2Economic Research Global Data Watch December 7, 2018 JPMorgan Chase Bank NA Bruce Kasman(1-212) 834-5515 bruce.c.kasman@jpmorgan David Hensley(1-212) 834-5516 david.hensley@jpmorgan Joseph Lupton(1-212) 834-5735 joseph.p.lupton@jpmorgan DM unemployment rates already have moved below our esti- mate of NAIRU. However, the two key channels that translatelabor market tightness into economic weakness—a compres- sion in corporate profit margins and a move toward restrictivemonetary policy stances—are not yet evident. Although DMwage inflation is firming, corporate profit margins havesurged this year, rising to their highest level in the expansion(Figure 2). A US tax cut alongside a modest pickup in DMproductivity growth has provided an important profit boostthis year, a point reinforced by this week’s productivity reportshowing US unit labor costs up a modest 0.9%oya last quar- ter. On the monetary policy front, the Fed has raised ratestoward neutral but is signaling caution while other DM centralbanks lag far behind. Overall, DM real policy rates remainnegative. A little better policy/politics news While the fundamental macroeconomic backdrop points tocontinued growth, there is always the risk that negative policyor geopolitical shocks could derail the expansion. These riskshave moderated somewhat in recent weeks. In particular:The FOMC is likely to move again on December 19 and weexpect the Fed to continue tightening next year. But recentFed communication makes it clear that the path ahead is farmore dependent on its assessment of risk and that it is un- likely to move again unless it is confident that growth willremain above trend. To this end, explicit guidance pointingto further rate hikes looks likely to be removed at the De- cember meeting. A temporary truce was called in the US-China trade warfollowing the G-20 meetings, as the US agreed to hold offfrom hiking tariffs for 90 days to give time for progress inthe negotiations. While some interim compromise on tariffalignment and import promises may be reached, the moreintractable issues around technology, China 2025, and intel- lectual property will likely be left on the table. In our fore- cast, this takes escalation off the table for 1H19, with con- tinued likelihood that increased tariffs are imposed laternext year. The US-China trade truce changes our view on China cur- rency policy. Rather than USD/CNY sliding through 7, wenow look for stability as the trade negotiations proceed.However, we continue to look for the Chinese authorities todeliver additional policy support. Weexpect fiscal policy totake the leadwith a focus on tax cuts as the boost fromin- frastructure spendingfades. For monetary policy, we expecttwo more 100bp RRR cuts in 1H19, while TSF growth like- ly will turn up moderately in 2019. With policy supportscoming and tariff increases delayed, the risk to our Chinagrowth forecast for next year has shifted modestly to theupside. This week’s OPEC+ announcement for a 1.2mn bpd crudeoil production cut was in line with our expectations thatBrent crude oil prices settle at about $70/bl in 1H19. De- spite this move prices are well off their highs earlier thisquarter. And with the broader supply side story fueled bysurging North American shale oil production the risk of alarge oil price shock—which has often been a contributingfactor to recessions—has receded. Brexit: Revocation, procrastination As UK politicians move toward next week’s rejection of thedeal PM May has negotiated with the EU, they are becomingmore assertive about their role in determining what happensnext. But a clear majority for a specific course of action hasyet to emerge. It appears very likely the ECJ will rule onMonday that the UK has a unilateral right to revoke its Article50 notification of the intention to leave the EU. That is a sur- prise to us, and one that increases the odds of a “no Brexit”outcome in early 2019. We continue to think Parliament ac- cepts May’s deal, perhaps with cosmetic changes. But thechance of a second referendum has risen, while the likelihoodof hard Brexit has fallen.Events next week are likely to move fast, with the failure ofthe vote on the withdrawal agreement likely to be followed byconfidence votes in May’s leadership of the ConservativeParty among its MPs, and a confidence vote in the Commonson the government as a whole. We expect PM May to surviveboth votes and not to resign voluntarily. At next week’s Euro- pean Council meeting, we expect the EU to offer only cosmet- ic changes to the withdrawal agreement. Amid an impasse,MPs will need to think harder about the path they want totake.But the possibility of the UK unilaterally “stopping theclock” on Brexit affords them a little more time to do so. This flexibility in turn suggests that political uncertainty willpersist for longer than we originally thought. Together withincreased signs that this is adversely affecting output as wellas sentiment, this week we revised down our near-termgrowth forecast andpushed back our call for the next BoEhike from February to May. A May tightening assumes activi- ty will recover from late 1Q as political uncertainty recedes.The labor market remains strong. And while unexpected polit- ical outturns may yet affect the timing of monetary tighteningnext year, we continue to believe that growth in excess of1.5% will prompt higher rates. 3Economic Research Global Data Watch December 7, 2018 JPMorgan Chase Bank NA Bruce Kasman(1-212) 834-5515 bruce.c.kasman@jpmorgan David Hensley(1-212) 834-5516 david.hensley@jpmorgan Joseph Lupton(1-212) 834-5735 joseph.p.lupton@jpmorgan EMU growth disappointment, wages rising Among large regions, the Euro area has delivered the biggestand most persistent growth disappointment this year. Thisweek, 3Q18 real GDP growth was revised down to 0.6%q/q,saar. A key source of last quarter’s weakness—a slump inGerman industry—has failed to deliver an expected rebound.With German manufacturing production reported to have fall- en 0.5%in October, output is now unchanged over the threemonths since August. Although France and Spain posted sig- nificant IP gains in October, the Euro area as a whole is nowtracking a modest 0.1%-pt rise in factory output (out nextweek)—a fair bit below ourexpectations. Despite repeated disappointments, it is hard to imagine a sig- nificant rebound in German industry is not in the offing giventhe clearly transitory auto sector headwinds holding growthback in 3Q18 (Figure 3). Beyond the industry noise, however,is the more important question of where the underlyinggrowth rate is for the Euro area. Italy is a significant source ofweakness, and while the latest news of a resolution to the debtstandoff is encouraging, the tightening in financial conditionsisdamping growth. Even as growth disappoints, wage inflation continues to risein response to tight labor markets. This week’s compensationdata show wage growth rising to 2.5% in 3Q18, up 1.5%-ptssince mid-2016. All of this will provide much food forthought at the ECB meeting next week. We do not expect anysignificant reassessment of the outlook, however. Whileweaker growth creates downside risks around the inflationoutlook, the wage developments will be more reassuring. Wedo not expect any policyannouncements, with QE ending asscheduled this month. However, Draghi might state that tech- nical committees will be commissioned to investigate how tomanage the TLTRO cliff-edge problem. EMAX sees softer external demand In contrast to the Euro area there are clear signs EmergingAsian industry is poised for a strong rebound this quarter.However, the latest survey and trade data for November raiseconcerns that this upturn will prove short-lived. While theglobal manufacturing PMI ticked up modestly in November,the PMIs moved lower across much of EM Asia. The exportdata for November echo this message. Korea’s customs ex- ports lost some of their earlier strength in November, led by acorrection in t