consecutive month in which the number came in below expectations.
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.
Mexican president-elect Andrés Manuel López Obrador, known as AMLO, has set out the first points of his austerity plan, two weeks after his overwhelming victory at the polls.
We continue to see signs of a strengthening upturn in Eurozone construction. Output in construction rose 0.3% month-to-month in April, pushing the year-over-year rate down to 3.2%, from an upwardly revised 3.8% in March.
Yesterday's national business confidence data for June provided further evidence that the EZ economy is rebounding.
The headline May durable goods orders numbers today probably will look very strong, with the odds favoring a much bigger increase than the 10.1% consensus; we'll come back to that.
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.
Brazil's GDP growth slowed to just 0.1% quarter- on-quarter in Q4, from a downwardly-revised 0.5% in Q3.
Friday's economic data in Germany left markets with a confused picture of the Eurozone's largest economy.
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.
Recent economic indicators in Brazil have undershot consensus in recent weeks, but the economy nonetheless continues to recover.
Survey data have been signalling a stronger German economy in the last few months, and hard data are beginning to confirm this story. Data yesterday showed that industrial production rose 0.4% month-to-month in November, pushing the year-over-year rate up to 2.2%, from an upwardly-revised 1.6% in October. The headline was boosted mainly by a 1.5% month-to-month jump in construction and a 0.9% rise in intermediate goods production.
The Prime Minister's refusal last week to reaffirm her party's 2015 election pledge not to raise income tax, National Insurance or VAT has fuelled speculation that taxes will rise if the Conservatives are re-elected on June 8. Admittedly, Mrs. May asserted that her party "believes in lower taxes", and the tax pledge s till might appear in the Conservatives' manifesto, which won't be published for a few weeks.
The EZ's current account surplus was stung at the end of Q3, falling to a three-year low of €16.9B in September, from a revised €23.9B in August.
Usually, we forecast existing home sales from the pending sales index, which captures sales at the point contracts are signed.
The Spanish economy has been punching above its weight in the current business cycle. Real GDP growth has trended at about 0.8% quarter-on-quarter since 2015, far outpacing the other major EZ economies.
We are revising our forecast for Fed action this year, taking out two of the four hikes we had previously expected. We now look for the Fed to hike by 25bp in September and December, so the funds rate ends the year at 0.875%. The Fed's current forecast is also 0.875%, but the fed funds future shows 0.6%.
The Brazilian Central Bank's policy board-- COPOM--voted unanimously on Wednesday to cut the Selic rate by 50bp to 5.50%.
The Eurozone's external surplus rebounded slightly at the start of Q3.
The recent jobless claims numbers have been spectacularly good, with the absolute level dropping unexpectedly in the past two weeks to a 43-year low. The four-week moving average has dropped by a hefty 14K since late August.
A shutdown of the federal government, which could happen as early as this weekend, is a political event rather than a macroeconomic shock. But if it happens--if Congress cannot agree on even a shortterm stop-gap spending measure in order to keep the lights on after the 28th--it would demonstrate yet again that the splits in the House mean that the prospects of a substantial near-term loosening of fiscal policy are now very slim.
In Brazil, last week's formal payroll employment report for March was decent, with employment increasing by 56K, well above the consensus expectation for a 48K gain.
February's consumer price report, released tomorrow, likely will show that CPI inflation has breached the MPC's 2% target for the first time since November 2013. Indeed, we think the headline rate jumped to 2.2%, from 1.8% in January, exceeding the 2.1% rate expected by the MPC and the consensus.
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.
Today's headline durable goods orders number for January is likely to blast through the consensus forecast, +2.7%. We expect a 6.5% jump, comfortably reversing December's 5.0% drop.
The minutes of the Banxico's monetary policy meeting on February 7, when the board unanimously voted to keep the reference rate on hold at 8.25%, were consistent with the post-meeting statement.
Fed Chair Powell broke no new ground in his Senate Testimony alongside--virtually--Treasury Secretary Mnuchin yesterday, maintaining the cautious tone of his recent public statements.
Colombia, the third largest economy in LatAm, has not been immune to the headwinds of the global economy since the financial crisis in 2008, though it remains one of the fastest growing economies in the region. GDP growth slowed sharply to just 1.7% in 2009, but that was still much better than the 1.2% contraction of the region as a whole.
Today brings new housing market data, in the form of the weekly applications numbers from the MBA. The weekly data are seasonally adjusted but are still very volatile, especially in the spring.
The passage of the House tax cut bill does not guarantee that the Senate will follow suit with its own bill, still less that both chambers will then be able to agree on a single bill which can then b e signed into law. As
The April IFO business sentiment survey increased the degree of uncertainty over the German economy, following stabilisation in the PMIs earlier this week.
Markets rightly interpreted yesterday's above consensus GDP report as having little impact on the outlook for monetary policy.
Consensus forecasts expect further gains in this week's key EZ business surveys, but the data will struggle to live up to expectations. The headline EZ PMIs, the IFO in Germany, and French manufacturing sentiment have increased almost uninterruptedly since August, and we think the consensus is getting ahead of itself expecting further gains. Our first chart shows that macroeconomic surprise indices in the euro area have jumped to levels which usually have been followed by mean-reversion.
Core machine orders in Japan held up surprisingly well in March, slipping by just 0.4% month-on-month, erasing only part of the 2.3% increase in February.
Further evidence that the general election has transformed business confidence emerged yesterday, in the form of January's CBI Industrial Trends survey.
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 central bank is finally decisively facing its demon, persistently high inflation. The eight-member policy board, known as Copom, decided unanimously on Wednesday to increase the Selic rate by 50bp to 12.25%, the highest level in more than three years, in line with the consensus.
The Eurozone has come under the spotlight for its growing external surplus, but domestic households have been doing the heavy lifting for GDP growth in this business cycle. During the last four quarters, consumers' spending has boosted year-over-year GDP growth by an average of 1.0 percentage points, in contrast to a 0.4pp drag from net exports.
Both the Prime Minister and Chancellor last week threatened to cut business taxes aggressively to persuade multinationals to remain in Britain in the event of hard Brexit. But these threats lack credibility, given the likely lingering weakness of the public finances by the time of the U.K.'s departure from the EU and the scale of demographic pressures set to weigh on public spending over the next decade.
Yesterday's German IFO survey broadly confirmed the bullish message from the PMIs earlier this week. The headline business climate index rose to 111.0 in February from a revised 109.9 in January, boosted by increases in both the current assessment and the expectations index.
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.
A thought, ahead of Chair Yellen's Testimony tomorrow. Conventional wisdom has it that the terminal Fed funds rate in this cycle will b e much lower than in the past--the Fed thinks 3¾%, compared to 5.25% in 2007, and 6.5% in 2000--reflecting the long-lasting legacy of the crash, particularly in household balance sheets.
Yesterday's barrage of French business sentiment data suggest that confidence in the industrial sector was a little stronger than expected in Q2.
Dire warnings that the plunge in s tock prices would depress consumers' confidence and spending have not come to pass. It's too soon to draw a definitive conclusion--the S&P hit its low as recently as the 11th--but peoples' end-February brokerage statements are on track to look less horrific than the end-January numbers, provided the market doesn't swoon again over the next few days.
The White House budget proposals, which Roll Call says will be released in limited form on March 14, will include forecasts of sustained real GDP growth in a 3-to-3.5% range, according to an array of recent press reports.
Recent global developments lead us to intensify our focus on trade in LatAm.
The monthly survey of small businesses conducted by the National Federation of Independent Business is quite sensitive to short-term movements in the stock market, so we're expecting an increase in the November reading, due today.
A firmer picture is emerging of how Japan's economy fared in Q3, in light of the latest slew of data for August.
Demand for new mortgages to finance house purchase has rebounded somewhat in recent weeks, following an alarming dip in the wak e of October's stock market correction. At the low, in the third week in October, the MBA's index of applications volume was at its lowest since mid-February, when the reported numbers are substantially depressed by a long-standing seasonal adjustment problem.
The escalation in the U.S.-Chinese trade wars has understandably pushed EZ economic data firmly into the background while we have been resting on the beach.
The Covid-19 shock to the real economy in China, and now the world, is colossal. Asia is leading the downturn, both because the outbreak started in China, but also because of its place in the supply chain.
The flattening of the curve in recent months has been substantial, but in our view it is telling us little, if anything, about the outlook for growth. More than anything else, investors in longer Treasuries care about inflation, and the likely path of headline inflation clearly has been lowered by the plunge in oil prices.
Brazil's decision to keep interest rates at 14.25% on Wednesday was a surprise. The consensus forecast immediately before the meeting was for a 25bp increase. As recently as Tuesday, though, most forecasters expected a 50bp increase, following hawkish comments from Board members since the last meeting in November, and rising inflation expectations. But the day before the meeting, the IMF revised its forecast for 2016 GDP to -3.5%, much worse than the 1% drop it predicted in October.
The case for believing that August's unexpected 14-year high in the ISM manufacturing index was a fluke is pretty straightforward, and it has both short and medium-term elements.
Recent global developments lead us to intensify our focus on trade in LatAm.
We're expecting a substantial inventory hit in the fourth quarter, subtracting about 1¼ percentage points from headline GDP growth. Businesses very likely added to their inventories in Q4, in real terms, but the we reckon the increase was only about $30B, annualized, compared to the $85.5B jump in the third quarter. Remember, the contribution to GDP growth is the change in the pace of inventory-building between quarters.
Recent data in Colombia have confirmed that virus containment measures caused much bigger declines in activity in early Q2 than initially expected.
Economic activity in Chile in the first half of the year is now a write-off, due to Covid-19. The country is in a deep recession, and the impact of lockdowns on labour markets and businesses will cause long-lasting economic damage, which will hold back the recovery.
Last week's enormous €1.3T take-up in the ECB's first post-virus TLTRO auction was hardly a blip for financial markets, consistent with the reactions to previous auctions.
Today's industrial production data in the Eurozone will extend the run of soft headlines at the start of the year.
Mexico's economy stuttered at the start of the year. Real GDP rose 0.4% quarter-on-quarter in the first quarter, after a solid 0.7% in the fourth quarter. Q1 activity was supported by the services sector, rising 0.5%, offsetting the 0.2% contraction in industrial activity.
Japan's export data for April unsurprisingly were abysmal, driving a massive deterioration in the trade balance, which flipped from a modest ¥5B surplus in March, to a ¥930B deficit.
February's industrial production and construction output data leave us little choice but to revise down our forecast for quarter-on-quarter GDP growth in Q1 to 0.2%, from 0.3% previously.
We're placing less weight than usual on conventional business surveys at the moment, as they are ill-suited to charting the economy's turnaround from the Covid-19 slump.
Most LatAm currencies have been under pressure recently, with the Brazilian real and the Chilean peso breaking all-time lows versus the USD in recent weeks.
Halifax's house price index rose by an eye catching 1.5% month-to-month in March, superficially suggesting that the housing market is reviving.
The BLS offered no estimate of the impact on payrolls of the snowstorm which hit the Northeast during the March survey week, but it appears to have been substantial. All the leading indicators pointed to a solid 200K-plus reading, more than double the official initial estimate, 98K.
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.
Today brings a wave of data, some brought forward because of Thanksgiving. We are most interested in the durable goods orders report for October, which we expect will show the upward trend in core capital goods orders continues.
After the strong Philly Fed survey was released last week, we argued that the regional economy likely was outperforming because of its relatively low dependence on exports, making it less vulnerable to the trade war.
It seems that yesterday's PMI data left investors and analysts more confused than enlightened.
The coronavirus pandemic is wreaking havoc in Brazil.
Inflation pressures in Brazil and Mexico are well under control, with the August mid-month readings falling more than expected, strengthening the case for the BCB and Banxico to cut interest rates in the near term.
Japan's flash PMI numbers for August were a mixed bag.
Slack in the labour market no longer is being absorbed and wage growth still is struggling for momentum, placing little pressure on the MPC to rush the next rate rise.
Yesterday's EZ CPI report points to a dovish backdrop for next week's ECB meeting. Advance data show that inflation was unchanged at 0.2% year-overyear in August, lower than the consensus, 0.3%. The headline was held back by a dip in the core rate to 0.8%, from 0.9% in July; this offset a lower deflationary drag from energy prices.
Yesterday's August PMI data in the euro area ran counter to the otherwise gloomy signals from the ZEW and Sentix investor sentiment indices.
LatAm's relatively calm market environment has been thrown into disarray over the last few weeks.New fears of a slowdown in China, political turmoil in the U.S. and, most importantly, the serious corruption allegations facing Brazil's President, Michel Temer, have triggered a modest correction in asset markets and have disrupted the region's near-term policy dynamics.
Public borrowing was below consensus expectations in August, fuelling speculation that the Chancellor might pare back the remaining fiscal tightening in the Autumn Budget on November 22.
We are hearing a great deal about the threat of a second wave of Covid-19 infections, caused either by the reopening of the economy, or the arrival of cooler weather in the fall, or both.
MPC member Michael Saunders, who has voted to raise interest rates at the last two MPC meetings, argued in a speech yesterday that tighter monetary policy is required now partly because it affects the economy with a long lag.
Our view that households will continue to spend more in the first half of this year, preventing the economy from slipping into a capex-led recession, was not seriously challenged yesterday by the BRC's Retail Sales Monitor.
We expect the official estimate of quarter-on-quarter GDP growth in Q4 to be revised up to 0.7% today, from last month's preliminary estimate of 0.6%. The consensus forecast is for no revision, so the data likely will boost interest rate expectations and sterling, if we're right.
The rate of growth of new coronavirus infections across Europe slowed yesterday, in some cases quite markedly. We can quibble about the reliability of the data in individual countries, given variations in testing regimes, but the picture is strikingly uniform.
We can't quibble with the consensus that GDP likely rose by 0.2% month-to-month in December, reversing only two-thirds of November's drop.
The gap between the hard and soft data from the industrial economy appeared to widen still further last week. But we are disinclined to take the data--the official industrial production report for March, and the first survey evidence for April--at face value.
Retail sales volumes held steady in September, undershooting the consensus, 0.3%, and they were unchanged in August too. At this stage, evidence of a slowdown in retail sales growth is only tentative, but the trend will weaken decisively when retailers raise prices sharply next year.
Yesterday was a nearly perfect day for investors in the Eurozone. The Q3 GDP data were robust, unemployment fell, and core inflation dipped slightly, vindicating markets' dovish outlook for the ECB.
Japan's January PMIs sent a clear signal that the virus impact is not to be underestimated. The manufacturing PMI fell to 47.6 in February, from 48.8 in January, contrasting sharply with the rising headlines of last week's batch of European PMIs.
The sharp decline in Mexico's leading indicators highlights the dramatic scale of the economic and financial hit from the coronavirus. High frequency data and the PMIs are the first numbers to capture the lockdown, and they signal that the services activity-- the bulk of Mexico's GDP--dropped sharply.
Korean GDP contracted by 1.4% quarter-on- quarter in Q1, erasing the 1.3% jump at the end of last year. The pullback was sharper than we expected, with the cliff-edge drop in private consumption, in particular, catching us by surprise.
Expectations that the ECB will respond to weakening growth in China with Additional stimulus mean that survey data will be under particular scrutiny this week. The consensus thinks the Chinese manufacturing PMI--released overnight--will remain weak, but advance PMIs in the Eurozone should confirm that the cyclical recovery remained firm in Q3. We think the composite PMI edged slightly lower to 54.0 in September from 54.3 in August, consistent with real GDP growth of about 0.4% quarter-on-quarter in Q3.
Consumer sentiment in the euro area has slipped this year, though the headline indices remain robust overall.
China's January trade data were scheduled for release on Friday, but instead, the customs authority delayed the publication, saying it would publish the numbers with the February data
The risk of higher US rates put LatAm currencies under pressure during the first half of the week, before the US FOMC meeting on Wednesday. But they recovered some ground yesterday, following the Fed's decision to leave rates on hold.
Friday's PMIs were supposed to provide the first reliable piece of evidence of the coronavirus on euro area businesses, but they didn't. Instead, they left economists dazed, confused and scrambling for a suitable narrative.
The BoJ yesterday kept the policy balance rate at -0.1%, and the 10-year yield target at "around zero", in line with the consensus.
The year so far in EZ equities has been just as odd as in the global market as a whole.
We can't yet know how bad the spread of the coronavirus from the Chinese city of Wuhan will be.
The Brazilian Central Bank's policy board-- COPOM--voted unanimously on Wednesday to cut the Selic rate by 50bp to 5.00%, as expected.
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.
This week's GDP figures showed that firms invested only sparingly in 2016, but their financial fortunes have been bolstered by a recovery in profits. The gross operating surplus of all firms rose by 4.5% quarter-on-quarter in Q4, the biggest increase for 11 quarters. This pushed the share of GDP absorbed by profits up to 21.3%, just above its 60-year average of 21.2%.
Borrowing by local authorities from the Public Works Loan Board, used to finance capital projects-- and arguably dubious commercial property acquisitions--has surged this year.
The Eurozone's external surplus recovered a bit of ground mid-way through the third quarter.
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.
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.
The sustained upturn in mortgage applications since last fall ought to have driven up the pace of new home construction quite sharply. But our first chart shows that single-family building permit issuance--we use permits rather than starts, as they are much less volatile--rose only 8.3% year-over-year in the three months to May, while applications for new mortgages to finance house purchase jumped by 18.8% over the same period.
The MPC's new inflation forecasts usually take centre stage on "Super Thursday" and provide a numerical indication of how close the Committee is to raising interest rates again.
The obsession of markets and the media with the industrial sector means that today's ISM manufacturing survey will be scrutinized far more closely than is justified by its real importance.
New home sales are much more susceptible to weather effects -- in both directions -- than existing home sales. We have lifted our forecast for today's February numbers above the 575K pace implied by the mortgage applications data in recognition of the likely boost from the much warmer-than-usual temperatures.
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.
The monthly new home sales numbers are so volatile that just about anything can happen in any given month.
Yesterday's partial trade data for Korea showed that the downturn in exports softened to -13.3% year-over-year in August from -13.8% in July, based on the 20-day gauge.
Yesterday's industrial production data in Germany were downbeat. Output fell 1.3% month-to-month in March, pushing the year-over-over rate down to 0.3%, from 2.0% in February. Production was held back by weakness in manufacturing and a plunge in construction, Meanwhile, energy output rebounded slightly following last month's fall. Over Q1 as a whole, though, the industrial sector performed strongly.
Brazil's recent political and economics news has shifted the near-term outlook from bad to worse. President Rousseff on Friday replaced hawkish Finance Minister Joaquim Levy, appointed just over a year ago, with a close partner, Planning Minister Nelson Barbosa. Mr. Levy resigned after continued conflicts with the government, including frustration by the Congress of his attempts to rein in the fiscal mess. Mr. Barbosa is known to be less market friendly, and will likely defend countercyclical measures, delaying any rapid fiscal consolidation. The appointment will deteriorate investors' confidence even further, placing the markets under enormous strain.
With the MXN up more than 7% since the low of 21.9 against the dollar in January, investors are pondering just how high the Mexican currency can go. We believe that the MXN will continue to hover around its recent range, 20.1-to-20.5, in the near term, but will come under pressure again as protectionist policies in the U.S. take real shape in the spring or summer.
The drop in the flash composite PMI in March will be one for the record books, unfortunately. We look for an unprecedented drop to 43.0, from 53.3 in February, which would undershoot the 45.0 consensus and signal clearly that a deep recession is underway.
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.
Here's something we didn't expect to write: The CPI measure of goods prices, excluding food and energy, rose in the three months to January, compared to the previous three months. OK, the increase was marginal, a mere 0.3%, but conventional wisdom has assumed for some time that the strong dollar would push goods prices down indefinitely.
Today's EZ calendar is a busy one.
Like just about everyone else, we have struggled in recent years to find a convincing explanation for the persistent sluggishness of growth even as the Fed has cut rates to zero and expanded its balance sheet to a peak of $4.2T. Sure, we can explain the slowdown in growth in 2010, when the post-crash stimulus ended, and the subsequent softening in 2013, when government spending was cut by the sequester.
The prospect of fiscal stimulus in the euro area-- ostensibly to "help" the ECB reach its inflation target-- remains a hot topic for investors and economists.
The re-opening of businesses in Georgia, South Carolina and Tennessee, starting this week and expanding next week, comes as the rate of increase of confirmed Covid-19 infections in these states remains much faster than in European countries where lockdowns have started to ease.
Mexican policymakers held an emergency meeting yesterday in the wake of DM easing, global fiscal stimulus, plunging oil prices, and the pandemic crisis, slashing interest rates to their lower level since early 2017.
The latest national accounts show that the economy is holding up much better in the face of heightened Brexit uncertainty than previously thought.
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.
Yesterday's barrage of survey data in France, tentatively suggest that business sentiment is stabilising following a string of declines since the start of the year.
The U.S. consumer is back on track, almost. We have argued in recent months that the sharp slowdown in the rate of growth of consumption is mostly a story about a transition from last year's surge, when spending was boosted by the tax cuts and, later, by falling gas prices, to a sustainable pace roughly in line with real after-tax income growth.
The FOMC did mostly what was expected yesterday, though we were a bit surprised that the single rate hike previously expected for next year has been abandoned.
Friday was a busy day in the Eurozone. The final and detailed GDP report confirmed that growth in the euro area slowed to 0.2% quarter-on-quarter in Q3, from 0.4% in Q2, with the year-over-year rate slipping by 0.6 percentage points to 1.6%, just 0.1pp below the first estimate.
Tomorrow's Q1 GDP report for Korea has a wider spread of forecasts than usual, reflecting Covid-19's uneven hit to the economy.
China's PMIs surprised the consensus forecasts to the downside for February. The manufacturing PMI dropped to 50.3 in February from 51.3 in January, while the non-manufacturing PMI fell to 54.4 from 55.3 in January.
Retail sales fell sharply in September, highlighting that consumers still are spending only cautiously amid high economic uncertainty and falling real wages.
We struggle to find much wrong with the near-term outlook for Eurozone manufacturing. The headline PMI fell marginally to 59.6 in January, from 60.6 in December, but it continues to signal robust growth at the start of the year.
The economy's fragility was underlined by the Q3 national accounts, released just before the Christmas break.
Today brings more housing market data, in the form of the Case-Shiller home price report for April.
Brazil's December industrial production and labour reports, released this week, confirmed that the recovery remained solidly on track at the end of last year.
LatAm assets and currencies had a bad November, due to global trade war concerns, the USD rebound and domestic factors.
In our view, the chances of a no-deal Brexit on October 31 have not surged just because Boris Johnson has become Prime Minister and is gesticulating wildly at the Despatch Box.
The key detail in Friday's barrage of economic data was the above-consensus increase in EZ inflation.
A rebound in quarter-on-quarter growth in households' spending in Q2, following the slowdown to just 0.2% in Q1, looks less likely following April's money data.
Brazil's recovery has been steady in recent months, and Q1 likely will mark the end of the recession. The gradual recovery of the industrial and agricultural sectors has been the highlight, thanks to improving external demand, the lagged effect of the more competitive BRL, and the more stable political situation, which has boosted sentiment.
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.
The verdict from the German business surveys is in; economic growth probably slowed further in Q2.
The recovery in the industrial sector from Covid-19 finally commenced in earnest in June, after May's stalled start.
Japan's Tankan survey for Q2 was unsurprisingly grim, given the devastation caused by the near- global lockdown in the first half of the quarter, and the nationwide state of emergency that enveloped April and May.
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.
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.
House purchase mortgage approvals by the main high street banks continued to recover in June, rising to a nine-month high of 40.5K, from 39.5K in May. June approvals, however, merely matched their postreferendum average, and the chances of a more substantial recovery are slim.
China's trade balance flipped to an unadjusted deficit of $7.1B in the first two months of the year, from a $47.2B surplus in December.
The response of U.K. producers and consumers to lower oil prices could not have been more different to those on the other side of the Atlantic. Counter-intuitively, U.K. oil production has grown strongly over the last year, while investment hasn't collapsed to the same extent as in the U.S., yet. Meanwhile, U.K. households have thrown caution to the wind and already have spent the windfall from the previous drop in oil prices, unlike their more prudent--so far--U.S. counterparts. With the costs still to come but most of the benefits already enjoyed, lower oil prices will be neutral for 2016 U.K. GDP growth, at best.
China's property market continued to slow in August, with prices rising by just 0.2% month-on- month seasonally adjusted, half the July pace.
Growth in households' disposable incomes has been supported in recent years by falling debt servicing costs. The proportion of households' incomes absorbed by interest payments fell to a record low of 4.5% in Q4 last year, down from 4.7% a year ago and a peak of 10% in 2008.
Brazil's industrial production rose 0.8% month- to-month in August, well above our call, and the consensus, for a trivial increase.
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 inevitable--more or less--correction from August's 14-year high is no big deal.
Chile's economic indicators for July were unreservedly weak, confirming that the economic recovery remains sluggish. The industrial production index--comprising mining, manufacturing, and utility output--fell by 5.2% year-over-year in August, after a 1.7% contraction in July. Mining production suffered a sharp 9.3% year-over-year contraction, due mainly to an 8.3% fall in copper production, as strikes and maintenance works badly hit the industry.
A cursory glance at July's labour market report gives no cause for alarm. The headline, three-month average, unemployment rate returned to 3.8% in July, after edging up to 3.9% in June.
Today's preliminary estimate of Q4 GDP likely will show that the Brexit vote has not caused the economy to slow yet. But growth at the end of last year appears to have relied excessively on household spending, which has been increasingly financed by debt. GDP growth likely will slow decisively in Q1 as the squeeze on households' real incomes intensifies.
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.
We can't recall a time when we have disagreed so strongly with the consensus narrative, in both the media and the markets, about the state of the U.S. economy. We think both investors and the commentariat are too bearish on growth and too complacent about inflation risks, and as a result, insufficiently worried about the speed with which interest rates will rise over the next couple of years.
The Brazilian Central Bank's policy board-- Copom--voted unanimously on Wednesday to cut the Selic rate by 50bp to 6.0%.
Korea's trade data have been extremely volatile over the past two months, thanks to distortions caused by last year's odd holiday calendar.
It is very difficult to be positive about the Brazilian economy in the short term, with every indicator of confidence at historic lows. The industrial business confidence index fell 9.2% month-to-month in March alone. Capacity use dropped to 79.7% from 81.5% in February, the lowest level in six years, and inventories rose, presumably because businesses over-estimated the strength of sales.
The trend of consensus-beating EZ economic data was brought to a halt yesterday. The IFO business climate index in Germany slipped to a five-month low of 109.8 in January, from 111.0 in December, mainly due to a fall in the expectations index. But we are not alarmed. The dip in the headline comes after a run of strong data, and the IFO remains consistent with GDP growth of about 1.6% year-over-year.
The Brazilian labour market is slowly healing following the severe recession of 2015-16. The latest employment data, released last week, showed that the economy added 35K net jobs in August, compared to a 34K loss in August 2016.
The French presidential election campaign remains chaotic. Republican candidate François Fillon had to defend himself again yesterday as investigations into his potential misuse of public funds deepened. Mr. Fillon and his wife have now been summoned to court to explain themselves. Markets expected Mr. Fillon to resign as the Republican front-runner. Instead, he used his unscheduled media address to defiantly declare that he is staying in the race.
Korea's GDP growth in Q3 was a miss. Quarter- on-quarter growth was unchanged at 0.6%, below the consensus for a 0.8% rise.
After three straight 1.3% month-to-month increases in core capital goods orders, we are becoming increasingly confident that the upturn in business investment signalled by the NFIB survey is now materializing.
We've suspected that China's GDP targeting system was on its last legs for some time now.
The business cycle in the Eurozone tends to follow a fairly simply script, at least in broad terms.
Base effects were the key driver of yesterday's upbeat industrial production headline in Italy.
The consensus for today's first post-apocalypse jobless claims number, 1,500K, looks much too low.
The rollover in core capital goods orders in recent months has been startling. In the three months to February, compared to the previous three months, orders for non-defense capital goods fell at a 7.6% annualized rate.
Business investment in Japan took a nasty hit in the third quarter.
The downturn in equity prices deepened yesterday, with the FTSE 100 index closing at 5,537, 22% below its April 2015 peak. We remain unconvinced, however, that financial market turmoil is set to push the U.K. economy into a recession. We continue to take comfort from the weakness of the past relationship between equity prices and economic activity.
This morning's second estimate of Q1 GDP likely will restate the preliminary estimate of a 0.4% quarter-on-quarter rise, confirming that the economic recovery has lost momentum since last year. Meanwhile, the new expenditure breakdown is set to show that growth remained extremely dependent on households and will bring more evidence that businesses held back from investing, ostensibly due to Brexit concerns.
In previous Monitors--see here--we've suggested that, thanks to the coronavirus, China simply will lose some of the spending that would have gone on during the holiday this year.
We were terrified by the plunge in the ISM manufacturing export orders index in August and September, which appeared to point to a 2008-style meltdown in trade flows.
The Conservatives have continued to gain ground over the last week, with support averaging 43% across the 13 opinion polls conducted last week, up from 41% in the previous week.
In yesterday's Monitor, we lamented the lack of growth in the French economy. The outlook is not much brighter in Italy. We think Italian GDP was unchanged quarter-on-quarter in Q4, slightly better than the -0.1% consensus but still very soft.
A decade of public deficit reduction was fully reversed in April, as the coronavirus tore through the economy.
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 extent to which the Covid wave in the South and West--plus a few states in other regions--will constrain the recovery is unknowable at this point.
One of the key positive signs in the Eurozone data since the virus hit has been the evidence that households' liquid money balances have been well supported by job retention schemes, extended unemployment insurance, and aggressive monetary stimulus.
Most of the indicators we follow point to another very strong payroll report today; we look for a 260K gain, matching May's performance. The best single leading indicator, the NFIB small business hiring intentions number, points to a massive 320K leap in private payrolls, as our first chart shows.
The latest CPI data in Brazil confirm that inflationary pressures eased considerably last month. Inflation fell to 8.5% year-over-year in September, from 9.0% in August, as a result of both lower market- set and regulated inflation.
The entire 10.5% increase in personal income in April, reported on Friday, was due to the direct stimulus payments made to households under the CARES Act.
Yesterday's IFO survey in Germany sent a marginally more downbeat message than the strong PMIs last week. The IFO business climate index fell to 115.2 in September, from 115.9 in August, its second straight monthly dip.
Brazil's economic data last week were appalling. The IPCA-15 price index rose 1.3% month-to-month, the fastest pace in 12 years, pushing the annual rate to 7.4% in mid-February from 6.7% in mid-January,well above the 6.5% upper bound of the BCB's target range.
I need to ask your indulgence today, because the release of the durable goods and advance international trade reports coincides with my elder daughter's college graduation ceremony.
Households' disposable incomes have been supported over the last eight years by a steady stream of compensation payments for Payment Protection Insurance--PPI--policies that were missold in the 1990s and 2000s.
The final numbers for China's balance of payments in the first quarter showed that the current account descended to a $34B deficit, from a surplus of $30B a year earlier.
Mexican policymakers yesterday voted unanimously to cut the policy rate by 50bp to 5.00%, the lowest level since late 2016.
The INSEE's manufacturing sentiment data in France are slightly confusing at the moment.
Yesterday's final May manufacturing PMIs confirmed that the EZ industrial sector is in fine form. The PMI for the euro area was unchanged at a cyclical high of 57.0 in May, in line with the initial estimate.
Data on Friday showed that the downward trend in Brazil's unemployment continued into this year. The unadjusted unemployment rate fell to 11.2% in January, slightly below the consensus, and down from 12.0% in January last year.
Sharp falls in energy prices have been a boon for consumers, freeing up considerable funds for discretionary purchases. Domestic energy and motor fuel absorbed just 4.7% of consumers' spending in Q2, the lowest proportion for 12 years and well below the 6.7% recorded three years ago.
August's money and credit figures show that households' incomes remain under pressure, indicating that the recent pick-up in growth in consumers' spending likely won't last.
Today's preliminary estimate of GDP likely will show that the economy continued to struggle in response to high inflation, further fiscal austerity and Brexit uncertainty.
Yesterday's business confidence data in the EZ core were mixed.
The single most important number in the housing construction report is single-family permits, because they lead starts by a month or two but are much less volatile.
Policymakers in Brazil and Chile took another big step this week in assuring markets that they won't hesitate to act in the fight against the virus.
German survey data did something out of character yesterday; they fell. The IFO business climate index declined to 117.2 in December from a revised 117.6 in November.
The Covid-19 scare can be split into two stages, the initial outbreak in China, concentrated in Wuhan, and the now-worrying signs that clusters are forming in other parts of the world, primarily in South Korea, the Middle East and Italy.
The mortgage market is continuing to hold up surprisingly well, given the calamitous political backdrop.
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.
Yesterday's IFO survey capped a fine Q4 for German business survey data. The headline business climate index climbed to a 34-month high of 111.0 in December, from 110.4 in November. An increase in the "current assessment" index was the main driver of the gain, while the expectations index rose only trivially.
A sharp increase in unsecured borrowing has played a big role in supporting consumers' spending over the past year. The stock of unsecured credit, excluding student loans, increased by 8.2% year-over-year in September--the fastest growth since February 2006--boosting the funds available for households to spend by around 1%.
We don't use the index of leading economic indicators as a forecasting tool. If it leads the pace of growth at all, it's not by much, and in recent years it has proved deeply unreliable.
The pound can't get a break. Sterling fell to just $1.24 yesterday, its lowest level against the dollar since March 2017, bar the momentary "flash crash" in January.
The return of Chinese PPI inflation in 2016 helped to stabilise equities after the boom-bust of the previous year.
Banxico cut its policy rate by 25bp to 7.25% yesterday, as was widely expected, following similar moves in August, September and November.
At next Wednesday's Budget, the Chancellor will have the rare pleasure of announcing lower-than- anticipated near-term borrowing forecasts. But hopes that he will prevent the fiscal tightening from intensifying when the new financial year begins in April look set to be dashed, just as they were at the Autumn Statement in November.
We'd be surprised to see any serious shift in the tone of Fed Chair Powell's semi-annual Monetary Policy Testimony today compared to the FOMC statement and press conference just three weeks ago.
Yesterday's sole economic report showed that the EZ trade surplus rebounded slightly at the start of the year, rising to €17.0B in January, from a revised €16.0B in February, lifted by a 0.8% increase in exports, which offset a 0.3% rise in imports.
The stagnation in business investment since 2016 has been key to the slowdown in the overall economy since the E.U. referendum.
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.
Housing rents account for some 41% of the core CPI and 18% of the core PCE, making them hugely important determinants of the core inflation rate.
The 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.
We keep hearing that the surge in Covid-19 infections in the South is not a big deal, because the number of cases and the subsequent hospitalizations are still very low when compared to the nightmare suffered in New York and other states, which had thousands of deaths.
Friday's detailed euro area CPI report for December confirmed that inflation pushed higher at the end of last year. Headline inflation increased to 1.3% year-over- year, from 1.0% in November, lifted primarily by higher energy inflation, rising by 3.4pp, to +0.2%. Inflation in food, alcohol and tobacco also rose, albeit marginally, to 2.1%, from 2.0% in November.
Mexico's policymakers are battling two opposing forces. First, inflation pressures are rising, on the back of the one-time increase in petrol prices and the lagged effect of the MXN's sell-off in Q4. These factors are pushing short-term inflation expectations higher, even though the MXN has remained relatively stable since President Trump took office and has risen by about 6% against the USD year-to-date.
Gasoline prices dropped sharply last month, but the 4½% seasonally adjusted fall we expect to see in the December CPI report today was rather smaller than the 9% collapse in December 2014, so the year-over-year rate of change of gas prices will rise, to -20% from -24% in November. This means headline inflation will rise too, though the extent of the increase also depends on what happens to the core rate.
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.
Last week's GDP figures illustrated that the economy is extremely vulnerable to a slowdown in households' spending. Our chart of the week, on page three, shows that consumers were alone in making a significant positive contribution to GDP growth last year.
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.
Wednesday's State Council meeting implies that the authorities are starting to take more serious coordinated fiscal measures to counter the virus threat to the labour market and to banks.
The Chancellor is likely to announce plans for additional public sector asset sales in today's Autumn Statement, to help arrest the unanticipated rise in the debt-to-GDP ratio this year. But privatisations rarely improve the underlying health of the public finances, partly because assets seldom are sold for their full value. And the Chancellor is running out of viable assets to privatise; the low-hanging, juiciest fruits have already been plucked.
The sudden jump in the headline, three-month average, growth rate of average weekly wages to a 10-year high of 3.3% in October, from just 2.4% four months earlier, might indicate that the U.K. has reached the sharply upward-sloping part of the Phillips Curve.
Improving fundamentals have supported private spending in Mexico during the last few quarters. This week's soft retail sales report does not change the picture of a strong underlying trend in consumption. Sales were weaker than expected, falling 1.1% month-to-month in September, but this followed a 1.5% jump in August, and average gains of 1.1% in the previous three months. Mexican retail sales are much more volatile than in most developed economies, and we have been expecting mean reversion following rapid gains during the first half of the year and most of Q3.
We doubt there will ever be a fail-safe leading indicator of when a recession is about to hit, but asset prices can help us to assess the risks, at least.
The key data today, covering March durable goods orders and international trade in goods, should both beat consensus forecasts.
Investors have welcomed the flurry of encouraging opinion polls for the Conservatives that were published over the weekend, with cable rising nearly to $1.30 on Monday, a level last seen on a sustained basis six months ago.
After three days of jaw-dropping actions from President Trump, the position seems to be this: The U.S. will apply 15% tariffs on imported Chinese consumer goods, rather than the previously promised 10%, effective in two stages on September 1 and December 15.
We're expecting to learn today that the economy expanded at a 2.6% annualized rate in the first quarter, rather better than we expected at the turn of the year--our initial assumption was 1-to-2%--and above the consensus, 2.3%.
Chile's activity numbers at the beginning of Q3 were mediocre, suggesting that the economy remains sluggish. The industrial production index--comprising mining, manufacturing, and utility output--fell by 1.7% year-over-year in July, reversing a 1.6% expansion in June. A disappointing 4.5% year-over-year contraction in mining activity depressed the July headline index, following a 1.4% increase in June. The moderation in output growth was due to maintenance-related shutdowns at key processing plants, and disruptions from labor strikes, especially a three-week strike by contract workers at Codelco--the state-owned mining firm--which badly hit production.
The spread of the Covid-19 virus remains the key issue for markets, which were deeply unhappy yesterday at reports of new cases in Austria, Spain and Switzerland, all of which appear to be connected to the cluster in northern Italy.
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 Andean economies have been clear examples of true leadership in the current global crisis. Leaders of these countries acted rapidly to contain the spread of the virus, jumping right over the phases of denial, anger and unscrupulousness we've seen in Brazil and Mexico.
The government's decision to shelve plans to reopen primary schools fully later this month will ensure that GDP remains greatly below its precoronavirus level throughout the summer months.
Brazil's President Dilma Rousseff was removed from office on Wednesday, following an impeachment trial triggered by allegations that Ms. Rousseff used "creative" accounting techniques to disguise Brazil's growing budget deficit, ahead of her re-election in 2014. The Senate voted 61-20 to convict Ms. Rousseff; only 54 votes were needed to oust her. For Ms. Rousseff's leftist Workers' Party, her removal marks the end of 13 years in power.
Markets tend to ignore Eurozone construction data, but we suspect today's report will be an exception to that rule. Our first chart shows that we're forecasting a 8.5% month-to-month leap in February EZ construction output, and we also expect an upward revision to January's numbers.
The upturn in the Eurozone construction sector likely paused in Q3. Yesterday's August report showed that output fell 0.2% month-to-month, pushing the year-over-year rate down to +1.6%, from a revised +2.8% in July.
Any model of payrolls based on the usual indicators--jobless claims, ISM hiring, NFIB hiring, and other sundry surveys--right now points to payroll growth at 250K or better. Indeed, the ISM non-manufacturing report on Wednesday is consistent with payroll growth closer to 400K, and the lagged NFIB hiring intentions number points to 300K. Yet the consensus forecast for today's October report is just 182K. Why so timid?
While we were out, Brazil's Monetary Policy Committee--Copom-- increased the Selic rate by 50bp to 14.25% on July 29th. The short statement indicated that the decision was unanimous and without bias. But it also signaled that the Copom is ready to end the tightening cycle if the data and, especially, the BRL, permit.
We're nudging up our forecast for today's August payroll number to 180K, in the wake of the ADP report.
The NFIB survey of small businesses today will show that July hiring intentions jumped by four points to +19, the highest level since November 2006. The NFIB survey has been running since 1973, and the hiring intentions index has never been sustained above 20.
We expect August's consumer prices report, released on Wednesday, to reveal that CPI inflation dropped to 1.8% in August, from 2.1% in July, thereby undershooting the consensus, 1.9%.
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.
In one line: April consumption no more disastrous than expected.
Housing Starts Surge In December
The Mexican economy maintained its relatively strong momentum in Q2. The first estimate of Q2 GDP, released last week, confirmed that growth was resilient during the first half of this year, despite the confidence hit caused by domestic and external headwinds.
The release yesterday of the weekly Redbook chainstore sales report for the week ended Saturday August 4 means that we now have a complete picture of July sales.
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 September NAHB survey, released yesterday, shows, that the housing market took a knock from the hurricanes but the damage, so far at least, appears to be contained.
Our conviction that the economy continues to grow at a snail's pace increased yesterday following the release of August's Markit/CIPS services survey.
Consumption and investment spending by state and local government accounts for just over 10% of the U.S. economy, making it more important than exports or consumers' spending on durable goods, and roughly equal to all business investment in equipment and intellectual property.
Sterling's renewed depreciation to just €1.10--just below last year's nadir--has fuelled speculation that it could reach parity against the euro within the next year.
The key labor market numbers from today's February NFIB report on small businesses--hiring intentions and the proportion of firms with unfilled job openings--were released last week, as usual, ahead of the official jobs report.
Chief U.K. Economist Samuel Tombs discussing U.K. GDP
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.
The September Banxico minutes restated that the U.S. Fed's first interest rate hike is the key event awaited by Mexican policymakers. Banxico's board of governors voted unanimously on September 21st to keep the main interest rate at a record-low 3%.
...The Fed told investors that it now requires only "some further improvement" in labor market conditions before starting to raise rates-- the "some" is new--but did not set out any specific conditions. With the unemployment rate now just a tenth above the top of the Fed's Nairu range, 5.0-to-5.2%, and very likely to dip into it by the time of the decision on September 17, while payroll growth is trending solidly above 200K per month, rates already would have been raised some time ago in previous cycles.
The MPC's forecast in August, which predicted that inflation would overshoot its 2% target over the next two years only modestly--giving it the green light to ease policy--assumed that inflation in sectors insensitive to swings in import prices would remain low. We doubt, however, that domestically generated inflation will remain benign.
Chief Eurozone Economist Claus Vistesen on Eurozone Economies
Economic growth in Chile picked up in Q1, but the recovery remains disappointingly weak, due to both global and domestic headwinds. The latest Imacec index, a proxy for GDP, rose just 2.1% year-over-year in March, slowing from a 2.8% gain in February. Assuming no revisions next month, economic activity rose 1.2% quarter-on-quarter in Q1, better than the 0.9% increase in Q4. These data points to a modest pick-up in GDP growth in Q1, to 1.8% year-over-year, from 1.3% in Q4.
After five straight undershoots to consensus, with the core CPI averaging monthly gains of just 0.05%, investors are asking hard questions about the Fed's belief -- and ours -- that core inflation is headed towards 2% in the not-too-distant future.
Chief U.K. Economist Samuel Tombs discussing the effect the general election will have on the pound,
Consumers' spending in the euro area weakened at the end of Q4, but we think households will continue to boost GDP growth in the first quarter. Data on Friday showed that retail sales fell 0.3% month-to-month in December, pushing the year-over-year rate down to 1.1%, from a revised 2.8% in November.
Yesterday's final CPI report in Germany confirmed the initial estimate that inflation was unchanged at 0.4% year-over-year in August. Deflation in energy prices eased further, but the headline was pegged back by a small fall in the core rate to 1.2% year-over- year, from 1.3% in July.
Brazil's inflation rate remained well under control over the first half of February. We see no threats in the near term, indicating that more stimulus will be forthcoming from the BCB.
Colombia is one of the fastest growing economies in LatAm but over the last few quarters the country has been adjusting to the collapse in oil prices, the depreciating currency and rising inflation. But the slowdown, especially on the domestic side of the economy, has been less dramatic than expected, so far. Our main scenario is that the adjustment process to challenging external conditions will continue over the coming quarters.
Today's labour market figures likely will cast doubt over the sustainability of strong growth in household spending. Growth in the three-month average level of employment likely weakened in August, from July's impressive 1.9% year-over-year rate.
In one line: Solid income and spending, and rising core PCE inflation before the virus. But...
In one line: Horrendous.
Chief U.K. Economist Samuel Tombs discussing the General Election in June
Chief Eurozone Economist Claus Vistesen on Latvia
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.
In one line: Spending is better than it looks, but sustainability depends on the U.S. not suffering a major coronavirus outbreak.
It's easy to claim from yesterday's labour market data that the economy is weathering the uncertainty caused by the E.U. referendum. Employment rose by 172K, or 0.5%, between Q1 and Q2, and the claimant count fell by 7K month-to-month in July. These numbers, however, flatter to deceive.
We expect August's consumer price figures, released on Wednesday, to show that CPI inflation declined to 2.4%, from 2.5% in July, matching the consensus and the Bank of England's forecast.
China's official PMIs paint a picture of robust momentum going into 2018 but we find this difficult to reconcile with the other data.
Yesterday's EZ industrial production data for January confirmed the string of positive advance numbers from most of the individual economies.
Eurozone manufacturing is showing signs of stabilisation. Final PMI data showed the headline gauge falling trivially to 52.4 in July from 52.5 in June, slightly above the initial estimate of 52.2. New orders slowed, though, with companies reporting weakness in export business amid firm domestic demand.
Chief US Economist Ian Shepherdson on "Remarkable" New Home Sales Data for February
The US trade deficit unexpectedly widened by 17% to $46.6 billion in December from $39.8 billion in November.
Industrial production figures look set to surprise the consensus to the downside again today. We think that production was flat on a month-to-month basis in August, falling short of the consensus forecast of 0.2% growth.
If the rate of increase of the core CPI in the second half of the year matches the 0.19% average gains in the first half, the year-over-year rate will rise to 2.3% by December. In December last year, core inflation stood at just 1.6%, following a run of soft second half numbers. We can't rule out a slowdown in the monthly increases in the second half of this year too, given the evidence suggesting a small bias in the seasonal adjustments.
The consensus forecast of a mere 0.3% month-to-month decline in retail sales volumes in December, following the 1.7% surge in November, looks far too timid. We anticipate a much bigger decline, about 1%, bringing volumes back in line with their underlying trend. We can't rule out a bigger fall.
Industrial sector activity in the euro area was broadly stable at the beginning of the third quarter, despite the headline dip in the July manufacturing PMI. The Eurozone index fell to 52.0 in July, from 52.8 in June, but if it holds at this level it will be unchanged in Q3 compared with the second quarter.
Chief US Economist Ian Shepherdson on Retail Sales figures, March
The new fiscal year began on April 6, marking the post-election intensification of the fiscal squeeze for many households. The Office for Budget Responsibility estimates net tax and benefit changes will subtract 1.2 percentage points from year-over-year growth in households' disposable incomes in 2016.
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.
Peru's central bank, the BCRP, kept borrowing costs at 3.25% last week, surprising the consensus forecast for a 25bp increase. This was an unexpected move because inflation risks have not abated much since the previous meeting, when policymakers lifted rates for the third straight month.
We expect today's consumer price figures to show that CPI inflation jumped to 0.9% in September, from 0.6% in August.
China's unadjusted current account was effectively in balance in Q2, after the deficit in Q1.
On Thursday morning, we'll get the best-performing indicator of the US labor market: initial jobless claims. For a while now, Pantheon Macroeconomics' Ian Shepherdson has been stressing that the weekly print is noisy, particularly with the volatility the end-of-year season brings
Our payroll model, which incorporates survey data as well as the error term from our ADP forecast, points to a hefty 225K increase in November employment. We have tweaked the forecast to the upside because of the tendency in recent years for the fourth quarter numbers to be stronger than the prior trend, as our first chart shows.
Everyone heard San Francisco Fed president Williams's suggestion Monday that central banks could raise their inflation targets in response to the sustained slow growth and lower-than-expected inflation of recent years. It's not clear, though, that markets grasped the scale of the increase he thinks might be appropriate.
Soon after last week's vote to keep Bank Rate at 0.50%, the MPC's doves were quick to assert that monetary easing is still imminent. A speech by Andy Haldane, published on July 15, called for "... a package of mutually complementary monetary policy easing measures" that should be "delivered promptly and muscularly". Meanwhile, Gertjan Vlieghe, who was alone in voting for a rate cut in July, wrote in The Financial Times last week that he also favours "a package of additional measures" in August.
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.
Chief U.K. Economist Samuel Tombs discussing sterling in 2018
Just how weak would the manufacturing sector have to be in order to persuade the Fed to hold fire this fall,