A further slowing in growth
Boris Johnson stood outside No. 10 Downing Street earlier, saying he didn’t want an election before the Brexit deadline.
The Eurythmics “Sweet Dreams (Are Made of This)” was a 1983 classic, just missing out on the UK number one spot by Bonnie Tyler’s “Total Eclipse of the Heart”. So it was with the overnight session with the US Labor Day Public Holiday set to keep markets relatively quiet until reports emerged that UK PM Johnson is edging closer to a General Election. Sky News/ITV report that should the UK Parliament pass a bill to extend the Brexit deadline today (Article 50), then PM Johnson will table a motion for a General Election to be held on October 14. GBP has fallen some -0.7% to 1.2067 on the news, while 10yr Gilt yields are -6.4bps to 0.42%. Outside of the UK, markets were relatively quiet with US rate futures implying little change to Friday’s levels, while the USD (DXY) climbed 0.2% to 99.04 largely driven by GBP weakness (with EUR -0.1% to 1.0969 and USD/YEN -0.1% to 106.21). European equities were little changed outside of the UK (FTSE +0.1% on a lower GBP), while US equity futures are pointing to a -0.9% open.
First to Brexit news. The UK Parliament resumes today where a bill is set to be discussed that would compel the PM to seek a 3m Brexit extension to 31 January 2020 unless MPs had approved a deal or voted in favour of a no-deal departure by 19 October. PM Johnson in reaction has said “there are no circumstances [under] which I will ask Brussels to delay” and argued it would weaken the UK’s negotiating position.
A Cabinet meeting overnight discussed the possibility of holding an early General Election with ITV/Sky News both reporting that UK Ministers agreed that there would be a vote on Wednesday on whether to hold a general election on October 14 should Parliament pass a bill to extend the Brexit deadline. The election threat is centred straight at Tory MPs who may vote with opposition parties to try and extend the Brexit deadline. Note the 2011 Fixed-Term Parliament Act requires two-thirds of sitting MPs to agree to an election – though this is not likely to be a limit given the opposition Labour party has long argued for a general election. The scene is thus set for a tumultuous few days that is likely to see GBP come under further pressure. My colleague Gavin Friend has written a more detailed note on the threat of a general election and implications for GBP – email Tapas.Strikland@nab.com.au if you would like a copy.
Compounding weakness in GBP was a soft UK Manufacturing PMI which came in at 47.4 against 48.4 expected, and is at its lowest level since July 2012. There were reports of some EU-based clients re-routing supply chains away from the UK, while the report itself feeds into fears that the UK may be heading towards a recession with Brexit stockpiling not appearing to be as large as it was in the lead into March.
US-China still remain no closer to easing tensions with a date for negotiators to meet in September yet to be determined. With the 70th anniversary of the founding the People’s Republic of China on October 1, we do not expect much progress on trade in the near-term as China’s focus increasingly turns towards the anniversary celebrations and then to the Party’s Fourth Plenum scheduled also for October.
CNH remains under pressure with USD/CNH +0.5% to 7.1928 overnight. News around Hong Kong continues to weigh. A better than expected Caixin Manufacturing PMI (50.4 v 49.8e) did little to reassure on the growth front with new orders remaining weak and export orders falling to its lowest level since November 2018. Commentary in the report noted “overall demand didn’t improve, and foreign demand declined notably, leading [to] product inventories to grow”.
There were also a number of other Manufacturing PMIs released overnight including the German PMI which came in at 43.5 against 43.6 expected. Overall there appears to be no letup in the global manufacturing slowdown and focus is now turning on whether the slowdown in the manufacturing side of the economy will weigh on the larger services side. Recent surveys including the German IFO and Official Chinese PMIs suggests it may be starting to.
Closer to home the AUD (-0.2%) and NZD (-0.3%) are both weaker with AUD fetching 0.6717 this morning. There was little reaction to yesterday’s GDP-partials of Inventories and Profits which suggested downside risks to Wednesday’s Q2 GDP. Inventories fell sharply and are set to detract around 0.6% points off quarterly GDP growth. Going into the release we thought inventories were going to add 0.1% points, so inventories presents sizeable downside risks to the market consensus for GDP of 0.5% q/q. More will be revealed today with Net Exports and Government Spending figures (see Coming Up Today below). The political smoke signals also highlight the risk of a weak Q2 GDP figure with PM Morrison yesterday stating he was “expecting soft June quarter results on Wednesday” and was urging people to “look through” the June numbers to the September quarter which will incorporate the effects of the income tax cuts which came into effect on July 1 as well as recent RBA rate cuts.
A very busy day today with key pre-GDP partials ahead of Q2 GDP on Wednesday, along with Retail Sales and the RBA. International focus will be on the UK Parliament which resumes from its break and on the US Manufacturing ISM:
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