Macro insights

Global economic slowdown underlined by weak sector data

Last week saw important US economic data emerge.

The continued weakening in the manufacturing ISM index reflected ongoing global softness, which was likely exacerbated by the General Motors strike that has entered its fourth week. However, the drop in the non-manufacturing index – below the low set in the 2015/16 slowdown – was more troublesome, suggesting more spill-over, than seen to date. Friday’s employment report was by comparison more equivocal, with a further softening in the headline employment growth number, but strength in the alternate household survey contributing to a drop-in unemployment to 3.5% - marking a 50-year low. While more heartening, we consider the labour data to be more of a lagging indicator - and with pay growth also softer - there were more concerning forward-looking trends. We therefore adjusted our interest rate outlook again, bringing forward a final expected cut from the Federal Open Market Committee (FOMC) to the 30 October meeting, from December. For now, we continue to see this as the final cut, with the Fed’s three 25 basis points cuts so far this year already showing signs of bolstering housing and consumer durable good spending, to offset headwinds from manufacturing. However, risks are clearly skewed to the downside, in part reflecting our fears that trade negotiations between the US and China this week will not avert a five-percentage point increase in tariffs next week, even if the APEC meeting in November holds out more hope of a pause in the next proposed tariff hikes in December. FOMC minutes on Wednesday evening will give a clearer outlook for the Fed’s next move. However, ongoing impeachment developments add to uncertainty, both directly and depending on how President Trump reacts to the renewed domestic political pressure. 

Euro area: Depressed business sentiment confirmed as September’s final PMIs revised down from 50.4 to 50.1,

on the back of intensified weakness in the manufacturing sector with a spill-over into services. Germany factory orders surprised on the downside, dragged lower by poor domestic demand. National industrial production data, to be released this week, will likely confirm the lacklustre survey data. We still expect euro area growth at 0.1% quarter-on-quarter in the third quarter (Q3) but risks are skewed to the downside, especially going into Q4. On the political front, as expected, Portugal’s ruling Socialists won the parliamentary elections, but fell short of the majority with 106 seats (versus a majority of 116 seats, and up from 86 in 2015). Negotiations with the Left Bloc, the Communists and People-Animals-Nature party to form a minority government will likely take a few weeks. We expect policy continuity and broad compliance with the European Union’s fiscal framework. This week attention will focus on the European Central Banks’s minutes, which are published on Thursday, although it is not clear if we will learn much, given the pretty vocal criticism and divergence within the Governing Council since the September meeting. The Ecofin meeting (Thursday/ Friday) might be worth watching as we could get some information on the replacement of Sabine Lautenschlaeger at the ECB. 

In the UK, last week’s PMIs underlined the risks that the global economic slowdown posed to the UK economy.

This Thursday sees monthly output data for August, including industrial production, construction and GDP, which will go some way to confirm the outlook for Q3 growth, which we currently estimate at 0.3%. However, Brexit still dominates the UK outlook and will continue to do so over the coming weeks. Last week the government set forth proposals surrounding the Irish border. While marking a significant concession from the UK’s previous position, they still fell short of what the EU is likely to deem acceptable. We await signs this week that the EU is prepared to seriously negotiate on these latest proposals - that could lead to a further narrowing of the differences ahead of next week’s Summit. However, we doubt this gulf can be bridged over the next couple of weeks. Rather, we envisage next week’s Summit will leading to no deal, forcing Prime Minister Boris Johnson to obey the Benn legislation and request a further extension of Article 50 – despite his assertion over the weekend that the UK would still leave the bloc on 31 October. We expect this to be swiftly followed by an election (before year-end). If Johnson emerges from this election with a stronger majority, would we expect the EU to have to more seriously consider the terms of the UK’s current position, which could form the basis of a deal in early 2020 as it approaches what would likely be a “final” deadline.


Upcoming events

US: NFIB small business optimism index, Producer Price Index (PPI), Federal Reserve Chair Jerome Powell NABE Conference speech (Tuesday), Fed Listens event in Kansas City including Chair Powell, FOMC meeting minutes (Wednesday), Consumer Price Index, expected US-China trade talks in Washington (Thursday), preliminary Michigan consumer sentiment index (Friday)

Euro Area: German and Spanish industrial production (Tuesday), European Union finance ministers meet in Luxembourg (Wednesday), European Central Bank account of September policy meeting published, German trade balance, French and Italian industrial production (Thursday), German and Spanish final HICP (Friday)

UK: Prorogation of UK Parliament, Bank of England speeches: Governor Mark Carney in Tokyo, Chief Economist Andy Haldane in Lisbon, Silvana Tenreyro in Frankfurt (Tuesday), August GDP, industrial production, trade balance (Thursday)

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