The Eurozone is walking a tightrope. Q4 2018 data suggests the European economy is growing slowly amid softer Chinese demand, Sino-American discord and a Brexit stalemate. After a 2018 yearly GDP gain of 1.20%, a 5-year low, inflation appears to have picked up. The contribution of higher wages is finally taking effect. The recent rise in January core inflation rate to 1.10% (prior: 1%), attributable to services, as well as the continued drop in unemployment rate (+ 7.90% as of December 2018) should support the European economy.
Although the European Central Bank forecasts core GDP and inflation to reach 1.50% and 1.60% respectively in 2019, we think these might be revised at the next monetary policy committee in March 2019. We do not expect the ECB to change its stance on stimuli, as risk of a recession in the EU is very low. A stabilization in the EU economy is feasible if current issues, including a US–China trade truce and a soft Brexit, are realised. The upbeat US employment numbers from last Friday should support the greenback against the EUR short-term.
Australia to maintain wait-and-see
Australia’s central bank’s (RBA) first policy meeting of the year is not opening in the best conditions. Unpleasant news from both home and foreign markets are weighing on the economy while optimism on growth is fading. Despite repeated intentions to raise its cash rate (currently at 1.50%), unchanged since August 2016, it appears investors are pricing in a change in the other direction. Currently trading at 0.7225, AUD/USD (+2.50%) is expected to head along 0.7220. We advocate a long position following tomorrow’s meeting.
In addition to a sharp drop in Chinese demand, which accounts for more than 40% of total exports in the country, Australia is facing direct consequences, starting with a slowdown in Q4 2018 inflation data, largely below RBA’s target of 2–3% while the hardest downturn remains for the property market. Building approvals are being given at a decade-low level, amid falling prices and tighter credit conditions. A positive signal remains in a vivid labour market. How dovish the RBA will be during Tuesday’s monetary policy meeting? Will it lower its key rate? Risk is balanced, since the economy remains stable, thus favouring an unchanged rate.
