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Macro Watch: US banks to kick off earnings season; China’s trade growth to slow; UK MPs to vote on Brexit deal

YOUR GUIDE TO THIS WEEK'S BIG ECONOMIC EVENTS

China’s export growth is expected to slow further in December, the fourth-quarter earnings season gets under way on Wall Street and the UK parliament will vote on the Brexit withdrawal agreement.

Chinese trade data should indicate slowing activity in December, reflecting the continuing impact of higher US tariffs as well as its own counter measures. In November, export growth fell to 5.4% year-on-year, down from 15.6%, while import growth dropped from 20.8% to 3% over the same period. In the short term, the temporary truce between the US and China should limit downside risks. That said, the outlook for negotiations between the two countries is still uncertain. Even if the pair reach a deal, it is likely to be temporary and fragile in nature, and their underlying structural issues will probably persist. Elsewhere, eurozone industrial production is expected to weaken in December. Recent surveys suggest that manufacturing activity in the bloc slowed steadily in 2018. Notably, the manufacturing PMI fell to 51.4 in December, marking its lowest level since February 2016. Meanwhile, available hard data points to a monthly contraction in December. Indeed, German industrial production, which accounts for about a third of the eurozone aggregate, fell by 1.9% month-on-month in December. The weakness in the bloc’s manufacturing activity has probably been overstated in recent months, owing to special factors – namely, new car-emissions rules, dry weather in Germany and, more recently, disruption from the Yellow Vests protests in France. Nevertheless, industrial production in the bloc has been trending downward, in-line with external demand, most notably from China. On Wall Street, the fourth-quarter earnings season will get underway, with several big US banks reporting early this week. According to Factset, consensus forecasts suggest that the S&P 500 will enjoy earnings growth of about 11.4% in Q4 2018. That would mark the fifth consecutive quarter of double-digit earnings growth for the equities index. However, attention will shift to guidance for the year ahead amid rising concerns about the economic outlook. 

A UK parliamentary vote will be held on Prime Minister Theresa May’s Brexit deal, unless another last-minute decision is made to postpone it. For May, the parliamentary arithmetic is not encouraging: according to Conservative whips, some 120 Tory MPs are against May’s deal, which means she could lose about 200 votes. May has been attempting to shore up support ahead of the vote, and she is hoping that some last-minute concessions from the European Union (notably, an assurance that the backstop to prevent a hard border between Northern Ireland and Ireland would be temporary) will win the support of the Democratic Unionist Party and isolate the MPs that are part of the European Research Group. 

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We expect UK consumer price inflation to decline to 2.1% in December, down from 2.3% in the previous month. The sharp drop in oil prices in recent months has been the main short-term driver of headline inflation. Meanwhile, the impact from the drop in the pound following the Brexit referendum has faded. Core inflation should be little changed at about 1.8-1.9%, slightly below the Bank of England’s 2% target. Meanwhile, the Turkish central bank will be probably hold interest rates at its monetary policy meeting. However, there is a chance of a rate cut as fundamentals are improving slowly (inflation has declined somewhat from elevated levels). In addition, the central bank could come under political pressure to take action ahead of local elections in March.  Across the Atlantic, US core control retail sales – a direct input for consumption of goods in GDP – is on track to grow by more than 5% in nominal terms and on an annualised basis in Q4. However, as the retail sales figures are produced by the Department of Commerce, they will not be released if the US government shutdown continues. 

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Recent improvements in Japan’s wage inflation suggest that the country’s consumer price inflation will inch higher in the coming months. However, the Bank of Japan’s 2% target looks ambitious. In November, core inflation, which excludes energy and fresh foods, was weaker than expected, falling to 0.3%. 

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UK retail sales should pull back in December after recording month-on-month growth of 1.2% in November. We expect a meagre increase in consumption in Q4 following two consecutive quarters of strong growth. In turn, this would support our GDP forecast of 0.1% quarter-on-quarter growth in Q4. Elsewhere, consensus forecasts point to a 0.3% month-on-month increase in US industrial production in December. That’s half the rate of growth recorded in the previous month. The manufacturing sub-component of industrial production has been weak in Q4, and this is likely to continue in December. Meanwhile, the University of Michigan’s consumer confidence index will probably show some cracks in January after recording higher readings in 2018 compared to historical standards. Consensus forecasts suggest that the gauge will decline to 96.8, down from 98.3 in December. Risks are skewed to the downside. Indeed, the recent correction in equity markets and, more recently, the US government shutdown are likely to weigh on sentiment.

CHART OF THE WEEK

Eurozone unemployment rate falls to a decade low

Source: Eurostat as at January 2019. 

Despite a series of disappointing economic data releases in the eurozone last year, the labour market has bucked the trend: in fact, the bloc’s unemployment rate has been declining steadily since 2013. Last week, new data released from Eurostat showed that its unemployment rate fell below 8% in November for the first time in a decade. However, divergences across the bloc are still pronounced: the unemployment rates of Greece, Spain, Italy and France is still above pre-crisis levels. Although a strong labour market will continue to underpin domestic demand, the main risks to the eurozone economy are external. What’s more, they are likely to persist this year.


WHAT WE'RE READING RIGHT NOW

The debate on negative interest rates, what happens when the US government goes into a partial or full shutdown and the stress that artificial intelligence (AI) will put on US-China relations are among the interesting reads that you may have missed.

Summers rejects negative rates as potential crisis-fighting tool

In a research paper, Harvard economist and former US Treasury Secretary Larry Summers, alongside Brown University’s Gauti Eggertsson and Ella Getz Wold and Norges Bank’s Ragnar Juelsrud, contend that negative interest rates are “at best irrelevant, but could potentially be contractionary due to a negative effect on bank profits”.

How this shutdown compares to every other since 1976

PBS documents how the last 21 US government shutdowns have occurred. The current shutdown is on track to become the longest one on record.

US-China relations in the age of artificial intelligence

A Brookings paper argues that we need a different narrative to describe the role of AI in the escalating competition between the US and China. AI will put immense stress on the relationship between the two countries, but it will also create opportunities for potential collaboration.

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Michael Kalenberg, Director - Business Development, Institutional, Switzerland
Ksenia Kelly, Director - Business Development, Financial Institutions, Switzerland