A look back over macroeconomic events for the period ending 27 January 2017. US economic data was a little disappointing, with Q4 GDP and durable goods both misses. There was more optimism in the UK, though, which had a good fourth quarter and showed fresh confidence from business leaders. There is plenty to look forward to this week, with three Central Bank meetings (Bank of Japan (BoJ), US Fed and Bank of England (BoE)) as well as nonfarm payrolls on Friday.
US growth slows down
Growth in the US economy slowed more than expected in the fourth quarter, with initial estimates showing a slowdown from 3.5% annualised in the third quarter to 1.9% in the final quarter, falling short of the 2.2% that was forecast. Although consumer spending came in as expected at 2.5%, it was disappointing trade data that dragged growth down – higher imports and lower exports combining to take -1.7 percentage points from the GDP measure amid a strengthening US dollar. As the new administration in the US takes control of the White House, concerns over a potential trade war could lead to an unpleasant war of attrition which the US economy would not be immune from.
Durable goods were also disappointing. Orders were down -0.4% month on month in December, which comes after a fall of -4.8% in November, and dashing hopes that there would be a rebound to 2.6% – weak autos orders appeared to be the main culprit. There was some positive news, though – services and manufacturing PMI both improved to 55.1 from 53.9 and from 54.3 respectively in January, ahead of forecasts.
UK GDP looks promising
There was fresh optimism in the UK, with fourth quarter GDP growth of 2.2% year on year, unchanged from the third quarter and marginally better than the 2.1% forecast. The Confederation of British Industry also reported a surprisingly upbeat business environment. Industrial trend orders were ahead of expectations, improving to a score of 5 from 0 previously – the first positive reading since the start of 2015. Similarly, the business confidence index rebounded to 15 for the first quarter of 2017 from the post-GFC low of -47 following the EU referendum.
On the subject of the EU referendum, we also had the Supreme Court ruling on the Brexit question, which upheld the ruling that the Government required parliamentary approval to trigger Article 50, though the Court also determined that approval from the devolved governments and assemblies was not required. The potential impact of the ruling had already been blunted by pre-emptive moves by the Government to pave the way for legislation – which submitted a bill just 130 words long – but it still managed to cause fresh disruption and rebellion in the ranks of the Labour party.
Last week’s other events
- Eurozone consumer confidence ticked up from -5.1 to -4.9, the highest reading since April 2015. Manufacturing PMI for January was also improved, up 0.2 points to 55.1 (expectations were for a fall to 55.4), but Services PMI disappointed, falling to 53.6 from 53.7 (52.9 expected).
- Japanese headline inflation was 0.3% year-on-year in December, down from 0.5% the month before. Core inflation remained negative at -0.2% year on year from -0.4% in November.
It was a relatively quiet week, with all movements of fairly modest magnitude.
- Equities – The S&P 500 index and Japan’s TOPIX index rose 1.0% on the week, with Europe just behind at 0.7% (as measured by the MSCI Europe ex-UK index) and the UK being the laggard as the MSCI United Kingdom index fell -0.1%. It was a stronger week for emerging markets as well – the MSCI Emerging Markets index rose 2.0% and in Hong Kong the Hang Seng index returned 2.1%. All in local currency terms on a total return basis.
- Bonds – 10-year US Treasuries were unchanged with yields at 2.49% by the end of the week. Gilt yields were slightly higher, by 3 bps to 1.47% whilst the equivalent German bunds were 4 bps higher at 0.67%.
- Commodities – There was little change in the oil price, with Brent Crude ending the week at US$55.52 per barrel. Gold was marginally softer on the week, last seen at US$1,188.40 an ounce whilst copper was slightly stronger at US$2.68 per lb.
- Currencies – Sterling strengthened across the board to close the week at US$1.26, €1.17 and ¥144.
The week ahead
Central bank activity is the theme of the week, with the Bank of Japan’s (BoJ) interest rate decision out in the early hours of Tuesday morning, the US Federal Open Market Committee (FOMC) meeting concluding on Wednesday and the Bank of England’s Monetary Policy Committee (MPC) concluding on Thursday. The FOMC meeting has no press conference associated, so markets won’t be able to do much more than scrutinise the statement for any change in language. Whilst the BoJ appears to have run out of ammunition, it may attempt to influence the markets through some of its rhetoric, particularly as its quarterly outlook report will be released around the same time. The MPC meeting could be more eventful, with the latest Quarterly Inflation Report due out amid questions over the Bank’s initially dire warnings about post-referendum chaos in the event of a ‘Leave’ result given the benign economic data that was subsequently released. The week doesn’t fizzle out, though – Friday we have US nonfarm payrolls, with forecasts for a reading of 168,000 from 156,000 in December. Elsewhere:
- Monday: In the morning, Eurozone Business sentiment survey results are released, and then in the afternoon the US releases personal income and expenditure data along with the PCE price index measures. Last thing in the evening, Japan provides data on household spending, unemployment and the December industrial production numbers.
- Tuesday: Just after midnight, UK consumer confidence data are released from Gfk before the BoJ interest decision and quarterly outlook. Later in the morning, the BoE will report on UK consumer credit conditions and mortgage activity before Eurozone GDP for the fourth quarter is reported at 10am UK time – forecasts are for an unchanged 1.7% year on year reading.
- Wednesday: Official Chinese PMI numbers are reported early in the morning, with UK manufacturing PMI data later on. In the afternoon, US Manufacturing numbers from the Institute for Supply Management are updated, ahead of the US FOMC decision.
- Thursday: Before the BoE activity, the only data of note are from Japan in the form of the Consumer Confidence gauge. In the afternoon, US unit labour costs and productivity data are reported.
- Friday: The end of the week sees the Caixin Manufacturing PMI data from China early in the morning, followed by UK Services PMI and Eurozone retail sales later in the morning. In the afternoon, nonfarm payroll numbers and associated data are released, as well as non-manufacturing PMIs from the ISM.
Data correct as at 30/01/2017. Source: Lipper.
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