2Economic Research Global Data Watch October 26, 2018 JPMorgan Chase Bank NA Bruce Kasman(1-212) 834-5515 bruce.c.kasman@jpmorgan David Hensley(1-212) 834-5516 david.hensley@jpmorgan Joseph Lupton(1-212) 834-5735 joseph.p.lupton@jpmorgan China trade stress tests policy support. China growthslowed to 6% ar last quarter, but our view is that policysupports will gain traction and hold growth around this paceeven as the tradewar intensifies through early next year.However, the nature of the stimulus differs from pastmeasures. While we do expect some turn-around in infra- structure spending,which has been a drag on growth year- to-date, the bulk of the recent easing is focusedon taxmeasures and credit easing. Thus, we expect the policy im- pulse to be spread across the various sectors.On trade, ne- gotiations are at a stall and may be excluded altogetherfrom a potential Trump-Xi meeting at the November 30 G- 20 Summit.Euro area struggling to getback on track.While EMUgrowth has not been weak, it surely has disappointed upbeatexpectations each quarter this year, and we once again low- er our sights on 3Q18 (out next week) to 1.5% ar from1.8%. More concerning is that momentum has yet to recov- er and risks to our 2.5% 4Q forecast are to the downside.The October flash PMI slid to a level consistent with just1.6% GDP growth, with weakness broadly based acrosssectors and countries and only France buckingthe trend (Figure 2). Temporary disruptions in the auto sector appearstill to be weighing on activity and this will fade, but con- cerns about a trade warwith the USalso have perked up.Upcoming industry reports (IP, orders, VDA car produc- tion) will help to gauge the auto sectorrebound, while thenext flash PMI for November will help to gauge the under- lying growth trend. Netting out the latest news from around the world, our globalnowcaster is tracking 2.7% real GDP growth at the start ofthis quarter, the softest pace since mid-2016.Global capex cycle keeps EM Asia on edge Despite lackluster global industry activity over the past twoquarters, the added boost from the tech cycle looks to haveincreased EM Asian (ex. China/India) factory output 5% an- nualized last quarter. However, with the tech bounce losingsome steam, headwinds are building as the global capex cycleis at risk of settling in closer to 4%-5%ar growth rather thanthe 5%-6% we have been looking for. Global capital goodsimports and G-3 shipments through August do not show muchlife while this week’s US September durables report was soft- er than expected. Perhaps most striking is the apparent sharppullback in EM capex spending. It is early still, but thisweek’s Korean 3Q GDP report underscores the downbeat tonefrom the EM of late (Figure 3). We will look to next week’sOctober PMIs to gauge the health of the region’s industrialsector following the disappointing outturns in September.It ain’t easy being easy With downside risks building, it is reasonable to question theFed’s commitment to a steady pace of policy normalization.With the December meeting still eightweeks away, there isample time for conditions to shift in a way that alters Fed be- havior. However, we believe the Fed islikely tohike again inDecember. In large part, this view is based on our expectation that the USwill sustain growth wellabovetrend this quarter.We expect next week’s employment report to show jobgrowth rebounding to 200k,with wage inflation moving to anexpansion-high3.1%oya. Although lower equity prices andslowing in interest-sensitive spending will get its attention, theFed’s own guidance sees rates rising so as to slow US growthback to trend. Vice Chair Clarida reinforced this messagethis week,stating that “I believe monetary policy today remainsaccommodative, and that, with the economy now operating ator close to mandate-consistent levels for inflation and unem- ployment, the risks that monetary policy must balance arenow more symmetric and less skewed to the downside.” In contrast to the Fed, the ECB and BoJ face a different back- drop as policy normalization is still some distance off. It isstill notable, however, that the central bank facing the mostdownside growth and inflation risks appears particularly san- guine on the outlook. The ECB this week stuck to its growthoutlook and went further to describerisks as “broadly bal- anced”while sidestepping the recent inflation disappoint- ments with a focus on tight labor markets and rising wageinflation. Nevertheless, next week’s flash inflation report forOctober will be a crucial test of this confidence. We expectcore inflation to rebound 0.3%-pt to 1.2%oya—the strongestsince August 2017 (Figure 4). Next week, the BoJ will provide its take on the recent marketsell-off in the context of an economy that looks to have con- tracted last quarter. As with the ECB, the BoJ appears com- fortable with the outlook. This week’s October flash PMIfirmed, supporting our view that growth will rebound follow- -30 -20 -10 0 10 20 30 2016201720182019 %q/q, saar Figure 3: Capital equipment spending Source: J.P. Morgan Korea EM ex China 3Economic Research Global Data Watch October 26, 2018 JPMorgan Chase Bank NA Bruce Kasman(1-212) 834-5515 bruce.c.kasman@jpmorgan David Hensley(1-212) 834-5516 david.hensley@jpmorgan Joseph Lupton(1-212) 834-5735 joseph.p.lupton@jpmorgan ing a series of adverse natural disasters through 3Q18. Thereis talk of the BoJfine-tuningits 10yr yield range from ±20bpto ±30bp next week or sometime soon to temper the adverseside effects of its policy stance.This seemsunlikely, however,as this week’s Financial System Report was not overly con- cerned about stress from low-for-longinterest rates. Central banks still cautiously constructive Echoing the sentiment of cautiously looking through recentmarket moves, a set of central banks beyond the major players also signaled they are not changing course. Responding tosolid growth, rising inflation, and relief on the updatedNAFTA agreement, the Bank of Canadahiked as expectedand is on a path to continue normalizing once a quarter. InSweden, the Riksbank heldbutmaintained ahawkish stancethat sets the stage for an expected hike in December or Febru- ary.Similarly, the Norges bank stood pat this week but sig- naled (explicitly for the first time) that a rate hike was likelyin 1Q19. Notably, both Scandi meetings took place after thedisappointing EMU PMI report.In the EM, central banks of current account deficit countriesare similarly comfortable enough to refrain from defensivehikes. As expected, the CBRT kept its policy rate unchangedat 24%, pleased by the recent firming in the currency attribut- edin part to increasedcredibility. It nevertheless still seesvulnerabilities and maintained a tightening bias. We expectthe CBRT to keep ratesunchanged through 1H19 before cut- ting 100bp in June. Although Bank Indonesia’s focus is onfinancial stability, couched in terms of currency stability evenas inflation hovers at the lower end of the target range, thebank refrained from hiking this week with an eye on externalgrowth threats. That said, we now expect BI to hike in De- cember following the Fed. In India, downside growth risksand low inflation, coupled with the drop in oil prices, are rais- ing the likelihood the RBI refrains from a December hike.Brexit lurking behind coming UK reports Brexit will have its fingerprints on two reports out next weekin theUK. We expect to see fewfiscal policy changes intheBudget on Monday. Stronger revenues reduce the need for thechancellor to raise taxes for increased spending. But he alsowill want to steer clear of any controversy given the risk thatthose resistant to the prime minister’s Brexit planvote againstthe Budget in protest. Should the Budget pass without issues,as we expect, this would help advance the Brexit negotiations.In next week’s Inflation Report,we expect the BoE to reviseup its forecast for wages and express greater confidence thatdomestic inflation will begin