Jam-packed week ahead for developed markets, but with no end in sight for the US government shutdown and a Federal Reserve likely to hit the brakes, our main focus turns towards Eurozone data - particularly growth and inflation, which in our view is going to give the ECB a lot to think about
The US government shutdown continues, and unfortunately, there is no end in sight. For the 800,000 workers not receiving their paycheck, the pain is obvious, but we are now seeing broader implications with private sector enterprise increasingly feeling the strain. Government contractors are not getting paid and will not be compensated, while new business permits and travel visas are not being approved and airport security lines continue to grow in length. This in itself is not enough to significantly hurt the US economy, but when combined with other headwinds such as the lagged effects of higher interest rates, the stronger dollar, and ongoing trade worries, it certainly adds to the economic uncertainty.
In this environment, the Federal Reserve is widely expected to sit on its hands with a no policy change announcement on 30 January. The fact that the government shutdown has limited the data flow also argues for a pause, until there is more clarity. Indeed, 4Q GDP data, scheduled for Wednesday, won't be released unless the government reopens imminently.
The Federal Reserve only raised rates last month, we continue to expect just two rate rises in 2019 versus the four we saw in 2018. Financial markets are pricing the risk of rate cuts, but we think the strength of the jobs market makes this unlikely. This week’s payrolls report won’t be anywhere near as strong as the December report, but the key themes of companies struggling to fill vacancies with wages being bid higher still holds – note the Bureau for Labour Statistics is fully funded until 30 September so will be publishing economic data. Moreover, if the US-China trade tensions start to soften, this will boost the case of a rate hike in June.
The National Bank of Hungary is likely to adopt a wait-and-see approach with respect to core inflation, while in the Czech Republic, PMI surveys should reinforce our view that the central bank will adopt a similar approach next month
Speculation about Hungary's next move on interest rates has increased in the wake of comments by central bank Vice Governor Marton Nagy in Vienna, who said the bank could start to tighten policy if core inflation reached or exceeded 3%.
We still expect the National Bank of Hungary to sit on its hands but think the press release could cite Nagy's concern over the risks to core inflation ex-tax and its possible implications. However, the NBH might want to wait for at least a couple of months to gather proof of core CPI ex-tax moving above 3% and announce an upcoming adjustment in monetary policy via FX swaps in March, along with an updated inflation forecast.
The trade and purchasing manager indexes (PMIs) from across Asia may reveal that 2019 isn’t off to a good start for regional economies, arguing for continued policy stimulus. India’s FY2019-20 budget will be a closely-watched event as the Modi government aims to boost economic growth in its bid for re-election
India’s interim finance minister Piyush Goyal presents the FY2019-20 budget to the parliament on Friday, 1 February (Arun Jaitley is reportedly on medical leave). Growth will outweigh fiscal discipline as the Modi administration pushes its way for a second term in the general election scheduled for May this year.
As such, after an overshoot of the deficit in the last financial year and more likely again in the current year, hopes of any fiscal consolidation taking place in the next financial year are largely misplaced. We see the revised budget for current FY2018-19 producing a deficit equivalent to 3.6% of GDP, well above the government's initial projection of 3.3% (consensus 3.5%). Our deficit forecast for the next financial year is 3.4%.
Persistently weak public finances will keep local government bonds and the Indian rupee under weakening pressure.
Discover what ING analysts are looking for next week in our global economic calendars