Key events in developed markets next week

It would be a big shock if former foreign secretary Boris Johnson isn’t unveiled as the new Conservative prime minister next week. According to betting odds at PaddyPower, Mr Johnson has a 97% chance of winning. Attention is turning to his stance on Brexit, and come September, one of his first acts will be to return to Brussels to attempt a renegotiation of Mrs May’s deal. However recent comments from Mr Johnson have specifically ruled out various potential compromises, and he has emphasised that he is focussed on removing the Irish backstop from the deal – something Brussels is unlikely to allow.

If a compromise is to happen, it may involve a longer transition period. That could help signal that the controversial backstop won’t kick-in for the foreseeable future, but the new PM will still find it hard to get it through parliament.

As the October deadline approaches, recent rhetoric suggests Mr Johnson would be prepared to pursue a ‘no deal’ exit if he can’t get a revised deal passed. But in this case, we think parliament would step in and force an election if no alternative legislative tool existed to block ‘no deal’.

The data focus next week will be the 2Q GDP report and although the headline outcome is likely to be softer than recent quarters, the underlying story should offer enough encouragement to ensure the Federal Reserve eases policy by 25bp on 31 July rather than by 50bp. 1Q GDP was boosted by a big net trade contribution as imports plunged after manufacturers and retailers built up stocks in 2H18. US firms had effectively brought forward purchases that would ordinarily have been delivered in 1Q in order to avoid feared tariffs on Chinese imports from 1 January. The tariffs didn’t actually happen (cancelled by the President in December 2018), but US companies didn’t have time to adjust plans so net trade contributed a full percentage point to 1Q GDP growth. There was also further domestic inventory building contributing 0.6 percentage points to the total GDP growth of 3.1%.

Both of these factors are likely to unwind and turn into major drags on 2Q GDP while softer durable order numbers point to weaker investment growth. However, the consumer sector is in great shape with consumption likely to grow by more than 4% given the recent retail sales numbers and the fact that unemployment is low, wages are rising and confidence is high. With the Federal Reserve’s Beige Book commenting that “the outlook generally was positive for the coming months, with expectations of continued modest growth, despite widespread concerns about the possible negative impact of trade-related uncertainty”, we continue to expect just two 25bp rate cuts in total versus the four priced by markets.

All eyes will be on the ECB next week as data has disappointed over recent weeks, which increases the chances of early action. The big question is whether it will act now or whether it will stick to very dovish communication including an extension of the forward guidance for the moment. Data out next week could still play a bit of a role for the governing council to determine whether it already needs to move, as the PMI, Ifo and consumer confidence are released just before the ECB meeting.