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Macro Watch: China marks 40 years of change; Italy to avoid budget disciplinary action, for now; central bank bonanza


China will celebrate the 40th anniversary of the launch of its 'reform and opening up' agenda and outline its policy priorities for 2019, Italy may avoid disciplinary action by the European Commission over its budget breach and central banks will take centre stage this week as policymakers from Tokyo to Washington make important monetary policy decisions.

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The Chinese ruling party will hold a political conference to mark the 40th anniversary of the 'reform and opening up' policies, which were launched by former leader Deng Xiaoping. Chinese president Xi Jinping is expected to deliver a keynote speech at the event, which will focus on the topic of economic liberalisation. Meanwhile, high-ranking Chinese leaders will attend the annual Central Economic Work Conference (CEWC), which takes place in the days that follow the political conference. The CEWC will outline the priorities for economic policy next year, including growth targets. Policymakers face a particularly pronounced trade-off between de-risking and rebalancing the economy and preventing a sharp slowdown amid external strains. However, they are expected to focus on the stabilisation of the domestic economy amid the recent trade spat with the US. The details of the discussions that take place at the CEWC will not be publicised until March 2019. 

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UK consumer price inflation should come in at 2.3% in December, down from 2.4% in the previous month, reflecting lower oil prices. Core inflation should be broadly unchanged at 1.9% – slightly below the Bank of England’s (BoE’s) 2% target. Elsewhere, the European Commission will announce the disciplinary action that it will take against Italy after it submitted a budget that breached the European Union’s (EU’s) fiscal rules. Last week, Italy signalled that it wanted to bring its feud with Brussels over its budget to a close. This move was helped in part by pressures from financial markets. Indeed, the increase in Italian sovereign bond yields in recent months has eroded fiscal space, pointing to a significant deterioration in the country’s fiscal outlook. It is likely that the Italian government will revise its fiscal deficit target to 2% of GDP, down from its initial proposal of 2.4%. What’s more, the European Commission and the bloc’s finance minister might allow for some flexibility, conditional on the Italian government adopting a more constructive approach to European Monetary Union reforms. A deal between the Italian government and Brussels would be welcomed by markets, and it should offer some short-term relief for Italian government securities (BTPs) and assets. However, fundamental issues – most notably, the lack of economic growth – will remain unresolved and political instability is likely to persist. Across the Atlantic, the US Federal Reserve (Fed) is expected to hike interest rates by 25bps to a range of 2.25-2.5%. The Fed has largely endorsed a rate hike this month in its recent communications. What’s more, markets are pricing in a 75% chance of such a move. The meeting should focus on the path of rates going forward after several Fed officials pointed to a pause in rate hikes in 2019. The September dot plot showed that the median interest rate forecast anticipates three hikes in 2019 and one more in 2020. Our base case is that the median dots will be unchanged at this meeting, but there is a slim chance of a downgrade.
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The Bank of Japan (BoJ) should stick to its yield curve control policy, pinning the 10-year yield at 0%. Despite concerns about the potential impact of lower-for-longer interest rates on the banking system, it is unlikely that the BoJ will adjust its policy setting before its planned VAT rate hike in October 2019. Importantly, inflation is still undershooting the central bank’s 2% target by a wide margin. Indeed, core CPI inflation (excluding energy and fresh food) is likely to be unchanged at 0.4% in November. Elsewhere, the BoE is expected to stand pat on interest rates at this month’s monetary policy meeting. Since its November gathering, Brexit negotiations have failed to progress and uncertainty about the UK’s exit from the EU has increased. Domestic developments have been mixed: economic growth is on course to slow sharply in Q4 (recent Purchasing Managers’ Index (PMI) readings have been consistent with GDP growth of 0.1% quarter-on-quarter), while domestic inflationary pressures have increased, with wage inflation hitting 3.3% in October – a high for the current cycle. Nevertheless, as Brexit-related uncertainty continues to dominate the economic agenda, the BoE is likely to maintain a very cautious tone. Meanwhile, UK retail sales should rebound in November, following a weak performance in October. That said, data from the British Retail Consortium showed that Black Friday sales were disappointing compared to last year, suggesting that the November improvement might be limited. In Mexico, the central bank will also join the chorus of monetary policy announcements. Consensus forecasts suggest that the central bank will hike its policy rate by 25bp to 8.25%. Last month, core inflation fell to 3.6%, dropping back within the bank’s target range.

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US core inflation – as measured by the Personal Consumption Expenditures index, the Fed’s favourite inflation gauge – is likely to be roughly unchanged at 1.8-1.9% in November (marginally below the Fed’s 2% target).


US vs the rest of the world: manufacturing activity readings show persistent divergence

Source: the ISM, Markit, the National Bureau of Statistics of China and the Bank of Japan as at December 2018.

Manufacturing activity has continued to cool outside the US, according to recent data. Indeed, Japan’s manufacturing Tankan index stabilised in Q4 compared to the third quarter, while the eurozone manufacturing PMI declined to 51.4 this month – its lowest reading since February 2016. According to historical evidence, these episodes of growth divergence are hardly sustainable. It is therefore conceivable that a more homogenous growth picture will reassert itself sometime next year, possibly due to a slowdown in US growth.


The Trump administration’s intensifying conflict with China, the inflation goals of Japanese Prime Minister Shinzo Abe and the inconvenient truth about climate-change policies are among the interesting reads that you may have missed.

The war on Huawei

Professor Jeffrey Sachs, of Columbia University, argues that the Trump administration’s conflict with China has little to do with US external imbalances but instead relates to limiting the country’s access to foreign markets, advanced technologies and global banking services.

Abenomics is working, don't stop now

According to a column by the Peterson Institute, the Bank of Japan should stick to its 2% inflation target so that it has greater room to fight any future downturn.

Climate change: the ultimate challenge for economics

In his Nobel Prize Lecture, Yale economist William D. Nordhaus contends that for climate-change policies to be effective they must raise the price of carbon dioxide and, by doing so, correct the externality of the marketplace.

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