The pound moved lower over the week after Boris Johnson stuck to his line that negotiations are progressing and the UK will leave the EU on 31 October 2019, while BoE policymaker, Michael Saunders, said it was plausible that the next move in UK interest rates “would be down rather than up” even if the UK avoided a no-deal Brexit.
This is significant, as Michael Saunders is usually one of the more hawkish policymakers, having voted for higher interest rates in 2017 and 2018 and, only a few months ago, was saying the interest rates need to rise as the UK economy might overheat!
We have long been advocates of lower UK interest rates despite the overwhelming market consensus for interest rate increases. With Michael Saunders finally acknowledging the current economic uncertainty and mounting downside risks to global economic growth, hopefully it is only a matter of time before the rest of the BoE policymakers will be compelled to reduce UK interest rates and make this one of the loosest tightening cycles ever.
The weaker pound is positive for the FTSE-100 (as around three-quarters of the FTSE-100’s total revenue is derived from abroad – so a weaker pound enhances returns for exporters and the value of overseas earnings), hence why the FTSE-100 was one of the best performing markets over the week.
Back to US/China trade talks, there were signs of warming trade relations despite reports that the US is unlikely to extend a waiver allowing US companies to supply China’s Huawei Technologies, after US and China officials described last weekend’s talks in Washington as “constructive” and “productive”, while Donald Trump said a trade deal with China is getting “closer and closer” and “could happen sooner than you think”.
Donald Trump also said that the US and Japan had agreed on a new trade pact that eases access for US food and agricultural goods.
Elsewhere, Eurozone PMI data was poor, with German manufacturing PMI falling to 41.4 in September from 43.5 in August, which suggests the German economy will slip into recession. The question now is whether or not the ECB’s recent interest rate cut is enough to stem the downturn and encourage activity or whether more stimulus is needed.
The main focal point for this week’s economic data will be Friday’s (4 October 2019) US employment data (non-farm payrolls; unemployment rate; participation rate; and average earnings). Additionally we have Eurozone unemployment and CPI inflation and Chinese PMI data.
Investment Management Team