Global Economic Conditions and Prospects | Week #10

 

 

It was a notably eventful week worldwide, despite the light economic calendar. Published data from last week confirmed a slowing economy in the US, with Durable Goods Orders and consumer confidence both falling short of expectations. Additionally, personal spending and income mirrored weaknesses observed in other sectors. Nonetheless, US economic growth continues to persist. On a different note, China saw some sluggish progress in its economic indicators, while Japanese investors welcomed the news of a postponed implementation of stricter policies. Meanwhile, persistent inflation and elevated wage growth in Europe are expected to keep the European Central Bank (ECB) on the sidelines until mid-2024.

 

US Economic Outlook

The upcoming week holds significant importance for the US economy, with pivotal labor market data scheduled for release on Friday, alongside Federal Reserve Chair Jerome Powell's testimony on monetary policy before both a House committee on Wednesday and a Senate panel on Thursday.

Powell can rightfully take pride in the Federal Reserve's policies, which have effectively managed to temper economic growth and inflationary pressures without precipitating a recession. In fact, the US stock markets continue to achieve new record highs month after month. Consequently, we anticipate Powell to staunchly defend the central bank's policies and underscore that it remains premature to speculate on when the Fed might initiate a reduction in its benchmark interest rate.

Ahead of Friday's employment data, attention will be on the ISM survey results and Trade Balance data. On Tuesday, the ISM survey will provide insights into non-manufacturing PMI, employment, and prices. Following increases in December and January, a relative decrease in service sector activities is anticipated. Nevertheless, all subcategories of the survey are expected to remain above the 50 expansion level. Similar expectations are held for the S&P Global Services PMI and the New York Fed's Services Business Activity Survey.

Thursday brings the release of US trade data. Factors such as a stronger dollar, robust income, a buoyant labor market bolstering domestic consumer spending, and a more robust US economy compared to its European counterparts could lead to a slight widening of the trade balance to -$63.3 billion in January.

While these data points are crucial, the focus remains on US labor market data, including JOLTs Job Openings, Average Hourly Earnings, and Nonfarm Payroll numbers.

JOLTs Job Openings for January are expected to decrease to 8.895 million, reflecting a modest decline from 9.026 million, signaling a slight loss of momentum in the labor market despite its current acceptable condition, in line with the Fed's expectations. With an anticipated participation rate of 62.5%, it is projected that average hourly earnings will increase by only 0.2% in February, following a 0.6% jump in January. Additionally, with a rise of 190,000 payrolls during the month, the unemployment rate is expected to remain unchanged at 3.7%. These projections suggest that the labor market, although cooling, continues to exhibit resilience in the face of tighter monetary policy.

 

European Economic Outlook

In the Eurozone, all eyes will be on the PMI numbers on Tuesday and the European Central Bank (ECB) meeting on Thursday. Regarding PMI data, we anticipate further progress in service activities. Specifically, we expect the service PMI to exceed the 50-expansion level in Spain, Italy, and the Eurozone overall, while the German PMI is forecast to rise to 48.9, up from 47.7 in January.

Despite the sluggish increase in economic activities and a recent uptick in inflation contrary to previous forecasts, we now anticipate the ECB to delay the onset of expansionary policies. ECB officials have underscored the risks of inflation and stressed the need for more evidence that inflation is trending toward its 2% target before considering rate cuts later in the year, with the first move expected in June.

Recent data indicate that consumer price inflation slowed less than anticipated in February, with underlying inflation also moderating at a slower pace than expected. However, wage growth remains a primary concern for the ECB, as it could sustain price pressures for a longer period.

Therefore, we anticipate the ECB to implement an initial 25 basis point rate cut at the June meeting. Additionally, we expect a cautious tone in ECB President Lagarde's press conference and subsequent speeches by other ECB members in the following days. The anticipated policy shift may exert more pressure on Eurozone stock markets but could provide support for the Euro against other currencies.

In the UK, the Services PMI is forecast to hold steady at 54.3 in February, while the Construction PMI is expected to rise to 49.0, up from 48.8 in January. Although economic activities are anticipated to experience a slight uptick, inflation in the UK is on a downward trend.

The Halifax House Price Index, which tracks changes in the prices of homes and properties financed by Halifax Bank of Scotland (HBOS), one of the UK's largest mortgage lenders, will be released on Thursday. Expectations suggest a modest increase of only 0.8% in February, significantly less than the 1.3% surge observed in January.

 

Asian Economic Outlook

In Japan, market participants have expressed disappointment with the potential increase in interest rates, even in the event of an exit from the negative interest rate policy. However, upcoming data releases may sway market sentiment. The Tokyo Core Consumer Price Index (CPI) is anticipated to rise to 2.5% in February, up from 1.6% in January, potentially encouraging the Bank of Japan (BoJ) to consider rate hikes. Conversely, the au Jibun Bank Japan Services PMI is expected to moderate to 52.5 in February, down from 53.1 in January, reinforcing officials' comments at the BoJ that the Japanese economy still requires additional support. Moreover, the Household Spending Index is projected to reveal further weakness in spending in January, potentially prompting policymakers to sustain easing policies. January's Household Spending is expected to decline by 4.1%, a more significant downturn compared to the 2.5% decrease observed last month.

In China, recent data releases indicate that government and central bank policies have somewhat stimulated markets, with economic indicators showing signs of growth. Looking ahead, the February Caixin Services PMI is estimated to increase to 52.9, up from 52.7 in January. Thursday's trade data is also expected to confirm a higher volume of exports compared to imports, potentially boosting the Chinese Trade Balance to $110.30 billion in February. In alignment with these positive trends, inflation figures are also anticipated to demonstrate increased market activity and prices. The expected data releases could bolster the Chinese yuan and stock markets in the upcoming week.