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Bill Evans, chief economist at Westpac, suggests that trade disruptions will be a certain theme through 2019.

Key Quotes

“We have seen that trade concerns have also weighed on the Chinese economy. Other more significant drags on Chinese growth have been winding back the shadow banking system and pollution policy. We expect credit policies, an easing in pollution restrictions and direct fiscal stimulus will all be used to maintain a managed slowdown in China. We are targeting a 6.1% growth rate in 2019 down from 6.4% in 2018.”

“Other regions are less important to the overall global view. Emerging markets will suffer under the weight of rising US interest rates and a higher USD. Japan will be preparing for the introduction of a new consumption tax. Europe will be impacted by the China/emerging markets slowdown and homegrown concerns around Brexit; Italian instability; political unrest in France and Germany; a gradual tightening of monetary policy as the ECB halts its balance sheet expansion from the beginning of 2019. European Parliamentary elections due mid year could be a focal point for many of these issues.”

As reported by Reuters, US Federal Reserve chairman Jerome Powell is setting up a rocky road for investors in 2019 as the chairman sets up for an “unscripted approach” in 2019, where Powell will be giving more post-Fed news conferences than any other Fed chair before him as the new Federal Reserve abandons forward guidance.

Key quotes

Powell took office in February determined to improve the Fed’s communications with Congress and the public. He meets frequently with legislators, and speaks about policy in a style that is less economic textbook and more folksy than past Fed chiefs, who in recent decades have all been economists. That style may have been part of Powell’s appeal to Trump, but it has arguably contributed to market volatility as investors hang on Powell’s every word for clarity on how much further the Fed may raise rates.

Complicating matters further, weaker global growth may threaten what have been powerful gains in the U.S. job market and strong domestic growth.

It is against this background that starting in January Powell will hold a news conference after every Fed meeting to provide more clarity about Fed actions and thinking, as he explained when he announced the change in June. The change will mean that Powell will hold eight news conferences in 2019, up from the current practice of four per year.

But the change also increases the odds of a stray market-rankling remark. It might be a good time to say even more forcefully that the Fed does not have all the answers, said former Fed Vice Chair Alice Rivlin. “That’s always difficult,” Rivlin said, recounting Greenspan’s reaction when she used the word “guess” in a speech. “(He) said, don’t use the word ‘guess’ because it sounds like we don’t know what we’re doing. And I thought well, okay — but we don’t.”

Goldman Sachs, citing a steepening global economic slowdown and a US economy that could be much closer to steady levels than previously thought, is slashing their rate hike forecast for 2019 from the US Federal Reserve.

Key highlights

A rate hike in Q1 quite unlikely.

Our estimates for the probability of hikes in subsequent quarters have also come down to 55% for Q2 (from 65%) and 45% in Q3 (from 55%).

We still view the probability of a hike in Q4 as 55%, i.e. slightly more likely than not.

We have also slightly raised our probability of rate cuts to 10% in Q3 (from 5%).

These probabilities generate an expected value of 1.2 net hikes in 2019, compared with market pricing of zero hikes.

A slowdown is already evident in the numbers.

The impulses from fiscal policy and financial conditions are turning more negative.

Unemployment is already ¾pp below our 4½% estimate of the rate consistent with a 2% inflation rate in the medium term … other measures of labor market slack confirm the message of labor market tightness. Given the close correlation between labor market overheating and subsequent recession, Fed officials will want to see a significant slowdown in growth. This means that if financial conditions reverse too much of their recent tightening, Fed officials would likely turn more hawkish to keep growth from rebounding too much.

As reported by Reuters, China’s contractionary PMI sees an economic slowdown beginning to pick up speed after the first PMI contraction in over two and a half years.

Key quotes

The official Purchasing Managers’ Index (PMI) fell to 49.4 in December, below the critical 50-point level that separates growth from contraction, according to data released by the National Bureau of Statistics (NBS) on Monday.

There are already signs trade frictions between the economic giants are hurting global supply chains with concerns the effects could become more pronounced next year in a blow to world trade and investment.

Chinese authorities are expected to roll out more supportive measures on top of a range of policy initiatives this year. A prolonged downturn in the factory sector, key for jobs and the overall health of the economy, would likely draw further steps to juice up domestic demand.

New export orders contracted for a seventh straight month on faltering external demand, with the sub-index falling to 46.6 from the previous month’s reading of 47.0.

• New Years sees markets trading flat, with crude oil strung out in consolidation.
• Upcoming OPEC+ production cuts could see prices back on the rise if energies traders believe the cuts will eat away at US oversupply.

Oil markets have strung out at familiar levels as broader markets head into the New Years shutdown, and crude barrels are constrained at near-term consolidation despite last week’s quick plunge into the 42.15 region for US crude prices. WTI has stabilized at the 45.00 handle, but the latter half of this week is primed for a fresh resurgence of swinging investor sentiment.

The US remains one of the world’s largest overproducers of crude oil, clocking in over 11 million barrels per day in production, and the massive supply glut is seeing oil energies buried at the low end; OPEC+ has promised to begin cutting production by over a million barrels per day beginning in January, with Russia announcing an excess production cutback, but barrel traders will be waiting to see if the production limits will be able to have an effect on the wave of WTI pouring out of the US into global supplies.

WTI Technical Levels

China’s NBS Manufacturing PMI for December slid to 49.4, falling past the forecast 49.0 and contracting over the previous month’s 50.0 reading as manufacturing in China continues to slip.

Despite the missed manufacturing read, Chinese Non-Manufacturing PMIs for the same period improved, ticking into 53.8 from the previous 53.4, which should help to keep Pacific investors upright.

• Risk-based pairs struggle to pick up momentum ahead of News Year’s.
• The Guppy remains constrained at the 140.00 key level as investors await a push in either direction.

GBP/JPY continues to grind sideways around the 140.00 major handle as broader markets see overall sentiment remain hung in the middle.

Economic data is clear for the rest of Monday’s thin action, though markets will likely remain trepidatious ahead of the New Years holiday after Chinese Manufacturing PMI missed the mark.

Heading into January, the Sterling will be facing down a fresh volley of political headlines, with Prime Minister Theresa May’s Brexit withdrawal proposal finally set to make the rounds of the UK’s House of Commons prior to a parliamentary vote on the bill, which looked set for a failure in December, but May and her allies are hoping to squeeze more yes votes out of naysayers by running down the Brexit clock. PM May will be facing her own vote in the UK’s parliament in January, when the UK’s House of Commons is also expected to begin with a no-confidence vote in PM May, tabled by the UK’s main opposition Labour Party.

GBP/JPY Technical Levels

• AUD/JPY is currently trading at 77.80 from a low of 77.60 and a high of 77.92
• AUD/JPY was moved all of 10 pips by the release of the Chinse PMIs’. 

Official PMI data from China for December 2018 arrived at 49.4, moving into ‘contraction’ for the first time since July of 2016 vs the expected 49.0 and prior 50.0
The non-manufacturing for December came in at 53.8 vs. expected 53.2. This data is not going to give the bulls a leg to stand on and casts a negative outlook for the start of 2019. 

Going into the New Year, China faces not just a slowing economy but also a protracted trade war with the US. What investors are fearing the ost, however, it is the amount of piled up debt that threatens the global economy along with the Chinese financial system – The Chinese face either painful reforms or pushing headline growth beyond traditional levers. Economic growth is expected to slow to 6.3% next year, after reaching 6.6% in 2018 while the nation’s expanded by 6.5% in the third quarter, the country’s worst quarter since 2009.

As for the Aussie, it trades as a proxy to China’s and commodities performance and the yen side of the cross tracks risk appetite making the pair a risk barometer for the FX space; The pair will likely be in vogue for the start of 2019.

AUD/JPY levels

AUD/JPY is flat around the pivot, consolidating with the broader trend intact, leaving a bearish bias on the charts. S3 is located down at 76.83 However, the bears broader target is down at 75.29 as the 161.8% Fibo extension of the recent downside and range between Oct lows and Dec highs. 

Investor sentiment is seeing some upside for early Monday trading as the Pacific-Asia market session sees some lift from US President Donald Trump, who tweeted over the weekend about positive progress on trade talks with China.

Just had a long and very good call with President Xi of China. Deal is moving along very well. If made, it will be very comprehensive, covering all subjects, areas and points of dispute. Big progress being made! – President Trump, via Twitter

Though actual evidence of progress remains to be seen, investors will be happy with positive statements as they see US President Donald Trump backing away from his usual trade-war rhetoric against China, and traders will be looking for further developments heading into 2019.

• USD/JPY is trading at 110.34 and in a standstill ahead of the Chinese PMIs, which if ignored, will likely leave the yen perched on the bid for the end of 2018. 
• USD/JPY has been broadly offered due to risk-off sentiment as we head into 2019. 

USD/JPY has dropped from the early Dec highs on the 114 handle and has been sliding as stock markets put on a show into year end. Investors are looking for safer havens in the main, although there has been quite a turnaround, in price action at least, in the last few sessions during illiquid holidays allowing for wild moves.

Stocks have been a roller-coaster

• What’s been happening over the holiday period and what can we expect for the first week of the New Year?

As explained previously in, What’s been happening over the holiday period and what can we expect for the first week of the New Year?, the Dow’s best daily performance came on 26th: “Traders pounced on beaten-down stock prices that came from a brutal sell-off on a shortened Christmas Eve. Both the Dow and S&P added 5% on the 26th and the NASDAQ 5.6% – Those were the best gains since 2009,  just after suffering the worst decline in history in the trading session before Christmas.” This sent USD/JPY higher, by only by a fraction in percentage and relative terms to the US stock markets leaving a bearish outlook on the charts still. At the same time, however, the U.S. rate complex is sinking as investors out price the Fed. the 2- and 10-year US Treasury yields hit a new low and hover near recent lows, adding weight long yen.

• China and International Trade in 2019: The crossroads of a great power

Markets now await the Chinese PMIs which may have some impact considering how investors are positioned for a Chinese slow down which investors fear could set the stage for 2019 and weigh on the broader global economic recovery. Elsewhere, Sino/US trade relations will be under the microscope as a mid-level US delegation is reportedly going to be heading to China in the week of January 7th to initiate the next round of trade talks. 

USD/JPY levels

• Support levels: 110.15 109.80 109.45
• Resistance levels: 110.75 111.05 111.40

Valeria Bednarik, Chief Analyst at FXStreet explained that the short-term picture for the pair is bearish, as it’s developing comfortable below the 38.2% retracement of the March/October rally at 110.75, the immediate resistance:

“In the 4 hours chart, the 100 and 200 SMA gain downward strength far above the current level, while technical indicators maintain downward slopes, the Momentum within neutral levels but the RSI currently at 37, anticipating additional declines ahead.”