Friday

Jan. 15, 2016

www.bloombergbriefs.com

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

COMMENTARY IN THIS ISSUE

Retail Sales, Factory Output, Consumer Sentiment Data

For the second

consecutive month, the
details of the retail sales
report are likely to reveal
greater strength than the
headline results: Carl
Riccadonna.
Declining manufacturing
and soft utility output
suggest that total U.S.
industrial production
remained weak last month:
Richard Yamarone and
Carl Riccadonna.

BEN 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. U.S. retail sales, the Empire
manufacturing survey and producer prices are all at 8:30 a.m. see a calendar of
forecasts here. New York Fed President William Dudley, a permanent voter on the
FOMC, speaks about the economy and Fed policy at 9 a.m. Industrial production is
due at 9:15 a.m. The University of Michigan consumer sentiment survey is due at
10 a.m.
ECONOMICS: China's broadest measure of credit jumped in December,
suggesting a stabilizing economy. San Francisco Fed President John Williams, a nonvoter on the FOMC, speaks at 11:10 a.m. and Dallas Fed chief Rob Kaplan, also a nonvoter, takes part in a panel at 1 p.m.
MARKETS: Chinese shares fell into a bear market. Oil fell to a new 12-year low
below $30 a barrel in New York. The freely-traded Chinese yuan in Hong Kong posted
its biggest weekly gain since October, narrowing the discount to the mainland rate.
(All times local for New York.)

Economists See Inflation Still Below Fed Target by 2017

The Bank of Canada will cut interest

rates next week to stem the widening
economic damage from slumping oil
prices, according to a growing number of
economists and investors: Greg Quinn.

Amherst Pierpont
Securities Global
Strategist Robert Sinche
discusses the recent
market volatility,
currencies and shifts in the
yield curve: Tom Keene.

QUOTE OF THE DAY

"With renewed declines in crude
oil prices in recent weeks, the
associated decline in marketbased inflation expectations
measures is becoming
worrisome."
St. Louis Fed President James Bullard in
remarks given in in Memphis, Tennessee. Read
more here.

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

NUMBER OF THE DAY

19% The median probability for a U.
S. recession in the next 12 months,
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.

Bloomberg Brief

Jan. 15, 2016

Economics

BIG PICTURE CARL RICCADONNA, BLOOMBERG INTELLIGENCE ECONOMIST

Retail Sales Hold the Key to 2016 U.S. Growth Engine
For the second consecutive month, the
details of the retail sales report are likely
to 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 from
spending 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-thanexpected reading could begin to cloud
the broader economic outlook by bringing
into question the health of the main
engine of growth in the medium term.

Retail Activity Dependent on Income Gains

What to Expect
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 a
materially 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 gas
station 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 year
earlier, implying an energy-related tax
cut of about $70 billion (annualized).
While base effects will erode the
magnitude of the implied cut in the
coming 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 is
projected to rise 0.3 percent in December,
which should push the quarterly

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 suggests
that 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 an
important additional piece of data
regarding fourth-quarter GDP forecasts.
Economists have steadily trimmed their
estimates of growth last quarter, and the
Atlanta Feds GDPNow forecast currently
stands at 0.8 percent. If accurate, that
suggests that the pace of growth will end
the year near where it began.
If the pace of growth is to rebound
toward the Feds 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. If

nominal wage and salary gains do not
keep ahead, real income growth will 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 in
November. Economic fundamentals
suggest this will not persist, particularly if
job gains remain solid and wage
pressures become more pronounced as
unemployment 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 that
income growth has steadily outpaced
retail 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 increasingly concerned about the
economys 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 not
deteriorate amid sluggish growth and
weak corporate profits.

Bloomberg Brief

Jan. 15, 2016

Economics

MANUFACTURING RICHARD YAMARONE AND CARL RICCADONNA, BLOOMBERG INTELLIGENCE ECONOMISTS

U.S. Industrial Output Plagued by Weak Manufacturing
Several related measures suggest that
total U.S. industrial production remained
weak 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 conditions
in October and November. Over the last
year, industrial production has fallen by
1.2 percent, the first contraction and
weakest posting since December 2009s
2.8 percent decline.
The monthly Employment Situation
report provides economists with
important data to produce a crude, backof-the-envelope estimate for the monthly
change in industrial production. In fact,
the Federal Reserve doesnt always
possess 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.
Decembers count of factory workers
increased by 8,000 to 12.331 million, from
12.323 million in November. Total
average 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 in
manufacturing, to 3.3 last month from 3.2
in November, implies a potential higher
reading 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.

IP Slide Expected to Continue in Last Month of 2015

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 everappreciating U.S. dollar, which has
increased 11 percent since December
2014. The Federal Reserves broad dollar
index averaged 122.37 last month, about
1.1 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 ISMs PMI fell further into contraction,
with a reading of 48.2 in December
compared with 48.6 in November.
Heating degree days, a measure of
how much the daily mean temperature
deviates from the 65 degree Fahrenheit
reference 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
months 69,561 but a 3.2 percent decline
from a year earlier at 75,319. This is
consistent with an improvement in
demand 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 in
production of consumer goods,
historically been a useful bellwether for
the 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.

Bloomberg Brief

Jan. 15, 2016

Economics

BANK OF CANADA GREG QUINN, BLOOMBERG NEWS

As Oil Slumps, Bets Shift to a Jan. 20 Rate Cut
The Bank of Canada will cut interest
rates next week to stem the widening
economic 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 the
Jan. 20 decision to 0.25 percent, which
would match the 2009 record low.
Toronto-Dominion Bank was the first of
Canadas big lenders to call for a cut.
Crude collapsed to below $30 a barrel
this week. The current price is
approaching levels where existing
production becomes uneconomic, and
increases risks that production
shutdowns will exacerbate the impact,
TDs head of global macro strategy David
Tulk 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 BMO
Capital Markets in Toronto, said by
telephone. "Its 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.
Canadas dollar fell below 70 U.S.
cents this week for the first time since
2003. Yields on 10-year government
bonds 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

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

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 Canadas five big banks
changing 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 that
will 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 in
stimulus.
The central banks 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 Canadas
last recession.
That report boosts the case for a rate
cut, Porter said. "With oil prices unlikely
to rebound meaningfully in the near term,
theres little reason to expect
improvement or even stability for at least
the next couple of quarters," he said in a
research note outlining his call for a cut.

Bloomberg Brief

Jan. 15, 2016

Economics

DATA & EVENTS

Empire Survey Should Bring Manufacturing Woes into '16

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 ago
today 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.

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

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

If the next U.S. president is a

democrat, what would it mean for
financial regulation? Simon Johnson at
the 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 and
important, unfinished agenda," he writes.
Read more here.

OVERNIGHT
Asia
Chinas 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-backed
banks for funding. Aggregate financing
rose to 1.82 trillion yuan ($276 billion) in
December, according to a report from the
Peoples 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 Bank of Japan should bolster
stimulus as quickly as possible because
the countrys inflation outlook suggests it
wont 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 an
interview.

Jan. 15, 2016

Bloomberg Brief

Economics

MARKET INDICATORS

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

Bloomberg Brief

Jan. 15, 2016

Economics

SURVEILLANCE WITH TOM KEENE

Amherst Pierpont Securities Global Strategist
Robert Sinche speaks with Bloomberg's Tom
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 crossborder based. And in that context it is a
little 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't
been the case, the activity has really been
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. Some profit taking in the early

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 the sense that there's not a lot of
volatility. 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 divergence
expectations 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 curve
would 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 expectations
are 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 future
economic outlook as that flatter curve
does often precede slowdowns in the
economy.
This interview has been edited and condensed.

Bloomberg Brief: Economics

Bloomberg Brief Managing Editor
Jennifer Rossa

Global Director Economic

Research & Chief Economist

Reprints & Permissions

Lori Husted

jrossa@bloomberg.net

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+1-717-505-9701 x2204

Economics Editors
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bbaris1@bloomberg.net

James Crombie
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Chief U.S. Economist

Carl Riccadonna
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U.S. Economist
Richard Yamarone
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