06 Sep 2019

Boris "Dead in a ditch"?

Boris refused to change tack despite mounting opposition.

Boris suffered further setbacks yesterday, as a number of factions in government have expressed mounting concern over the treatment of senior Tory party members who voted against the government. Both the 1922 committee representing backbenchers, and the One Nation group which represents over 100 Tory MP’s expressed dissatisfaction with the decision.

 

Key cabinet members Michael Gove and Sajid Javid also express concern over the moves, and most significantly, Boris’ brother Jo also resigned from government and from his seat due to concern over the events of the past few days. His resignation leaves Johnson with a 43 seat minority.

 

The PM carried on regardless yesterday. He continued to go at Labour leader Jeremy Corbyn in an attempt to force him into accepting an election, and push for a Oct 31 Brexit. Speaking yesterday, he also stated that he would rather be “dead in a ditch than delay Brexit”, giving rise to fears that even if the extension bill is passed that he may not go to the EU to request an extension, which could force a vote of no confidence or further legal wrangling, and added uncertainty in either event.

 

Sterling rebounds as no deal risks subside

EURGBP finally broke below the key 0.90p level after one of the longest periods above it on record. EURGBP closed above 0.90p for 29 consecutive trading days, one day short of equalling the record for longest period which occurred after Theresa May’s disastrous election in July 2017 left her powerless and parliament deadlocked.

 

The improvement in the pound came as prospects of a cliff edge no deal Brexit on 31 October subsided as the rebel bill continues to make its way through parliament, and fears of attempts to slow the bills progress through Lords also subsided. According to bookmakers’ odds, the prospects of a no deal Brexit occurring before the end of the year have dropped from around 45% to around 1 in 5 in just over 1 week.

 

The pound made even more headway against the dollar, which has gained almost 3% in the past 3 days to recover from 2 ½ year lows close to 1.1950 to touch 1.2350 yesterday.

 

Payrolls and Powell key ahead of Fed

Non-farm payrolls climbed by 164k in July, close to the average of the previous three months. While US manufacturing is clearly struggling, the economy as a whole continues to exhibit solid growth and we expect this to continue to be reflected in the employment reports.

 

The weekly jobless series certainly indicates that the labour market remains tight, with new initial claims broadly at low levels not seen since the early-1970s. A specific factor which may come into play this month is the hiring of workers for the 2020 Census. Typically the bulk of these jobs does not come on stream until the middle of the Census year. However there have been recent reports that perhaps 40k individuals have been taken on. We have included an additional 25k Census workers in our forecast, which is a payroll gain of 190k this time (consensus forecast is for 160k).

 

The strong employment situation is one side of the conundrum facing the Fed, who are widely expected to cut rates by 25-50bps in their next meeting on 18 Sept despite record low levels of unemployment and strong employment growth. The Fed are concerned that the economy may be slowing, and that escalation in the trade stand-off with China may bring about a recession.

 

The decision to add 15% tariffs on another $100bn of Chinese imports earlier this week confirmed the likelihood of Fed action in many people’s eyes. Many are still questioning the wisdom of the decision however, as the relatively closed US economy has shown relatively little evidence of a negative impact from tariffs outside of a handful of industries.

 

All eyes will be on Jerome Powell who speaks in Zurich at 5.30pm to see how he reconciles the strong economy (inflation close to 2% target, unemployment close to record lows and a stock market within 2% of all-time highs), with the prospect of what many expect could be a series of rate cuts.


Economic Releases

10.00  EC   GDP (Q2)

13.30  US   Non-farm payrolls

17.30  US   Fed's Powell speaking