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The Global Markets Weekly – 1/29/16
Dented But Not Down
Q4 U.S. GDP posted a weak 0.7% gain, close to expectations, with more-modest consumption growth providing the main support as inventory investment, trade, and capex lagged. All this happened before equity markets started 2016 on a sour note, a development that many analysts and investors worry might eventually pull the U.S. a global economies into recession.[private]
DE continues to argue against extrapolating weakness in domestic manufacturing, notably oil, and China, into a pessimistic outlook for the U.S. and global economies. Manufacturing is only 12% of GDP, with oil and gas mfg. just 2%, and exports to Asia are only 6%. The U.S. is a net oil importer and benefits from lower oil prices. However, consumers have saved about half of their oil-related winnings, allowing the adverse effects of the sharp and rapid drop in energy investment to cause a mild drag on GDP growth last year. If oil prices stabilize, the positive effects on consumption will dominate and could easily add 0.5 percentage point to growth.
DE’s baseline outlook remains favorable, although we have downgraded our 2016 growth forecast for the U.S. towards 2.5% from closer to 3%. Strength should be concentrated in consumption and housing, with deep problems in the mining and energy sectors a drag to be worked out over time. Japan, China, and the Eurozone economies should also become less of a drag, perhaps even picking up around yearend. Fresh or upcoming easing measures in key developed economies will be important features of 2016. While the Fed cannot really “ease,” DE now believes the Federal Reserve is unlikely to move again before mid-year, shifting our forecast from two hikes to one-to-two.
- U.S.:Payrolls (Fri) will be an important test for the markets after a weak ISM mfg survey (Mon) hits the tape. We worry the risks are on the downside about the jobs report. A supportive report with a steady un. rate and a 200K gain in jobs may be discounted having come before the equity slide really unfolded, while a weak figure will mean the end is coming nearer.
- Eurozone: Real economy data have started to show some softer signs of late, although this needs to be placed in an appropriate context. Regardless, the still-improving real economy may be evident in one important set of official data, namely Labor Market numbers such as the German update due on Tuesday where another record-low jobless rate may be in the offing. But on a broader basis, Eurozone Unemployment (Tue) may show further falls.
- UK: As has been the case for quite some time, no-one expects the BoE to alter policy when it gives it next policy verdict on Thursday, especially in the wake of the more recent comments from Governor Carney arguing against any imminent change in policy. Even so, the minutes to the meeting and (perhaps more crucially) the Monetary Policy Summary will get their usual clear scrutiny, as will the InflationReport that will be released alongside, the later possibly still envisaging above target inflation two years hence!
- Japan: A light data week follows the surprise BOJ move to introduce negative interest rates. In DE’s view such action was overdue as the effects of aggressive QE were waning. Perhaps the surprisingly weak data last week was the tipping point in a close vote.
- China: The two closely watched PMI figures (Mon) was expected to show some stability after the December weakness. Some stability or even a modest “manageable” slowdown would help relieve hard-landing concerns. Stimulus is needed but action will not happen soon while the Golden Week holidays dominate the calendar after next week.