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Macro Watch: Fed meeting in focus; May calls a third Brexit vote ahead of EU summit


Central banks will take centre stage this week as policymakers from the US Federal Reserve (Fed) to the Bank of England (BoE) hold their monetary policy meetings and UK Prime Minister Theresa May will hold a third meaningful vote on her Brexit deal just one day before a European Union (EU) summit to approve an extension of Article 50 negotiations.

US-China trade negotiations should resume this week in the wake of the annual National People’s Congress, which ended last Friday. US President Donald Trump delayed the imposition of additional tariffs on China, which were originally due to begin on 1 March. However, it is not clear how long the delay will last, given his recent comments that he is in no hurry to complete a deal with China. Expectations of a meeting between Trump and Chinese President Xi Jinping at the end of this month have been scaled back, and the latest media reports suggest that such a meeting might take place in April, at the earliest. Recent media reports suggest that the two sides are in general agreement on many crucial issues, including the rebalancing of trade flows, foreign-exchange stability and protection of intellectual property, but the sticking point is the enforcement mechanism. Worryingly, Robert Lighthizer, the US Trade Representative, warned last week that trade-policy talks with China could fail. He added that the threat of higher tariffs should be maintained (tariffs are currently frozen at 10% on $200bn of Chinese goods but they could rise to 25%). The risk-on tone prevailing in financial markets suggests that markets have already priced-in a positive outcome. As such, they are vulnerable to negative developments. From a broader perspective, our view is that even if a trade deal is reached in the short term, it will be fragile and temporary. What’s more, we believe such a deal will not fix the underlying structural issues. The confrontation between the two countries – ultimately concerning tech dominance – will likely persist in the medium term, resulting in repeated escalations of trade tensions.

Ahead of Brexit and as the broader economy slows, attention will turn to the UK labour market. The unemployment rate will probably remain unchanged at 4% – a multi-decade low for the series – while wage inflation may come off its cyclical high of 3.4% but remain solid at above 3%.

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UK Prime Minister Theresa May will make a third attempt to get her Brexit deal through parliament – a week after it was defeated heavily for a second time by MPs. However, a government motion was approved late last week: it states that if May manages to garner enough support by 20 March, the government will seek a short extension of Article 50 negotiations to the end of June. By contrast, if the deal is not passed, a longer extension will be required. However, the EU will need to know the purpose of such an extension and the UK will participate in the EU elections in May. The threat of a protracted delay to Brexit (potentially leading to no Brexit at all) could persuade some members of the European Research Group (the Conservative group of hard Brexiteers) and, possibly, some Brexit supporters from the Labour party to back May’s deal. That said, it will be hard for May to reverse a vote she lost by a margin of 149 last week. Meanwhile, UK consumer price inflation should be unchanged in February, having declined to a two-year low of 1.8% last month, reflecting a fall in energy prices. This would be in line with the BoE’s most recent forecasts.  Elsewhere, Italy will sign the Belt and Road memorandum agreement with China, making it the first G7 country to endorse the infrastructure project. The move has raised concerns across Europe and in the US. In New Zealand, consensus expectations suggest that GDP will grow 0.6% quarter-on-quarter in Q4. In Brazil, the central bank should keep its key Selic rate on hold at 6.5%. Indeed, interest rate futures show it unchanged at 6.5% through January next year. The Fed will also hold its monetary policy meeting. In January, the US central bank made a dovish turn, adopting a mantra of patience and suggesting that the next move in rates – up or down – will depend on data development. Recent comments by Fed Chair Jerome Powell confirmed that the central bank is in no hurry to change this approach, signalling that there is no clear time limit to its current pause. At this meeting, the Fed faces the challenge of adjusting its projections for the policy rate (the so-called dot plot) to reflect its dovish pivot, while maintaining flexibility about the direction and timing of its next move. We expect that the dot-plot will show one rate hike this year (down from two) and one in 2020 – but there is a risk that the dot plot will show fewer (or no) moves in the next two years. The meeting might provide information on likely changes to the Fed’s plans for balance sheet normalisation – hinting that it might end soon. In addition, during the press conference, Powell will probably face questions about the Fed’s upcoming review of its monetary policy strategy and his views on possible evolutions, such as average inflation or price level targeting.  

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In Japan, consumer price inflation should be little changed in February. In January, headline inflation came in at 0.2%, with core inflation (excluding energy and fresh food) at 0.4% – well below the Bank of Japan’s 2% target. Elsewhere, the Bank of England should stand pat on rates, stressing persistent – and rising – uncertainty about Brexit. We do not expect that the central bank will change its cautious tone, as recent data has evolved broadly in line with the downbeat forecasts provided in the February Inflation Report. In Europe, the Swiss National Bank (SNB) and the Norwegian central bank will also hold their monetary policy meetings. Consensus forecasts suggest that the SNB will leave its policies on hold, while the Norgesbank is expected to hike rates by 25bps to 1%, at odds with the more dovish tone most central banks have adopted globally. Nonetheless, the Norgesbank will probably signal a shallower hiking cycle, reflecting increased downside risks from external developments. Meanwhile, the European Council summit will get underway. Brexit and the EU-China relationship are likely to dominate the agenda. Last week, in a government motion, the UK Parliament voted to extend Article 50 negotiations. As such, UK Prime Minister May is expected to take a request for such an extension to the summit. EU leaders will discuss the length and the conditions of an extension.

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The flash readings of the Purchasing Managers Index (PMI) should continue to show signs of stabilisation in February. However, weakness will probably persist in the eurozone and Japan. Manufacturing indices will be in focus after they slipped into contractionary territory in the eurozone and Japan in January.


US retail sales rebound in January, but not enough to offset December's slump

Source: US Department of Commerce and University of Michigan as at March 2019.

US retail sales rose by more than expected in January, but the December reading was weaker than originally reported. Data from the Department of Commerce showed that US core retail sales (the so-called control group, which excludes gasoline, building materials, autos and food services) bounced back by 1.1% month-on-month in January. Meanwhile, data for December was revised down to show a fall of 2.3% month-on-month, compared to the 1.7% drop that was previously reported. The fall in December was the biggest since January 2000. The retail sales data alongside the mixed employment report for February throws some shadows on the consensus assessment of the US consumer. For the time being, we maintain the view that the US economy will slow down somewhat but will continue to post decent growth this year – a view that mainly relies on the positive indications from economic surveys that have been released so far this year.


The European Central Bank (ECB) in a post-Draghi era, the World Trade Organisation (WTO) disputes between China and the US and a review of Chinese official GDP data are among the interesting reads that you may have missed.

The ECB after Draghi: 'you need an actor who can act fast'

The Financial Times reviews Mario Draghi’s tenure as ECB President and asks: will his successor have the firepower to deal with a global slowdown?

In US-China trade disputes, the WTO usually sides with the US

An analysis by the Peterson Institute for International Economics shows that over the last 16 years, US officials have challenged Chinese practices 23 times in the WTO; the win-loss record is 19-0, with four cases pending.

A forensic examination of China's national accounts

A Brookings paper estimates that China’s GDP growth from 2008-2016 is 1.7 percentage points lower relative to the official numbers.

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