Market movers today
Markets are set to digest the results of the US-China trade negotiations this morning after the two sides agreed to continue talks in February.
On the data front, we have some interesting numbers today to finish off a busy week. PMIs are due to be released in many countries before noon and should give more input into the slowdown in the global economy.
We expect euro area preliminary inflation for January to decline to 1.3% y/y (consensus 1.4% y/y) down from 1.6% y/y in December. However, this is driven entirely by energy prices. Focus is instead set to be on the core inflation number, which we expect to stay unchanged at 1.0% y/y.
Later today all eyes turn to the US employment report and ISM manufacturing. We expect unemployment to rise due to the government shutdown. When it comes to payrolls, it is unclear whether the shutdown affects this, so focus is likely to be on private employment, which should be unaffected. Wage growth is also likely to draw attention. We look for a decline from 3.2% y/y to 3.1% y/y, which would cement the view that the Fed is firmly on hold now.
The ISM manufacturing index took a big dive in December. We expect it to fall a bit further in January from 54.3 to 54.0.
Selected market news
Asian stocks are mostly flat this morning, weighing up the positive signs from the trade talks between the US and China against a further fall in the Chinese Caixin PMI manufacturing index. On the trade talks, the Chinese side said in a statement that the negotiations had made ‘important progress’ and described the discussions as ‘candid, specific and constructive’. On the US side, both Donald Trump and his top negotiator Robert Lighthizer reported substantial progress. Trump also said that he and Chinese president Xi Jinping would meet soon to try to seal a comprehensive deal. Steven Mnuchin and US Trade Representative Lighthizer are scheduled to visit China in mid-February to hold the next round of talks. We see the developments as a further sign the two sides are keen to make a deal and continue to expect a deal by the end of Q2 (75% probability). That we have not yet met any major roadblocks in the talks – even after negotiations about the most thorny issues – suggests to us that it is indeed possible to make a deal. In our view, it will still be difficult to meet the 1 March deadline but it seems increasingly likely that Xi and Trump will sign a deal at a meeting at some point in March.
Overnight, the Chinese Caixin PMI manufacturing index fell more than expected from 49.7 in December to 48.3 in January. This is the lowest reading since February 2016. However, we see the index stabilising soon in line with the official PMI index, which increased slightly yesterday on a small pickup in the export order index.
