FUNG GLOBAL RETAIL & TECHNOLOGY

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1 Global Economic March Analysis 17, 2017 Weekly Macro Commentary: US Jobs Report Reflects Strength in Labor Market; Producer Prices Increase, Thanks to a Commodity Rally 1) US: The US released a solid jobs report that revealed low unemployment and a desirable increase in nonfarm payrolls, signaling the economy s readiness to adapt to higher interest rates. Producer prices showed a continued reflation trend, driven by a rally in commodity prices. 2) Europe: In the eurozone and the UK, industrial production was relatively weak. Nonetheless, the ZEW Survey indicated that growth momentum remained intact. 3) Asia-Pacific: China s core Consumer Price Index (CPI) showed a slowing but still acceptable pace of inflation, while the country s Producer Price Index (PPI) jumped amid robust demand, a weaker yuan and the recent commodity price rally. 4) Latin America: In Brazil, industrial production showed a slight increase. The country s inflation rate reflected a more stable price environment, which bodes well for monetary measures designed to help the economy get out of a recession. 1

2 Our View The Fed raised the federal funds rate by 0.25% this week. The rate hike was well expected by the market and the move did not cause any major adjustments in global equity markets. The Fed saw little change to the economic and financial environment and maintained a projection of three rate hikes this year, which was perceived as a relatively dovish stance that in turn contributed to a rebound in bond prices. The Bank of England kept its policy stance unchanged, but the minutes of the March interest rate meeting struck a slightly more hawkish tone that a rate hike will be probable on condition that there s more upside news on the prospects of activity and inflation. However, we do not see a rate hike in the UK before the country shrugs off some of the lingering uncertainty over Brexit. Figure 1. Global Macro Indicators Released the Week of March 8 15, 2017 Country/Region Indicator Period Actual Survey Prior Impact on Economy* US Unemployment Rate Feb 4.7% 4.7% 4.8% + US Change in Nonfarm Payrolls (Thous.) Feb US Average Hourly Earnings (MoM) Feb 0.2% 0.3% 0.2% + US Average Hourly Earnings (YoY) Feb 2.8% 2.8% 2.6% + US PPI Final Demand (YoY) Feb 2.2% 1.9% 1.6% = US PPI ex Food and Energy (YoY) Feb 1.5% 1.5% 1.2% = US PPI ex Food, Energy and Trade (YoY) Feb 1.8% 1.6% = UK Industrial Production (MoM) Jan (0.4)% (0.5)% 0.9% = UK Industrial Production (YoY) Jan 3.2% 3.2% 4.3% = EZ Industrial Production (SA, MoM) Jan 0.9% 1.3% (1.2)% EZ Industrial Production (YoY) Jan 0.6% 0.9% 2.5% EZ ZEW Survey Expectations Mar CN CPI (YoY) Feb 0.8% 1.7% 2.5% = CN Core CPI (YoY) Feb 1.8% 2.2% + CN PPI (YoY) Feb 7.8% 7.7% 6.9% = BZ Industrial Production (MoM) Jan (0.1)% (0.4)% 2.4% + BZ Industrial Production (YoY) Jan 1.4% 1.0% (0.1)% + BZ IBGE Inflation IPCA (MoM) Feb 0.3% 0.4% 0.4% + BZ IBGE Inflation IPCA (YoY) Feb 4.8% 4.9% 5.4% + *Fung Global Retail & Technology s evaluation of the actual figure s impact on the economy relative to historical benchmarks and the current macroeconomic environment: + indicates a positive signal for the country s economy, indicates a negative signal and = indicates a negligible or mixed impact. Source: US Bureau of Labor Statistics/UK Office for National Statistics/National Bureau of Statistics of China/Singapore Department of Statistics/Instituto Brasileiro de Geografia e Estatística (IBGE)/Fung Global Retail & Technology 2

3 In the US, the unemployment rate edged down to 4.7% in February. Nonfarm payrolls increased by 235,000, which was higher than the market s expectation of 200,000. US: Unemployment Edges Down Further and Payrolls Beat Estimates; Producer Prices Tick Up In the US, the unemployment rate edged down to 4.7% in February. Nonfarm payrolls increased by 235,000, better than the market s expectation of 200,000. Average hourly earnings edged up 0.2% month over month and 2.8% year over year in February, which bodes well for inflation to pick up. Figure 2. US: Unemployment Rate (Seasonally Adjusted), % Feb 12 Feb 13 Feb 14 Feb 15 Feb 16 Feb 17 Source: US Bureau of Labor Statistics The core PPI Final Demand indicator, which excludes price movements from food and energy, increased by 1.5% year over year in February. The PPI Final Demand indicator, which makes up about two-thirds of the headline PPI, increased by 2.2% year over year in February. The core PPI Final Demand indicator, which excludes price movements from food and energy, increased by 1.5% year over year in February, in line with the median estimate. We see the pickup in producer prices as driven by a recent recovery in commodity prices. Figure 3. US: Core PPI Final Demand, YoY % Change Feb 11 Feb 12 Feb 13 Feb 14 Feb 15 Feb 16 Feb 17 Source: US Bureau of Labor Statistics 3

4 In January, eurozone industrial production increased by 0.9% month over month, which was weaker than the median expectation. Europe: Eurozone and UK Industrial Production Subdued; ZEW Survey Expectations Reading Bodes Well for Future Growth In the eurozone, industrial production increased by 0.6% year over year in January and by 0.9% month over month, which was weaker than the median expectation of 1.3% month-over-month growth. Nonetheless, the ZEW Survey Expectations reading increased from 17.1 in February to 25.6 in March, signaling that growth momentum remained intact. Hard data released in the coming months will confirm whether or not the improved sentiment was warranted. Figure 4. Eurozone: Industrial Production Excluding Construction, MoM % Change (0.5) (1.0) (1.5) () Jan 15 Jan 16 Jan 17 Source: Eurostat In the UK, industrial production edged down 0.4% month over month in January. The figure was slightly higher than the median estimate, but weaker than December s reading, which was revised downward to 0.9%. Figure 5. UK: Industrial Production (Seasonally Adjusted), MoM % Change (1.0) (0.4) () (3.0) (4.0) Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Source: UK Office for National Statistics 4

5 In China, the core CPI increased by 1.8% in February, indicating that inflation had slowed but was still within an acceptable range. Asia-Pacific: China s Consumer Prices Remain Within Acceptable Range, While Producer Prices Jump In China, the CPI increased in February by 0.8% year over year, which was below the consensus estimate. The core CPI, which excludes price movements from food and energy, increased by 1.8%, showing that inflation had slowed but was still within an acceptable range. China s PPI came in at 7.8% year over year in February, slightly above expectations of 7.7%. The gauge rose to a postcrisis high, reflecting robust demand, higher commodity prices and a weaker yuan. Figure 6. China: CPI and PPI, YoY % Change () (4.0) (6.0) (8.0) Feb 12 Feb 13 Feb 14 Feb 15 Feb 16 Feb 17 CPI PPI Source: National Bureau of Statistics of China Brazil s industrial production decreased by 0.1% month over month in January after December s reading was revised upward to 2.4%. Latin America: Brazil s Industrial Production Edges Down, While Inflation Appears to Be Stabilizing In January, industrial production in Brazil decreased by 0.1% month over month, which was better than the median estimate of a 0.4% drop. December s reading was revised upward to 2.4%. On a year-over-year basis, the gauge increased by 1.4%, which was better than the consensus estimate of 1.0%. Brazil s IPCA inflation index ticked down to 4.8% year over year in February, reflecting a more stable price environment. Figure 7. Brazil: Industrial Production (Nonseasonally Adjusted), YoY % Change (5.0) (1) (15.0) Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Source: IBGE 5

6 Figure 8. Upcoming Economic Data Releases Date Country/ Region Indicator Period Covered Mar 20 EZ Labor Costs 4Q Mar 20 BZ Formal Job Creation Feb Mar 21 JP Convenience Store Sales Feb Mar 21 UK CPI Feb Mar 21 UK Retail Price Index Feb Mar 21 UK PPI Feb Mar 21 UK House Price Index Jan Mar 21 JP Trade Balance Feb Mar 22 JP Supermarket Sales Feb Mar 22 JP Nationwide Department Store Sales Feb Mar 22 JP Tokyo Department Store Sales Feb Mar 22 US Existing Home Sales Feb Mar 23 SG Core CPI Feb Mar 23 UK Retail Sales Feb Mar 23 US New Home Sales Feb 6

7 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 7