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Macro Watch: Fed to release FOMC meeting minutes; flash PMIs to stabilise; Fitch to review Italy’s credit rating


Investors will peruse the minutes from the US Federal Reserve’s (Fed’s) latest monetary policy meeting for further details about its dovish change in strategy, Markit will publish the flash Purchasing Managers’ Index (PMI) readings for Japan, the eurozone and the US, and Fitch will review Italy’s credit rating.

US markets will be closed for Presidents Day.

Japan’s finance ministry will publish its monthly trade data. In December, the country’s trade deficit narrowed to ¥184bn, down from ¥481bn in the previous month. However, both imports and exports contracted on the month, suggesting that prospects for trade remain challenging in an environment of weaker demand. Elsewhere, we expect that the eurozone current account surplus will be little changed in December, having come in at €20bn in the previous month. Indeed, the eurozone current account surplus is still large, but it has come off the highs it hit between late-2017 and early-2018, as the region’s trade surplus shrunk somewhat in 2018. As a share of GDP, we predict that the current account surplus probably came at 2.3% in Q4, down from 3.7% in Q1 2018. In the UK, the unemployment rate should be roughly unchanged at 4-4.1% in December. Last year, regular wage inflation advanced rapidly, reaching 3.3% in October/November – a high for the current cycle.

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The European Commission will release its indicator for consumer confidence across the bloc. Last month, the index rose by 0.4 points to -7.9, up from -8.3 in December, reflecting an increase in the French sub-component (which was probably depressed by disruptions from the Yellow Vest protests in December). The index reached a cycle high of -3.4 in December 2017, but it has trended downward over the last year, in line with most sentiment indicators for the region. Nonetheless, it is still running above its long-term average of -10.5, which is probably a testament to the relative strength of the labour market. Across the Atlantic, the Fed will publish the minutes from its latest monetary policy meeting. The meeting was important as it marked a dovish change in strategy, from gradual interest rate increases to patience and data-dependency. The Fed signalled a pause in its hiking cycle, which will last for H1, at least. Accordingly, the minutes will be scrutinised for more details about the requisites needed to restart the hiking cycle. The Fed now faces a tough hurdle to resume its hiking cycle and we believe an inflation surprise would be the only development that could justify a resumption of tightening – a surprise that we think is unlikely. In addition, the Fed released a special statement on balance sheet normalisation at its January meeting, suggesting that it is prepared to adjust the pace of its balance sheet runoff, if needed. The statement was quite vague, and it did not make any reference to an ideal balance sheet size. Thus, we hope the minutes will provide more clarity on this (and on the conditions that would lead to adjustments).

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Japanese inflation – as measured by the consumer price index (CPI) – is likely to remain broadly unchanged in January. There was no material improvement in consumer inflation last year, despite higher wage inflation. The country’s core CPI inflation, which excludes energy and fresh food, averaged 0.4% in 2018. Elsewhere, Markit will release the February flash PMI readings for Japan, the eurozone and the US. In January, the global composite PMI fell to 52.1, marking its lowest level since September 2016. Forward looking indicators were mixed, suggesting that the PMIs should stabilise this month. In addition, we see the divergence between the US and the rest of the world narrowing, even though the January surveys suggested otherwise.

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The German IFO business confidence index has trended down over the last year, in line with developments in other economic activity surveys, such as the PMIs. It declined to 99.1 in January, down from 101 in the previous month – that’s some way off its cycle high of 104.8, which it hit in November 2017, and close to its long-term average of 97.6. The German manufacturing sector is exposed to external demand and, for the most part, the recent slowdown has been probably driven by developments in China. The backdrop will remain challenging, but our base case is that Chinese stimulus will allow for some stabilisation in coming months, at slower growth rates. Elsewhere, Fitch will review Italy’s credit rating. In light of recent disappointing macro data, there is a decent chance (50%) that Fitch could downgrade Italy’s rating by one notch to BBB- with a stable outlook – that’s just one notch above non-investment grade. Importantly, when Moody’s made a similar move in October last year, the reaction from financial markets was limited. Meanwhile, a number of Fed officials will take part in the Chicago Booth School Monetary Policy Forum in New York. John Williams, New York Fed President, will discuss inflation, while Philadelphia Fed President Patrick Harker and St. Louis Fed President James Bullard will cover the Fed’s balance sheet. 


UK business investment contracts at sharpest pace since global financial crisis

Source: Office for National Statistics and the Bank of England as at February 2019.

UK economic growth slowed to 0.2% in the final three months of 2018, following a solid performance in Q3 (which was probably helped by the good weather and the feel-good effects of sport events). Overall, UK GDP increased by 1.4% in 2018, down from 1.8% in 2017 and 2016. The slowdown reflected both external factors and domestic issues, which are likely to remain challenging in the near term. Weaker external demand weighed on growth, with net trade shaving about 0.2 percentage points off annual growth, having added about 0.5 percentage points in the previous year. At the same time, business investment contracted by 3.7% in 2018, likely reflecting a more intense drag from Brexit-related uncertainty. Indeed, indications for early 2019 are not very encouraging: the UK composite PMI – the best summary indicator of economic activity – slipped to 50.3 in January, a level which is typically associated with stagnation.


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