Key events in developed markets

All eyes on the ECB this week as months of buildup should now result in dovish action. A rate cut seems to be a done deal, the big question is whether renewed QE will be part of the package. The governing council is likely to remain divided on the topic as quite a few ECB speakers have come out against a reboot of the asset purchase programme in recent weeks. Markets have come down on the side of the doves on this one and disappointment is therefore a possibility come Thursday.

The law that seeks to avert a ‘no deal’ exit on 31 October is likely to pass through parliament as we head into next week. The only question then is if, and more importantly, when, we get a general election. The Conservative party is pushing for an election in mid-October, but all the signals suggest the Labour party will push for a later date – potentially after the current 31 October deadline.

Either way, a general election will be extremely tough to call. Conservatives currently lead in the polls, but the picture is much more complicated. For markets, this means the ‘no deal’ risk hasn’t gone away forever. If Mr Johnson’s Conservative party retain power, then he may push for the UK to leave without a deal if parliament still can’t agree on a withdrawal agreement.

Meanwhile, the highlight in the UK data calendar will be the jobs report. Wage growth is likely to stay close to post-crisis highs, and this is why the Bank of England has hinted that it is still mildly inclined to hike interest rates further if it can. In reality though, Brexit uncertainty points to a prolonged period of pause.

The recent US economic data flow has suggested that the domestic-focused, consumer-orientated parts of the US economy continue to perform well while the more international and manufacturing-related parts of the economy are struggling. This week’s data is likely to keep that trend in place with retail sales the key release to watch. Given employment is strong, wages are rising and gasoline prices have been falling, consumers have cash to spend. Auto sales were strong in August, but the plunge in energy costs will see weaker gasoline station sales. Other components look set to post respectable gains. Consumer confidence may rise modestly after a couple of sizeable falls while inflation is going to be depressed at the headline level by energy costs, but core inflation is set to continue trending higher.

This situation will leave the Federal Reserve in a quandary. Currently they appear reluctant to acquiesce to Presidential demands and market expectations of aggressive cuts to interest rates. Of course, trade discussions remain critical to the outlook. Should we get a positive conclusion in coming months then this can remove a dark cloud hanging over the global economy, but should they fail then the gloom in manufacturing may increasingly spread through the economy. For now, we continue to look for 25bp Federal Reserve rate cuts in both September and December.