In one of his last interviews before he retires from the International Monetary Fund (IMF), its chief economist has warned that the US may start to feel the effects of a sharp slowdown over the next couple of years, although he does not believe that it will result in a recession. Dr Maurice Obstfeld, speaking to the Financial Times and The Wall Street Journal said ‘We've long been predicting somewhat lower US growth for 2019 than what we are seeing this year’ adding the slowdown ‘is going to be sharper probably in 2020 than in 2019, according to the data we are seeing’. The warning comes after the IMF had already downgraded its prediction for US growth form 2.8% this year to 2.5% in 2019.
The last two Fed speakers on Friday before the blackout period ahead of the Fed’s meeting next week were Bullard, a non-voter, and voting Governor Brainard. Bullard, a dove, who has been constant in calling for restraint in rate hikes said he sees ‘no purpose in inverting the yield curve to try to be pre-emptive on inflation’. Brainard noted ‘that some tailwinds to the US economic outlook are fading’, though flagged that the labour market remains strong.
Tonight at midnight the Feds blackout period begins ahead of the 18th/19th December meeting. Interesting that the probability of a hike at that meeting fell to below 70% yesterday when just three weeks ago the market had a 95% take on a hike. Fed Governor Lael Brainard is the last scheduled Fed speaker before the blackout tonight in Washington.
Yesterday we heard from the Atlanta Fed president Bostic a voting member of the board who thinks the Fed should be taking a more neutral position.
The European Union yesterday unveiled plans to challenge the US dollar’s dependence in global markets by strengthening the international role of the Euro, with the longer term view of ‘de-dollarising’ the world economy. At the launch, Pierre Moscovici, the EU economic affairs commissioner believed ‘A wider use of the euro in the global economy yields important potential for better protecting European citizens and companies against external shocks and making the international finance and monetary system more resilient’.
The five days of debate to precede the “meaningful vote” on Brexit began atrociously yesterday, with Prime Minister Theresa May suffering three defeats in the House of Commons. This included the Cabinet and Attorney General Geoffrey Cox being found in contempt of Parliament as they sought to balance “conflicting constitutional issues” believing that releasing only a summary of the attorney general’s Brexit advice (published on Monday) along with a three hour interrogation of Mr Cox would be the best course forward for national interests.
An interesting day in the US Treasury market yesterday as the risk on trade gained traction with longer-dated bonds continuing their rally. In fact this morning we have an inversion of the yield curve from two years out to a five year maturity with the spread dropping through zero for the first time since 2007. Indeed the two year ten year spread also hit levels not seen for almost eleven years, trading below 14bp.
This weekend we saw a thaw in the ongoing trade disputes between the world’s biggest economies, as US President Donald Trump and his Chinese counterpart Xi Jinping agreed to a temporary truce on trade disagreements at the G20 summit in Argentina. The pair agreed to stop all new trade tariffs for 90 days to allow for talks, whilst Trump agreed to maintain the 10% tariff on USD200bn worth of goods, not raising them ‘at this time’ ahead of the deadline on the 1st January 2019.
The November FOMC Minutes emphasised that ‘monetary policy was not on a preset course’, it should be ‘guided by incoming data’ and that ‘a gradual approach’ remained appropriate. Another 25 basis point hike in the Fed Funds target range in December still looks extremely likely as ‘almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon’ assuming no drastic change in the job and inflation data.
Not one to ever shy away from warning about a potential Brexit train wreck, yesterday Mark Carney, the Bank of England Governor gave his most dire forecast yet of possible outcomes a no-deal Brexit would have on the UK economy. In the BoE’s ‘worst-case scenario’ analysis, a disorderly Brexit would cost the UK nearly 11% of its national income over the next 5 years, nearly double unemployment to 7.5% as well as causing house prices to crash by nearly a third (commercial property prices could be even worse at nearly 50%), and sterling getting smashed to the tune of 25%.
Jerome Powell assumed the Chairmanship of the Federal Reserve now almost 10 months ago; but only now will the 16th Fed Chair really start to hold the market’s attention. For in his inaugural months as Chair, Powell has been steering a ship that has mostly been on autopilot. And although Trump has this week lambasted him for how the Fed’s rates policy has not aligned with his politicised perspective, even blaming him for the ongoing troubles at GE, the Fed has been ‘following’ the widely anticipated path for rates that seemed largely in motion from before Janet Yellen stepped down.
We have long worried about the Eurozone, particularly the Banks in the southern member countries; the constant flow of funds especially into Greece and Italy from the Bundesbank and the Bank of France has already caused concern in those countries. In Germany a number of court cases have already been held in this regard. It was ex Fed Chair Greenspan that brought this situation to the fore a few years ago, at that time saying it could easily result in the collapse of the Euro.
After 45 years of the UK being part of the European Union, it took just 38 minutes for the remaining 27 members to rubber stamp the agreement on the terms of the UK’s departure, entitled ‘Withdrawal Agreement and Political Declaration on the future EU-UK relations’. Jean-Claude Juncker, the European Commission President was not cracking open the bubbly after the agreement, saying ‘To see a country like Great Britain leave the EU is not a moment of joy nor of celebration, it's a sad moment and it's a tragedy’ adding that there was a ‘shared sadness’ felt by the remaining members and that this was not a moment for ‘raising champagne glasses’.
Despite Fed Chair Powell’s unsettling comments in October that ‘We may go past neutral, but we're a long way from neutral at this point, probably’ and the September Fed dot plot looking for a rate hike in December and a further three 25 basis point rate rises in 2019 we think there are also some signs of a more cautious approach emerging.
Earlier this week the Italian government stuck to its guns when it announced that it was not willing to open negotiations over its deficit target of 2.4% of gross domestic product next year, although they did indicate that there would be some aspects of the budget that could be up for discussion. The announcement came after the European Commission formally rejected Italy’s 2019 budget proposals, believing that the borrow-and-spend plans could be a spark for another debt crisis that the EU seems ill-prepared for.
The collapse in the oil price continued yesterday with Brent down 6.41% at one stage before a ‘dead cat bounce’ of less than a dollar. While we believe that there is now an awful lot of bad news in current pricing especially regarding the supply situation, there appears to be very little interest in catching the proverbial falling knife. Indeed the perfect storm of bearish drivers, headlined by supply, with Iranian waivers a key element, and a negative outlook for 2019 demand/supply conditions, continues to force prices lower.
Yesterday was another testing day for equity markets with the Dow closing down nearly 400 points with further unsettling losses in the tech sector. Apple was down another -4% yesterday and Facebook down a further -5.7%; this means there is at least somebody who has now lost 20% on Apple stocks in the past month, along with everyone else who has lost money buying the tech giant in the past 3 months (and still holds the stock).
In a bid to ease the pressure on New Mexico and West Texas’s infrastructure, education and healthcare systems, caused by the boom in shale gas and oil production in the Permian Basin, more than 15 energy companies have pledged USD100m to the local economies. Among the energy companies involved, Royal Dutch Shell, Exxon Mobil and Chevron will help back a consortium called the Permian Strategic Partnership. USD100m sounds like a big number, however, when you consider the Permian Basin covers approximately 75,000 square miles (the whole of the UK is 93,500 square miles) the number may/will need to grow.
Oil has had a torrid time of late with the Brent Crude price trading down ~22% from its October high. Suhail Al Mazrouei, the UAE Energy Minister and President of OPEC stated that OPEC+ needs to review its strategy and it will adjust projection to balance the market stating: ‘We have cut in the past to reach the market balance, and if we need to cut production to keep the market balanced, we will’. This follows Saudi Arabia advocating a 1million bpd cut to production earlier in the week.
Theresa May will have to fight for her political life in the coming days as a growing revolt from within her own party threatens to derail her plan for the UK to leave the EU. According to some news outlets, there may be as many as 48 letters of no confidence in the PM lodged with the Conservative 1922 Committee by lunchtime today. Already today we have seen the Northern Ireland Minister, Shailesh Vara, resigning saying he can in no way support the Brexit deal as it stands, believing it ‘leaves the UK in a halfway house with no time limit on when we will finally be a sovereign nation’. Naturally, the Labour party and the SNP has already said that it will vote against any Brexit deal.
After nearly 600 days of waiting, news of a draft Brexit treaty hit the wire; yet markets showed their disillusionment as sterling bounced less than a penny and then weakened again below yesterday’s close, and at time of writing hovers below 1.2950 against the dollar. The scant enthusiasm reflects the scant political endorsement of the deal – with antagonizing of the draft deal from both Brexiteers and Remainers even before they had a chance to evaluate the 400-500 page outline. Boris Johnson stated he would vote against this “vassal state stuff” that would leave Britain following unreasonable EU rules.