Macro insights - Negotiations on trade and Brexit continue, but has progress been made

Negotiations on trade and Brexit continue, but has progress been made?

Trade tensions continue to dominate market focus in the US.

The US announced it would defer the planned increase in tariffs - to 30% from 25% - on $250bn of China imports, in exchange for $40-50bn of agricultural product purchases by China, a transparent currency regime and increased US access to Chinese financial services. Though this is a positive development, we are sceptical of how long this might last. China subsequently suggested that these “Phase One” agreements should be subject to further talks before it signs any partial trade deal at the upcoming Asia-Pacific Economic Cooperation meeting in November. Moreover, “Phase Two” negotiations, concerning intellectual property protection and forced technology transfer, have always been thornier and are implicitly associated with the potentially more damaging tariff increases still scheduled for 15 December.

Trade tensions will continue to dominate the economic outlook.

The coming week’s Empire State and Philadelphia Federal surveys will provide the first estimates of October’s US manufacturing activity. Given the deterioration in both manufacturing and non-manufacturing surveys so far, we expect the Federal Reserve to announce a further 0.25% cut to the Fed Funds Rate at its meeting on 30 October, as well as resuming balance sheet expansion - albeit for liquidity, rather than monetary policy reasons. 

Last week’s surprise Brexit development was that a private meeting between UK Prime Minister Boris Johnson and the Irish Taoiseach Leo Varadkar resulted in what was described as a “pathway to a deal”. After weeks of negative reporting, the ensuing few days have seen the UK and European Union (EU) in “intense” negotiations to finalise a deal, though few details have emerged.

This led to a marked 4% rally in sterling to $1.27 to the US dollar from $1.22 at the end of last week. However, the EU negotiator Michel Barnier suggested yesterday that the UK’s proposals were “fiendishly complex” and “lacked detail”. The prospect of finalising a deal by Thursday – the EU Summit - appears a tall order and sterling has retreated to $1.26. After that, the UK’s upcoming Saturday session of Parliament will coincide with PM Johnson’s legal obligation to seek to extend Article 50. This, we think, is likely to be followed by the scheduling of a UK General Election, which could see the momentum to finalise a Brexit deal dissipate. But recent developments will be important if PM Johnson is returned with a majority after an election.

Events over the coming three weeks until 31 October will remain very fluid and will overshadow the important labour market and inflation data reported on Tuesday and Wednesday.

The European Central Bank minutes released last week revealed that although there was broad agreement on the protracted weakness of the euro area economy and the need to act, the decision to restart quantitative easing was very controversial.

This came as no surprise given the vocal criticisms and remarks made by individual Council members over the past few weeks. This week the annual International Monetary Fund (IMF) and World Bank meetings will be worth watching with Christopher Lane, Jens Weidmann, François Villeroy de Galhau, Pablo Hernándex de Cos and Ignazio Visco scheduled to speak. The main event will of course be the EU/UK summit, while the data calendar is light with only the ZEW economic sentiment survey tomorrow. Last week, German industrial production and trade data suggested that Germany could escape technical recession in the third quarter (Q3), but indications for Q4 remain bleak.

Polish parliamentary election results are due today.

Exit polls suggest that the ruling Law and Justice party (PiS) could have obtained a simple majority in the Lower House (Sejm) with 43.6% of votes in its favour. As such, PiS should be able to form a government on its own again. This would be in line with indications from pre-election opinion polls and most likely with financial markets expectations. The growth-stimulative policies of the PiS are therefore likely to continue.

 

Upcoming events

US: Empire State manufacturing survey (Tuesday), retail sales, NAHB housing market index, Federal Reserve releases Beige Book (Wednesday), Philadelphia Fed manufacturing index, industrial production (Thursday)

Euro Area: German ZEW sentiment survey (Tuesday), Consumer Price Index (CPI) (Wednesday), European Union Council Summit (Thursday and Friday), Swiss General Election (Sunday)

UK: State Opening of Parliament, Bank of England (BoE)’s Deputy Governor Sir Jon Cunliffe speech in London (Monday), unemployment, BoE Governor Mark Carney gives parliamentary testimony, BoE’s Gertjan Vlieghe speech in London (Tuesday), CPI, Governor Carney takes part in an IMF panel discussion and speaks at Harvard Kennedy School (Wednesday), retail sales (Thursday), Parliament sitting after EU Council (Saturday)

China: Trade balance (Monday), CPI (Tuesday), Q3 GDP (Friday)

Other: IMF World Economic Outlook published (Tuesday), IMF Global Financial Stability Report published (Wednesday), IMF Managing Director Kristalina Georgieva press conference (Thursday)

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