2Economic Research Global Data Watch November 2, 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 point to a troubling wedge opening up in the DM betweenbusiness assessment of current and future conditions (Fig- ure 3). Our business sentiment index (which measuresfirms’ assessment of current conditions) has stabilized inrecent months at an elevated level. However, expectationshave moved down to the lowest level in two years. Awedge of this type is not evident in the past decade and it ishard to ignore the role of trade tensions as a likely drag.The link between this wedge and growth runs through globalcapex. Globalcapex (ex. China) is increasing at a 5% rate thisyear, disappointing our forecast at the start of the year for astronger 7% pace (link to global RN). With our analysisshowing that business sentiment has been an important driverof the 2017-18 global capex rebound, risk is building that anexpectations drop soon weighs on sentiment and spendingmore broadly.PMIs underscore downside risk in China This week’s reported decline in the NBS and Markit PMIschallenges our view that growth in China will stabilize aroundits 3Q18 outturn of 6% as policy supports offset the impact ofbuilding trade tensions. Along with the headline figures drop- ping yet again, the tumble in the export orders PMI to its low- est level since early2016 hints that the trade war is taking alarger toll(Figure 4). Next week’s October trade report willbe important to watch in this regard, and we expect someslowing following the surprising upside move in September.A reported positive phone call between Presidents Trump andXi is encouraging but we think it would be a mistake to give it much weight ahead of theiractual meeting at the G-20 Sum- mit at the end of this month. In the meantime, we look forfurther policy easing in China. Following a meeting this week,the Politburo recognized difficulties in business operations forsome and downside risks for the economy overall.The official statement from the meeting reinforced our as- sessment that policy will step upfurther, but that the actionswill not be as aggressive as in the past. Notably, the govern- ment appears willing to tolerate slower growth in 2019 (weexpect a slowing from 6.6%y/y this year to 6.1%) and statedthe purpose of policy support is to control the pace of thisslowdown.Euro area core inflation stuck at 1%The building blocks of higher Euro area core inflation—highresource utilization rates, higher wage growth, and higher unitlabor cost growth—are firmly in place. And yet underlyinginflation is not yet rising. Euro area core inflation rose from0.9% in September to 1.1% in October, as factors that tempo- rarily depressed pricing faded from the scene. While this is awelcome pickup, the trend appears stuck at about 1%, and wehave lowered our year-end forecast to 1.1%oya. With growthalso falling short of expectations, it seems natural to considera dovish shift by the ECB. We do not expect such a shift asthere seems little advantage to the ECB tying its hands moretightly, given its already dovish guidance that leaves marketswith a subdued set of interest rate expectations. Merkel likely to remain in power a whileFollowing the disastrous electoral results for the CDU in theregional elections in Hesse last Sunday, Chancellor Merkelannounced that she would step down as CDU party leaderlater this year and that she would leave politics altogetherwhen her fourth term ends in 2021. There is a significant like- lihood that Merkel will not remain chancellor until 2021, but it is important to recognize that this would be difficult. TheBundestag elects the chancellor and the CDU does not have amajority in the Bundestag. A replacement for Merkel wouldneed either the support of the SPD, or the combined supportof the Greens and the FDP. An inability to agree on Merkel’sreplacement, if she either resigns or loses a confidence vote,would trigger an early general election.This puts the focus on-2 -1 0 1 2 1012141618 Std.dev from mean, since 2010 Figure 3: DM business confidence Source: J.P. Morgan Currentconditions Expectations -20 -12 -4 4 12 20 46 48 50 52 54 20152016201720182019 DI, sa Figure 4: China export orders PMI and exports %oya Source: J.P. Morgan, NBS PMI -export orders Merchandise exports 3Economic Research Global Data Watch November 2, 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 their partner in the grand coalition. As with the CDU, supportfor the SPD has collapsed in recent state elections. As a result,they are willing to continue in the grand coalitionfor now, buta key date will be next September when the coalition treatyhas scheduled a midterm progress evaluation. Brexit: Heat at the end of the tunnel Next weekUK and EU negotiators will attempt again to final- ize the withdrawal agreement and political declaration. Thenews is mixed, but we remain confident that agreement willbe reached by the December 13-14 EU Council. Securing theassent of the House of Commons looks likely to be more dif- ficult. The May administration can tolerate only 14 of its ownMPs voting against it if others vote along established lines,but the number of pro-Brexit MPs hostile to the agreementlooks set to comfortably exceed that. It may hence take morethan one attempt before the threat of no-deal or no-Brexit mo- tivates enoughMPs to vote in favor of it.This week’s Inflation Report saw the MPC acknowledge boththe near-term risks created by the Brexit process, and the needto move rates higher a little more quicklythan previouslythought if those risks are resolved. Expecting heightened po- litical volatility around Brexit to be removed byJanuary, wecontinue to see the BoE nudging rates higher in February.Aside from Brexit-related developments, that call also re- quires a strongertone in the global data flow ahead of the meeting. BoJ fades both growth and inflation misses Factory output in Japan slumped 6.6% ar last quarter, while abigger-than-expected 1.1% drop in September implies a weaktrajectory for the current quarter. With business surveys hold- ing up and manufacturers projecting a surge in October, weare comfortable with the call that industrial activity reboundsfrom recent weather-and earthquake-related drags. Still, atthis week’s policy meeting the BoJ shifted its risk assessmentfor FY2018 from “balanced” to “downside.” The biggest risk,in our view,is the indirect impact of intensified trade frictionsbetween the US and China through corporate sentiment andfinancial markets. The BoJ did not fine-tune itspolicy settingas some market participants had speculated. Moreover, Gov- ernor Kuroda dismissed the downward revision toits inflationoutlook for all three years by stating that this revision onlyreflected the recent weakness in CPI, even though it is hard torationalize why FY2019 and FY2020 should be affected bynear-term disappointments if not owing to more fundamentalchallenges to the BoJ’s goals. We continue to see the BoJmissing its inflation target for FY2019 by a considerable0.5%-pt margin. Jitters over Turkish fiscal policy In reaction to weakening domestic demand, Turkey’s gov- ernment announced a series of tax cuts this week. The cutsthemselves shouldnot have any meaningfulfiscal impact— weestimate the total fiscal cost of the cuts at only 0.07% ofGDP. However, the move could hurt already fragile investorsentiment. The measures are a reminder ofpolicymakers’sensitivity to domestic constituentswhen they see improve- ment in market dynamics. Concerns about the risk of furtherpolicy easing are likely to remain elevated ahead of electionsnext March.Shifting winds in the LATAM political map Having signaled a pragmaticapproach to policy soon after