2Economic Research Global Data Watch July 27, 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 to ramp up demand, while the level of the future output PMIremains fairly subdued. We have also seen signs of a setbackin EM Asian (ex. China) industry and export data in June.These data can be noisy and so we will watch next week’sJuly PMI readings to gauge the underlying trend. More gener- ally, we are reassured by signs that global final goods demandgrowth firmed last quarter and believe thiswill support indus- try growth again this quarter.The broad-based surge in USdemand is especially impressive and with an expected tail- wind from the inventory cycle we revised up our projectionfor 3Q GDP growth to 3.5% ar.Similar to the growth data being generally positive but withsome mixed signals, we are cautiously encouraged by the lat- est developments in the US’s multilateral trade disputes. Thisweek’s meeting between Presidents Trump (US) and Juncker(EU) seemed to let some steam out of the building trade warbetween the two regions. It is unclear how long this trucemight last, however. Juncker suggested Europe could pur- chase more US soybeans and liquefied natural gas althoughthe European Commission has no authority to deliver on this.The two sides have agreed to start talks that would eliminatetariff and non-tariff barriers and subsidies to trade. Althoughany new US tariffs on auto imports from Europe would besuspended as long as the talks continue, the US CommerceDepartment’s Section 232 investigation of auto imports isongoing. It is worth recalling that Canada and Mexico wereinitially exempt from the Section 232 tariffs on steel and alu- minumonly to be included when the US declared insufficientprogress had been made on NAFTA negotiations.The most recent news on NAFTA also is encouraging withboth US Trade Representative Lighthizer and Mexican Econ- omy SecretaryGuajardo this week indicating a possibleagreement in principle by August. To be sure, the commentswere largely in the context of political practicalities and stick- ing points are still unresolved with regard to dispute resolu- tion and the so-called sunset clause. It also remains to be seenwhether Canada is on board to fast-track an agreement. Thisweek’s meeting between Canada’s Foreign Minister Freelandand Mexican authorities was constructive, although Canadagenerally has been more reluctant to accommodate some USdemands. Nevertheless, the positive tone in and of itself ispositive, even if the eventual outcome remains unclear. Looking to PMI to affirm upswing in EMAXIf global factory output growth is picking up as expected, thisshould be particularly evident in cyclically-sensitive EM Asia(ex. China/India, or “EMAX”). However, following solidmonthly gains in April and May,activity appears to have end- ed the quarter more mixed (Figure 3). Along with broadlybased declines in exports last month, Taiwan and Singaporehave reported outright drops in IP and we expect the same forKorea (out next week). Withglobal final goods demand ex- panding solidly and a positive impulse from the smartphonecycle set to kick in, we are looking through the June pause.While we takecomfortfromthe rising trend in the EMAXmanufacturing PMI through June, it will be important to seenext week’s EMAX PMIsfor July.We also look for a bouncein Korea’s exports in July based on the first-20-day report. BoE to hike; BoJ to adjust YCC policy Despite each of the G-4 expanding at an above-potential pace,varying inflation dynamics are driving divergent monetarypolicy paths. We did not learn much from the ECBthis week,as officials left their guidance unchanged with respect to QEendingin December and rates staying on hold “at leastthrough the summer of 2019.”Draghi characterized growthprospects as positive and said that, while inflation remainsgenerally muted,domestic cost pressures are building (weexpect core inflation to print 1%oya innext week’s June flashrelease). Draghi again endorsed the market’s very low expec- tations for future policy rates, whereas we expect the ECB toraise rates faster once the cycle is under way. Next week will bring meetings of the Fed, BoE, and BoJ.With the Fed having just hiked in June and the economy ex- panding 3.1% ar in 1H18, the non-press conference meeting islikely to be uneventful. The post-meeting statement shouldreaffirm plans for “further gradual increases” in rates, thatrisks are “roughly balanced,” and that policy remains “ac- commodative.” In contrast to the Fed, the BoE is poised todeliver a 25bp hike, as above-trend growth has resumed fol- lowing the 1Q lull. Although an unexpected dip in core infla- tion to 1.9%oya in June is likely to trigger some dissent, wethink the majority will attribute this to currency and seasonaldiscounting issuesand point toan above-target inflation fore- cast.Much attention will be on the BoE’s first-ever publishedestimate of the real neutral rate. Given the BoE has done little-15 0 15 30 Jan 17Apr 17Jul 17Oct 17Jan 18Apr 18Jul 18 %3m/3m, saar; Korea est for June 2018 Figure 3: EM Asia manufacturing output Source: J.P. Morgan Korea Singapore(ex pharma) Taiwan 3Economic Research Global Data Watch July 27, 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 to challenge market expectations for one hike per year, it wouldbe difficult to argue for an r* any higher than -0.5%-0%(im- plying a 1.5%-2% nominal neutral rate).The most fireworks are likely to come from the BoJ, largelyof its own making. The BoJ is in an increasing dilemma, ascore inflation has fallen back in recent months to just 0.2%oyaas of June, a move that will likely force a downward revisionto the BoJ’s forecast. To help guard against a further slide ininflation expectations,we now think the BoJ will introducesoft forward guidance that it will maintain the 10-year yieldtarget at zero until it sees substantial progress toward refla- tion. However, the BoJ also seems increasingly concernedabout the potential negative side effects on the JGB market,bank profits, and asset prices.Media accounts this week sug- gest policymakers may increase the informal ceiling on 10- year yields to allow for more volatility. The immediate re- sponse was swift and has driven the 10yr rate to near 0.10%,an outcome that risks further degrading the BoJ’s commit- ment to raising inflation to 2% at the earliest possible time, akey pillar of Abenomics (Figure 4).CBRT surprise hold; trio of EM hikes ahead Alongside the major DM players, a slew of EM central bankmeetings are also underway. In EMEA EM, the CBRT sur- prised markets by keeping its policy rates unchanged at17.75%, saying it wanted to first see the impact of prior tight- ening. Though the tone of the statement remainedfairlyhawkish, the decision reignited investors’ concerns aboutCBRT independence. Although positive EM sentiment helpedcontain FX losses, we believe risks of further depreciation andinflation overshoots remain substantial and project a 125bphike at the next policy meeting. Elsewhere in the region, cen- tral banks in Hungary, Russia, and Nigeria remained on holdas expected. In Hungary, there were no substantive changes inrhetoric following last month’s mildly hawkish shift. In Rus- sia, the CBR continuedto signal an extended pause given theincreased inflationary risks from a planned VAT increase andgeopolitics. In Nigeria, increased pre-election uncertaintyprompted three MPC members to vote for a hike, a surpriseshift. Next week, we now expect Czech National Bank to hike25bp following more aggressive recent commentary. The RBI hiked rates 25bp at the June review because its infla- tion forecasts for 1Q19 were implicitly pegged close to 5%— significantly abov