Mixed US data and optimism in Europe

Macro Highlights - 4/25/2017

Industrial production in the United States rose in March, but retail sales were down. The government is under pressure and had to postpone its tax cut proposal. In the eurozone, confidence surveys have continued to improve early in the second quarter. Investors were relieved that Emmanuel Macron made it through to the second round of the French presidential election.

In the United States, the latest Q1 data were mixed, with an improvement in industrial production but a drop in retail sales.

Despite a decline in manufacturing output, industrial production bounced back in March (+0.5%) after moving sideways for two months. Utilities were behind this rebound, as demand for production was up 8.6% on the previous month owing to unfavourable weather conditions in March.

Retail sales, however, were disappointing and fell 0.2% in March. This was due to the decline in sales of volatile components, such as energy, construction materials and automobiles. Excluding these components, retail sales were up 0.5%.

Volatile components also caused headline inflation to fall from 2.7% in February to 2.4% in March. This decrease was largely due to the slower rise in energy prices, which increased 1.2% in February and 0.9% in March (see left-hand chart). This lower contribution from energy prices had, however, been forecast. Prices of services and automobiles also put downward pressure on core inflation (excluding food and energy prices), which went from 2.2% in February to 2.0% in March. This drop is no cause for concern, as we foresaw that core inflation would fluctuate between 2.0% and 2.3% in the first half of 2017. The slight acceleration in growth forecast for the start of the year should not have any major impact on inflation.

Finally, Donald Trump should provide more details about his tax cut proposal on Wednesday. US Treasury Secretary Steven Mnuchin stated some days ago that it would not be realistic to enact tax reform legislation before August. He did, however, point out that it should be possible to reach a deal with Congress before the end of the year. This supports our scenario that the tax cuts will not have an impact on the US economy until late 2017 or even early 2018. In the meantime, it seems unlikely that there will be a government shutdown at the end of this week, the date by which the debt ceiling has to be raised. If Congress doesn't manage to reach a deal, it is still possible to move the deadline back to May and then October.

In the eurozone, Purchasing Managers' Indexes (PMI) are continuing to rise this month after reaching their highest levels in close to six years in the first quarter. The composite index hit 56.7 in April, up from 56.4 in March, beating expectations. This was due to France's buoyant private sector – the country’s composite PMI reached 57.4 (56.8 in March) on the back of a solid increase in the manufacturing sector (55.1 in April, up from 53.3 in March). This offset the first decline in Germany's composite PMI since January 2017 – it went from 57.1 in March to 56.3 in April but nevertheless remains in a range that indicates solid output growth.

Consumer confidence is also on the rise and is at its highest point since before the 2007 financial crisis. This should provide a boost to retail sales, which have been hit by rising inflation (1.8% in Q1 2017 compared with 0.7% in Q4 2016).


These data indicate further robust growth in the eurozone's private sector in early Q2. However, for the momentum observed in the confidence surveys to turn into strong GDP growth in the second quarter, indicators of real activity, such as industrial production, also need to show signs of a sustained acceleration, which is not yet the case.


Investors were relieved that Emmanuel Macron made it through to the second round of the French presidential election. The prospect of the En Marche candidate winning the overall election will strengthen expectations of improved relations between Germany and France and a stronger eurozone. The eurozone will therefore be able to continue sorting out its banking sector and implementing economic policies that are more adapted to its needs. But European markets will remain volatile until after the second round of the French elections on 7 May.

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