October Economic Update: Buffeted by political storms
The global economy continues to drift, but October looks set to be a month of political action that could cause a stir in financial markets. From trade talks to Brexit, find out what our economists and strategists are expecting as we enter an uncertain period in the global economic cycle.
October Economic Update: Buffeted by political storms
The global economy continues to drift, but October looks set to be a month of political action that could cause a stir in markets. The US Presidential impeachment process is getting underway. While we doubt it'll succeed, it could make President Trump more willing to move in China-US trade negotiations to deliver a "win" that his re-election campaign desperately needs. In Europe, there are tentative signs that governments are willing to spend more to help activity. Brexit is once again centre stage as hopes of a last-minute deal ahead of the 31 October deadline fade. An Article 50 extension is likely, and an election looks almost inevitable, but given the volatility in UK politics, this may not bring the clarity businesses, and markets are hoping for.
US: A polarised nation
The latest economic and political newsflow highlight the divides in the US. Presidential impeachment hearings are set to go ahead so there is little prospect of any bipartisan policy agreements ahead of the November 2020 election. With trade and global growth worries lingering, markets will continue to look to the Federal Reserve to provide support
Eurozone: Fiscal policy to the rescue?
Forward-looking indicators like new orders and hiring intentions point to a further growth slowdown in the coming months, although strong real money growth and a modest fiscal stimulus would be compatible with some improvement in the course of 2020. The ECB is unlikely to remove any monetary stimulus before 2022
UK: Brexit - election looms as chances of last-minute deal fade
The massive gulf between the UK and the EU on the Irish backstop mean chances of a revised deal this month are slim. Failure to get an agreement approved by MPs would oblige the UK prime minister to ask Brussels for more time. The way Boris Johnson tackles this deadline, and the way an extension is viewed by voters, will be key in a late-2019 election
China’s not so happy 70th birthday
The 70th anniversary of the People’s Republic of China came against the difficult backdrop of the trade war, protests in Hong Kong, swine flu and a struggling economy
Japan: Trying times
After all the speculation, Japan’s government has imposed the consumption tax hike. The coming months will be heavily distorted by this and it may not be until the New Year before we have clarity on how this plays out
FX: Dollar remains in demand
Having proven to be the strongest G10 currency over the third quarter, the dollar should also perform well in 4Q. Keeping the dollar bid are familiar themes such as expensive dollar hedging costs and unattractive investment stories outside of the US. We can’t see these themes changing anytime soon and expect EUR/USD to trade between 1.05 and 1.10 in 4Q
Rates: The twilight zone
We get accustomed to extreme levels as we hit them, but a 1.5% US 10-year inflation break-even and a practically zero 10yr real rate is worth paying attention to. German real yields at -1.5% is another one. These are not just levels, they are also market discounts painting a gloomy picture for the future. And these implied expectations are only getting worse
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3 October 2019
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