2Economic Research Global Data Watch November 30, 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 and is reflected in Powell’s comments about being mindful ofmonetary transmission lags and the need to monitor both eco- nomic and financial indicators.On inflation, recent developments are mixed. Indeed, thisweek’s November minutes show growing conviction on theFOMC that labor and other input costs are firming,supportingthe case that inflation has normalized. This view should bereinforced next week as we expect average hourly earningsgrowth to riseto a cycle-high 3.2%oya. But doubts surround- ing theprice Phillips curve linger,as the core inflation trajec- tory has shifted downagain. Core PCE inflation slipped to1.8%oyainOctober and to a 1.4%ar in the last three months; market pricing of 5y inflation 5y forward also has slipped inrecent months (Figure 1). With our baseline forecast looking for growth and core infla- tion to continue above 2% in 1H19,we see the Fedcontinuingon its current path of quarterly policy adjustments. But werecognize that a “data dependent” Fed will make decisionsbased on the interaction of economic outturnsand its percep- tion of risk. In addition to assessing financial conditions andgeopolitical events, our recently developed macro-quant toolscan help in assessing macroeconomic risk. Thesetools esti- mate the probability of tail events based on incoming news. Inthis regard, the evolution of the probability of recession with- in the next 12months and of a dip in core PCE inflation be- low its current levelis worth monitoring (Figure 2). The prob- ability of recession has moved modestly higher in recentmonths and currently stands at 33%. However, inflation in- puts have remained stable pointing to a still-modest 16%probability of a fall in core PCE inflation below 1.75%.Geopolitical event risks on deck Given the importance the US-China trade war in our outlook,this weekend’s summit meeting between Presidents Trumpand Xi will be closely watched. Our forecast assumes the USnot only increases the current 10% tariffs to 25%, but alsoadds a 25% tariff on all remaining goods imports from Chinaby 1Q19. However, hopes have built this week for a dtente atthe meeting. Even if some positive comments are made, wethink it will prove too hard to bridge the wide gap between thetwo sides. On a related front, Congressional Democrats aresending President Trump a message that passage of the newUSMCA trade agreement is going to be a difficult and con- frontational process.OPEC meets next Thursday against the backdrop of a slide inBrent oil prices to below $60/bbl. While demand growth hasbeen less than forecast, we think supply has been the maindriver of this slide. OPEC, Russia, and the US ramped up out- put by over 2mbd in the past six months in anticipation of awithdrawal of Iranian crude that has been less severe thanexpected. Saudi Arabia is now leading an effort to addressover-supply without upsetting the Trump administration,which has applauded the price drop. Our oil strategists thinkproduction needs to be reduced at least 1.2mbd from Octoberlevels to generate the modest rise in prices we expect.The Brexit drama is set to enter a new and likely chaoticphase as the UK House of Commons begins debate on thewithdrawal agreement next week. By all accounts, the Com- mons is likely to reject the agreement by a large margin in theDecember 11 vote. We think confidence votes on May’s lead- ership among Conservative MPs and on the government as awhole in House of the Commons will ensue. PM May is likelyto survive both. The European Council meeting December 13- 14 should see the EU step up its “no deal” preparations whiletelling PM May the deal cannot be improved. We expectChristmas will hence approach amid an uncomfortable im- passe that forces MPs to confront the reality of the choicesthey face. Our best guess is that a majority of MPs will decidethat May’s deal is the least bad among the available options,resulting in its passage in January. Mixed news on global growthAlong with the geopolitical events just ahead, the globalgrowth backdropcontinues to send mixed messages. Thelong-awaited rebound in global industry appears to have got- ten underway in October. Our forecast calls for global IP toaccelerate to 3% ar this quarter, which would be the strongestgain of the year. The pickup is concentrated in Europe andJapan, which are bouncing back from transitory drags in 3Q.Incoming reports support the forecast, with global IP on trackfor a robust 0.6%m/m increase in October, lifting the %3mchange to 4.4% ar (Figure 3). Gains have been strong acrossAsia, including Friday’s news of a 2.9%m/m surge in Japan.Next week we look for Germany to report a strong 0.8%m/mgain.-1.1 0.0 1.1 2.2 3.3 4.4 5.5 48 50 52 54 56 201620172018 DI, sa; w/Nov est Figure 3: Global manufacturing output PMI and actual output %3m, saar; w/ Oct est Output PMI Mfg output Source: J.P. Morgan, Markit 3Economic Research Global Data Watch November 30, 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 While the October industrial output gain is encouraging, sur- vey data show a continued decline in underlying momentum.Theglobal manufacturing PMI declined in October and a fur- ther slide in the recent November G3 flash readings points toa drop in our global output PMI to a level consistent with just1.5% ar IP growth. Importantly, the new orders PMI droppedin both the Euroarea and Japan despite the rebound from dis- ruptions. China’s NBS PMI also ticked down this month. Concern about underlying momentum is most acute in theEuro area. The regional PMI fell sharply in November, span- ning both manufacturing and services, challenging our viewthat growth in the region will average close to 2% in comingquarters. So, too, does recent evidence confirming a softeningin the labor market. Job growth slowed sharply in 3Q and theunemployment rate has stopped falling the past four monthsamid a decline in the employment PMI and a rise in house- hold unemployment fears. The deterioration in Italy, in par- ticular, sends a more downbeat message for the region. More cautious Fed buys time for EM… For the EM as a whole, rising downside DM growth risk is ofconcern to all. However, the dovish tilt in Fed rhetoric, alongwith falling oil prices, removes financial market pressure onthe most vulnerable high-yielding countries. Lower US rateexpectations have been accompanied by a general firming in currencies and narrowing in spreads in this group. While thiswill buy policymakers time, it does not eliminate the need fordifficult choices to lay the foundation for more sustainablegrowth, particularly if we are right that the Fed will continueto hike (Figure 4).In EM Asia, India has benefited from the decline in energyprices and Indonesia has been aided by technical factors miti- gating USD demand for oil imports. But both remain vulnera- ble given limited adjustments in their real external balances.In EMEA EM, energy price declines also have benefited Tur- key greatly but so too have more material adjustments to itsexternal imbalances. Still, fiscal and monetary policy credibil- ity remains a concern. For South Africa, the SARB’s 25bphike is supporting the currency for now, but more currencyadjustment may be needed for external rebalancing. For the larger countries in Latin America, the swings in oilprices are relatively neutral from an external accounts per- spective and could deliver some relief onthe inflation front, inturn easing domestic pressures on central banks. More rele- vant for Brazil and Mexico are market perceptions of theirrespective new governments’ ability to execute ambitiousfiscal adjustment efforts in Brazil