Review of the week: Another week, another low

American economic measures took a dive early last week, taking equity markets with them. Chief investment officer Julian Chillingworth reckons upcoming quarterly earnings releases will set the tone for the winter.

Markets had a rocky week, with leading indicators plummeting but the labour market holding up, neither too hot nor too cold.

The ISM Manufacturing survey slumped again last week to 47.8, the worst level since June 2009. Not good news, but manufacturing isn’t the bellwether it used to be for the American economy – most jobs are now in services. So not great that the ISM Non-Manufacturing survey, which covers the rest of the economy, slipped as well to 52.6.

It was panic stations for some, with the S&P 500 down aggressively early in the week. The fear led other markets into the red as well, with the UK particularly hard hit. Bond yields fell sharply and stayed there. The US 10-year is back near all-time lows at 1.53% while the UK 10-year had the dubious honour of hitting a new record low of 0.44%. Bad for savers and grim as far as growth forecasts go, but hey, nice and cheap for the UK government’s big spending splurge and the US government’s pre-election tax cuts (come on, you know it’s on the cards). There’s always a silver lining with interest rates.

And then there’s the Fed Express! Everyone likes a rate cut. The US Federal Reserve (Fed) is widely expected to snip another 25 basis points off the benchmark interest rate when it meets at the end of the month. Besides, not every measure of the American economy is terrible right now. Unemployment hit a 50-year low of 3.5% and wage growth at 2.9% is higher than inflation (admittedly, this was a deceleration from previous months). The Labour Bureau’s wage growth number is only one of many, however, with others showing higher prints. The Atlanta Fed’s Wage Growth Tracker is a three-month moving average whose latest observation was 3.7%. Unfortunately, labour measures tend to lag other parts of the economy, i.e. by the time they start falling we’re already in trouble.

It’s not the happiest investment environment out there. Quite a miserable mood considering the backdrop – the US stock market has banked a 20% total return so far in 2019. That’s an extraordinary rise in the face of a Chinese-US trade war, slowing GDP growth and rising Middle Eastern tensions. Even UK investors, staring down the barrel of Brexit, are up more than 10%. Some of that can be placed at the door of falling bond yields which increase the value that analysts put on companies’ future earnings.

Speaking of earnings, they will be under intense scrutiny as companies report their third-quarter results over the coming few weeks. Investors will be watching for any sign of weakness caused by trade friction or slowing GDP growth. They have been merciless in the past and unlikely to be any different now. Expect to see some spicy falls for any businesses that disappoint.



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Source: FE Analytics, data sterling total return to 4 October

The troubles

Boris Johnson’s Brexit compromise was revealed last week. His plan is for a regulatory border in the Irish Sea and customs checks between Northern Ireland and the Republic (just away from the border in warehouses and on boats). Northern Ireland’s reluctance to be tied to a different regulatory regime than the UK mainland has been mitigated because Stormont would be able to vote every four years on whether to continue with the EU rules or move to align itself with the UK.

Mr Johnson’s plan seems to have many of the problems of Mrs May’s deal – and a few more for Ireland and the EU. For instance, under his offer Northern Ireland can vote unilaterally to jettison itself from the EU regulations in four years, precipitating a hard border with the Republic. A customs border between the two doesn’t seem to directly contravene the wording of the agreement, but people on both sides (especially the Republic) fear it would harm the peace by breaking with the spirit of the agreement.

Meanwhile, while we all focus on this one bit of minutiae, there are thousands of other issues that float in the background. Rules on everything from railways and flightpaths to security information-sharing, foreign trade agreements and legal overlaps such as the European Court of Justice need to be arranged as well. We can only hope they are on track for the deadline.

Mr Johnson has left the door open for further compromises, but has held firm on his intention to take the UK out of the bloc on Halloween if no deal is struck. Parliament trumped the Prime Minister on this point with the Benn Act, and he doesn’t have the votes to enact a hard Brexit. But rumours are that the government plans to challenge the Benn Act in the courts.

Whichever way you slash it, there are a lot of scares coming up before Halloween.


UK 10-Year yield @ 0.44%

US 10-Year yield @ 1.53%

Germany 10-Year yield @ -0.59%

Italy 10-Year yield @ 0.83%

Spain 10-Year yield @ 0.14%


Economic data and companies reporting for week commencing 7 October

Monday 7 October

US: Monthly Budget Statement, Consumer Credit

EU: Sentix Investor Confidence


Tuesday 8 October

UK: BRC Sales (Like for Like), BoE’s Mark Carney Speaks in Tokyo, Unit Labour Costs,

US: NFIB Small Business Optimism, PPI Inflation

EU: GER: Industrial Production

Final results: YouGov


Wednesday 9 October

US: MBA Mortgage Applications, Wholesale Inventories and Trade Sales, Fed’s Jay Powell Speaks in Kansas, FOMC Minutes

Trading update: Robert Walters


Thursday 10 October

UK: GDP (Q3), Construction Output, Services Index, Industrial Poroduction, Manufacturing Production, Trade Balance, RICS House Price Balance

US: CPI Inflation, Real Average Hourly Earnings,

EU: ECB Minutes; GER: Trade Balance

Final results: Brown (N) Group


Friday 11 October

US: Export and Import Indices, University of Michigan Sentiment

EU: GER: S&P Sovereign Debt Rating, CPI Inflation

Total votes: 46

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