Market news 23 August 2019

FOMC minutes reveal divergence in views

• The main revelation of the minutes of the Federal Open Market Committee (FOMC) July meeting, published this week, was that the voting pattern  was more hawkish than expected, with just two members voting for a 50bp cut, whilst “several” officials argued in favour of keeping rates steady, judging the real economy to be in a “good place”.
• The diversity in views creates a challenge for Mr Powell ahead of the next FOMC in September, where economists are expecting a continued easing of rates to protect the domestic economy from the impact of global slowdown and trade tensions. Current expectations are for another 25bp cut in September, although this decision may be influenced by upcoming inflation readings, manufacturing / employment data and the scheduled tariffs on a further $130bn in imports from China on 1 September.

PMIs flat in Europe but lower in the US

• August flash PMIs from Europe beat consensus with a modest uptick in activity, posting a composite reading of 51.8 (July: 51.5, consensus: 51.2). The German composite improved 50bps to 51.4, in line with the continent-wide trend of service sectors offsetting contracting manufacturing sectors across Europe (German service sector: 54.5, manufacturing: 43.6). The French composite recovered from its dip in July, reading 52.7, as services rebounded and manufacturing rose back into expansion (51.0).
• Flash PMIs from the US were disappointing, services falling -2.1 points to 50.9 and manufacturing -0.5 points to 49.9 into the sub-50 contractionary region and the lowest level seen since September 2009. Growth in new orders and export sales dropped over the month, reflecting continued economic growth going into Q3.

Geopolitics continues to inject uncertainty into the outlook

• China announced tariffs on $75bn of imports, including autos, oil and agricultural products, from the US in retaliation for the increase in tariffs announced by the US at the start of the month.
• In response USD sold off across the board, presumably having inferred from previous Fedspeak that the impact on confidence arising from an exacerbation of trade tensions would prove the decisive factor in favour of further easing in the face of still reasonably robust domestic activity. This presumably explains why equities only briefly retreated in response to the tariff news. A time of writing President Trump had just tweeted that he would be making a big announcement “soon”, which some took possibly to mean explicit intervention to weaken the dollar.
• In an effort to smooth negotiations with the EU ahead of the 31 October deadline, Boris Johnson met senior leaders this week including Emanuel Macron and Angela Merkel. The contentious issue discussed in both conversations was the Irish backstop plan, but Mr Johnson said he was “powerfully encouraged” by his meeting with Mrs Merkel, where she expressed hope that a solution to the Irish border issue could be found. Macron subsequently reiterated that an Ireland-Northern Ireland backstop plan was “indispensable” in preserving political stability and the single market.
• Continued economic weakness and forecast economic contraction has increased expectations for fiscal stimulus intervention in Germany. Although the central bank have not suggested such a program, economists at the Bundesbank predict that output might fall -0.1% in Q3, and previous weakness in the manufacturing sector is showing little sign of recovery.
• The annual Jackson Hole conference will take place this weekend, hosting central bankers, economists and financial organisations, including Fed Chair Jerome Powell. The G7 summit will also take place in France, with leaders from Britain, France, Germany, the US, Italy, Japan and Canada meeting to discuss international policy matters. There are no particular expectations from either conference, although a change to expectations may cause a spike in market volatility.