Japan’s manufacturing activity stopped expanding in December. Activity in Japan’s manufacturing sector fell to the neutral mark in December, according to flash Purchasing Managers’ Index data out this morning, after two-and-a-half years of expansion. This follows trade data yesterday that showed Japanese exports fell 3.8% year over year in December, the slowest pace in two years amid slower growth in China and global trade tensions. Just one year ago exports were growing at a double-digit annual pace. However, in an encouraging sign, the IMF raised its gross domestic product growth forecast for Japan earlier this week from 0.9% to 1.1%, and the Bank of Japan voted to maintain its ultra-loose monetary policy when it met earlier this week. Our cautious tactical view of developed international equities is more Europe-driven, as discussed in this week’s Weekly Market Commentary, and while we still favor U.S. and emerging market (EM) equities, among developed international markets we continue to favor Japan over Europe.
ECB stands pat on rate plans, downgrades growth expectations. At the conclusion of its monetary policy meeting earlier today, the European Central Bank (ECB) left its key deposit rate at -0.4%, as expected. It also reiterated that it expects the key “interest rates to remain at their present levels at least through the summer of 2019” and intends to continue reinvesting principal payments from maturing securities for an extended period of time past the date when it begins raising rates. However, in his post-meeting press conference, ECB President Mario Draghi acknowledged that risks remain to the downside as economic data has deteriorated recently, and inflation has failed to sustain any upward momentum.
Europe’s woes go beyond Brexit. Brexit is not the only risk in Europe for global investors to consider. Throughout the continent, a tighter regulatory environment and strict labor laws have restricted business growth, while the rise of populism has added obstacles. Today on the LPL Research blog, we outline potential outcomes for the U.K.’s pending separation from the European Union, as well as other issues weighing on the region that suggest investors tread carefully.
Bring on the stimulus. China’s economy grew 6.4% year over year in the fourth quarter of 2018 and 6.6% for the full year, its slowest pace since 1991. Other data including retail sales, industrial production, and capital investment corroborate the slowdown. Economic weakness puts additional pressure on the Chinese to resolve U.S. trade issues and increases the odds of meaningful fresh stimulus. A potential U.S.-China trade agreement over the next several months would also have a stimulative effect and we think could help buoy performance of EM stocks.
- Initial Jobless Claims (Jan. 19)
- Markit US Composite PMI (Preliminary, Jan)
- Markit US Manufacturing PMI (Preliminary, Jan)
- Markit US Services PMI (Preliminary, Jan)
- Leading Index (MoM, Dec)
- Japan Leading Index (Nov)
- Markit Eurozone Manufacturing PMI (Preliminary, Jan)
- European Central Bank Rate Decision (N/A)
- Japan Tokyo CPI Report (Jan)
- Durable Goods Orders (Preliminary, Jan)
- New Home Sales (MoM, Dec)
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