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G20 summit in Tokyo; eurozone inflation; US and UK consumer confidence

YOUR GUIDE TO THIS WEEK'S BIG ECONOMIC EVENTS

The G20 summit starts in Tokyo this week, with all eyes on developments in the US-China trade saga, the eurozone reports inflation figures and the US and UK release consumer confidence survey results for June.

Forecasts suggest that the German IFO business climate index will come in at 97.9 in June, unchanged from its reading in May. The survey has trended down over the past year, with last month producing the lowest reading since November 2014 – far below the record high of 105 in November 2017.

The US Conference Board will release its indicator for consumer confidence. The index is expected to reach 132, slightly down from 134.1 in May. Despite experiencing volatility early in 2019, the index remains at elevated levels; strong labour and equity markets should continue to support consumer sentiment. Meanwhile the US Federal Reserve (Fed) Chair Jerome Powell will speak at the Council on Foreign Relations in New York. He will address the challenges facing the US economy and discuss the Fed’s policies.

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New Zealand’s central bank is expected to leave rates on hold at 1.5%, after cutting them by 25bps in May. In the US, manufacturing surveys suggest that capex growth will remain subdued in the short term. Consensus forecasts expect core capital-goods orders (excluding defence and aircraft) to be flat in the month in May, following a 1% decline in April. Meanwhile in the UK, the Bank of England (BoE) Governor Mark Carney will report to Parliament’s Treasury Committee on May’s Inflation Report. Deputy Governor for Monetary Policy, Ben Broadbent, and policy makers Silvana Tenreyro and Michael Saunders will also speak. At its last meeting, the BoE retained a mild tightening bias, but also maintained a firm wait-and-see stance in light of persistent Brexit uncertainty (and higher perceived risks of a no-deal Brexit) as well as growing downside risks from international developments. Much of the conversation is likely to focus on Brexit.

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In Japan, retail sales should have enjoyed a modest boost in May. They are likely to have risen by 0.6% on the month before, following a 0.1% monthly decline in April and after a quarter-on-quarter fall of 1.3% in Q1. Chinese industrial profit growth has been on a downward trajectory over the past year, despite some volatility around the Chinese New Year. Profits dropped by 3.7% year-on-year in April, the slowest growth rate since December 2015 and a far cry from the high of 27.7% in September 2017. Tariffs on exports to the US are probably one of the main reasons for the recent fall. Profit growth will continue to be lacklustre if the latest tariff hike introduced in May sticks. The European Commission will release the bloc’s Economic Sentiment Indicator (ESI) for June. This is likely to fall to 104.5, reversing the small increase recorded in May. The ESI has trended downwards since the start of last year, weighed down by the cyclically sensitive manufacturing sector (services have stabilised in recent months). The index highlights the bloc’s deteriorating economic conditions. The Mexican central bank may adopt a more dovish tone at its meeting, keeping rates unchanged at 8.25%. The economy has been lacklustre of late, with GDP shrinking by 0.2% quarter-on-quarter in the first three months of the year. Survey data also highlight subdued economic activity in April and May, particularly for the export-focused manufacturing sector. Trade tensions with the US will continue to weigh heavily on the outlook going forward. In addition, inflation edged down to 4.3% in May, from 4.4% in April, although it remains above the central bank’s 3% target. The central bank will also be watching the US Fed’s increasingly dovish stance.

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In South Korea, industrial-production growth should continue to decline. Forecasts expect production to shrink by 0.9% year-on-year in May, following on from a 0.1% fall in April. Again, intensifying trade tensions will likely dampen activity going forward. The UK GfK Consumer Confidence Index is forecast to come in at -11 in June, slightly below May’s reading, but broadly in line with its long-term average of -9. This is an improvement from the lower readings of -13/-14 seen since November 2018. There is persistent optimism about personal finances, probably due to the solid labour market. This seems to have offset rising concerns about the broader economic situation which is likely weighed down by continued Brexit-related uncertainty. Elsewhere, Japan’s unemployment rate should remain unchanged at 2.4% in May. The labour market is tight, with the jobless rate stabilising at very low levels, averaging 2.4% throughout 2018 and 2019 so far. Separately, industrial production should rise by 0.6% month-on-month in May, following a similar increase in April and a quarter-on-quarter contraction of 2.6% in Q1. Meanwhile, in the eurozone, inflation – defined by the Harmonised Index of Consumer Prices (HICP) – was probably unchanged at 1.2-1.3% in June, compared to 1.2% in May. Some cross-currents have been in place in June: gasoline prices responded to developments in the international oil price and fell by about 1.5%, while core inflation likely bounced back to 1.1%, up from 0.8% the month before, due to some Easter-related volatility in service prices. We expect only a modest improvement in core inflation in 2019, leaving it well below the European Central Bank’s (ECB) 2% target. In the US, recent Consumer Price Index and Producer Price Index reports suggest that core personal consumption expenditures (PCE) inflation – the Fed’s preferred gauge of underlying inflation – is likely to have remain unchanged in May, at 1.6%. Even accounting for special factors that are putting downward pressure on some components (portfolio management fees, apparel and airfares), underlying price dynamics look subdued. Elsewhere, the G20 summit starts in Tokyo. The focus will be on the bilateral meeting between US President Donald Trump and Chinese President Xi Jinping, which now seems set to go ahead after a period of uncertainty. Trump has indicated that his decision on whether to impose the next round of tariffs, of 25% on $300bn-worth of Chinese goods, will depend on the outcome of the meeting. Our base case is that the meeting will result in a truce: we think that new tariffs will not be implemented, but the current ones will stay in place. There remains a significant risk of escalation though, given that respective positions remain divergent. The US administration maintains that the resumption of negotiations is dependent on China’s acceptance of the previous agreement draft, along with a focus on an enforcement mechanism for the deal, with the latter proving particularly problematic for China. Separately, European leaders will continue to discuss the appointment of the top EU positions on the sidelines of the G20 summit, before a working dinner on 30th June, which was scheduled following the failure to reach an agreement at the EU Council meeting last week.


CHART OF THE WEEK

The Fed's latest dot plot, featuring the median projection for future rate rises

Source: Federal Reserve 

The Fed left its policy rate unchanged at 2.25-2.5% at its last meeting. It adopted an explicitly dovish bias, however, hinting at imminent rate cuts. The change in stance was obvious from the Fed’s statement, which dropped the language focusing on patience. It also introduced a reference about its readiness to support the current expansion, due to uncertainty about the economic outlook and persistently low inflation. The dot plot has evolved significantly: while the median dot for the end of 2019 was unchanged at 2.375%, the median for 2020 moved down from 2.625% to 2.125%. In other words, the Fed now expects that it will cut rates in 2020 – a significant change in sentiment from March, when it expected to make one rate hike over the same time horizon. Importantly, the dot distribution for the end of 2019 now suggests that one or two rate hikes in the second half of the year are on the table: eight of the 17 Federal Open Market Committee (FOMC) officials expect to slash rates by the end of the year, with seven expecting two cuts. A day before the Fed meeting, the president of the European Central Bank (ECB), Mario Draghi, delivered a similarly dovish speech at Sintra. He suggested that the ECB will take easing measures, such as interest-rate cuts and the resumption of quantitative easing, should the outlook not improve. This is a far cry from six months ago, when central banks – led by the Fed – started to remove their tightening biases, adopting a neutral stance. Major central banks have now completed their u-turn by adopting an explicitly dovish bias.


WHAT WE'RE READING RIGHT NOW

The latest progress report on the Sustainable Development Goals, the issue of European fiscal integration and the longer term implications of the US’s blacklisting of Huawei are among the interesting reads that you may have missed.

Sustainable Development Report 2019

The annual review of countries’ performance on the 17 Sustainable Development Goals – covering all 193 UN member states – shows that four years after the adoption of the SDGs and the Paris Agreement no country is on track to meeting all the goals. We are losing ground in many areas, notably with respect to climate change and biodiversity.

Banning Huawei: an act of economic war

 

Ahead of Trump and Xi’s meeting at the G20 summit this week, Gary Greenberg, Head of Hermes Emerging Markets, considers how a US-China economic war would have far-reaching implications for emerging-market technology companies and the world they operate in. 

The euro area falls short on fiscal reform

The Peterson Institute for International Economics asserts that a failure by the eurozone to achieve further fiscal integration will limit Europe’s ability to be able to respond to the next downturn.

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