LAST WEEK – KEY TAkeAways
US economy: Latest data supports positive outlook
- The US job market beat forecasts to create 201,000 new jobs in August, according to the non-farm payroll report released on Friday, while the unemployment rate remained at 3.9%;
- The tightening labour market helped boost wage growth to 2.9% in August, the fastest pace in nine years;
- There was more good news from the industrial sector as demand propelled manufacturing activity to a 14 year high in August, while services, which account for a significant share of US economic growth, also picked up;
- Omnis view: Positive developments for the US economy increases the likelihood of the Federal Reserve raising interest rates a number of times before pausing, which could strengthen the US dollar and weigh down countries with high levels of dollar debt.
UK politics: Prime Minister defends her Brexit strategy
- After dipping at the start of the week, sterling recovered following reports Germany would accept a more open-ended transition deal on the UK’s future relationship with the EU;
- UK Prime Minister Theresa May defended her Brexit strategy against criticism from former Foreign Secretary Boris Johnson, and she pledged to take on Eurosceptic MPs in her own party;
- Meanwhile, Brexit Secretary Dominic Raab claimed he would not give up on Mrs May’s strategy, despite criticism from Brussels and Brexiteers, and he suggested it formed the basis for the ultimate deal with the EU;
- Omnis view: Support from Germany reinforces our belief that a soft Brexit is the most likely outcome, regardless of the inevitable posturing from both the UK and the EU as the deadline approaches to secure a deal.
UK economy: Services compensate for slower manufacturing activity and retail sales
- Manufacturing activity in the UK grew at its slowest pace in two years in August, according to data from IHS Markit, as export orders fell due to slowing global economic growth;
- Growth in retail sales also slowed in August, as the impact wore off from catalysts including the World Cup, the royal wedding and the hot weather over the previous two months;
- However, activity in the services sector picked up in August, boosted by growth in new orders;
- Omnis view: The services sector is one of the biggest drivers of the UK economy, so an increase in activity is encouraging.
Global trade: Next round of US tariffs on Chinese goods loom large
- Following the expiration of the public comment period, President Trump said tariffs on $200 billion of Chinese goods could be imposed soon, and he hinted at levies on a further $267 billion worth of goods;
- Some of America’s biggest tech companies, including Cisco, Dell and Hewlett Packard, wrote to US trade representative Robert Lighthizer, asking him to exempt networking equipment from the next round of tariffs;
- Meanwhile, talks resumed between the US and Canada about Canada’s continued participation in the North American Free Trade Agreement;
- Omnis view: Ahead of the midterm elections, President Trump appears to be increasing the pressure by hinting at additional tariffs which would mean all of China’s exports to the US are subject to levies. However, the letter sent by the tech group supports the view that corporate America could give him pause for thought, as tariffs start to disrupt supply chains for domestic businesses.
Emerging markets: Argentina takes steps to stabilise its economy while Turkey mulls higher interest rates
- President Mauricio Macri announced a new austerity programme to stabilise the Argentinian economy, which will increase taxes and reduce bureaucracy, while the country’s central bank raised interest rates to 60%;
- Argentina’s government also continued talks with the International Monetary Fund about accelerating the release of a $50 billion loan to help cover its financing needs;
- Elsewhere in emerging markets (EMs), the Turkish central bank hinted it might be prepared to raise interest rates at its next meeting as inflation hit 17.9%;
- Omnis view: We believe there is limited scope for Argentina’s economic woes to spill into other EMs, but they may impact sentiment towards the asset class in general. On a more positive note, a conventional approach to monetary policy should help relieve the pressure on the Turkish economy.
LOOKING AHEAD - TALKING POINTS
Interest rate decisions and key economic data
- The Bank of England (BoE) and the European Central Bank are unlikely to change interest rates following their meetings on Thursday, while the BoE is expected to maintain its current level of quantitative easing;
- UK unemployment is forecast to tick up when the Office for National Statistics releases July’s data on Tuesday;
- US inflation is expected to fall slightly when August’s annualised figure is published on Thursday;
- Omnis view: The BoE should leave interest rates unchanged on this occasion, which will be welcomed by the UK economy as Brexit uncertainty persists. Meanwhile, softening inflation in the US will not be a strong enough reason for the Federal Reserve to pause its tightening cycle.
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