Eurozone data is improving even with the activation of Article 50 looming in the first half of the year. What does this mean for the Eurozone outlook in 2017?

Headwinds are formidable for the EU. Floundering inflation, Brexit, a referendum in Italy that could lead to “Italeave”… dumb names… As concerns mount regarding a potential contagion of Brexit, the economic state of the EU has improved greatly. Manufacturing PMI came in at 54.9, above 50 indicates expansion[1]. Inflation, as measured by the Consumer Price Index, rose 1.1% year over year in December. The EU’s best inflation reading since 2013[2].

US Data

PMI data improved in December, giving the US a consistent theme of increasing economic strength through the second half of 2016.

On Friday, the jobs report provided two key pieces of data. First, the unemployment rate increased to 4.7%. Job adds were not as robust as expected leading to the .1% increase in the rate. Second, and more impactful to the current environment, wages grew 2.9% for the year[3]. The increase in wages is a signal for future inflation. It also poses a concern, should productivity lag the increase. If productivity does not keep pace, future profitability could suffer.

International

Rates are beginning to retreat in Brazil. A behavior that is bringing price strength to their bond market. Infrastructure spending and political reform have brought hope that high single digits for their key interest rate may be possible by the year’s end. Bond prices should benefit from this outlook throughout 2017 as prices and rates move in opposite directions.

The Japanese ¥ has weakened, promoting stronger economic opportunity in Japan. Between a softer ¥ and an accommodative central bank the Japanese outlook is strong for 2017.

For months now the € has weakened, which has promoted growth along with inflation. Fuel prices have rebounded over the last month, which also stimulated inflation. This growth could cause the ECB to reduce their bond purchase program pre-emptively.

Conclusion

The ECB is unlikely to shorten their buying program as it is breathing life into their economic resurgence. The strengthening dollar is giving Europe and Japan everything their own central banks have been unable to deliver. By years’ end, developed non-US markets could prove to be a leader in performance.

All this said, developed non-US markets have a headwind in the form of potential reforms to export costs to the United States. Those concerns seem to be more focused on emerging markets, but remain an unknown for them at this point.

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[1] www.investing.com – economic calendar

[2] www.troweprice.com – global market wrap up

[3] www.mfs.com – week in review