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Macro Watch: Powell to testify before Congress; MPs to debate Brexit deal again; deadline for US-China trade talks looms


The US Federal Reserve (Fed) Chair Jerome Powell will deliver his semi-annual testimony to Congress, UK MPs could table amendments to Theresa May’s Brexit motion again and US-China trade negotiations are likely to be extended.

Bank of England (BoE) Governor Mark Carney will appear before the Treasury Select Committee to answer questions pertaining to the central bank’s most recent Inflation Report. He will be joined by Deputy Governor Dave Ramsden and external MPC members Jonathan Haskel and Gertjan Vlieghe. The BoE adopted a more dovish tone at its last monetary policy meeting in early February, as Carney warned that the “fog of Brexit” is creating “tensions” within the economy and volatility in financial markets. Indeed, Brexit uncertainty is likely to dominate the debate. However, Carney may also face questions on the deteriorating external conditions – a factor that impacted the BoE’s recent decision to downgrade its UK economic growth forecast – as well as productivity growth. The BoE has adopted a more sobering view of productivity growth, reflecting recent disappointing developments. Across the Atlantic, Carney’s counterpart at the Fed, Jerome Powell, will testify before the Senate Banking Panel. Powell’s semi-annual testimony will focus on the outlook for the US economy and monetary policy. He will probably reiterate the Fed’s new strategy of patience and data-dependency, justified by recent mixed signals on the US economy and a rise in external downside risks. The panel’s questions will probably focus on the health of the domestic economy and the direction of monetary policy, particularly the Fed’s balance sheet. Elsewhere, consensus expectations suggest that US consumer confidence will bounce back to 124.2 in February, largely reversing the government shutdown-related sentiment shock in January. In addition, a solid labour market and the recent positive tone in the equity market should support consumer confidence.

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The UK government is expected to table another amendable motion on Prime Minister Theresa May’s Brexit deal. This could mark a defining moment in the Brexit process as a majority of MPs may be ready to support an amendment (similar to the one Labour MP Yvette Cooper and Tory MP Nick Boles presented a few weeks ago) to definitively avoid a no-deal Brexit. Elsewhere, the eurozone economic sentiment index had a weak start to the year, extending the downward trend that prevailed in 2018. In January, the index came in at 106.2, marking its lowest level since November 2016. The index’s subcomponents were mixed, with pronounced weakness evident in business sentiment (notably, for the manufacturing sector) and a modest improvement in consumer confidence. We expect that business sentiment will stabilise this month, reflecting a more supportive international context (notably, a more accommodative Fed, easing US-China trade tensions, and more monetary and fiscal support in China). In Canada, core inflation – defined as the average of the Bank of Canada’s favourite consumer price index measures (trimmed mean, weighted median and common component) – should remain roughly unchanged at 1.9% in January. Meanwhile, following his appearance before the Senate Banking Panel on Tuesday, Fed Chair Powell will testify before the House (based on the same prepared remarks).

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China's National Bureau of Statistics will publish its Purchasing Managers’ Index (PMI) readings. The survey weakened in H2 2018, with its manufacturing component dipping below 50 (the threshold that separates contraction from expansion) in December. Last month, it improved slightly, owing to developments in the services sector. Going forward, we expect activity in the manufacturing sector to stabilise, reflecting the impact from recent fiscal and monetary stimulus and optimism about trade negotiations with the US. Elsewhere, Japan’s unemployment rate is likely to be broadly unchanged at 2.4% in January. Over the last year, it has run at its lowest levels since 1993, suggesting that the labour market is tight. Meanwhile, the Korean central bank is expected to leave its policy rate unchanged at 1.75%. In Vietnam, North Korea’s Kim Jong-un will sit down for a second time with US President Donald Trump to discuss denuclearisation. However, we believe this summit is unlikely to lead to any breakthroughs between the two leaders, as media reports have suggested that North Korea has continued its nuclear activities since their initial meeting in June last year. Nevertheless, it is encouraging (for peace and stability in the Korean peninsula) that there is an ongoing dialogue between the two countries. In India, consensus forecasts point to a slowdown in economic growth in Q4 2018 to 6.9% year-over-year, down from 7.1% in the previous quarter. The Indian economy has held up quite well over the last year, reflecting support from domestic demand. Away from Asia, Brexit uncertainty is likely to remain a drag on UK consumer confidence in February. Last month, it came in at -14, below its long-term average of -9. In the US, consensus forecasts suggest that economic growth should slow to an annualised quarter-on-quarter rate of 2.5% in Q4 2018, down from 3.4% in the previous quarter. A consensus-like print for Q4 would imply annual growth of 2.9% for 2018 overall, compared to 2.2% in 2017. The publication of US GDP data was delayed by almost a month due to the recent government shutdown. Meanwhile, in Brazil, economic growth is expected to slow to 0.4% quarter-on-quarter in Q4 2018, down from 0.8% in the previous quarter. Overall in 2018, annual growth should come in at about 1.2% – marking the second year of expansion following the deep recession in 2015/16.

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The US-China trade truce will expire. The news flow around ongoing negotiations has been positive, but the two countries’ positions are still far apart, suggesting that it will take more time to define a trade deal. At this stage a short extension of negotiations looks likely (press reports suggest it could be extended by about 60 days). Meanwhile, Markit will publish the global manufacturing PMI reading for February. Last month, it declined to 50.7, down from 51.4 in December. Early indications are weak as flash manufacturing PMIs for both Japan and the eurozone fell into contractionary territory this month to 48.5 and 49.2, respectively. Country details – most notably, for China – also warrant close attention. Elsewhere, eurozone headline inflation, as measured by the harmonised index of consumer prices, may edge up to 1.5% in February, reflecting a modest rise in energy prices month-on-month. Core inflation will probably be roughly unchanged at about 1.1%. For 2018 overall, we only expect a modest improvement in core inflation (for further information see The inflation story: 2019 and beyond). In Canada, economic growth is expected to cool to an annualised quarter-on-quarter rate of 1.2% in Q4 2018, down from 2% in Q3. Meanwhile, US auto sales should enjoy a modest increase this month to 16.8m on an annualised basis. Last month, auto sales fell to 16.6m, adding to cracks that have recently emerged in other US economic data. That said, car sales came in at 17.2m in 2018 overall, which is roughly in-line with annual data for 2016 and 2017. In addition, US core PCE inflation – the Fed’s favourite gauge of underlying inflation – should hold steady at 1.9% year-over-year in December. 


China slowdown hurts Japanese exports  


Source: Reuters Datastream, Japan’s Ministry of Finance and the National Bureau of Statistics of China as at February 2019.

Japan’s exports recorded their biggest decline in more than two years amid slowing demand, notably from its biggest trading partner China. Data from the Ministry of Finance showed that Japan’s exports fell to -8.4% year-on-year in January, down from 3.9% in the previous month. However, recent developments in China’s manufacturing PMI point to stabilisation in the second quarter of this year.


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