Taking the pulse of Brexit
Scott Thiel, Chief Fixed Income Strategist:
“The gilt market has performed well recently because the Bank of England was a little more dovish than market participants had expected. With no deal behind us, the risk premium associated with gilts has come out a little bit. However, it’s really a function of Brexit and now the election, and that outcome is very hard to call. This election is hard to poll because there are domestic issues and Brexit that cut across party lines and cut across constituencies. We have to be careful not to read too much into the polling.”
What we think
Scott Thiel on the likelihood of recession
“Our view is that we’re in a late cycle economic phase. This is more consistent with a medium-term correction in policy, which is what we’ve just had. If we look at the economic profile going forward, we don’t see recession imminent in 2020 or 2021. We look at the comments (by the Federal Reserve) on the US consumer being very important, while Chinese economic growth looks to be coming in at 5.75-6%. As a result, from a global perspective, we don’t see significant risk of recession.
“The economic statistics we’ve had are consistent with past late developments. In a cyclical environment, there is usually overheating of the economy, tightening of monetary policy and then a recession. That’s not the dynamic we see today. The biggest question is the impact of the China trade negotiations.”
Week past
Bank of England rate decision – The Monetary Policy Committee left rates unchanged but gave a clear sign that a rate cut may be imminent. Two members dissented, voting for an immediate rate cut while the Bank said underlying UK growth had “slowed materially” in 2019.1
UK economic growth Q3 – Britain's economy grew at the slowest annual rate in almost a decade, with year on year economic growth at 1%, lower than the 1.3% expected. However, the UK continues to avoid recession. 2
UK employment and wages – UK wage growth slowed in the three months to September, with average earnings increasing by 3.6%, compared with 3.8% growth in the previous month. Unemployment dropped by 23,000 to 1.31 million over the same period. 3
German industrial production fell back to levels last seen at the start of 2017 in September, adding to recession fears for the Eurozone’s largest economy. Overall activity dropped 0.6% compared to August, weaker than the consensus for a 0.4% fall. 4
US/China trade tensions - US President Donald Trump said some US tariffs on China are likely to remain in place even if a trade deal is agreed. China's Commerce Ministry responded by saying the two sides had agreed to cancel the tariffs "in stages".5
1 Bank of England ready to cut rates if economy slows further, Financial Times, November 2019
2 UK growth 'slowest in almost a decade', BBC, November 2019
3 UK wage growth slows as unemployment falls, November 2019
4 German industrial production slumped in September, Financial Times, November 2019
5 Trump says no full 'rollback' of China tariffs, BBC, November 2019
Week ahead
UK Inflation (October) - Prices are expected to rise 1.8% year on year and 0.2% month on month. This is marginally higher that last month’s growth of 1.7%.6
UK retail sales (October) - Sales are expected to be 3.2% ahead of the same period last year, but down 0.2% month on month. The recent British Retail Consortium and KPMG figures earlier this month showed that the value of retail sales rising 0.6% year on year, the fastest annual growth rate since April.6,7
Eurozone gross domestic product (GDP) (Q3, preliminary) – Overall, GDP is expected to rise 0.2% quarter on quarter and 1.1% year on year, but all eyes will be on Germany and whether it dips into recession. Eurozone industrial production is expected to be particularly weak.6
Eurozone inflation (October) – Prices are expected to rise 0.2% month on month and 0.7% year on year. Last month saw Eurozone inflation slow to its lowest level in nearly three years.6,8
US retail sales (October) – The US consumer has been an important engine of global growth, but has been flagging in recent months. Commerce department data showed sales dipping 0.3% in September. This month, sales are forecast to rise 0.2% month on month.6,9
US Inflation (October) – Inflation is expected to rise 0.3% month on month and 1.7% year on year. Inflation expectations have been falling.6,10
Japan GDP (Q3, preliminary) – Japan’s economy is expected to grow 0.4% quarter on quarter and 1.3% year on year, in spite of the recent impact of the hike in sales tax.11
6 The Week Ahead, IG index, November 2019
7 Retail sales rise as shoppers shrug off political uncertainty, Financial Times, October 2019
8 Eurozone inflation rate drops to three-year low as outlook darkens, Financial Times, October 2019
9 US retail sales fall by the most in seven months, Financial Times, October 2019
10 US inflation expectations slip to record low in Federal Reserve survey, October 2019
11 Economic Calendar, FX Street, November 2019
The opinions expressed are as of November 2019 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative only.
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