。Economic Research
Global Data Watch
February 1, 2019
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
confidence has lost altitude as a result of rising geopolitical
concerns. A thawing of the US-China trade truce may be
calming outlook fears. The global manufacturing PMI of fu-
ture output jumped nearly 2pts in January, breaking a nearly
continuous downtrend that took hold in 1Q18 (Figure 2). This
week’s negotiations in Washington, which were characterized
as constructive, are set to be followed by a next round of talks
in Beijing in mid-February.
Although the FOMC was expected to reinforce its decision to
pause this week, its removal of any tightening bias sent a
stronger-than-anticipated signal about its growth concerns.
The committee also emphasized patience anda new reference
to monitoring “muted inflation pressures”alongside “global
economic and financial developments.”A shift in tone about
inflation was central in Chair Powell’s press conference
where he noted that the risk of too-high inflation has dimin-
ished in recent months. With wage inflation rising and core
PCE inflation remainingin a narrow 1.8%-2.0% rangeit ap-
pears that the FOMC’s inflation tolerance is shifting more
than the data (Figure 3). With Clarida and Williams—who
have recently assumed leadership roles—havingspoken ap-
provingly of an inflation overshoot, we may be seeing a reac-
tion function shift where a rise in core inflation above 2%is
nowa desired outcomeof a high-pressure labor market. To be
sure, we do not believe thePhillips curve is dead and this
week’s shift in rhetoric may turn out to be an overreaction to
downside risk. But this week’s FOMC communication did its
best to put the Phillips curve into a closet.
Let the doves awake
The degree to which the dovish shift that has taken place
among the major central banks (and the Fed in particular) has
rippled across the globe will be on display in next week’s 11
central bank meetings. In Asia, we look for India’sRBI to
turn dovish and cut25bp, aided in part by a food-price-
induced undershoot of their inflation target but nowa close
call in light of recent fiscal developments. We expect the BoT
(Thailand) and BSP (Philippines) to remain on hold. We also
see the RBA (Australia) on hold butgiven market expecta-
tions for a cut by year-end, the decisioncould be viewed as
somewhat hawkish.
In Europe, we look for the BoE (UK) to maintain a tightening
bias next week but the risk is that our call for a May hike is
delayed depending upon next week’s communications, which
will likely include color on the bank’s thinking about Brexit
and the impact of a potential “nodeal.”In the Czech Repub-
lic, a softer external backdrop (EMU and Brexit) and an easier
Fed are offsetting tight domestic conditions and we now ex-
pect the CNB to express a hawkish hold at next week’s meet-
ing—delaying our call for hikes to May and August. With
growth in Russia slowing in response to past preemptive
hikes, we see the CBR on hold at next week’s meeting. But
with inflation remainingelevated, we still expect one last hike
in March even though the risks are for an end to the hiking
cycle. Bucking the global trend, the CBRT (Turkey) this week
sent an unexpected (but welcomed) hawkish signal even as it
revised down its inflationforecasts. We think the Bank is cur-
rently free from political pressure and is using this opportuni-
ty to rebuild credibility(Figure 4).
In Latin America, no central bank is more geared to the Fed
than Banxico (Mexico), whichwe see remaining on hold at
next week’s meeting. Despite closely watching the Fed,
Banxico’s main focus is on domestic factors, namely elevated
inflation expectations contrasted with sluggish growth as well
as the ramifications of government actions. On balance, we
now see the rate hiking cycle as over, with next move being a
cut in early 2020. Similarly, we expect the COPOM (Brazil)
to stay on hold with risks shifting in the direction of an ex-
tended pause.
US–China trade talks progress
Both sides said this week’s US-China trade talks achieved
“significant progress.” US Trade Representative Lighthizer
and Treasury Secretary Mnuchin will travel to China in mid-
1.0
1.5
2.0
2.5
3.0
1.5
2.0
2.5
3.0
3.5
1213141516171819
%oya; both scales
Figure 3: US average hourly earnings and core PCE deflator
Source: BLS, BEA, J.P. Morgan
Core PCE
AHE-4
-2261020
25
10131619
%.p.a.; both scales
Figure 4: Turkey policy rate
Note: Real rate calculated based on %oya in CPI. Source: J.P. Morgan
Real
NominalEconomic Research
Global Data Watch
February 1, 2019
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
February to continue the negotiations; that round is expected
to be followed by a meeting between Presidents Trump and
Xi in late February. Despite recent progress, the two sides
appear to have substantial disagreements on US demands for
structural change in China and how to enforce it. We think the
March deadline will be extended, with China committing to
continued negotiations on reforms and to significantly in-
crease its imports from the US. With the latest data pointing
to a potential further downshift in Chinese growth and the Fed
signaling it is on hold, Chinese officials also appear poised to
enact additional stimulus. We now expect the PBOC to cut the
7-day reverse repo rate (possibly by 5-10bp) in March and
look for another 100bp RRR cut in April. Likewise, we now
anticipate a bit more easing of fiscal policy. Our latest fore-
casts look for the augmented fiscal deficit to increase to
11.5% of GDP in 2019, from 10.8% in 2018.
Looking for higher oil prices
With a number of supply and demand factors tugging in op-
posing directions, Brent crude oil prices have traded in a very
tight$59-63/bbl range in the last two weeks. Our bias re-
mains a move toward $70/bbl. While high US inventories
have weighed on oil prices, we believe deeper production cuts
by Saudi Arabia compared to the level pledged under the
OPEC+ agreement, the expected slowdown in US production
growth due lower capital expenditures and completion in the
US, and risks to supply from Iran and Venezuela due to US
measures are likely to support oil prices. The latest US sanc-
tions on Venezuela should effectively halt the flow of Vene-
zuelan crude to the US, currently around 500kbd, and the
generator of more than half of Venezuela’s export revenue.
This might be enough to force a change in government, in
which case there could be longer-term term upside supply
risks. At the same time, a US-China trade deal should support
oil prices.
PM May buys time, “no deal” still unlikely
This week Prime MinisterMay achieved two things that ulti-
mately do not change the Brexit dynamic. Whileshe was able
to avoid the House of Commons beginning a process that
would give it the legal ability to instruct the executive to seek
an extension of Article 50, this came with thepromise that
another opportunity to do so will be presented on February 14
if the Commons does not agree to a deal in the meantime.
Second, May was ableto secure majority support for the
statement that the House would accept the Withdrawal
Agreement if it contained “alternative arrangements”for the
Irish backstop. This supportprovides t