Weekly Macro Commentary: US Consumer Sentiment Remains Favorable; China’s Price Environment Firms
US President Donald Trump reaffirmed the US’s recognition of the “One China” policy in a phone call with Chinese President Xi Jinping, easing some concerns over a worsening US-China relationship. While Trump’s executive orders regarding construction of a wall along the US-Mexico border and travel restrictions from seven majority-Muslim countries triggered tensions with those countries and protests in the US, he seemed to be more cautious and less outspoken about China, easing fears about a trade war between the two countries.
US Federal Reserve Chair Janet Yellen commented that waiting too long to raise interest rates would be unwise, thereby signaling a possible rate hike in March. Yellen also mentioned the importance of fiscal policy in boosting the economy. We expect the Federal Open Market Committee to wait to see the magnitude of a tax reform plan that Trump pledged to announce in the next few weeks before it decides on the timing of a rate hike.
In the US, the University of Michigan Index of Consumer Sentiment retreated in February, dropping 2.8 points to 95.7 after hitting its highest point in a decade in January. The decline centered on the Index of Consumer Expectations. US President Trump’s government policies appear to be affecting consumer confidence, as 30% of consumers surveyed indicated they felt positive about his policies, while 29% felt negative about them. That means nearly six in 10 consumers surveyed took a stance over government policies’ influence on the economy. The figure represented the highest number that had weighed in on the question in the long history of the surveys, which have been conducted since 1946.
The PPI increased by 0.6% month over month and by 1.6% year over year in January; the increases were higher than the market had estimated in both cases. The core PPI, which excludes price movements of food and energy, increased by 0.4% month over month. The gauges signaled a firming price environment in the factory sector.
In the eurozone, real GDP grew by 0.4% quarter over quarter in the fourth quarter, which was weaker than the previous quarter’s 0.5% growth. In December, industrial production in the eurozone dropped by 1.6% month over month, trailing the market’s estimate, but increased by 2.0% year over year. The ZEW Indicator of Economic Sentiment declined significantly, from 23.2 in January to 17.1 in February. Economic sentiment in Germany also saw a sharp decrease, falling from 16.6 in January to 10.4 in February.
The UK’s production sector posted a strong gain in December, driven by a surge in manufacturing output. UK industrial production increased by 1.1% month over month and by 4.3% year over year in December. The figures were above the median estimates of 0.2% month-over-month growth and 3.2% year-over-year growth.
China’s PPI increased by 6.9% year over year in January, up from a 5.5% increase in December and exceeding expectations of a 6.5% increase. The gauge reflected a combination of robust demand and surging commodity prices. The fact that the surge in producer prices was tied to the commodity rally suggests that factory reflation might not be sustained.
China’s CPI rose by 2.5% year over year in January. January’s pleasing economic data add incentive for the government to continue tightening monetary policy as it leans against excess leverage, capital outflows and inflationary pressure.
Japan’s real GDP expanded by 1.0% on a quarter-on-quarter annualized basis in the fourth quarter, down from a 1.4% increase in the previous quarter.
Brazil’s IPCA inflation measure increased by 0.4% month over month in January, in line with the consensus estimate. Brazil’s inflation rate stabilized on a year-over-year basis, falling from over 10% approximately six months ago to 5.4% in January. We expect the month-over-month price pressure to be short-lived and to ease significantly over the first quarter, given that it originated from the readjustment of regulated items, such as transportation, communication, water and sewage
In Mexico, headline CPI increased by 1.7% month over month and by 4.7% year over year; both increases were in line with estimates. The sharp increase was attributable to higher domestic gasoline prices following regulatory changes aimed at reducing government subsidies. The core CPI increased slightly faster than expected at 0.6% month over month, largely driven by peso depreciation.