FUNG GLOBAL RETAIL & TECHNOLOGY

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1 Global Economic January Analysis 6, 2017 Weekly Macro Commentary: US Manufacturing and Housing Market Remain Solid; Inflation in Eurozone Improves 1) US: The most recent economic data releases indicate a solid manufacturing sector and housing market in the US. The ISM Manufacturing Index points to further expansion, and new orders jumped in November. Home prices moderated upward in October and existing home sales edged up in November. However, a drop in pending home sales in November revealed weakness that will likely be reflected in December s figures. 2) Europe: The eurozone CPI improved, with Germany s data coming in stronger than its peers. The UK s GDP in the third quarter was revised upward and the UK manufacturing PMI rose markedly. However, the outlook for the country s manufacturing sector depends largely on its relationship with the EU and the outcome of Brexit. 3) Asia-Pacific: In China, both the Caixin Manufacturing PMI and the services PMI showed improvements. Singapore s GDP jumped in the fourth quarter after having contracted in the third quarter. Japan s industrial production was buoyed by a weaker yen. 4) Latin America: In Brazil, both the manufacturing and services sectors remained in contractionary territory amid high unemployment and weakening consumer confidence. Mexico s retail sales jumped in October, while the country s unemployment rate edged up. 1

2 Our View The Federal Open Market Committee meeting minutes released during the week revealed confidence on the part of US policy makers, whose marked-up economic projections in December reflected a more hawkish stance on interest rate normalization. President-elect Donald Trump s pledges of massive fiscal stimulus and reforms have improved market sentiment in the country. However, the form, magnitude and timing of the proposed policies remain uncertain. The depreciation of the Chinese yuan in recent months has brought a much milder shock to global markets compared with one year ago. Against the backdrop of an outlook for a likely yuan depreciation and a US dollar appreciation, attention will now shift from the yuan cross rate with the US dollar to the yuan s real effective exchange rate against a basket of trading partners currencies. Figure 1. Global Macro Indicators Released the Week of December 28, 2016 January 4, 2017 Country/ Region Indicator Period Actual Survey Prior Impact on Economy* US S&P CoreLogic CS 20-City Index (SA, MoM) Oct 0.6% 0.5% 0.5% + US Existing Home Sales (MoM) Nov 0.7% (1.8)% 2.0% + US Pending Home Sales (MoM) Nov (2.5)% 0.5% 0.1% US ISM Manufacturing Index Dec US Real Personal Spending Nov 0.1% 0.1% 0.1% + UK Nationwide House Price (MoM) Dec 0.8% 0.2% 0.0% + UK Nationwide House Price (NSA, YoY) Dec 4.5% 3.8% 4.4% + EZ** CPI (Advance, YoY) Dec 1.1% 1.0% 0.6% + EZ** Core CPI (Advance, YoY) Dec 0.9% 0.8% 0.8% + CN Manufacturing PMI Dec CN Caixin Manufacturing PMI Dec SI GDP (YoY) 4Q 1.8% 0.3% 1.2% + SI GDP (QoQ) 4Q 9.1% 4.0% (1.9)% + JP Industrial Production (Prelim., YoY) Nov 4.6% 4.7% (1.4)% + BZ Markit Manufacturing PMI Dec MX Retail Sales (NSA, YoY) Oct 9.3% 7.0% 8.1% + MX Markit Manufacturing PMI Dec *+ indicates a positive signal for the country s economy and indicates a negative signal. **EZ denotes the eurozone. Source: S&P/National Association of Realtors/Institute for Supply Management (ISM)/Bureau of Economic Analysis/Eurostat/UK Nationwide Building Society/Markit/China Federation of Logistics and Purchasing/Caixin/Singapore Ministry of Trade and Industry/Nikkei/Japan Ministry of Economy, Trade and Industry/Instituto Nacional de Estadística y Geografía (INEGI)/Fung Global Retail & Technology 2

3 US: ISM Manufacturing Index Points to Further Expansion; Housing Market Remains Solid The ISM Manufacturing Index ticked up to 54.7 in December, up 1.5 points from November s reading. The ISM data showed broad-based strength, with new orders jumping to 60.2 from 53.0 in November. Figure 2. US: ISM Manufacturing PMI (Seasonally Adjusted) Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Source: ISM The S&P CoreLogic Case-Shiller 20- City Composite Home Price Index increased by 0.6% month over month in October. The S&P CoreLogic Case-Shiller 20-City Composite Home Price Index increased by 0.6% month over month in October, above the expected 0.5% and following an upward revision to 0.5% in the previous month. Existing home sales edged up 0.7% month over month in November, reaching 5.61 million. Pending home sales dropped 2.5% month over month in November, revealing weakness that will be reflected in December s data. The fear of a drop in home prices following mortgage rate hikes counteracts buyers attempts to lock in low mortgage rates before they spike further. Figure 3. US: S&P CoreLogic Case-Shiller 20-City Composite Home Price Index (Seasonally Adjusted), MoM % Change (0.5) (1.0) Oct 11 Oct 12 Oct 13 Oct 14 Oct 15 Oct 16 Source: S&P Annualized US GDP growth was revised upward to 3.5% quarter over quarter in the third quarter. Real personal spending grew by 0.1% month over month in November, while real disposable income edged down 0.1%. 3

4 In the eurozone, the core CPI, which excludes food and energy price movements, ticked up 0.9% year over year in December. EU: Inflation Edges Up in Eurozone; UK s PMI Jumps In the eurozone, the advance estimate of December s CPI showed an increase of 1.1% year over year. The figure was higher than the estimate of 1.0% and the November reading of 0.6%. The core CPI, which excludes food and energy price movements, ticked up 0.9% year over year. Germany s preliminary CPI data indicated 1.7% growth, topping the median estimate of 1.4% and the previous month s 0.8% increase. Figure 4. Eurozone: CPI (Nonseasonally Adjusted), YoY % Change (0.5) (1.0) Dec 14 Dec 15 Dec 16 Source: Eurostat Headline Core The UK s final reading of quarter-over-quarter GDP growth in the third quarter was revised upward to 0.6%. The UK Nationwide House Price Index ticked up 0.8% month over month in December, above the median estimate of 0.2%. UK consumer credit rose to 1.9 billion, its highest level since 2005, showing a resilient consumer market amid uncertainties in Europe. The UK manufacturing PMI for December rose markedly, to 56.1, above the median estimate of 53.3, but we remain cautious on the outlook for the UK s manufacturing sector. The UK manufacturing PMI for December rose markedly, to 56.1, above the median estimate of The underlying fundamentals of the sector paint a mixed picture. A weak pound supports demand for exports, but the manufacturing sector imports a large amount of materials for production, which drives up the cost of production. Moreover, uncertainties regarding the UK s relationship with the EU could dampen export growth, and such growth could even turn negative following a hard Brexit. Figure 5. UK: Markit/CIPS Manufacturing PMI (Seasonally Adjusted) Dec 14 Dec 15 Dec 16 Source: Markit 4

5 In China, both the official and Caixin PMI gauges point to further improvement in conditions for manufacturers and service providers. Asia-Pacific: China s PMIs Show Positive Signs; Singapore and Japan Improve In China, both the official and Caixin PMI gauges point to further improvement in conditions for manufacturers and service providers. China s official manufacturing PMI in December edged down to 51.4 from 51.7 in November, remaining above the expansion threshold of The nonmanufacturing PMI also fell, dropping to 54.5 from The Caixin Manufacturing PMI was 51.9 for December, increasing from 50.9 in November and coming in above expectations of The Caixin Services PMI also edged up, to Taiwan s manufacturing PMI continued to rise, reaching 56.2, while Hong Kong s manufacturing PMI edged up to Figure 6. Greater China: Manufacturing PMIs Dec 14 Dec 15 Dec 16 China (Official) China (Caixin) Taiwan Hong Kong Source: China Federation of Logistics and Purchasing/Caixin/Nikkei In Singapore, GDP jumped 9.1% in the fourth quarter on a quarter-over-quarter basis, far ahead of expectations of a 4.0% increase and showing a sharp improvement from the third quarter s 1.9% contraction. Singapore s economy has been buoyed by electronics and biomedical manufacturing and by the services sector, which includes transportation and business services. Figure 7. Singapore: Real GDP (Nonseasonally Adjusted), YoY % Change Q11 4Q12 4Q13 4Q14 4Q15 4Q16 Source: Singapore Ministry of Trade and Industry 5

6 Japan s November industrial production increased by 4.6% year over year, largely driven by a weaker yen. However, the national CPI remained lackluster. The all items CPI edged up 0.5% and the core CPI, which excludes fresh food, decreased by 0.3%, showing that Japan has not yet shrugged off deflationary pressure. The legalization of casino facilities in Japan may spark tourism and entertainment spending, but we expect the impact will be seen only after Figure 8. Japan: Industrial Production (Nonseasonally Adjusted), YoY % Change (5.0) (10.0) (15.0) Nov 11 Nov 12 Nov 13 Nov 14 Nov 15 Nov 16 Source: Japan Ministry of Economy, Trade and Industry Brazil s manufacturing PMI fell to 45.2 in December and the services PMI increased to Both gauges stayed below the expansionary threshold of Latin America: Dreary Outlook in Brazil Brazil s manufacturing PMI fell to 45.2 in December and the services PMI increased to Both gauges stayed below the expansionary threshold of The unemployment rate stayed at 11.9% in November and the IBRE/FGV Consumer Confidence survey figure dropped further in December, to Figure 9. Brazil: Manufacturing and Services PMIs (Seasonally Adjusted) Dec 14 Dec 15 Dec 16 Manufacturing Services Source: Markit In Mexico, retail sales in October rose by 9.3%, ahead of both the median estimate of 7.0% and September s reading of 8.1%. The unemployment rate edged up slightly, to 3.61% from 3.56%. The Markit Manufacturing Index ticked down from 51.1 to 50.2 in December, but stayed above the 50.0 threshold. 6

7 Figure 10. Upcoming Economic Data Releases Date Country/ Region Indicator Period Covered Jan 9 GE Industrial Production Nov Jan 9 UK Halifax House Prices Dec Jan 9 CN CPI Dec Jan 9 CN PPI Dec Jan 10 FR Industrial Production Nov Jan 10 BZ Retail Sales Nov Jan 10 US Wholesale Inventories Nov Jan 10 US JOLTS Job Openings Nov Jan 11 UK Industrial Production Nov Jan 11 BZ IBGE Inflation IPCA Dec Jan 11 MX Industrial Production Nov Jan 12 EZ Industrial Production Nov 7

8 Deborah Weinswig, CPA Managing Director Fung Global Retail & Technology New York: Hong Kong: China: Charlie Poon Research Assistant Hong Kong: 8th Floor, LiFung Tower 888 Cheung Sha Wan Road, Kowloon Hong Kong Tel: London: Marylebone Road London, NW1 6JQ United Kingdom Tel: 44 (0) New York: 1359 Broadway, 9th Floor New York, NY Tel: FungGlobalRetailTech.com 8