All eyes on Fed, Trump and trade

Even as markets wind down towards Christmas and New Year, there is plenty on the agenda this week - from interest rate hike forecasts to trade data - to keep investors on their toes.

The US Federal Open Market Committee meeting tomorrow and Wednesday is expected to end with the last interest rate hike for this year, and investors will scrutinise its statement for clues on what to expect for next year.

The Fed's last median projection in September indicated there would be three hikes next year, but after more dovish comments from Fed chair Jerome Powell recently, markets are hoping for just one hike instead.

UOB's Global Economics and Markets Research team maintains its expectation of three hikes of 25 basis points in 2019, but said the policy path will become more uncertain if the Fed shifts from its well-worn "gradual rate trajectory" rhetoric to place more emphasis on data dependency.

Two other aspects of the report to note would be the Summary of Economic Projections (SEP) and the dot plot chart, UOB added.

Significant downgrade revisions to growth and inflation for next year in the SEP would be perceived as dovish and reinforce expectations for fewer rate hikes next year.

The US is also staring at the possibility of a government shutdown if US President Donald Trump does not get the funding he wants for a border wall in federal funding negotiations with Democratic leaders before the Dec 21 deadline.

However, markets are fairly unperturbed so far. Mr Trump previously made similar threats to shut the government down over immigration demands, but did not follow through.

In addition, the majority of funding for the federal agencies was approved earlier this year, leaving fewer agencies that will be affected by a lack of funding and the shutdown at this point.

Data releases this week will be monitored for impact from the trade war, but are likely to be overshadowed by other events like Brexit talks in addition to US-China trade headlines.

"Although trade tensions between the world's two largest economies seem to be easing following reports of China placing major orders of US soybeans and reducing the US car tariff, it may be too early for any celebrations," FXTM research analyst Lukman Otunuga said.

"With trade disputes in the past re-escalating just a few days after cooling, investors should remain cautious and on high alert."

This week, China will be focusing on its annual Central Economic Work Conference from Wednesday to Friday, where state leaders, ministers, provincial governors and senior advisers will set the policy priorities and tone for the coming year.

UOB expects their guidance for the 2019 economic outlook to include an early assessment of US-China trade negotiations.

Singapore releases its non-oil domestic export figures for November today. The UOB Global Economics and Markets Research team expects a contraction -2.8 per cent year-on-year in November from an 8.3 per cent rise year-on-year in October. It which would be the first decline since March.

Other markets reporting November trade data this week are Indonesia today, Japan on Wednesday and Thailand on Thursday. All will be scrutinised for trade war impact, said Prakash Sakpal, ING economist for Asia.

"The impact is becoming apparent, slowly but surely, as we've seen from weak November exports from north-east Asia including China, Korea and Taiwan," he noted.

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