FUNG GLOBAL RETAIL & TECHNOLOGY

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1 Global Economic April Analysis 7, 2017 Weekly Macro Commentary: US Consumer Spending Weak; the Outlook for Japanese Manufacturers Continues to Improve Supported by a Weaker Yen 1) US: Real GDP in the fourth quarter was revised upward due to better consumer spending. However, in the first quarter, the spending trend faltered, appearing weak in the first two months of the calendar year. The core Personal Consumption Expenditure (PCE) deflator approached the Federal Reserve s inflation target. 2) Europe: In the UK, fourth-quarter GDP growth was revised downward due to weakness in the services sector. Home prices were down for the first time in almost two years, as UK consumers faced challenges from rising inflation and subdued wage growth. In the eurozone, high youth unemployment persisted. 3) Asia-Pacific: In Japan, the Tankan surveys signaled further improvements for both large and small manufacturers, underpinned by a weaker yen and better domestic demand, respectively. We will monitor whether the better sentiment translates into hard data improvements. 4) Latin America: Brazil s retail sales came in below estimates, as the retail market was hit hard by worsening employment conditions. 1

2 Our View The US economic environment showed slower growth in the first quarter, with inflation approaching the Fed s target levels. Amid this environment, geopolitical developments such as the Xi-Trump summit are a significant factor that could move markets and sentiment in the near term. Chinese President Xi Jinping is set to meet with US President Donald Trump this Friday in the US. The meeting will focus on trade and North Korea. Trade is high on the agenda after Trump signed an executive order on March 31 for a detailed study on US trade shortfalls with specific countries. The meeting might prove to be revealing for the future of the US-China relationship, with a positive outcome likely to spur optimism about possible lower barriers for Chinese and US companies to do business in each other s respective markets. However, a negative outcome could fuel fears of protectionist measures, which would be in line with Trump s pre-election rhetoric. Figure 1. Global Macro Indicators Released March 29 April 5, 2017 Country/Region Indicator Period Actual Survey Prior Impact on Economy* US Annualized GDP (QoQ, Third Rev.) 4Q 2.1% % 1.9% + US Personal Spending Feb 0.1% 0.2% 0.2% US Real Personal Spending Feb (0.1)% 0.1% (0.2)% US PCE Deflator (YoY) Feb 2.1% 2.1% 1.9% + US Core PCE Deflator (YoY) Feb 1.8% 1.7% 1.8% + US Pending Home Sales (MoM) Feb 5.5% 2.5% (2.8)% + UK GDP (QoQ, Final) 4Q 0.7% 0.7% 0.7% = UK GDP (YoY, Final) 4Q 1.9% % % UK Nationwide House Price Index (MoM) Mar (0.3)% 0.3% 0.6% = UK Nationwide House Price Index (NSA, YoY) Mar 3.5% 4.0% 4.5% = EZ Unemployment Rate Feb 9.5% 9.5% 9.6% EZ Retail Sales (MoM) Feb 0.7% 0.5% (0.1)% + EZ Retail Sales (YoY) Feb 1.8% % 1.2% + JP Tankan Large Manufacturing Index Mar JP Tankan Large Manufacturing Outlook Mar JP Tankan Small Manufacturing Index Mar JP Tankan Small Manufacturing Outlook Mar 0 1 (4) + BZ Retail Sales (MoM) Jan (0.7)% 0.5% (1.9)% BZ Retail Sales (YoY) Jan (7.0)% (4.3)% (4.9)% BZ National Unemployment Rate Feb 13.2% 13.1% 12.6% * 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 Economic Analysis/National Association of Realtors/UK Office for National Statistics/Nationwide Building Society/Eurostat/Bank of Japan/Instituto Brasileiro de Geografia e Estatística (IBGE)/Fung Global Retail & Technology 2

3 US real GDP growth in the fourth quarter was revised upward to 2.1% quarter over quarter, mainly due to stronger-than-expected consumer spending. US: Real GDP Revised Upward; Consumer Spending Weak in February US real GDP growth in the fourth quarter was revised higher by two-tenths of a point, to 2.1% quarter over quarter, mainly due to stronger-than-expected consumer spending. Economy-wide corporate profits rose by 0.5% in the fourth quarter following a 5.8% gain in the previous quarter. Figure 2. US: Real GDP (Seasonally Adjusted Annual Rate), QoQ % Change () () 4Q11 4Q12 4Q13 4Q14 4Q15 4Q Source: US Bureau of Economic Analysis Consumer spending edged up 0.1% month over month in February, missing the consensus estimate of 0.2%. Real consumer spending decreased by 0.1%, due to erosion from inflation. The PCE deflator increased by 2.1% year over year in February, above the Federal Reserve s target of %. The core PCE deflator, which excludes energy and food price movements, increased by 1.8% year over year, moving closer to the Fed s % target. Figure 3. US: Personal Consumption Expenditure (Seasonally Adjusted), MoM % Change; PCE Deflator (Seasonally Adjusted), YoY % Change Personal Consumpaon Expenditure (0.1) (0.2) (0.3) (0.4) (0.5) Feb 12 Feb 13 Feb 14 Feb 15 Feb 16 Feb 17 PCE Deflator Feb 12 Feb 13 Feb 14 Feb 15 Feb 16 Feb 17 Headline Core Source: US Bureau of Economic Analysis US pending home sales, a leading measure of housing contract activity that is generally ahead of existing home sales by a month or two, showed a 5.5% month-over-month jump in February. The gauge s improvement further confirms that warmer-than-usual winter weather has brought an early start to the US home-buying season this year. 3

4 In the UK, fourth-quarter GDP growth was finalized at 1.9% year over year, revised downward by 0.1% due to a weaker services sector. Europe: UK GDP Growth Revised Downward; High Unemployment Persists in the Eurozone In the UK, fourth-quarter GDP growth was finalized at 1.9% year over year, revised downward by 0.1% due to a weaker services sector. The Nationwide House Price Index decreased by 0.3% month over month in March, sliding for the first time since June Consumers in the UK face challenges from rising inflation and weak wage growth, which may have deterred them from making home purchase decisions. Figure 4. UK: Real GDP, YoY % Change Q11 4Q12 4Q13 4Q14 4Q15 4Q Source: UK Office for National Statistics In the eurozone, the unemployment rate remained at a high level in February, coming in at 9.5%. High youth unemployment persists in the region. In the Southern European countries of Greece, Spain, Italy and Cyprus, three in 10 young people are out of work. In France, the youth unemployment rate reached 19.4%. Figure 5. Eurozone: Unemployment Rate (Seasonally Adjusted) Feb 12 Feb 13 Feb 14 Feb 15 Feb 16 Feb 17 Source: Eurostat Despite the high unemployment rate, eurozone retail sales showed improvement in February. Retail sales increased by 0.7% month over month and by 1.8% year over year, driven by higher clothing and footwear sales. 4

5 In Japan, the March Tankan survey revealed that sentiment among large manufacturers had further improved due to a weaker yen. Asia-Pacific: Japan s Tankan Surveys Signal Further Improvements The Tankan Business Conditions Large Enterprises Manufacturing Index a barometer of Japan s exporting industries rose to 12 in March from 10 in the previous period, but the reading was lower than market s expectation of 14. The improvement could be attributed mainly to the weaker yen boosting the exports outlook for the economy. The business conditions forecast index stood at 11 in March, as the same manufacturers expect a slight deterioration in conditions in the next quarter. Sentiment among small manufacturers continued to improve in March, indicating that the manufacturers perceive domestic demand to be better. We will monitor whether the sentiment improvement actualizes in hard data. The Tankan Business Conditions Small Enterprises Manufacturing Index increased from 1 in the previous period to 5 in March, and was above expectations of 3. The Small Non-Manufacturers Index improved from 2 to 4. However, both small manufacturers and small nonmanufacturers still expect worsening outlooks. Figure 6. Japan: Tankan Business Conditions Large Enterprises Manufacturing Index (1) (2) Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Source: Bank of Japan Business Condilons Forecast Latin America: Brazil s Retail Sales Worsen Amid High Unemployment Brazil s retail sales decreased by 0.7% month over month in January and by 7.0% year over year. Both figures were below median estimates, which had called for a mild recovery from December. Retail sales were hit hard by the worsening labor market, which showed few signs of resilience. Brazil s unemployment rate worsened in February, reaching 13.2%, which was higher than both the consensus estimate and the previous reading. Figure 7. Brazil: Retail Sales (Seasonally Adjusted), MoM % Change () (0.7) () () 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 Apr 11 UK Consumer Prices Index Mar Apr 11 EZ Industrial Production Feb Apr 11 GE ZEW Survey Current Situation Apr Apr 11 EZ ZEW Survey Expectations Apr Apr 11 MX Industrial Production Feb Apr 11 US JOLTS Job Openings Feb Apr 11 SK Unemployment Rate Mar Apr 11 AU Westpac Consumer Confidence Index Apr Apr 12 SI Retail Sales Feb Apr 12 UK Claimant Count Rate Mar Apr 12 UK Jobless Claims Change Mar Apr 12 UK ILO Unemployment Rate (3 Mos.) Feb Apr 12 BZ Retail Sales Feb Apr 13 US University of Michigan Index of Consumer Sentiment (Prelim.) Apr 14 US Consumer Prices Index Mar Apr 14 US Retail Sales Advance Mar Apr 14 US Business Inventories Feb Apr 16 UK Rightmove House Prices Apr Apr 16 CN Retail Sales Mar Apr 16 CN Industrial Production Mar Apr 16 CN GDP 1Q Apr 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