2Economic Research Global Data Watch December 14, 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 signals from monetary and fiscal authorities. Absent a slide ingrowth to a below-trend pace, we see high and rising DMutilization rates—now reflected in faster wage inflation— pushing core consumer price inflation higher. Geopolitical risk remains the wild card. We are cautious aboutthe truce in the US-China trade conflict. Although we expectnegotiations to continue at least through midyear, the linger- ing threat of intensification is likely to weigh on global busi- ness confidence. However, we are increasingly confident thatoil markets are generating a positive supply shock that willboost global consumer spending next quarter.Inflation poised to fall sharply next quarter Our outlook calls for global headline inflation to move lowerin response to energy price declines but recent developmentssuggest we might be underestimating this decline. Our com- modity impact model projects headline inflation based on themovements in commodity prices (taking core as given). Run- ning a simple exercise where we hold commodity prices attheir current level points to headline inflation falling below1% ar next quarter, well below our 2.2% ar forecast (Figure3). While not yet visible in the aggregate, the %3m pace ofglobal CPI energy has fallen more than expected, explainingthis decline. Along with a large 4.4% drop in the DM, energyinflation in the EM has tumbled 15%-pts on a sequential %3mbasis from August to November. Two other factors look toreinforce this decline. First, an earlier spike in EM food priceinflation is starting to unwind as we see a significant drop inEM Asia where November data are available for China. Sec- ond, the run-up in core inflation induced by the sharp curren- cy declines in the high-stress EM economies in 2Q-3Q18 isnow unwinding (in Turkey and Brazil in particular). A shift toward less monetary tightening For the most part, recent changes in the economic and finan- cial market backdrop, which entail lower nominal GDPgrowth and tighter financial conditions, shift risk toward lessmonetary tightening than assumed in our forecast.This is a consistent theme in the DM.Although the FOMCappears set to hike next week, we expect a dovish signal fromits statement language and the revised economic forecast and“dot” plot. This week ECB officials also made modestdown- ward changes to their growth and inflation outlook. And whilesticking to their narrative of continued above-trend growthand rising core inflation, they expresseda greater sense ofcaution. We now think the Riksbank will stay on hold nextweek in response to the recent downside surprise in core infla- tion, waiting until next February to initiate a rate cycle. Alsothis week, the Norges Bank remained on hold as expected.Although growth is solid and core inflation is running neartarget, the Bank is concerned about the impact of higher rateson consumer spending.We think the next hike will occur inMarch.The drift in the EM is similar. However, not all countries areexperiencing inflation relief andsome central banks remainon guard against capital outflows.In EMEA EM, near-term inflation relief is providingma- neuvering room for CEE central banks eager to take theirtime. Thus, the Czech and Hungarian central banks likely both will remainon holdnext week. While acknowledging“some” improvement in inflation dynamics, Turkey’s CBRT left rates unchanged and signaled plans to maintain atight policy stance to lock in a much larger decline in infla- tion. We expect the policy rate to remain unchanged until2Q19. Idiosyncratic factors have pushed up inflation inRussia, prompting the CBR to deliver an unexpected hikethis week. We expect a final 25bp hike in March.With food and energy inflation slowing across EM Asia,central banks’ tone is turningdovish. This week the BSPleft rates on hold and trimmed its inflation forecast. Whilewe still forecast a 25bp hike in 1Q19, the risks are skewedtoward no further tightening. In India, an unexpected slidein inflation prompted us to incorporate a 25bp rate cut inFebruary. This week’s appointment of Shaktikanta Das asRBI governor may have reinforced the chances of easierpolicy. Das previously served in the Ministry of Finance. Itremains to be seen whether the change will result in anyregulatory easing to promote credit growth as the govern- ment has called for.In Latin America, Brazil’s central bank left rates unchangedand signaled it intends to remain on the sidelines. Officialstrimmed their inflation forecast to 4% or below for the nextfew years and sounded less concerned about potential mar- 0 1 2 3 4 2013201420152016201720182019 %3m/3m, saar (assumes oil constant at $60/bbl through 2H19) Figure 3: Global CPI Source: J.P. Morgan Model fit Actual/fcst 3Economic Research Global Data Watch December 14, 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 ket disappointments regarding government reforms. Bycontrast, Mexico’s Banxico is likely to hike another 25bp to8.25% next week in a bid to anchor inflation expectations,limit MXN depreciation,and reduce the risk of capital out- flows amid uncertainty about the new government’spoli- cies. Markets are eagerly awaiting AMLO’s budget,whichwill be unveiled on Saturday. We expect officials to target aprimary surplus close to 1% of GDP. However, this will behard to achieve given the administration’s aggressive plansto spend on energy, infrastructure, health, and education. Chinatracking 6% growth Despite somewhat softer-than-expected November data thisweek, China is still tracking a 6.1%q/q, saar real GDP gainthis quarter. In general, IP growth around 0.3% per monthaligns with 6% GDP growth (Figure 4). While this week’sreported 0.2% gain in November was below this pace, it fol- lows a stronger gain in October and the 3m gain still averages0.3%. A 2.9% drop in exports held back factory output, evenas shipments to the US bucked the trend. Perhaps more con- cerning are signs that domestic demand continues to struggle.Retail sales disappointed again in November as auto salescontinue to work off the incentive-induced surge that occurredin 2016-17. Tighter consumer credit policy and a scalingdown of real estate renovation subsidies also are weighing onconsumer spending. By contrast, fixed asset investment isnow firming broadly, with strong gains in manufacturing, realestate, and infrastructure investment. We expect the impact ofpolicy supports to build in the coming months evenas the US- China trade conflict remains a headwind—keeping GDPgrowth near 6% annualized. Further clarity on official policysupport will come from next week’s annual economic workconference. Euro area revised down as France drags The Euro area Decemberflash PMI rounded off a year char- acterized by “one-off” hits to growth. This time, it was a 5ptcollapse of the French composite PMI coming in the face of awave of street protests. Looking past this move, the broadstability in the rest of the region also was disappointing. As aresult we slashed our current-quarter French GDP forecast and cut our Euro area forecast from 2.5% ar to 1.75%q/q. Ifwe are right, the package President Macron announced thisweek will calm the protests and generate a French reboundnext quarter. We expect this to be accompanied by a delayedbounce in the German auto sector. Our assessment that therewill be stronger growth in 1H19 requires a large rise in thecomposite PMI—of around 2.5pts to 54—to confirm that theregion’s underlying growth rate continues to hold at close to2%. Brexit: Predictable chaos, slow progress UK prime minister May faces the task of convincing a majori- ty of MPs that the withd