U.S. payrolls have disappointed and there are worries about the future drag on the economy from trade. More immediate concerns about Eurozone and Chinese growth have prompted more stimulus, but worries seem likely to persist.


1. In the U.S., payrolls growth is down sharply and a large December external deficit has focused attention on the drag from trade.

Today’s payrolls data showed gains of only 20k, well below expectations, although wages kept on rising and the unemployment rate fell further. Previously, the strength of the U.S. consumer had helped push up the monthly December 2018 U.S. trade deficit to the highest level in over a decade (page 2). Net exports took -20bps off U.S. annualized GDP growth in Q4 2018 and it is possible to imagine this drag continuing. Markets have stalled as we await news on U.S./China trade negotiations. Both sides, however, have clear incentives to find a solution: the question is how comprehensive the initial agreement will be.

 

2. The ECB has revised down its 2019 growth forecast sharply as it puts further stimulus in place: meanwhile, Brexit casts a shadow.

The ECB has unveiled a sharp cut in its growth forecast for 2019 – from 1.7% to 1.1% - while announcing extra stimulus, in the form of new targeted long-term refinancing operations (TLTROs, page 3). In fact, some recent Eurozone data has been better than expected but the EUR fell sharply on the news (page 9) and many political and other concerns remain. Brexit looks likely to grab the headlines next week, with a series of votes from Tuesday onwards about the proposed leaving deal and then (if this is rejected) a “no deal” exit and the possibility of extending Article 50. We continue to think that a “no deal” exit is unlikely but, given the uncertain political dynamics, this cannot be wholly ruled out at this stage. An acceptance of Mrs. May’s Brexit deal would likely lift markets, in that it removed one source of uncertainty. Conversely, markets could be rattled by a decision to extend Article 50 (as seems quite possible) but much will depend on whether the proposed extension is short-term, to allow accompanying legislation to be wrapped up, or longer-term – indicating continued disagreement about what course to take.

 

3. China has cut VAT rates to stimulate growth and the Malaysian central bank is starting to sound slightly more dovish.

Earlier this week, the Chinese government announced both a reduction in its 2019 growth forecast and significant fiscal stimulus through VAT rate cuts; further stimulus is likely. But what is also important is how other Asian economies address their own problems of slower growth: on page 5 we focus on Malaysia. This week the Bank Negara Malaysia (BNM, the central bank) opted to keep interest rates at current levels, but the accompanying commentary turned slightly more dovish, with an admission of downside risks to the Malaysian economy. Low inflation will help give the BNM some leeway to ease policy.

 

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