Fra BNP Paribas:
Last week ended with a clean-sweep of positive US data.
The first was an upward revision to GDP in Q4 2015 (we, like consensus, expected a downward revision) to 1.0% q/q saar from 0.7%, on the back of an inventory price adjustment and weaker imports. Additionally, we saw Q1 consumption data kick off well, with upside surprises in both personal income (+0.5% m/m) and spending (+0.5 m/m) in January. Core PCE inflation exceeded even our above-consensus expectations, with a 0.3% m/m gain that brought the y/y rate to 1.7% – the highest since early 2013.
Our key takeaway from the personal spending report is that it should remain firm in Q1 on the back of strong real income gains in Q4. As these gains start to fade along with a negative impact from higher inflation, we expect the economy to begin to slow in H2 2016. This week, Fedspeak and the employment report are likely to garner the most attention. We will hear from New York Fed’s William Dudley, San Francisco Fed’s John Williams, and Dallas Fed’s Robert Kaplan. As centrists (Dudley is more dovish), they are likely to reiterate the FOMC’s data dependency and uncertainty on the outlook.
This week’s employment report will probably do little to shift members’ outlooks, but continued upside surprises could have implications for market sentiment. We are forecasting payroll growth of around 215k in February, with the unemployment rate expected to have ticked down to 4.8%. Our call would imply that non-farm payrolls bounce back to trend, which we see as close to 200k. We expect changes in temporary and education workers to have bounced back, after declines in January (a firing month for these sectors).
Meanwhile, retail and manufacturing hiring is likely to have pulled back after a big upside surprise in January. We expect average hourly earnings to pick up by 0.2% m/m (2.6% y/y), following December’s upside surprise. Continued gains are to be expected as the labour market is at full employment, in our view. We expect monthly wages of about 3% y/y by 2017. In other data, we expect the national ISM manufacturing index to have ticked up 0.3 points to 48.5 in February, but to have remained below its breakeven point of 50. We continue to see headwinds to the manufacturing sector from the oil-price shock and the strong dollar.
The nonmanufacturing ISM, on the other hand, has probably held steady at 53.5 following January’s decline. Earlier declines in equity prices and slower payroll growth in January are expected to have held back business sentiment. Still, we continue to see services outpace manufacturing. Eurozone: Consumer demand picking up, consumer prices falling back While we do not have the breakdown of Q4 GDP, data for Germany (+0.3% q/q), France (-0.3% q/q) and Spain (+0.7% q/q), suggest consumer spending grew by around 0.2% q/q in Q4. This is relatively soft, considering that the late-2015 fall in oil prices should have boosted incomes.
However, retail sales figures for the eurozone and main countries show that momentum built through the quarter and we expect Q1 to have started solidly. Certainly, French consumer spending rose by 1.0% m/m in December, followed by a 0.6% m/m increase in January. German retail sales for December, which were initially thought to have fallen by 0.2% m/m have been revised upward, to a 0.6% m/m rise. We expect a further 0.3% m/m gain in January, as the income gain from the fall in oil prices continues to support spending. This also needs to be seen in the context of a significant rise in car registrations at the start of the year. Overall, we expect eurozone retail sales to have risen by 0.3% m/m in January, the same as in December.
With car registrations having jumped by 5% m/m in December and a further 1.5% in January, consumer demand may well surprise to the upside in Q1. However, this needs to be set against the backdrop of declining business confidence, which points to more generalised downside risks to activity in the first half of 2016. Risks to inflation are also tilted to the downside. Preliminary figures for February HICP in three of the big-four eurozone countries were all weaker than market expectations. Although a full breakdown by component is not available at this stage, lower-than-expected headline inflation rates were driven by lower core and energy-price inflation.
Against this backdrop, we now expect February’s eurozone flash HICP inflation to print -0.2% y/y, down from 0.3% in January. Core inflation, meanwhile, should moderate by 0.2pp to 0.8% y/y, with risks to the downside to 0.7%. Together with the latest run of weaker survey data, the sizable downward surprises in inflation, in particular in lower core inflation, coming as early as February should increase pressure on the ECB ahead of its policy meeting on 10 March.
