Fed cuts again, Eurozone PMI surprises, UK prorogation ruling due
The US Federal Reserve took the spotlight last week.
In terms of monetary policy, its decision to cut rates by 0.25% to 1.75-2.00% was in line with our expectations. However, the dissent within the Federal Open Market Committee (FOMC) - with one member voting for a 50 basis points cut and two voting for no change - illustrated there is no clear direction in policy outlook. The FOMC’s rates outlook – its dot plot – showed only a minority, albeit a decent one, looking for additional cuts. We forecast one further 0.25% cut at the end of this year, although markets continue to foresee more rate cuts going into 2020. But recent developments have highlighted how uncertain this outlook has become. Adding to this uncertainty is the ongoing upbeat commentary on trade developments, suggesting that the White House administration may be softening its position on trade - with a view to economic performance going into an election year. We have heard similar positive trade assessments before, only to be disappointed. Moreover, we are wary of US trade policy with regards to auto tariffs and its implications for the European Union (EU) from mid-November. Indeed, the next twists and turns in the outlook for trade could be pivotal to the US monetary policy outlook. Separately, last week the Federal Reserve Bank of New York was also the focus of much opprobrium. A bigger-than-expected reaction in market rates, in response to seasonal short-end dollar funding pressure, led the Fed to introduce short-term liquidity operations, which it stands ready to back into October. However, underlying these developments is a broader question about whether the amount of reserves in the US system is still “abundant”. We now expect the Fed to resume “organic” growth of its balance sheet in the final quarter of this year, ahead of our earlier expectation of 2020.
The Eurozone Flash Purchasing Managers’ Index (PMI) for September surprised to the downside, dropping to 50.4, the lowest since mid-2013.
Quite worryingly, the decline was broad-based in terms of countries and also sectors, with manufacturing weakness showing signs of spilling over to the services sector. Such a poor reading is consistent with our forecast of 0.1% quarter-on-quarter GDP growth in the third quarter (Q3), and depressed forward-looking components bode ill for the last quarter of the year. Beyond business surveys – the German Ifo and French INSEE are released on Tuesday - attention will focus on speeches by members of the European Central Bank (ECB), in particular President Mario Draghi on Monday and Thursday. On the political front, the Spanish Socialist Workers’ Party, PSOE, failed to form a government in Spain, and the country’s fourth general election in as many years will be officially announced this week, likely taking place on November 10.
Brexit will continue to be the focus in a quiet week for UK data.
The UK’s Supreme Court is due to rule on the Government’s decision to prorogue Parliament, either today or tomorrow. Its decision could determine the tone of Brexit debate over the coming weeks. The Labour Party Conference gets underway in Brighton this week, but an underlying division in the Party continues to garner headlines. Despite Labour’s announcement of further provocative domestic policy initiatives, including changes to the privately-educated schooling model, media focus remains on whether grass-roots Labour Members of Parliament will force the leadership into a clearer, remain-leaning position. Meanwhile, senior resignations on the Conference eve continue to attest to divisions throughout the Party. UK Prime Minister Boris Johnson attends the United Nations Assembly this week in New York where he will meet German Chancellor Angela Merkel, Irish Taoiseach Leo Varadkar and US President Donald Trump. Finally, UK/EU negotiations continue in the background. The tone of these negotiations has certainly improved as the UK Government’s options have been narrowed by Parliament. However, there still seems a disparity in terms of substance, particularly over the Irish border. Further speculation that the EU will not offer a further extension if a deal is reached, or would only extend for an election or second referendum, adds to our assessment that the UK will avoid a no-deal exit on 31 October. We continue to envisage a further extension to allow for a General Election as the most likely outcome over the coming weeks.
Exports momentum in Asia remains weak but fiscal stimulus has begun.
In general, growth in regional exports continued to decline on the back of weak demand and trade war uncertainty. South Korea’s first 20-day export figure dropped to -21.8% year-on-year from -13.3% in August. This was the fifth month of double-digit decline and ninth consecutive month of deceleration. This weakness was broad-based to major destinations - China, the US, the EU and Japan - suggesting persistent soft global demand. However, although the smaller number of working days may have exacerbated the deterioration, the momentum will likely remain weak going forward. On the bright side, India’s Finance Minister last Friday announced a fiscal stimulus of 0.7% of GDP by reducing corporate tax rates by US$20bn. This announcement was positive for markets, demonstrated by a domestic equity market surge of almost 5.5%, the largest rally in a decade. With weakening growth taking precedence in governments’ actions and central banks’ policy calls, we expect more fiscal expansionary measures to head our way and central banks to ease more going into year-end.
US: Preliminary manufacturing and services PMI (Monday), final Q2 GDP, goods trade balance (Thursday), Personal Consumption Expenditures price index, preliminary durable goods orders, Michigan consumer sentiment (Friday)
Euro Area: German Ifo business climate index, French INSEE manufacturing confidence (Tuesday), German GfK consumer confidence (Wednesday), ECB publishes Economic Bulletin (Thursday)
UK: Supreme Court prorogation ruling (expected early this week), Labour Party Conference (Monday to Wednesday), public sector net borrowing (Tuesday), Bank of England Governor Mark Carney speaks in Frankfurt (Thursday), GfK consumer confidence (Friday), Conservative Party Conference starts (Sunday)
Japan: preliminary manufacturing PMI (Monday), Bank of Japan (BoJ) Governor Haruhiko Kuroda speeches (Tuesday and Thursday)
Other: General Assembly of the United Nations: high level meetings (Tuesday onwards)
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