New Year New Concerns
Happy New Year from all of us at Heritage Pay!
The new year brings with it different concerns: a fresh Brexit chapter in the UK; a beleaguered US President facing impeachment and whose actions could become increasingly erratic in an election year; a worsening economic situation in Zimbabwe; a deeply unpopular government in Australia and by the end of the year possible warning signs of the early stages of a likely global slowdown.
In the UK, things will return to normal next week after the Christmas break. In particular, parliament reconvenes on Tuesday with the final passage of the EU Withdrawal Act first on the agenda. Three days of discussion are scheduled after which the bill is expected to go to the House of Lords on Thursday. Given the Government’s substantial majority the Bill seems certain to pass ensuring that the UK, by the end of January, enters the transition period ahead of full withdrawal. Discussions between the UK and the EU on their long-run relationship will then get underway. After a brief rise immediately following the UK election, the pound subsequently depreciated sharply in the last few days of 2019. A number of reports attributed the slide to an escalation in concerns that a ‘no deal’ Brexit remains on the cards boosted in part by PM Johnson’s decision to amend the withdrawal bill to rule out an extension of the transition period past the end of this year. That seemingly leaves a very tight timetable for agreement on future relations between the UK and the EU. Sterling has subsequently stabilised near to the middle of its trading range of recent months. However, there remains considerable disagreement amongst analysts whether passage of the Brexit bill will provide a boost to business confidence and an acceleration in economic growth or whether businesses will immediately start to focus on the next Brexit deadline.
Next week’s very light UK economic data calendar is unlikely to provide clarification, although the BRC’s unofficial retail sales measure (Thursday) will give a potentially interesting gauge of the strength of retail activity over the Christmas period. The following week’s calendar will be much busier but as the bulk of the data including November GDP will cover the pre-election period it is likely to be seen as old news. Indeed, it will not be until the second half of January at the earliest when business surveys will provide the first indications of whether the economy is set to see a ‘Boris bounce’ in 2020. We have our doubts.
Meanwhile, it has been a volatile start to 2020 in financial markets. The first trading day of the year saw a carry-over of the ‘risk on’ mood seen late last year. Global equity markets climbed once again while government bond yields rose led by US Treasuries and the US dollar continued to slide. US President Trump’s confirmation that the US will sign a ‘phase one’ trade deal with China on 15th January boosted hopes for stronger global growth in 2020. However, Friday saw a turnaround as equities fell and the oil price and ‘safe haven’ assets spiked following a US raid on Iran which resulted in the death of a top Iranian general. The strike was seen as retaliation for the attack on the US embassy in Baghdad. The oil price has climbed to its highest level since last September in the wake of the news. However, so far the overall market response has been relatively muted as it remains unclear whether the situation will continue to deteriorate. The Iranian President has called for reprisals but it is certainly questionable whether this would involve anything that would have serious implications for the global economy and so markets. Meanwhile, the US Congress will return from its Christmas break next week amid ongoing talks on how President Trump’s impeachment trial should proceed. It will probably take place later this month in the Senate. Given that the Republicans have a majority in the Upper House a guilty verdict remains unlikely. However, the electorate’s perception of the process could impact on voting in November Presidential election.
Going into the New Year the market expectation is that following last year’s easing moves both US and Eurozone interest rates are likely to now be left unchanged for a considerable period of time. The coming week’s economic data releases are not expected to throw doubt on those assumptions. In the US, Friday’s labour market report will as usual be seen as a key bellwether of economic conditions. The last report, for November, was much stronger than expected confirming that another near-term Fed interest rate cut is unlikely. We expect another solid outturn for December with a decent rise in employment alongside a further indication that wage growth remains close to a cyclical high. However, the report is unlikely to be strong enough to raise expectations that the Fed will hike rates anytime soon. Other key data include the ISM nonmanufacturing index (Tue). That fell in November and at 53.9 is close to its lowest level in almost a decade. We expect a rebound to 55.0 in December consistent with a continuation of relatively solid economic growth.
In the Eurozone, annual CPI inflation is forecast to have picked up to 1.4% in December from 1.0% in November. That would be its highest rate since last April. However, that would still leave inflation well below the ECB’s target of close to but below 2.0%. Moreover, ‘core’ inflation (excluding food and energy prices) is expected to remain unchanged from November at 1.3%, so the rebound seems unlikely to be seen by markets as a signal that ECB policy is about to shift in a tightening direction. Meanwhile, November German factory orders (Wed) and industrial production (Thu) will be watched for signs that the slump in manufacturing activity is levelling off. We look for a 0.8% rise in activity following the previous month’s decline of 1.7%.
The expected US China trade deal may help ease the pressure on the German manufacturing sector, which has a high weighting in investment goods industries and so can be significantly impacted by shifts in business confidence.
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See you next week!
None of the information in this article is, nor should be construed as financial advice. All foreign exchange transactions involve risk and you should always seek your own independent financial advice before entering into any foreign exchange transaction.