Front and centre of our thoughts this week include

If you were hoping for a quiet start to the year, last week will have left you bitterly disappointed as some weak economic data complemented by heated US politics resulted in a volatile first few trading sessions of 2019.

We’re prepared for another busy week as we begin with a focus on US-China trade tensions. Talks between both countries will resume today, concluding tomorrow, with US officials heading to Beijing in what will be the first set of talks since the agreed truce last month. The world will be watching in the hope they can begin their journey to de-escalate trade tensions globally. Indeed, financial markets have started the year in volatile fashion: weak economic data from both countries along with a warning from Apple in their trading update (more on this below) have been influenced by the trade impasse.

A highlight of the week will be the release of the Federal Open Market Committee (FOMC) minutes on Wednesday from their meeting last month (19th December) when they raised interest rates by 0.25%. While some of the detail will be redundant due to new data being released since then, it will be useful to read their views on some key areas, such as: slowing global growth and the reduction of the Fed’s balance sheet in their continued shift to tightening monetary policy.

One of the key issues for investors is trying to forecast how late-cycle the US is and, in turn, how much further the Federal Reserve (Fed) will raise interest rates. The inflation (CPI) report on Friday will be closely watched. Lower oil prices are expected to push the headline reading to below 2% for the first time since August 2017. Core inflation, which excludes the oil price, is expected to hold at the previous month’s level of an annualised rate of 2.2%. 

Also on Friday we will receive the UK’s GDP growth estimate for November. It’s been widely cited that the UK economy has suffered due to the tightening in monetary policy, as well as the uncertainty surrounding Brexit negotiations – we had further signs of this last week as house prices were shown to have grown at an annualised rate of just 0.5%, the lowest since February 2013. Expectations are for GDP to have grown 0.1% in November.

Going on in the engine of Brexit

Expect Brexit news flow to ramp up this week as the Parliamentary debate on the Brexit deal resumes on Wednesday, ahead of the critical vote on January 15th. As such, Theresa May will spend this week attempting to persuade MPs to vote for her deal, whilst simultaneously trying to gain an improvement on the deal with the EU to appease MPs.

With it looking likely that Mrs. May’s deal will be voted down and matters ending up in a ‘no deal’ scenario, some MPs are working on a plan to prevent Britain leaving the EU without any form of exit deal.

In the rear view mirror of last week we saw

Weak manufacturing data (notably the Caixan China PMI) for China kicked off 2019 with a worry that has recurred at the start of the past few calendar years: will we see a significant slowdown in the Chinese economy this year? The PMI came in below consensus forecasts but, more significantly, fell below 50 indicating contraction in the sector. Fears were alleviated later on in the week as the corresponding services PMI came out ahead of expectations, as well as the unexpected announcement that they are cutting their bank reserve ratio by 1% in an effort to help stimulate the economy.

The world’s second largest economy wasn’t alone in releasing disappointing manufacturing data – the US also suffered a large blow to confidence in the sector as we received the latest reading for the ISM Manufacturing Index. The index suffered its biggest one-month fall since October 2008 as the index dropped to its lowest level since November 2016 (54.1).

Despite this weak headline-grabbing economic data in the US and China, the UK fared much better. Both the manufacturing and services PMIs came out comfortably ahead of expectations, with the manufacturing PMI showing particular strength. The strong headline figure, however, should be taken with a pinch of salt as it hides the fact that it was probably boosted by short-term stockpiling of both input materials and finished goods in preparation for a messy Brexit.

The week finished off on a positive note. With it being the first Friday of the month, we received the latest US employment report, which showed a very impressive 312,000 increase in non-farm payrolls. As has been anticipated for some time, the strength of the US labour market continues to apply upward pressure to wage growth, which unexpectedly jumped up to an annualised rate of 3.2%, which is the joint highest reading since 2009.