09 Sep 2019

Up This Week

Westminster will continue to be the focal point for the start of this week.

Boris Johnson’s government is expected to make a second attempt to call an election under the fixed term parliament act, and otherwise will prorogue parliament as previously planned.

 

While events continue in parliament, Boris is in Dublin to meet Leo Varadkar today, where the prospects of a Northern Ireland only backstop may receive significant discussion. Boris will be keen to be seen to be making progress towards a deal after Amber Rudd resigned from cabinet over the weekend partially due to the perceived lack of progress in negotiations with the EU.

Aside from politics, UK data next week is set to include GDP figures for the month of July. For some time we had looked for Q3 GDP to be boosted by an absence of seasonal automotive retooling in July, but weak SMMT car production data has called this into question.

 

Overall we look for a modest 0.1% monthly rise in GDP in July and for Q3 as a whole to just about eke out a 0.1% rise. But we are questioning the possibility of a repeat contraction in Q3, which would mean that the UK is in a technical recession. Other data includes labour market figures on Tuesday and the RICS survey on Thursday, whereas external BoE MPC member Gertjan Vlieghe is set to speak about the UK’s readiness for the next recession on Monday

Europe this week

In Europe the focus will be on Thursday’s ECB meeting, where outgoing ECB chief Mario Draghi is widely expected to cut the deposit rate from -40bps to -50bps. An introduction of ‘tiering’ (of the deposit rate) to protect struggling European banks is also expected.

 

There have also been calls to restart of QE purchases, but this is less certain, as a number of ECB members have recently expressed the opinion that it may be slightly premature for the ECB to begin purchasing assets again. Mr Draghi may also be reluctant to embark on a massive easing programme so close to the end of his tenure, mindful of the mess he inherited from Jean Claude Trichet, who rushed through 2 premature rate hikes 10 years ago which had to be quickly reversed.

US & ROTW this week

Stateside, the Fed has now entered into its “blackout” period ahead of its Sept 18 meeting. Fed chair Jerome Powell sounded less dovish when speaking on Friday than he did in August at the Jackson hole symposium but a 25bps rate cut is still widely expected from, the Fed next week, although expectations that the cut could be as large as 50bps have fallen off sharply. Key releases this week ahead of that meeting will be Inflation (CPI data on Thursday), retail sales figures and consumer sentiment data (Friday).

Additionally, China watchers will be eyeing a potential policy decision from the PBoC after the state council announced that “broad and targeted” RRR cuts would be used in a “timely manner”. Chinese trade data is also due this weekend, while lending figures are expected to be released at some point over the week. Finally, in Japan ‘core’ machinery orders on Thursday will be looked to as a proxy for global trade flows.

 

Irish Economy: Construction PMI improves in August but outlook is uncertain

Activity in the country’s construction sector increased at the fastest rate in four months in August according to the Ulster Bank Construction PMI. The headline PMI increased from 51.4 in July to 53.7 in August, with a level above 50 indicating expansion.

Activity levels increased in all three of the sectoral sub-indices. The index of housing activity rose to 58.4 in August from 55.9 in July, commercial construction activity ticked up from 54.7 to 55.1 and civil engineering improved from 40.5 in July to 42.5 last month (although this level still indicates a sector in contraction).

 

Despite the improvements in August, the outlook for the sector is far from rosy at present with Brexit uncertainty “impacting work pipelines due to delayed decision-making”. The sentiment index fell to its lowest level in almost nine years and the new orders index was at its lowest since 2015.


Economic Releases

09.00  UK   BoE’s Vlieghe speaking

09.30  UK   Industrial production