Bloomberg Brief Economics 15JAN2016

7/21/2019 Bloomberg Brief Economics 15JAN2016

http://slidepdf.com/reader/full/bloomberg-brief-economics-15jan2016 1/7

Friday

Jan. 15, 2016

www.bloombergbriefs.com

Due to the U.S. holiday, the next edition will be published on Tuesday, Jan. 19.

Retail Sales, Factory Output, Consumer Sentiment DataBEN BARIS AND ALEX BRITTAIN, BLOOMBERG BRIEF EDITORS

WHAT TO WATCH: The U.S. economics calendar is packed, with several major data

reports as well as appearances by Fed officials. theU.S. retail sales, Empire

and are all at 8:30 a.m. — see a calendar ofmanufacturing survey producer prices

forecasts . New York Fed President a permanent voter on thehere William Dudley,

FOMC, speaks about the economy and Fed policy at 9 a.m. isIndustrial production

due at 9:15 a.m. The is due atUniversity of Michigan consumer sentiment survey

10 a.m.

ECONOMICS: China's broadest measure of credit jumped in December,

suggesting a stabilizing economy. San Francisco Fed President a non-John Williams,

voter on the FOMC, speaks at 11:10 a.m. and Dallas Fed chief also a non-Rob Kaplan,

voter, takes part in a panel at 1 p.m.

MARKETS:  fell into a bear market. fell to a new 12-year lowChinese shares Oil

below $30 a barrel in New York. The freely-traded in Hong Kong postedChinese yuan

its biggest weekly gain since October, narrowing the discount to the mainland rate.

(All times local for New York.)

COMMENTARY IN THIS ISSUE

For the second

consecutive month, the

details of the retail sales

report are likely to revealgreater strength than the

headline results: Carl

Riccadonna.

Declining manufacturing

and soft utility output

suggest that total U.S.

industrial productionremained weak last month:

andRichard Yamarone

Carl Riccadonna.

The will cut interestBank of Canada

rates next week to stem the widening

economic damage from slumping oil

prices, according to a growing number ofeconomists and investors: Greg Quinn.

Amherst Pierpont

Securities Global

Strategist Robert Sinche

discusses the recentmarket ,volatility 

currencies and shifts in the

yield curve: Tom Keene.

QUOTE OF THE DAY

"With renewed declines in crudeoil prices in recent weeks, theassociated decline in market-based inflation expectationsmeasures is becomingworrisome." 

 — St. Louis Fed President James Bullard in

remarks given in in Memphis, Tennessee. Read

more here

NUMBER OF THE DAY

 —19%  The median probability for a U.

S. in the next 12 months,recession

according to a Bloomberg survey of 36

economists. It's the highest measure

since February 2013 and up from three

straight months at 15 percent.

Economists See Inflation Still Below Fed Target by 2017

Slow and steady are set to be the watchwords for two of the main U.S. economic indicators

in the coming years. Slow GDP growth, and a steady rise in prices. That's according to the

median estimates in the latest Bloomberg News survey on U.S. data. Economists see

domestic growth holding at 2.4 percent for the next two years, according to the survey,

which was conducted from Jan. 8 to Jan 13. The PCE deflator — the Fed's preferred

measure of inflation — is expected to rise to 1.3 percent this year and 1.9 percent in 2017,

perhaps as transitory factors such as low oil prices abate. That would put inflation just below

the Fed's 2 percent target. See more data forecasts on the .terminal 

 — Ben Baris, Bloomberg Brief Editor 

7/21/2019 Bloomberg Brief Economics 15JAN2016

http://slidepdf.com/reader/full/bloomberg-brief-economics-15jan2016 2/7

Jan. 15, 2016 Bloomberg Brief Economics 2

BIG PICTURE CARL RICCADONNA, BLOOMBERG INTELLIGENCE ECONOMIST

Retail Sales Hold the Key to 2016 U.S. Growth EngineFor the second consecutive month, the

details of the retail sales report are likelyto reveal greater strength than the

headline results. Analysts will scrutinize

the December data for confirmation that

consumers are seizing the growth mantel

at the turn of the year, despite what are

likely to be significant drags fromspending on autos and gasoline.

Watch for continued strength in

discretionary spending. The market

reaction to this report is likely to be

asymmetric, as a significantly worse-than-

expected reading could begin to cloud

the broader economic outlook by bringinginto question the health of the main

engine of growth in the medium term.

Headline retail sales will be negatively

affected by weak gas and auto sales, so

the underlying details will provide a more

reliable snapshot of consumer activity.

Ex-auto sales are projected to rise at amaterially faster pace — 0.2 percent

versus 0.4 percent prior — than the

headline, as unit motor vehicle sales

were unexpectedly weak in the month.

Gasoline prices continued to drop in

December (minus 5.6 percent); watch for

additional drag on the headline from gasstation sales.

Retail sales excluding automobiles and

gasoline will provide a less distorted

assessment of consumer activity.

Less spending on motor fuels — and

household utilities — is providing

consumers with additional disposable

income. Gasoline prices fell 69 cents in

the fourth quarter compared with a yearearlier, implying an “energy-related tax

cut” of about $70 billion (annualized).

While base effects will erode the

magnitude of the implied cut in thecoming months, it is worth keeping an

eye on discretionary spending categories

to better understand how households are

responding.

Retail control, a direct input into GDP,

will provide useful insight on consumer

spending in the GDP accounts. It isprojected to rise 0.3percent in December,

which should push the quarterly

What to Expect

Read this analysis with additional interactive charts on the Bloomberg terminal .here

annualized change, currently 2.4 percent,closer toward the third-quarter pace of

4.6 percent.

While the December increase in

aggregate income growth was a

moderate based on the monthly jobs

report, the three-month change suggeststhat consumers have witnessed faster

employment income growth in the fourth

quarter than any other quarter in 2015.

Faster income growth should support

consumption over the medium term.

December retail sales will provide animportant additional piece of data

regarding fourth-quarter GDP forecasts.

Economists have steadily trimmed their

estimates of growth last quarter, and the

Atlanta Fed’s GDPNow forecast currently

stands at 0.8 percent. If accurate, that

 suggests that the pace of growth will endthe year near where it began.

 If the pace of growth is to rebound

 toward the Fed’s 2016 forecast of 2.4

 percent, consumer spending will have to rise even faster, at least in the high 2

 percent range. For this to be achieved,

 household income growth will need to

 outpace the rebound in inflation that is

already underway.

As last reported, headline CPI had

increased to 0.5 percent from zero at the

 end of the third quarter and is set to

 converge with core inflation at a level

closer to 2 percent later this year,

assuming that energy prices stabilize. Ifnominal wage and salary gains do not

keep ahead, real incomegrowthwill falter

and spending will inevitably follow suit.

Nominal wage and salary gains have

been mildly but steadily decelerating

from 5.3 percent in July to 4.8 percent inNovember. Economic fundamentals

suggest this will not persist, particularly if

 job gains remain solid and wage

pressures become more pronounced asunemployment falls below 5 percent. In

fact, aggregate income growth, derived

from details of the jobs report, suggests

that the slowdown is already fading.

Nominal wages edged higher in last

month and rose at the fastest quarterly

pace of the year in the fourth quarter.

The above figure illustrates the

dependence of retail activity on

employment income gains. The fact thatincome growth has steadily outpacedretail spending for most of 2015 is an

encouraging signal that consumers are

well-positioned to increase the pace of

spending in the near term.

If retail sales disappoint, forecasters will

become increasinglyconcerned about the

economy’s ability to grow above trend this

year. BI Economics expects consumers to

pull through over the medium term — as

long as labor market conditions do notdeteriorate amid sluggish growth and

weak corporate profits.

Retail Activity Dependent on Income Gains

7/21/2019 Bloomberg Brief Economics 15JAN2016

http://slidepdf.com/reader/full/bloomberg-brief-economics-15jan2016 3/7

Jan. 15, 2016 Bloomberg Brief Economics 3

MANUFACTURING RICHARD YAMARONE AND CARL RICCADONNA, BLOOMBERG INTELLIGENCE ECONOMISTS

U.S. Industrial Output Plagued by Weak ManufacturingSeveral related measures suggest that

total U.S. industrial production remainedweak in December. Manufacturing output

is set to decline based on hours worked

in the month, while utility output is likely

to remain soft due to unseasonably warm

weather, although the monthly change

could be tame following mild conditionsin October and November. Over the last

year, industrial production has fallen by

1.2 percent, the first contraction and

weakest posting since December 2009’s

2.8 percent decline.

The monthly Employment Situation

report provides economists withimportant data to produce a crude, back-

of-the-envelope estimate for the monthly

change in industrial production. In fact,

the Federal Reserve doesn’t alwayspossess enough information and they are

forced to use some of the associated

employment data in their estimate of

output. The quickest measure may be

calculated by multiplying the tally of

employees engaged in manufacturing

activity by the numbers of hours worked.

December’s count of factory workers

increased by 8,000 to 12.331 million, from

12.323 million in November. Totalaverage weekly hours of all employees in

the manufacturing industry climbed 40.6

hours per week in the month, compared

with 40.7 previously. This resulted in

500.6 million worker-hours last month, or

a 0.2 percent decline from the 501.5

million worker-hours in November. This is

identical to the forecast by economists

polled by Bloomberg.

A slight gain in average overtime hours

worked for all employees inmanufacturing, to 3.3 last month from 3.2

in November, implies a potential higherreading in the manufacturing, ex-utility

component. Furthermore, the one-month

diffusion index of manufacturing — which

covers 80 industries — climbed to 58.8

last month from 52.5 in November, which

also bodes well for a stronger increase.

The Bloomberg consensus is for an

unchanged manufacturing output figure.

Read this analysis with additional live charts on the Bloomberg terminal .here

One of the driving forces behind the

weakened pace of output in recent

months has been the seemingly ever-

appreciating U.S. dollar, which has

increased 11 percent since December

2014. The Federal Reserve’s broad dollar

index averaged 122.37 last month, about1.1 percent more than the November

average. It has increased an additional

1.6 percent in January, suggesting

weaker external demand for U.S.

manufactured goods in the first weeks of

2016. This is already apparent in very soft

readings in other manufacturing gauges:

The ISM’s PMI fell further into contraction,

with a reading of 48.2 in December

compared with 48.6 in November.

Heating degree days, a measure ofhow much the daily mean temperature

deviates from the 65 degree Fahrenheitreference rate, fell to about 729 in

December from 873 a year earlier, due to

warmer than usual weather across much

of the U.S. For this reason, it would make

sense that utility production was

somewhat muted. But since October and

November were also warm, gains in

utility production might be misleading.

According to Edison Electric, U.S.

electricity output averaged 72,936

gigawatt-hours in December, a 4.8

percent increase from the previous

month’s 69,561 but a 3.2 percent decline

from a year earlier at 75,319. This is

consistent with an improvement indemand from low levels registered during

October and November. At the same

time, it also denotes a moderation in the

year-over-year rate of change. Since

utility production as a whole accounts for

about 10 percent of industrial output, and

the year-over-year comparison is still

contracting amid a period of low demand,

a modest decline for utilities is likely.

Households appear to be pulling back

on the spending reins. Growth inproduction of consumer goods,

historically been a useful bellwether forthe tone of the domestic household

sector, fell sharply in November to 0.8

percent over the last 12 months from an

impressive 3.0 percent pace in October.

This implies a softer growth rate in

overall consumer spending, which has

moderated from 3.8 percent in January

2015 to 2.5 percent in November. 

IP Slide Expected to Continue in Last Month of 2015

7/21/2019 Bloomberg Brief Economics 15JAN2016

http://slidepdf.com/reader/full/bloomberg-brief-economics-15jan2016 4/7

Jan. 15, 2016 Bloomberg Brief Economics 4

BANK OF CANADA GREG QUINN, BLOOMBERG NEWS

As Oil Slumps, Bets Shift to a Jan. 20 Rate CutThe Bank of Canada will cut interest

rates next week to stem the wideningeconomic damage from slumping oil

prices, according to a growing number of

economists and investors.

Bank of Montreal and Canadian

Imperial Bank of Commerce are now

calling for a quarter-point rate cut at theJan. 20 decision to 0.25 percent, which

would match the 2009 record low.

Toronto-Dominion Bank was the first of

Canada’s big lenders to call for a cut.

Crude collapsed to below $30 a barrel

this week. The current price is

approaching levels where “existingproduction becomes uneconomic,” and

increases risks that production

shutdowns will exacerbate the impact,

TD’s head of global macro strategy DavidTulk said in a note Wednesday.

Trading in overnight index swaps show

investors are putting the odds of a rate

cut at about 50 percent, compared with

16 percent a month ago.

"It was more just the persistent

relentless downward dive in oil and other

commodity prices that was reason

number one" for the forecast change,

Doug Porter, chief economist at BMOCapital Markets in Toronto, said by

telephone. "It’s still a close call."

Bank of Canada Governor Stephen

Poloz cut his overnight rate twice last

year — in January and July — to guard

against the damage of crude oil prices

that slumped to less than $50 a barrel

from more than $100.

Canada’s dollar fell below 70 U.S.

cents this week for the first time since

2003. Yields on 10-year governmentbonds touched a record low 1.192

percent."We see the odds having tilted in

recent days, and are now ever so slightly

on the side of seeing a rate cut in

January, or

 April at the latest," Avery Shenfeld, chief

economist at Canadian Imperial Bank of

 Commerce, wrote in a research note

 Thursday. "The Bank may feel that a cut

now would not be a shocking surprise to

the Canadian dollar or other markets."

With three of Canada’s five big bankschanging their predictions to a cut this

week, the tally in a Bloomberg economist

survey now stands at 14 of 27 calling for

a cut, with the remainder seeing no move.

Royal Bank of Canada chief economist

Craig Wright and Derek Holt,

Scotiabank's vice-president of

economics, expect Poloz will stand pat at

0.5 percent. Along with its rate decision

Jan. 20, the central bank will also release

its quarterly monetary policy report thatwill include any revisions to growth and

inflation forecasts.Canada is set to benefit from a weak

dollar that boosts non-energy exports,

Poloz said this month in Ottawa. He also

said the adjustment from the commodity

 shock is complex and will take years to

 play out, and predicted policy divergence

 will be a dominant theme, as a

 strengthening recovery in the U.S.

 prompts the Federal Reserve to rein instimulus.

The central bank’s Business Outlook

Survey, released Monday, showed

damage from the slump is widening

beyond the oil-patch, and executives had

the lowest readings on investment, hiring

and inflation since 2009 during Canada’s

last recession.

That report boosts the case for a rate

cut, Porter said. "With oil prices unlikely

to rebound meaningfully in the near term,there’s little reason to expect

improvement or even stability for at leastthe next couple of quarters," he said in a

research note outlining his call for a cut.

Poloz Cut Twice in 2015 to Guard Against the Drop in Oil

7/21/2019 Bloomberg Brief Economics 15JAN2016

http://slidepdf.com/reader/full/bloomberg-brief-economics-15jan2016 5/7

Jan. 15, 2016 Bloomberg Brief Economics 5

DATA & EVENTS

TIME COUNTRY EVENT SURVEY PRIOR

8:30 U.S. Retail Sales Advance MoM  -0.10% 0.20%

8:30 U.S. Retail Sales Ex Auto MoM  0.20% 0.40%

8:30 U.S. Retail Sales Ex Auto and Gas 0.40% 0.50%

8:30 U.S. Retail Sales Control Group 0.30% 0.60%

8:30 U.S. PPI Final Demand MoM  -0.20% 0.30%

8:30 U.S. PPI Ex Food and Energy MoM 0.10% 0.30%

8:30 U.S. PPI Final Demand YoY -1.00% -1.10%

8:30 U.S. PPI Ex Food and Energy YoY 0.30% 0.50%

8:30 U.S. Empire Manufacturing  -4 -4.59

9:15 U.S. Industrial Production MoM  -0.20% -0.60%

9:15 U.S. Capacity Utilization 76.80% 77.00%

10:00 U.S. Business Inventories -0.10% 0.00%

10:00 U.S. U. of Mich. Sentiment  92.9 92.6

10:00 U.S. U. of Mich. Current Conditions — 108.1

10:00 U.S. U. of Mich. Expectations — 82.7

Source: Bloomberg. Surveys updated at 5:30 a.m. New York time.

Click to view a live version of this chart on the Bloomberg terminal.here

CALENDAR

Click on the to see the full range of economists' forecasts on the terminal.highlighted releases 

WHAT WE'RE READING

"Sometimes you have to take tough

decisions." Thomas Jordan, the head of

the Swiss National Bank, has no regrets

about the bank's decision a year agotoday to remove the cap of 1.20 francs to

the euro — a move that took many

investors by surprise. Read more of his

comments in Bloomberg's interview .here

If the next U.S. president is a

democrat, what would it mean for

financial regulation? Simon Johnson atthe Peterson Institute goes over the three

candidates' plans. "All of them... agree

that the 2010 Dodd-Frank Act moved

some issues in the right direction, but

there remains a substantial andimportant, unfinished agenda," he writes.

Read more .here

OVERNIGHT

China’s broadest measure of new

credit surged the most since June as

companies increase borrowing on the

corporate bond market, underscoring a

shift away from reliance on state-backedbanks for funding. Aggregate financing

rose to 1.82 trillion yuan ($276 billion) in

December, according to a report from the

People’s Bank of China on Friday,compared with the median forecast of

1.15 trillion yuan in a Bloomberg survey.

The data shows companies are turning to

alternative sources for credit given

banks’ reluctance to lend. It also adds to

signs the economy is stabilizing, not

slumping as its falling currency and

plunging stock market seem to suggest.

The should bolsterBank of Japan

stimulus as quickly as possible because

the country’s inflation outlook suggests it

won’t reach its price target even after

three years of record asset purchases,

said noted economist Allen Sinai. "The

situation cries out for more stimulus,”

Sinai, president of New York-based

Decision Economics Inc., said in aninterview.

Asia

Empire Survey Should Bring Manufacturing Woes into '16

The first indication of manufacturing conditions in 2016 is not expected to be encouraging.

The strengthening U.S. dollar is atop the worry list of manufacturers and exporters, and

concerns about global growth in general — as reflected in the latest World Bank growth

forecasts — and slowdown concerns in China in particular will likely suppress any

meaningful improvement in factory sentiment. Economists polled by Bloomberg anticipate a

slight increase in the New York Fed’s headline Empire State manufacturing survey to minus

4.0 in January from minus 4.6 the prior month, but the contraction in both new orders (minus

5.1) and order backlogs (minus 16.2) suggest that production is at risk of slipping in the near

term, and hence the headline should remain below zero at least in the next few reports.

 — Carl Riccadonna and Richard Yamarone, Bloomberg Intelligence Economists

7/21/2019 Bloomberg Brief Economics 15JAN2016

http://slidepdf.com/reader/full/bloomberg-brief-economics-15jan2016 6/7

Jan. 15, 2016 Bloomberg Brief Economics 6

MARKET INDICATORS

Source: Bloomberg. Updated at 5:50 a.m. New York time

7/21/2019 Bloomberg Brief Economics 15JAN2016

http://slidepdf.com/reader/full/bloomberg-brief-economics-15jan2016 7/7

Jan. 15, 2016 Bloomberg Brief Economics 7

Bloomberg Brief: Economics

SURVEILLANCE WITH TOM KEENE

Amherst Pierpont Securities Global Strategist

speaks with Bloomberg's TomRobert Sinche

Keene and Francine Lacqua about the recent

market volatility, foreign exchange and the shifts

in the yield curve.

Q: What has changed in the air in the

last three days? We seem to get to 12 noon or 2 p.m. New York time and the

bottom falls out. Why is that?

A: Yeah I think it's interesting. You know

the foreign exchange markets have been

relatively calm which would suggest that

a lot of what's going on here is actually

domestically based rather than cross-

border based. And in that context it is alittle perplexing for us here in the U.S.

because normally we see a lot of volatility

in the morning when we overlap with

Europe. And as you noted, that hasn'tbeen the case, the activity has reallybeen

in the afternoon when the U.S. kind of has

the markets to itself. That also supports

the notion that this is domestically based.

I think part of it here in the U.S. is

tax-driven. Someprofit taking in theearly

part of the year. But really no reason for

other investors to buy against that profit

taking.

 Q: State Street Global Investors is

 saying currencies have proven to be

the best haven in the 2016 turmoil. Will

it continue to be the case?

A: Well you know I don't know if they're a

haven in thesense that there's not a lot ofvolatility. But it's not like anybody's

making tremendous returns in the

currency markets. So I think what it

suggests is that divergence in monetary

policies or expectations of divergence are

not getting any greater. In fact if anything,

they're narrowing right?The expectations about future Fed

tightening are probably coming in. U.S.

rates are coming down a bit which

suggests that there's less divergenceexpectations so fewer moves in the FX

markets. But it doesn't help in the sense

of generating positive confidence and

positive moves in these domestic

markets.

 Q: Curve flattening is going on 

throughout the world. I'm going to

 suggest it's not a recession call yet,

but nevertheless we need to be

sobered by a flatter curve. Discuss the

movement in 2s versus 10s.

A: Absolutely the case. One of the better

economic indicators, at least before the

Fed became heavily involved in the US

Treasury market was the shape of the

yield curve. And a steep yield curvewould tend to suggest that the Fed was

keeping short-term rates low. Whereas

higher long-term rates would be a

function of rising inflation expectations.

We have kind of the opposite now. I

think longer term inflation expectations

are coming down. Yet the expectationsare still there that the Fed would like to

normalize rates. That creates a flattening

yield curve but it also is, as you said,

sobering with respect to the futureeconomic outlook as that flatter curve

does often precede slowdowns in the

economy.This interview has been edited and condensed

Bloomberg Brief Managing Editor

Jennifer Rossa

 [email protected]

Economics Editors

Ben Baris

[email protected]

James Crombie

 [email protected]

Global Director Economic

Research & Chief Economist

Michael McDonough

[email protected]

Chief U.S. Economist

Carl Riccadonna

[email protected]

U.S. Economist

Richard Yamarone

[email protected]

Reprints & Permissions

Lori Husted

[email protected]

+1-717-505-9701 x2204

Advertising

Adrienne Bills

[email protected]

+1-212-617-6073

Economics Terminal Sales

Matthew Traum

[email protected]

+1-212-617-4671

© 2016 Bloomberg LP.

All rights reserved. This newsletter

and its contents may not be

forwarded or redistributed without

the prior consent of Bloomberg.

Please contact our reprints group

listed left for more information.