Global Economics will be taking Christmas week off. Next edition will be January 3, 2020

Introduction

President Trump's impeachment by the House of Representatives made for a tumultuous week of news. But with apparently no risk of his removal from office, markets have shown no visible reaction to the events unfolding in Washington. Markets have also been showing a lack of reaction to unfolding economic data which, because of troubles for manufacturing, have been less than robust. A more immediate foundation for investor confidence has been this year's round of global rate cuts as well as government stimulus in the US and China and prospects of increasing stimulus in other economies including the UK. And economic policy in the UK, where Brexit is finally in the endgame, is where we'll open.

The global economy

Monetary policy

As widely anticipated, the Bank of England's December meeting concluded with no changes to monetary policy. Bank Rate remains at 0.75 percent which, under the BoE's current forward guidance, equates with an unchanged ceiling for quantitative easing of £445 billion (of which gilts are £435 billion). However, in line with November's outcome, the vote on rates was not unanimous but only 7-2 as both Jonathan Haskel and Michael Saunders again called for an immediate 25 basis point cut. The minutes show that members thought it too early to make any judgement whether the Conservative's victory in the general election will have any material impact on either business or consumer confidence. However, the majority thought it likely that the new government's commitment to getting a Brexit deal done by the end of next year could end up reducing uncertainty in due course.

As part of its unrevised central case scenario in which Brexit is delivered and the UK achieves a deep free-trade agreement with the EU, the Monetary Policy Committee also opted to retain its gentle tightening bias. This has the bank anticipating that "some modest tightening of policy, at a gradual pace and to a limited extent" may be needed to meet the bank's inflation target. The bias reflects official expectations that UK GDP growth will pick up during 2020 on the back of reduced uncertainty surrounding Brexit, an easier fiscal policy and some recovery in global business activity. This combination sees demand growth outstripping a subdued pace of supply growth, and so putting upside pressure on prices. Yet uncertainty levels are still high and, for now at least, the BoE maintains that policy could respond in either direction to changes in the economic outlook.

There was nothing new in these results to impact financial markets: the policy statement was insignificantly different from November. This means that while the BoE may still feel that the next move in interest rates is up, investors will first need to see justification in the economic data. And on current trends, that could well be some time in coming. Of special note, Mark Carney's replacement as  head of the BoE was named late in the week: current chief executive of the Financial Conduct Authority and former BoE deputy governor Andrew Bailey will be the bank's next governor. Bailey, who has already spent some 30 years at the BoE, will take his seat at the start of February 2020. Given his previous experience, financial markets are likely to see Bailey as a safe pair of hands.

Another bank that met in the week, one biased not toward tightening but strongly toward easing, was the Bank of Japan whose Monetary Policy Board left settings unchanged, in line with consensus forecasts. As it has been since early 2016, the BoJ's short-term policy rate for excess reserves remains at minus 0.1 percent while the target level for the long-term 10-year yield remains at around zero percent. For now, officials believe that purchasing Japanese government bonds at an annual rate of ¥80 trillion is consistent with keeping the 10-year yield on target. MPB members voted 7-2 in favour of these decisions. Officials also retained their forward guidance, reaffirming their commitment to keeping policy rates at or below current levels for "as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target" will not be lost. Officials repeated they will not hesitate to ease policy further if they conclude that this momentum is fizzling. Speaking at the post meeting press conference, BoJ Governor Haruhiko Kuroda noted that risks to the global outlook remain high and warrant the continuation of an easing bias for policy. He also dismissed a recommendation by the International Monetary Fund that Japan should introduce a target range for inflation.

Inflation

Japan's epic struggle to lift inflation is where we'll open the week's rundown of economic data, and for the BoJ, which like everyone else has a discreet 2.0 percent inflation target, the news is encouraging, at least marginally so. The bank's measure of underlying inflation, CPI excluding fresh food and energy prices, rose a detectable 0.2 percent on the month in November and advanced 0.8 percent on the year, up from 0.7 percent in October. The accompanying graph tracks the recent progress of this measure which, however, is still below the 1 percent rates posted last year. Turning to headline consumer prices, November's index rose 0.5 percent on the year, picking up from 0.2 percent in October for its highest level since July. On the month, the index advanced 0.2 percent, up from no change in October. Food price inflation accelerated from a yearly 0.9 percent to 1.5 percent in November, utilities charges moved out of contraction and housing costs firmed, up 0.8 percent after October's 0.7 percent increase. Core CPI, which excludes fresh food prices, increased 0.5 percent on the year in November, up from 0.4 percent in October, and rose 0.2 percent on the month, as it did previously. However far from spectacular, November's results may help reassure officials that price momentum is continuing to move in their favor.

Housing

Some of the biggest headlines came early in the week from the new home market in the US. Note the specificity here of new homes as sales of US existing homes, data released later in the week, proved flat as a pancake. But when it comes to the construction of US homes, the news couldn't be stronger beginning Monday with a giant 6 point spike in the housing market index to a 20-year high at 76. This index is produced by the National Association of Home Builders and included a surge in the report's traffic component which posted one of its very best scores in 34 years of records. The news was followed by housing starts and permits as tracked by the government which, for starts, jumped a monthly 3.2 percent to a 1.365 million annual rate in November and rose 1.4 percent to 1.482 million for permits, both of which easily beat Econoday's consensus forecasts. Single-family permits are a key indication of future housing activity, both construction and sales as well as residential investment in the GDP accounts. And the results here were very favorable, with permits at a 918,000 rate for a 0.8 percent monthly gain from what was a very strong 911,000 in October. Multi-family permits rose to a 564,000 rate for a 2.5 percent gain on the month. As permits point to future activity, starts point to immediate gains for construction. Here the single-family gain in the month was 2.4 percent to a 938,000 rate with multi-family homes also showing strength.

Low mortgage rates and very high levels of employment, along perhaps with pent-up demand following a whole cycle of subdued gains, have made the new housing market a top contender (along of course with consumer spending) as the top performing US sector of the 2019 economy. As far as sales of existing homes go, they actually fell in November, down 1.7 percent to a 5.350 million annual rate and were held down by lack of available resales on the market. On the year, resales were up only 2.7 percent last month in contrast to new home sales where this measure in October was up over 30 percent. Yet sooner or later as buyers move up to new homes, supply of existing homes along with sales are bound to get a lift. US new home sales for November will be one of the coming week's highlights on the global calendar.

Fixed asset investment

The week started out very favorably with data from China that included a much better than expected gain for industrial production to a growth rate of 6.2 percent and an 8.0 percent growth rate for retail sales which was also much better than expected. But only making expectations was a 5.2 percent growth rate for fixed asset investment which extended, as seen in the graph, a long trend lower. Investment in power production and in property sectors as well as investment in sections of the services sector accelerated in November, but not investment in manufacturing where growth slowed. Investment here isn't getting any lift from what has been a year of contraction for Chinese exports.

Manufacturing

German manufacturing has also been having a rough year, evidenced dramatically as always by Markit Economics' PMI. Germany's manufacturing flash for December came in at just 43.4, well below most forecasts and ending two months of modest improvement. By contrast, services, at 52.0, saw activity rates pick up slightly versus November's 51.7. Aggregate new orders fell for a sixth successive month despite the first increase in services in four months, while overall backlogs were also down again. Employment was broadly unchanged as further job creation in services was offset by deeper cuts in manufacturing — the second deepest in fact in almost a decade. Still, business expectations improved to their highest level in half a year courtesy of services where confidence recovered further from October's nearly 7-year low. Turning to prices, input costs showed almost no change as a weaker manufacturing component was offset by a stronger services contribution. And for selling prices, inflation eased to its weakest level since August 2016 with factory gate charges posting another outright decline. December's results do little to change the longstanding picture of very sluggish overall growth and soft inflation pressures for Germany. Hopes that manufacturing might be turning higher took a knock with this survey and the improvement in services was less than convincing. Real GDP will do well to keep its head above water this quarter.

US manufacturing, like that for Germany and elsewhere, has also been having a rough year, though industrial production, reversing two months of GM strike effects, did hit the top end of Econoday's consensus range with a 1.1 percent monthly gain in November. Yet this followed steep declines of 0.9 percent and 0.4 percent in the two prior months, declines that were both revised slightly deeper in the latest report. The effects of the GM strike, which started in September and lasted through most of October, were centered in manufacturing where production, like the overall headline, also jumped 1.1 percent in November. Yet here too, the gained followed deep and downwardly revised declines of 0.7 percent in the two prior months. A key gauge of how to judge where manufacturing volumes stand is the year-on-year rate which remains in the negative column at minus 0.8 percent as seen in the graph.

Looking specifically at motor vehicles, production surged a monthly 12.4 percent following 6.0 and 5.7 percent declines in October and September. Yearly vehicle production was still in the negative column, at minus 0.4 percent. Outside of vehicles, selected hi-tech production also gave November an important lift, rising a monthly 1.7 percent with this yearly reading up a very strong 7.4 percent. This gain was reflected in business equipment which also jumped 1.7 percent in the month though here the yearly rate was minus 1.4 percent in a reminder of Federal Reserve concerns over business investment. Also lifting the overall headline, aside from manufacturing, was utility output which jumped 2.9 percent in the month though year-on-year output was down 4.1 percent. Mining output, which had been growing in the double digits not too long ago, was at only 2.0 percent annual growth with November's monthly change at minus 0.2 percent.

Both an immediate and also looming factor for US manufacturing was Boeing's announcement in the week that it is suspending production of the 737 Max. Boeing is continuing to engage global regulators and customers on the safe return to service of the aircraft, but US regulators have made it clear that this may be a lengthy process. The graph tracks shipments of civilian aircraft in the blue columns and unfilled orders in the red line. Whether Boeing customers begin to cancel what are more than 4,400 unfilled orders for this aircraft will be a big question, not only for future industrial production, but for the durable goods and factory orders reports as well. At more than $100 million per plane, the 737 Max makes up the bulk of unfilled aircraft orders which at $577 billion in October, made up nearly half of all unfilled orders in the factory sector. In contrast, shipments of civilian aircraft, at only $10 billion per month, made up only a couple of percentage points of total factory shipments which in October totaled $500 billion.

Retail sales

We end the week's data run with a bit of a shocker from an economy that had been outperforming others. Retail sales in Canada posted their fourth decline in six months, falling 1.2 percent versus expectations for a 0.5 percent rise and following a 0.1 percent dip in September. The annual reading, at minus 0.6 percent as tracked in the graph, posted the first contraction in seven years and the deepest contraction in 10 years. Sales were even weaker in volume terms, falling 1.4 percent on the month and 1.6 percent year-on-year. Core sales, which exclude autos and gasoline, fared slightly better with a fall of 0.8 percent in dollar terms on the month in and leaving annual growth still positive at 1.0 percent. Lower sales at motor vehicle & parts dealers (minus 3.2 percent) and at building material & garden equipment dealers (minus 3.1 percent) led the monthly decline. But the poor results were broad-based, with lower sales reported in 8 of 11 subsectors, representing 81 percent of retail trade. This was actually a very rough week for Canadian data as manufacturing sales in October, pulled down by the GM strike, fell 0.7 percent on the month and 2.1 percent on the year. The weakness of these reports, especially retail sales, is likely to raise the pressure on the Bank of Canada to join other central banks in cutting rates, especially as it puts into question the bank's expectations that one of the key supports of the domestic economy would be strong consumer spending.

Markets: It was a very good year

Stock markets are winding up 2019 in style. Yet not having such a great time is Singapore's Straits Times which slipped 0.1 percent in the week to pull down its 2019 gain to 5.3 percent. Trade data in the week didn't help, as Singapore's non-oil exports fell 5.9 percent on the year in November for the eighth straight month of contraction, which is broadly in line with other regional data where trade flows have been weakening. One economy in Asia, however, that has not been weakening is Australia. The All Ordinaries rose 1.2 percent in the week and were lifted on Monday by the strong industrial production and retail sales results from China. Year-on-year, this index is up 24.3 percent in a reminder of how much monetary policy matters to a nation's stock market; the Bank of Australia was one of the first to cut rates in 2019, beginning in May and extending to June and October to total 75 basis points and a new record low for the Overnight Cash Rate at 0.75 percent. New records of all sorts was the 2019 story for the technology heavy Nasdaq, rising 2.2 percent in the week for a monumental 2019 gain of 36.5 percent. Yes the Nasdaq fell nearly 4 percent in 2018 but 2019, doubts over business investment or not, more than makes up the difference.

The bottom line

Straight up is really not much of an exaggeration when describing the new home market in the US, though this description doesn't quite fit for Japanese consumer prices where improvement, nevertheless, appears to be underway. Central bank policy, after a round of synchronized rate cuts clumped at mid-year, has been coasting into year-end while related gains in global stock markets have been building apace. Should monetary policy and also fiscal policy continue to be investor friendly will very likely if not certainly, despite whatever troubles for cross-border trade and manufacturing, determine rates of growth for the global economy and global financial markets in 2020.

**Jeremy Hawkins and Brian Jackson contributed to this article as did Mace News

Week of December 23 to December 27 (all days local)

It will be a light holiday week for global economic data, headlined on Monday by US new home sales, where no cooling is the expectation, and also US durable goods orders which have been moved forward from an originally scheduled Tuesday release. Japanese news will be out in force beginning on Tuesday with Bank of Japan minutes and capped off on Friday with industrial production and retail sales results. Also of note will be monthly GDP out of Canada, which apparently had a bumpy October.

Canadian GDP for October (Mon 13:30 GMT: Mon 08:30 EST)

Consensus Forecast, Month-to-Month: 0.0%

No change is the consensus for October GDP versus annualized growth of 0.1 percent in September. September's year-on-year growth rate was 1.6 percent.

US Durable Goods Orders for November (Mon 13:30 GMT; Mon 08:30 EST)

Consensus Forecast, Month-to-Month Change: 1.5%

Consensus Forecast: Ex-Transportation: 0.2%

Consensus Forecast: Core Capital Goods Orders: 0.0%

After a very solid October that helped reverse prior weakness, durable goods orders are expected to extend their improvement in November, at a consensus increase of 1.5 percent overall. But excluding transportation equipment that include aircraft and vehicles, orders are expected to increase only 0.2 percent. Core capital goods orders, which shot 1.2 percent higher in October, are expected to come in unchanged in November.

US New Home Sales for November (Mon 15:00 GMT; Mon 10:00 EST)

Consensus Forecast, Annualized Rate: 735,000

Consensus Range: 715,000 to 750,000

Home builder optimism is at a 20-year high and new home sales have been rising very strongly, at their best level in 12 years. Econoday's consensus for November's annual new home rate is steady strength, at 735,000 versus 733,000 in October.

Japanese Unemployment Rate for November (Thu 23:30 GMT; Fri 08:30 JST; Thu 18:30 EST)

Consensus Forecast: 2.4%

The unemployment rate came in unchanged in October at an as-expected 2.4 percent and is expected to hold steady in November.

Japanese Industrial Production for November (Thu 23:50 GMT: Fri 08:50 JST; Thu 18:50 EST)

Consensus Forecast: -1.4%

Industrial production in Japan has been up and down but, down 4.2 percent, was especially weak in October. For November, forecasters are calling for a monthly decline of 1.4 percent.

Japanese Retail Sales for November (Thu 23:50 GMT: Fri 08:50 JST; Thu 18:50 EST)

Consensus Forecast, Year-over-Year: -1.7%

Retail sales have been swinging sharply, first higher in September in advance of an increase in consumption taxes than lower in October after the increase. November's consensus is a year-on-year decline of 1.7 percent versus minus 7.1 percent in October.