。Economic Research
Global Data Watch
January 25, 2019
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
geopolitical concerns. With global employment growth
holding up—recent US jobless claims readings and an ex-
pected 170,000 January employment gain support this
view—there is a strong case for global consumption to ac-
celerate. Although the US December reading has been no-
tably delayed, the latest data suggest global consumer
spending accelerated at year-end as lower inflation boosted
purchasing power (Figure 2).
Bank credit continues to flow.Last week we highlighted
the contrast between the concerns aboutcredit tightening
andtheevidence that bank lending continues to expand at a
solid pace. Recent news reinforces the message that the
credit cycle remains a supportive macro impulse, as China
bank credit picked up into year-end and the 1Q19 Euro area
bank lending officers survey points to a continued easing in
credit standards.
First do no harm.With trade and other political conflicts a
key driver of the slowdown it is important that they turn
more positive as we move through this year. To be sure,
geopolitics remains a wild card with a mix ofpositives and
negatives in recent weeks. At the same time, macro policies
are turning more supportive with China stimulus building
broadly and DM central bank rhetoric turning more dovish.
Absent a material negative geopolitical shock, we believe
that policy shifts will gain traction in supporting business
sentiment and financial conditions.
G-3 CBs sensitive to growth, not inflation
The macroeconomic impulse from G-3 monetary policy com-
bines three channels: the growth drag of Fed rate normaliza-
tion; the growth support of stimulative stances even in the
face of Fed moves; and the potential damage to policy credi-
bility in the Euro area and Japan as policymakers have not
responded to persistent inflation undershoots. With global
growth projections edging lower and risks still skewed to the
downside, the Fed has decided to pause, a message that it will
likely reinforce at next week’s FOMC meeting. We expect no
change on balance sheet policy, where we believe there is
misplaced angst over quantitative tightening(see here). As a
result, the drag from the first channel should fade as the pow-
er of the other two channels remains firmly in place.
This week, the ECB was explicit in acknowledging downside
risks and suggesting it will stay in wait-and-see mode before
making policy adjustments. In terms of rate guidance, the
ECB seems to view its current commitment to low rates
through this summer as open-ended and with risks shifting
down, consistent with market pricing for remaining on hold
until 2021. This week’s meeting did not break new ground on
the likely need to extend the LTRO program, but we continue
to expect the ECB to implement a two-year LTRO in June.
For its part, the BoJ also appears sensitive to growth risks and
is signaling it will be on hold indefinitely. These signals have
combined with the Fed pause to lower market expectations on
the path of G-3 policy in the coming two years (Figure 3).
While the shift to stable accommodative stances should sup-
port growth, the failure of the ECB and BoJ to address persis-
tent inflation undershoots is weighing on market expectations
of medium-term inflation (Figure 4). Indeed, neither central
bank has provided a road map for what tools can be employed
if inflation remains well below target, reinforcing the risk that
credibility will erode further.
China data suggest growth is stabilizing
This week’s China data pointed to stabilization in GDP
growth and domestic activity at year-end. Notably, December
data show retail sales and FAI increasing moderately, contrib-
uting to a stronger-than-expected 0.5%m/m increase in IP.
However, advances in final goods demand and IP seem incon-
sistent with the collapse in imports in November/December.
As we suggested last week, one explanation is that companies
reduced inventories, focused principally on imported goods.
The sharp drop in Chinese exports into year-end itself normal-
0.0
0.3
0.6
0.9
1.2
1.5
-0.9
-0.6
-0.3
0.0
0.3
0.6
0.9
2016201720182019
%pt cumulative rolling revision from Jan 2016
Figure 3: G-3 FRI and 2-year government bond yield
Percent per annum
Source: J.P. Morgan
2-year government
bond yield
G-3 FRI
-0.5
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
201720182019
Cumulative %-pt change since Jan 2017
Figure 4: G-3 5y5y inflation swaps
Source: J.P. Morgan
US
Euro area
JapanEconomic Research
Global Data Watch
January 25, 2019
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
ly would have dragged down imports. Theextra margin of
import compression, above and beyond that of exports, could
be due to an inventory adjustment reflecting fears about the
outlook.
Given downside risks to growth, we expect more policy sup-
port to be announced. Moreover, Chinese officials took an
important step to bolster the banking system and the provision
of bank credit this week. Regulators intend to count bank-
issued perpetual bonds as collateral for the PBOC’s liquidity
operations, while also permitting insurance companies to in-
vest inthese bonds. These changes provide a conduit for
banks to access capital from the insurance sector, with the
central bank acting as an intermediary for liquidity as needed.
India and South Africa facing fiscal tests
India’s BJP government presents the last Budget of its term
next week, just months before the summer general election.
We expect the Budget for 2019-20 to incorporate a potentially
large “agricultural package” including unconditional cash
transfers, crop insurance, and interest waivers for farmers.
Already, this year’s plan is under stress with GST revenues
undershooting. However, given India’s cash-accounting sys-
tem, we think policymakers will find a way to stick to the
3.3% of GDP budgeted central government deficit for 2018-
19 and announce modest consolidation for next year, though
markets will scrutinize the assumptionsclosely. India’s total
public sector borrowing remains a hefty 8.2% of GDP and has
been a source of pressure on bond yields. Any new unfunded
liability—like cash transfers—will simply increase the pres-
sure when the next government presents a full Budget in July.
South Africa’s fiscal authorities are on a path to provide sub-
stantial support for state-owned enterprises (SOEs), which
would aggravate an already challenging fiscal situation. This
week’s comments by Finance Minister Mboweni and a
presentation to the ANC leadership add to momentum that
substantial support to SOEs could materialize in the near
term, indeed potentially before the elections in May. Officials
already faced an uphill task to stabilize the debt-to-GDP ratio.
The medium-term fiscal update in October disappointed mar-
kets and ratings agencies alike with a projected fiscal deficit
stuck around 4% of GDP, rather than the sequential narrowing
of the fiscal gap envisaged in the February budget, raising
risks of a sovereign rating downgrade, exclusion from a glob-
al bond index, and resultant portfolio outflows. The Sustaina-
bility Committee’s report to be released around January and
the State of the Nation address on Feb