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The Global Markets Weekly – 1/5/18
2018 Looks Solid Across the Globe
One week in, 2018 equity markets have taken the baton from 2017 and haven’t stumbled. In addition, corporate spreads are tighter, sovereign yields are churning but waiting for inflation to break higher, and the USD continues to weaken. Friday’s U.S. jobs report points to solid and stable momentum, still moderate price and cost inflation, and solid expansion ahead for firms and households. The 148,000 payroll gain and 0.3% increase in average hourly earnings (2.5% y/y) isn’t indicative of an overheating labor market that would boost concerns the FOMC will act much more quickly than the three hikes penciled in for 2018—it may even keep the Fed a bit behind the curve. DE sees four as more likely, given our expectation for stronger-than-consensus growth and a much lower jobless rate this year. DE continues to see a cyclical upswing to a “New New Normal” pace of real GDP expansion nearer around 3% over the near-to-intermediate term.
Meanwhile, the Eurozone is entering 2018 on the back of strong momentum (more within our Focus article this week). DE estimates that real GDP growth clocked in at 0.8% in Q4, up 2.3% for 2017 as a whole, the fastest pace since the Great Recession. We expect it to accelerate to 2.4% y/y in 2018. Responding to strong new orders (mostly exports), manufacturing has been the main driver of the economic expansion, a trend likely to persist in 2018. The Eurozone Composite and Services PMI stood at an 80-month high in December, while the Manufacturing PMI at 60.6 was at a record high. Moreover, the ECB’s insistence on staying with ultra-accommodative policies and low rates continues to buoy asset prices. The deep dive in two-year yields is especially noticeable for countries in the periphery. That Greece can borrow at a lower cost than the U.S. Treasury is unprecedented.
In Japan, growth continued to improve in the third quarter, accelerating to 2.1% y/y helped by capex and net exports, less-so support from households. The Bank of Japan has pushed back against commentary that continued stimulus may be harming bank lending with low and negative rates, but we still think they (and the ECB) are both likely to take further steps toward less aggressive accommodation later this year. Net asset purchases by major central banks are likely to move toward zero this year after a lengthy period of ease. In China, authorities’ efforts to crack down on frothier leverage is coming at a welcome time when global growth is picking up, pushing back fears of a hard landing yet again. Overall, DE remains aggressively bullish on global equities even at these levels, favoring Europe and Japan over the U.S. at the moment.
Coming Week’s Key Indicators and Events:
|Release||DE / Consensus||Comment|
|U.S.||Dec CPI (Fr)
Dec Retail (Fr)
|0.2% / 0.2% m/m
0.2% / 0.2% m/m
0.4% / 0.4% m/m
|2% annualized on the core in second half 2017, overall CPI may move above 2.5% y/y around midyear 2018.
Vehicles a bit firmer, anecdotes around holiday spending positive; consumer on track to post 3% annualized in Q4.
Dudley (Thu), Bullard (Wed), Evans (Wed), Rosengren (Mon), Bostic (Mon), Williams (Mon). Outlooks important.
|Euro||Nov. Unemp. (Tu)||8.7% / 8.7%||Wide country variation, but falling!|
|U.K.||Nov. IP (We)||0.3% / 0.4% m/m||Decelerating y/y.|
|China||Dec CPI (We)
|1.9% / 1.9% y/y||Follows 1.7% in November, PPI softens.
Monthly checkup on lending and credit.
|Other Cen. Banks||Poland (We)
|Hold / Hold
Hold / Hold
N/A / -25 bps
|Eastern Europe seeing strong growth and generally stable inflation, Peru gauges success of easing cycle, and Israel sees low inflation and political uncertainty.|