Key events in developed markets

The Federal Reserve has characterised the interest rate cuts of July and September as a mid-cycle adjustment to ensure US economic growth remains robust in the face of the headwinds from weaker global activity and trade relations. However, recent data has suggested that the US manufacturing sector is in recession, capital expenditure plans are being cut and the pace of hiring is slowing. Consumer confidence has also been declining, suggesting some contagion to the more domestically focused parts of the US economy.

This week, we will get the ISM manufacturing report, which may improve modestly given regional surveys did not fall as fast as this national ISM measure has done recently, but it will be the labour market that is the focus. All indications suggest that it is tight with unemployment at multi-decade lows, but uncertainty appears to be making more and more firms wary about hiring. We therefore expect further evidence to suggest that payroll growth is sitting closer to 150,000 per month versus more than 200,000 per month over the past few years. As such, the US economy is not dropping off a cliff, but it is set to experience a weaker period of growth. Consequently, we think the Fed will choose to lower interest rates again in December and early 2020.

The UK manufacturing sector has been volatile over recent months. Brexit-related stockpiling helped boost production in 1Q19, before subsequently falling back in 2Q. It’s unclear whether firms will again have seen a modest increase in new orders as businesses prepare for the current 31 October deadline. Either way, with inventory still high and warehousing space limited, any increase in the manufacturing PMI will be modest and will remain well below the breakeven 50 level. Of course, it’s worth remembering that manufacturing represents only around 10% of the UK economy, and the continued domestic and global uncertainty is continuing to weigh on the much larger service sector.

That said, we think it’s unlikely that the Bank of England will follow the Fed and ECB into policy easing just yet.

The eurozone focus next week will be on service sector strength. The September PMI showed a marked weakening in service sector activity, increasing worries that the manufacturing downturn is starting to spill over to the wider economy. The unemployment rate for August will shed light on whether the economy will still be supported by tailwinds from the labour market. On Thursday, August retail sales will provide insight into 3Q consumer spending. The volatile indicator ticked down in July and without a bounce-back in August, consumer spending could well contribute negatively to GDP growth in 3Q. What looks like the most important indicator is inflation, to be released on Tuesday. While always important to keep an eye on, it looks like it remains stuck around 1% for the moment, so the September inflation release will likely just be glanced over by the ECB bar any big surprises.