Calm Before The Storm
The UK financial markets are focused on the upcoming general election. The campaign is now in full swing with most parties have launched their manifestos and a string of live and likely-to-be-lively TV debates lined up.
A snap poll following the first debate showed the PM as only a marginal winner 51% to 49%. However, the Conservatives continue to hold a strong lead in polls regarding the likely result of the election. So far, the impact of the campaign on market pricing seems to have been limited. Sterling continues to trade around the top end of its trading range for the second half of this year . Broadly speaking, it has only moved marginally over the past few weeks - reflecting the afore-mentioned range trading. Volatility may rise as the election draws near and also in response to opinion polls that are out of sync with market consensus. Economic data releases have had little impact on UK financial markets of late and that seems likely to continue to be the case with next week’s sparse calendar.
Possibly of most interest will be the November readings for the GfK consumer confidence measure and the Lloyds Bank Business Barometer (both due next Friday). Their outturns were mixed last month as consumer confidence dropped to a joint low for the year, whereas our business measure rose for the second consecutive month. Friday’s data will be watched for the impact on sentiment of the Brexit deal agreed with the EU and the announcement of the general election. Already released November ‘flash’ PMI data were much weaker than expected, with services activity in particular down sharply. However, it should be noted that these seem to have underestimated output growth compared to ‘official’ data inrecent months. Earlier in the week the CBI retail survey (Mon) will provide one of the first updates on the health of retailing in November. However, it should be noted that it has not been a good indicator of the official retail sales measure of late and that it will not include the impact of Black Friday sales. Also of interest will be the Bank of England’s lending and mortgage approvals data for October (Fri). That has recently been showing a relatively subdued level of activity in the housing market.
While UK markets are focused on Brexit, the number one issue for markets more globally is the ongoing trade negotiations between the US and China. Recent weeks has mostly seen a ‘risk on’ mood in markets reflecting optimism that a ‘Phase 1’ deal will be done before year end. However, sentiment took a turn for a worse this week after the US Congress voted for a bill supporting the Hong Kong protestors. That is expected to be signed into law by President Trump. The threat of possible Chinese retaliation led to a more ‘risk off’ mood amid concerns that a near-term deal may now be harder to achieve. Global equities fell sharply in mid-week, while US Treasuries rallied. However, sentiment stabilised after China’s chief negotiator said he was “cautiously optimistic” and invited US negotiators for further face-to-face talks. A key date is 15th December when a further round of US tariff hikes are supposed to kick in if a deal has not been agreed, although there have been some reports that those may be delayed. Meanwhile, markets are likely to continue to focus next week on reports of how negotiations are progressing.
It will be a holiday shortened week in the US with Thanksgiving on Thursday. Ahead of that, the data calendar is not particularly exciting. Wednesday’s Q3 GDP is a second estimate that is not expected to be revised from the initial increase of 1.9% annualised. Potentially more interesting to markets will be the indications of Q4 growth. Most significant of those will be October’s consumer spending (Wed). The consumer was again a key driver of US growth in Q3 and the data for October is expected to confirm that it will remain so in Q4. The report will also contain the latest reading for the Fed’s preferred inflation measure, the PCE deflator, which is expected to show inflation still below the 2.0% target. Other indicators of October activity will be the advanced trade report (Tue), new home sales (Tue) and durable goods orders (Wed). There are not many US Fed policymakers scheduled to speak but Fed Chair Powell will make his first public comments since this week’s meeting with President Trump. Despite the President’s demands for further rate cuts, Powell is likely to reiterate the Fed’s previous message that policy is now on hold while they monitor the impact of this year’s three reductions. This week’s Eurozone data provided some tentative indications that manufacturing activity is stabilising but that services output may be weakening. A combination of a rebound in the manufacturing measure but a fall in the services index pushed the November Eurozone composite PMI to just 50.3 (from 50.6 in October), only marginally in expansionary territory. Monday’s German survey for November may provide a further indication whether the slide in the country’s manufacturing sector is levelling off. Markets in particular will be watching for a further pickup in the expectations component. Meanwhile, Eurozone November annual ‘headline’ CPI inflation (Fri) is forecast to rise slightly to 0.8% (from 0.7% in October), still well below the ECB’s inflation target of close to but below 2.0%. Core inflation (excluding food and energy) is expected to be unchanged at 1.1%.
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See you next week!