Janus Henderson: Global Snapshot January 2019

Market drivers:

US

Core stability
Core inflation remained static, defying predictions of a pick-up in response to faster wage growth. The annual increase in the consumption price index excluding food and energy was 1.9% in November, below the Federal Reserve’s 2.0% fourth-quarter forecast.

China

Profits weakness
Industrial profits fell by 1.8% in the year to November, the first annual contraction since 2015, reflecting limp economic growth and slowing producer prices. Economic weakness intensified at year-end, with manufacturing purchasing managers’ indices falling below 50.

Japan

Muted recovery
Industrial output bounced back after third-quarter disruption due to bad weather, but underlying momentum appears weak with the manufacturing purchasing managers’ index well down on a year ago. Consumer confidence has also eroded.

Eurozone

Weak economy
Purchasing managers’ surveys signalled a further loss of economic momentum in the fourth quarter, following shock German and Italian GDP contractions in the third quarter. The survey-based composite output index fell to a 49-month low in December.

UK

Unemployment rise
Brexit worries contributed to a further fall in business investment and a slowdown in hiring. Unemployment rose by 20,000 in the three months to October, while the number of people claiming unemployment-related benefits is the highest since 2014.

Emerging markets

Policy tightening
The trend towards higher interest rates continued, with inflation and currency concerns outweighing softer economic data. Central banks in Chile, Czech Republic, Indonesia, Korea, Mexico, Philippines, South Africa and Thailand hiked official rates last quarter.

Trends to watch:

US

Profits slowdown
Corporate profits continued to expand solidly in the third quarter but equity analysts cut earnings forecasts in late 2018, reflecting concerns about top-line sales and wage costs. A profits slowdown would feed back into business investment and wider economic weakness.

China

Policy easing
Policymakers are cutting taxes, boosting infrastructure spending and trying to encourage bank lending to private companies. Further easing measures are likely in early 2019. Watch money trends – currently still weak – for evidence that policy stimulus is gaining traction.

Japan

Inflation slowdown
The Bank of Japan’s core inflation measure eased to 0.3% in November, far below its 2% “price stability target”. Yen strength suggests a further decline but will the central bank admit defeat and downgrade the target in 2019?

Eurozone

Unemployment reversal?
The unemployment rate fell from 8.7% to 7.9% over the year to November 2018 but recent weak GDP growth may feed through to a turnaround in early 2019 – contrary to the European Central Bank’s forecast of a continued decline.

UK

Economic weakness
Money growth and local share prices both fell during 2018 – historically a signal of poor GDP performance in the following year. Brexit uncertainty will remain a drag on economic prospects even if a no-deal crash-out is avoided.

Emerging markets

Currency stabilisation
EM currencies could rally if a US slowdown causes the Federal Reserve to shelve tightening plans. A recovery would ease inflationary pressures and create scope for policy easing, supporting local currency bond markets, with equities suppressed by weaker export earnings.