HIGHLIGHTS OF THE WEEK

  • Global central banks have followed the cue set by the Fed, as they too take a break from tighter monetary policy to assess mounting risks to global growth.
  • Activity in the U.S. services sector cooled a bit in January as government-funding uncertainty and trade tensions weighed on business sentiment. Nonetheless, non-manufacturing activity remained well in expansion territory.
  • Senior U.S. trade officials are off to Beijing next week to work on a trade deal, even as a meeting between the two countries’ presidents seems unlikely before the March 2nd deadline. All eyes will be on Washington to avert yet another government shutdown as the temporary funding gap expires on February 15th.

 

Central Banks Have Cause For a Pause

In a week where economic data was sparse (partly due to delayed releases as a result of the government shutdown), global developments filled in the gap. On the heels of the Fed’s decision last week, the Bank of England (BoE) and the Reserve Bank of Australia (RBA) both left policy rates unchanged this week.

The BoE cited the likelihood of slower growth due to elevated financial uncertainty on the possibility of a no-deal Brexit, while the RBA highlighted trade-related downside risks to global growth. Elsewhere, the European Commission also significantly reduced its GDP outlook for the euro zone in 2019 and 2020 as it expects growth in the bloc’s largest economies to be held in check by global trade tensions.

The decidedly dovish shift in U.S. and global central banks’ statements reflects the turn south in economic and inflation momentum in the latter half of 2018, as well as the accumulation of event risks over the next several months. Among these, trade tensions between the U.S. and China looms largest.

On that front, prospects for a trade deal were dealt a blow this week with the announcement that President Trump is unlikely to meet with Chinese President Xi before the March 2nd deadline for additional U.S. tariffs. Continued uncertainty about the tariff hike has led to volatility in the international trade data. Imports fell fairly substantially in November, perhaps reversing some earlier inventory hoarding, as hopes for a trade deal increased (Chart 1). They could rebound again in the months ahead as prospects dim.

As long as the economic tea leaves remain cloudy, expect data-dependent central bank officials to remain cautious, taking the time to evaluate the cumulative impact of tighter financial conditions and slowing trade (see here). Stateside, this will have to be balanced against economic data that so far has continued to show resilience. As expected, initial jobless claims fell by 19k back towards post-recession lows during the week ended Feb 2nd as the effects of the longest U.S. government shutdown faded. In conjunction with the jobs report released last week, the data points to continued labor market strength.

Still, there are signs that the shutdown has had a negative impact on activity. The pace of expansion in the services sector decelerated in January. The ISM non-manufacturing index fell to 56.7 in January from 58.0 in December, reflecting concerns about the government shutdown, which negatively impacted new orders (Chart 2).

In his State of the Union address President Trump pleaded for unity, but continued to press a hardline on border security and immigration. All eyes will be watching the February 15 deadline for a longer-term funding package to avert yet another government shutdown that could take an additional toll on U.S. economic growth.

Shernette McLeod, Economist | 416-415-0413

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