Simply Economics

With Brexit hobbling, Germany slowing and the U.S. government shutting down, the New Year opens with as much uncertainty and investor caution as ever. Jeremy Hawkins and Mark Pender discuss the latest details including which U.S. indicators are affected by the shutdown and which are not.

An early signal on what to expect for 2019 will come on the third week of January when the House of Commons votes on Teresa May's Brexit withdraw bill. For the U.S., the first signal for 2019 will come from Wednesday's FOMC forecast and whether the markets can expect fewer rate hikes ahead, or perhaps no hikes at all.

The U.S. employment report for November was on the soft side, setting up what could be a backing off in 2019 rate hikes at next week's FOMC. Also discussed are outlooks for Brexit, European Central Bank policy, and riot-stricken France.

A run down of central banks from Canada to India to Europe points to steady monetary policy and following last week's dovish turn from Jerome Powell, fewer rates may now be the call for the Federal Reserve. Our panel also updates Brexit risks, the latest data out of the Eurozone, and a possible upside jolt for Friday's U.S. employment report.

Theresa May appears to be well short of the votes needed in the House of Commons to secure her agreement with the Eurozone, raising questions over her leadership and also whether new amendments or new elections are in store. For the U.S., early indications for fourth-quarter GDP are mixed with net exports continuing to weaken while inventories continue to build.

A Fed tightening may be just a matter of time but sluggish European household demand leaves an ECB rate hike a distant prospect. Little excitement is expected from the week’s RBA and RBNZ announcements but speculation about a Brexit deal should keep investors focussed on UK financial markets, just in case...

US GDP proved strong on the surface in the third quarter but mixed in the details while expectations for Friday's employment report are upbeat though year-on-year wages are expected to jump. In Europe, flash GDP data for the third quarter show growth slowing to a 4-year low with the political shake up in Germany adding further uncertainty.

The Chinese stock market has turned volatile as the nation's economic data have slowed. The US has third-quarter GDP coming out on Friday but the following week's wage data may have more impact on Federal Reserve policy. In Europe, Italy's budget-busting plans are not helping market stability and are proving a negative for the euro.

Pessimism is back in front as Brexit negotiations, still snagged by the Irish border, hit yet another climax this week. For Italy, budget busting plans and possible EU protests are the focus. A budget bust in the US is also playing out and is giving a Keynesian boost to what looks like another strong quarter for GDP.

Another cut in Chinese banks’ reserve requirements shows that the PBoC is more interested in supporting economic growth than it is worried about containing inflation. The new Italian government has no inflation to worry about but it also wants to give its economy a lift, even if it does mean breaking the EU Commission’s fiscal rules. In both cases, international investors do not seem impressed.

Rates look to go up at tomorrow's FOMC as attention focuses on the extent of future hikes and risk of recession. In the UK, Brexit developments are becoming more testy and include the chance for a second referendum. While in Italy, fiscal debt is the topic and its implications for policy across the continent.

Initial effects of this year's U.S.-China trade war, whether on trade or the yuan or U.S. Treasuries, are still unfolding and that was before this week's U.S. actions against China. No change is the theme for the European Central Bank and Bank of England as well as the Swiss National Bank where trouble for emerging- market currencies, and resulting strength for the Swiss franc, is a special factor.

The European Central Bank is expected to keep its easing bias and the Bank of England it's tightening bias at this week's meetings. In the U.S., a tightening labor market is raising questions over wage inflation while in Japan, earthquakes and typhoons are raising third-quarter risks.

US economic data have been slowing slightly but not expectations for Friday's employment report. Australia is enjoying its 27th straight year without recession amid a solid outlook including for non-mining industries. Too solid are the gains underway for the Swiss Franc as increasing turmoil hits the emerging markets.

Overall growth continues to flatten in Europe while flat wages, rising housing costs and failure to modernize are behind a leadership change in Australia. In the U.S., early third-quarter data are mixed though a big jump in the consumer's assessment of the labor market is hinting at a very strong August employment report.

Despite strength in Germany, Eurozone manufacturing is in technical recession while key data out of China, both industrial production and retail sales, are lower than expected. Lower than expected is also the result for U.S. import and export prices as businesses absorb higher costs and as tariff-related effects on metals fade.

The discussion revolves around questions of labour mobility and what it means to matching jobs and skills in a tight market. The Reserve Bank of Australia remains on hold for two years. Germany’s worrisome manufacturing sector. Will the Bank of England increase rates again?

The Bank of Japan, to the surprise of some, is keeping its easing efforts at full force while the Federal Reserve is expected to make no policy change in a Wednesday statement, however, that may have a hawkish edge. A move higher for core inflation is good news for the European Central Bank though slowing second-quarter growth isn't, while for the Bank of England a rate hike on Thursday would give it policy headroom to lower rates in the future.

Will the Bank of Japan make changes at month end to its aggressive quantitative easing program? The European Central Bank is expected to hold policy steady at this week's meeting but there are still questions over the 2019 outlook . And for the Fed, a retaliatory rate hike to assert its independence at next week's FOMC may be out of the question but its rate-hike path, pressure from the administration aside, is clearly laid out in detail.

Jerome Powell isn't making waves in his semi-annual testimony, while lack of progress in Brexit and lack of variation in Chinese GDP are also topics of interest.