Key events in developed markets next week

Financial markets had a tumultuous end to 2018 as worries about trade wars and weaker global demand led to sharp markdowns in equity prices and Treasury yields. The government shutdown is adding to a sense of unease, and barring any sudden breakthrough on Capitol Hill; this will result in a delay to the release of trade and durable goods orders numbers scheduled for next week.

However, the key events next week will be comments from Federal Reserve officials. At the December FOMC meeting, they scaled back their expectations for monetary policy, suggesting two 25 basis point moves was the most likely scenario for 2019, down from the three hikes they had pencilled in back in September. Amidst all the current doom and gloom, financial markets are not even fully pricing in one move this year.

While there certainly are more headwinds for the US – lagged effects of higher borrowing costs, a strong dollar, fading fiscal stimulus and weaker external demand at a time of rising trade protectionism – there are also positives, with the strong jobs market delivering higher pay and the recent plunge in gasoline prices boosting household cashflows.

As such, we expect the bulk of Fed speakers to remain cautiously optimistic while soothing the concerns about an overly aggressive response from the central bank to any perceived inflation threat. In this regard, we expect December headline inflation to be pulled lower by energy price moves while core inflation remains at 2.2%.

The eurozone starts the year with some quite relevant data releases. With some pitch black surveys about the eurozone economy throughout the fourth quarter, the question is whether hard data confirms the slow growth environment.

Retail sales data for November will be an important gauge of consumer spending, and unemployment will shed light on whether the labour market continues to improve. Also look out for December's Economic Sentiment Indicator, which will probably be impacted by the Yellow Vest protest movement in France.

Having been dramatically postponed in December, the Parliamentary debate on the Brexit deal resumes next Wednesday ahead of the critical vote on 14 January. When that happens, it still looks likely that Theresa May’s deal will be rejected, potentially by a heavy margin.

If so, we’re likely to hear renewed talk about a possible no-confidence vote in the government, although so far the opposition Labour Party has appeared reluctant to go down this route. That option aside, it’s likely that MPs will get a say on what Brexit route to pursue next, and the possibilities that seem most likely to garner majority support are either a second referendum or a push for a Norway-style deal. In either case, the chances a Brexit delay in one form or another would increase, given time is short.

The recent oil price slump, weaker-than-expected business investment in 3Q18, a stabilising housing market and US-China trade tensions all mount to pushing the central bank of Canada to become more cautionary.

We still see a hike in the first quarter of 2019, but don’t expect this to arrive next Wednesday. Instead, it’s more likely to come when the central bank next meets in March when policymakers have had the chance to let the risk environment develop and assess the impact on economic capacity. Governor Stephen Poloz recently said this was a significant factor in determining the appropriate pace of rate hikes.