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Weekly macroeconomic and market update – 18 January 2016

A look back over macroeconomic events for the week ending 15/01/2016. Markets continued in a risk-off mode over what was a quiet week in terms of macro events. Equities slid further – putting China into a technical bear market, and oil fell through the US$30 a barrel mark. This week’s focus is likely to be on the European Central Bank (ECB) meeting due on Thursday – will they inject more stimulus?

Ben Seager-Scott Ben Seager-Scott
18 January 2016

China trade data

Against the backdrop of a deeply unsettled equity market, trade data from China came in significantly ahead of expectations, although both exports and imports were down on a year below. Exports trade was down -1.4% year on year, but this was a notable improvement on the -6.8% reading from the month before and ahead of expectations for a sharper fall. In dollar terms this translates to US$224.2 billion of export trade.

The story was similar for imports, which were down -7.6% year on year to US$164.1 billion from -8.7% (forecasts were for a deterioration into a double-digit fall of 11.5%). This helped increase the balance of trade to US$60 billion for December. Bearing in mind that data around this period can be skewed due to the new year, and considering Chinese imports and exports in US dollar terms, Chinese trading conditions are arguably back on near-term trend. However, we are cognisant that there are many other sources of stress facing China and, of course, one swallow doesn’t make a summer.

US retail sales disappoint

US retail sales in December were disappointing, falling -0.1% month on month from a 0.4% gain in November. Consensus was for a flat reading, on the back of subdued auto sales (0.2% month on month growth was forecast excluding autos, but this reading also came in at -0.1.%). The Federal Reserve’s (Fed’s) Beige Book of anecdotal economic evidence suggested that economic growth was reasonable – a better report than many had feared – but that wage and price pressure remained subdued.

This fact was highlighted by further weakness in the producer price index (PPI) which fell -0.2% month on month, in line with expectations (core PPI was up 0.1% month on month, as expected). Industrial production measures were also soft, with December showing the third monthly decline in output. This weakening outlook for inflation and wages makes the Fed’s ‘four hike’ forecast for this year seem increasingly unlikely.

Last week’s other events

  • UK industrial and manufacturing figures disappointed. Year-on-year industrial production grew only 0.9% in November after a sharp contraction in November (forecasts were for 1.7% year on year growth). Manufacturing production was down -1.2% year on year, compared to -0.8% expected. The Bank of England left policy unchanged.
  • In the latest US Job Opening and Labour Turnover Survey (JOLTS), job openings came in as expected at 5.4 million in November, although initial jobless claims crept up to 284,000 (275,000 were expected). Export and import prices also fell -1.1% and -1.2% month on month respectively.
  • European industrial production joined the theme, with a month-on-month fall of -0.7% in November that was worse than expected and dragged the year-on-year number down to 1.1% (forecast was 1.3%). Minutes also showed a clear split within the ECB policy committee, potentially giving some explanation for the surprising lack of aggression in December’s stimulus action.
  • Energy Information Administration’s crude oil stocks added just 234,000 barrels for the week ending 8th January. This was far lower than the 2.6 million expected, but a reversal from the 5.1 million outflow the week before.

The markets

Another risk-off week, with equities suffering across the board as Chinese domestic equity indices officially entered bear territory, and oil prices plunged down through the US$30 a barrel mark. Sovereign bonds were the unsurprising beneficiaries, although gold failed to rally in dollar terms.

1 month performance of major asset classes
Another tough week for global equity markets, with no major bourses spared. In China, the Shenzhen A-share index has fallen more than 20% from its December high, and is now down around 43% from the highs of last summer. In the UK, the FTSE All-Share returned -2.3% on the week, the S&P 500 was down -2.2%, Europe (ex-UK) was down -3.15%, and in Japan the Topix index was down -2.2%. The Hang Seng index, being proximal to the mainland indices, was slipped -4.6% during the week.
No surprises that sovereign bonds were most peoples’ go-to asset class during the turbulence. Looking at the ten-year bonds, UK gilts were 12 bps lower to 1.66%, US Treasuries were 8 bps lower but still just above 2% at 2.04%, whilst German Bunds fell 4 bps to 0.47%.
Oil grabbed the headlines again, with both Brent and West Texas Intermediate crashing below US$30 a barrel – levels not seen since the early 2000s. The two measures have recently been trading close to parity, with Brent last seen on Friday at US$28.94 a barrel. Gold weakened overall in the week, despite something of a rally on Friday, closing at US$1,088 an ounce (from US$1,106 at the start of the week). Copper was also softer, last seen at US$4310 per tonne.
Sterling was the main faller across the week, falling 1.8% against dollar and 2.1% against the generally stronger yen. This helped investors with overseas holdings (including gold). The yen was marginally stronger, rising 0.5% against the euro and 0.3% against the US dollar.

The week ahead

There is a lot of broad economic data released this week, including some inflation, PMI and retail sales figures. However, the highlight will be the ECB’s interest rate policy decision on Thursday. After "Draghi’s Disappointment" in December, and subsequent Central bank action as well as a reported split from the previous minutes, further action is certainly possible. Ahead of that, Tuesday will be interesting as China reports on its official growth rate for the first quarter of 2015 – reported growth is forecast to have slipped from 1.8% to 1.7%, bringing the full-year number down to 6.8%. Although the official numbers now have little credibility in actual economic terms, it is informative as to the government’s thinking. Elsewhere:

Monday will be quiet, with little going on except a bank holiday in the US for Martin Luther King Jr. Day. On Tuesday China will provide more detail on the reported state of the economy – we will see updates on GDP data, Fixed Asset Investment (forecast is 10.2%), Industrial Production (expected to slow to 6.0% from 6.2% year on year forecast) and Retail Sales (forecast to accelerate from 6.2% to 6.3% year on year). On the same day the UK inflation update is released with a forecast of growth at 0.2% year-on year (1.2% core inflation is forecast). Later in the morning there is also the ZEW sentiment surveys of German and Eurozone economic conditions.

On Wednesday, UK unemployment is expected to remain at 5.2% while average earnings growth is expected to slip from 2.4% to 2.1%. In the afternoon, the US will update inflation (expected to increase from 0.5% to 0.8% year on year, with core forecast to have improved to 2.1% from 2.0%).

On Thursday we have a quiet morning before the ECB policy announcement at lunchtime. This is followed by Eurozone consumer confidence numbers (expected to remain subdued) then the latest US oil and gas reserves figures in the afternoon, as well as more initial jobless numbers.

Ending the week, we start with Eurozone Flash PMI readings which are likely to remain in the low-to-mid 50s in aggregate. Afterwards, UK retail sales figures for December are forecast to have slipped slightly while still showing a strong year-on-year reading of 4.2%. In the afternoon, the US releases house prices and existing home sales numbers together with the Manufacturing PMI reading.


Data correct as at 18/01/2016. Source: Lipper.

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