In this briefing:
- FLASH: BoE Blocked by Brexit Uncertainty
- FLASH: UK Retail Surges into Christmas 2018
- FLASH: UK Nov-18 Inflation Slows as Expected
- Time-Out Not Time up for Trade War
- Fed Policy in 2019: Low Inflation Complicates an Uncertain Outlook
1. FLASH: BoE Blocked by Brexit Uncertainty
- The MPC voted unanimously for no policy change in December, as widely expected.
- Near-term GDP growth and inflation forecasts were both trimmed, but the extent may have been exaggerated by missing some recent news.
- Judging the appropriate policy stance was deemed to depend on the data in light of Brexit clarity. That should have occurred in time for a May-19 hike, in my view.
2. FLASH: UK Retail Surges into Christmas 2018
- UK retail sales surged by 1.2% m-o-m in Nov-18, which takes the level well above trend. Black Friday sales helped but discounting is not responsible.
- Sales in December have had a strong positive correlation with November since 2014. I pencil in +0.5% m-o-m before sales normalise lower in the new year.
- The latest rise raises my Nov-18 monthly GDP forecast to 0.2% m-o-m and removes the downside risk to my 0.3% q-o-q forecast for 4Q18.
3. FLASH: UK Nov-18 Inflation Slows as Expected
- UK inflation matched Consensus expectations in Nov-18 as it slowed to 2.3% on the CPI and 3.2% on the RPI with the index printing at 284.6.
- Food price inflation slowed sharply, consistent with my proprietary pricing data. Beer and tobacco prices were stronger than I expected, but both were broadly in line with my new database, which I intend to assign more weight to incrementally.
- Further falls in headline inflation are likely to occur in the coming months. An earlier December index date would weigh on airfares, and Ofgem’s energy cap comes into force for January. Sub-2% inflation currently looks likely through 2019.
4. Time-Out Not Time up for Trade War
- Xi and Trump walk away from Buenos Aires with something to sell at home
- But trade negotiations will be dominated by fraught disagreements
- After 90-day negotiations, further delays to tariff escalation are likely
5. Fed Policy in 2019: Low Inflation Complicates an Uncertain Outlook
The current tone of incoming US economic data is, once again, at variance with the behavior of financial markets, whereby the data dynamic is in apparent reversal of the disconnect that prevailed when the Fed deployed ultra-accommodative policy settings.
Fed Chair Powell will not wish to convey the impression that policy is being dictated by financial markets, while firm labour demand would seemingly rule out a pause in rate hikes.
As 2019 unfolds, the persistence of low inflation, despite faster economic growth, could potentially offer the Fed some breathing space to pause raising the federal funds rate at the Federal Open Market Committee (FOMC) meeting in March.
The long-standing dichotomy in inflation trends for goods and services remains intact, while the FOMC will be paying careful attention to prospective movements in rental costs and health care for indications of future inflation momentum.
Although falling oil prices may have helped to keep inflationary expectations well-anchored, Fed policy credibility and the rising dollar exchange rate probably played more dominant roles.
The US monetary policy outlook in 2019 will become more uncertain due to a confluence of factors, but the FOMC will require faltering economic data in Q1 to justify a pause in raising the federal funds rate in March.
