7 December 2018
US payrolls: Firms feeling the pinch

November payrolls were soft, but this was partly driven by the lack of available workers to hire. Wage pressures are building and will keep core inflation moving higher and the Federal Reserve hiking rates

US non-farm payrolls rose 155,000 in November versus the 198,000 consensus forecast, and there were a net 12,000 downward revisions to the past two months’ data. Manufacturing employment was good, rising 27,000, but services saw slower gains than hoped.

However, markets shouldn’t be too disappointed as the fact that there aren’t enough workers was almost certainly a major factor. Indeed, the National Federation of Independent Businesses continues to report that the proportion of firms that can’t fill the vacancies remains at an all-time high. The rate of jobs growth has accelerated in 2018 to average 206,000 per month versus 182,000 in 2017, but it will slow next year, partly for this very reason.

Decent economic momentum means there is little reason to expect a significant drop-off in demand for workers anytime soon but the key question is whether companies can actually find workers. Given the scarcity of available labour, this suggests further upside for wages

Conversely, wage pressure will continue to build because of worker shortages. Wage growth rose 0.2% month on month leaving the annual rate of wage growth at 3.1%. Firms are also increasingly having to compete on non-wage benefits with this week’s Fed’s Beige Book stating that “most Districts noted examples of firms enhancing non-wage benefits, including health benefits, profit-sharing, bonuses, and paid vacation days”.

If we round out the numbers, the unemployment rate remains at a 49-year low of 3.7% with underemployment at 7.6%.

Political storm brewing in Belgium

A political crisis has developed in Belgium over its position on the UN migration pact. Will this crisis cause the government to fall? The answer is complex, especially as the next general election is scheduled for next May. We think the election campaign has already begun

Will the Prime Minister go to Marrakech?

A UN pact on migration is in negotiations at the UN, and each country must present its position next Monday on 10 December in Marrakech, Morocco. 

In September, Prime Minister Charles Michel pledged Belgium would support and sign the pact, and this didn't seem to be a problem for the different parties of the majority back then. But in the last few days, the Flemish nationalist party, who are also his coalition partners have become strongly opposed to signing the pact and believe the Prime Minister can't go to the conference as he doesn't have the support of his government. 

After this afternoon’s vote, we can't rule out that ministers from the NV-A party won't resign, but that is not our base case

But the Prime Minister has confirmed he will attend the meeting to defend the position of the Belgian Parliament, which will vote over a motion in favour of the pact this afternoon alongside an interpretative document clarifying the supremacy of the national legislation over the Pact itself - as other countries have also done.

Without the NV-A, the government won't have a majority to adopt the motion at parliament, but other parties, currently in the opposition, are ready to support the motion which means PM Michel could have a majority but not the one he currently has in government, hence the political crisis.

2019: The best of times, the worst of times

As we look ahead to 2019, we're hoping for the best and preparing for the worst. Our base case calls for a slowdown in economic growth. But with so much being driven by political posturing, we'll admit, anything is possible. So here’s a look at some of the best- and worst-case scenarios for the global economy next year

In this list, we look at some possible outcomes-- both positive and negative-- for the most important themes of the year, including Brexit, the US expansion, global trade problems and the eurozone economy. While we don't consider these to be the most likely outcomes, they're not farfetched either and we can't afford to ignore them. P.S. if this isn't bleak enough for you, we also did a piece with some pitch-black scenarios just for the eurozone.

Eurozone: It’s the end of QE as we know it…

…and we will be fine as the European Central Bank is gradually shelving the controversial bond-buying programme

The ECB meeting next week will not only be the last meeting of the year but will also be a historic meeting. It should mark an important step in returning monetary policy to normality. Only, hardly anyone seems to be interested. Thanks to changes in the communication back in June, market participants and ECB watchers have been well prepared for the gradual end of the ECB’s net asset purchases. Anything else than the announcement to bring these purchases down to zero by year-end at Thursday’s meeting would be a great surprise.

Eurozone: Filibuster on Eurozone reforms continues

Another red-eye meeting of Eurozone finance ministers shows how difficult it is to agree on further Eurozone reforms. Only another existential crisis would speed up the reform efforts - something even the most Europhile experts should not really hope for

For euro crisis veterans, it was almost a deja-vu: a red-eye meeting of Eurozone finance ministers with several breaks ending early in the morning with a hard-fought written conclusion. 

However, contrary to the heydays of the euro crisis, there was no market opening or debt payment which had increased the urgency to act to a maximum. Instead, the urgency is more of a longer-term nature. Currently, apparently not enough for Eurozone finance ministers to decide on additional bold institutional reforms of the monetary union.

To put last night’s Eurogroup meeting into perspective: the latest attempt to revive the discussion of further Eurozone reforms started more than a year ago, was than postponed last December due to a political deadlock in Germany and picked up by the Eurozone government leaders in June this year. Already back then, Eurozone government leaders had agreed to: i) start work on a “roadmap for beginning political negotiations on the European Deposit Insurance Scheme”; ii) the ESM providing “the common backstop to the Single Resolution Fund” and further strengthening of the ESM; and iii) to discuss “possible instruments for convergence and stabilization in EMU”. Eurozone finance ministers were asked to present their results at next week’s Euro Summit.

Soybeans: How much is “substantial”?

The soybean market was eagerly awaiting the outcome of trade talks between China and the US at the G20 summit, and discussions were constructive with the two nations suspending any new trade tariffs. However, until China lifts tariffs on US soybeans, upside to CBOT prices should be limited

What was agreed?

Trade talks between China and the US appeared to go better than many in the market were expecting, evident in the strength that we have seen across the commodities complex today. According to a White House statement, both nations will refrain from implementing any additional tariffs for a 90-day period, while they try to come to a deal. Failing to do so would mean that US tariffs on Chinese goods would increase from 10% to 25%, an increase that was planned to come into force on 1 January 2019.

Specifically for the soybeans market, the White House statement does say that China agreed to buy a “substantial” amount of US agricultural products from US farmers immediately. However there was no mention of what “substantial” means, whilst the Chinese statement does not specify what specific goods they agreed to purchase, and under what timeframe.

Russia 2019: Risk-averse mode

With persistent external uncertainties, we expect Russian consumers and corporates to remain risk-averse in 2019. Any monetary stimulus is unlikely given the mounting inflationary risks, while the budget could be used as a tool to support growth. We remain constructive on the rouble and rates while acknowledging there are external risks to this view 

Little confidence in income growth puts pressure on consumption

We see GDP growth slowing from our already modest forecast of 1.6% in 2018 to 1.0% for 2019, primarily due to weakening household consumption. The income fundamentals are still rather strong, with unemployment close to the lows of 4.5 - 5.0% and real wage growth still in the mid-single digit range. 

The current slowdown in household consumption growth doesn't reflect declining income, but a somewhat higher preference for savings

However, this doesn't translate into higher consumer confidence because only 25% out of Russia's 73 million employees see an acceleration in the salary growth, which is mostly budget-driven. The increase in consumer confidence is limited as the electoral cycle is over too. The remaining 75% of employees (except IT and telecommunications, which account for 2% of Russia's employees) don't see faster salary growth and are instead focused on accelerating inflation, upcoming VAT rate hike and increase in the retirement age.

The silver lining in this reality is that the current slowdown in household consumption growth from 2.5% in 2018F to 1.0% in 2019F doesn't reflect declining income, but a somewhat higher preference for savings - making future improvements in the consumption trend a matter of confidence.

G20: Don’t cry victory yet


The ceasefire between the world’s largest trading nations is positive because the signals coming from the preceding negotiations were rather pessimistic. The ceasefire means that the planned elevation of import tariffs by the US are off for the next three months. But there is a long way to go before there is a real deal

Little time for a deal

Although the deal between China and the US is mainly a question of buying time, China has committed itself to import more industrial, agricultural products and energy from the US.

If President Trump is consistent in his demands, the reduction of the bilateral trade deficit has to be more than China’s offer of US$70bn last spring, which was not good enough for Trump. Trump has demanded a halving of the deficit, which means a reduction of US$190bn. It is not clear how far China is prepared to go.

Another reason to wait before cheering the end of the trade war is that 90 days to work out a broad agreement is very short. Especially because the agreement should also encompass a deal on more sensitive issues like the theft of intellectual property and forced technology transfers in joint ventures. Most wide-ranging bilateral trade agreements take years to negotiate.

A positive is that both parties did not say that China's ‘Made in China 2025’- strategy will be part of the coming negotiations. This could mean that Trump has accepted that this is a ‘no go’ for China.

Uncertainty continues for WTO

On the WTO there is just a commitment to talk about reforms. No steps made on the content side, so it is too early to say whether a deal is possible. Trump will keep the WTO under high pressure by blocking the appointment of judges for the appellate body as long as his demands for reforms are not met. If there are no new judges before 1 December 2019, it will paralyse the WTO.

This approach fits the strategy that we have seen in all the trade battles that President Trump has started thus far. And it means that the closer we get to the December deadline, the larger the pressure will become on the other countries that are more attached to the survival of the WTO, to give in to Trump's demands.

In six months world leaders will discuss the progress of reforming the WTO at their next G20 meeting. Developed nations want China and other large emerging economies to give up their status as ‘developing nation’ within the WTO and the benefits that come along with it. China is thus far not prepared to give in. Once again, China faces a difficult choice in the months to come: does it want to call President Trumps bluff and risk that the US paralyses the WTO? Or will China compromise to save the international guard dog of trade, an institution that watches over a framework that helped China, like many other countries, to increase living standards of its people

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In case you missed it: Rocky road ahead

OPEC and Russia agree to cut oil production, US firms are beginning to feel the pinch, Belgium's government is on the edge and after a decade of negotiations the Swiss snub the EU risking financial sanctions. Plus, we bring you some of the best-and-worst-case scenarios for the global economy next year 

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