Review of the week: Steady as she goes

Markets pottered along last week, shrugging off some disappointing American data. Our chief investment officer Julian Chillingworth looks ahead to lots of central banking news and political posturing. 

Steady as she goes

After a few weeks of greater optimism out of America, a few bits of economic data wobbled last week.

US industrial production fell 1.5% and the Empire Manufacturing Index unexpectedly dropped 1.1 points to 2.9, leaving the measure much lower than its 2018 level. But digging into these releases shows future orders actually look ok, so it could simply be friction from adjustments needed because of the trade war. It keeps the pressure on the US Federal Reserve (Fed), whose minutes from the 29-30 October meeting will be released on Wednesday.

Germany narrowly avoided recession, eking out a 0.1% gain in GDP during the third quarter. Meanwhile, the European Central Bank (ECB) is having a difficult time. Outgoing President Mario Draghi did a pretty good job, all things considered, juggling the needs of the starkly different economies that make up the currency bloc. But he left a lot of simmering ill will in his wake. That may be why he was replaced by Christine Lagarde, a French diplomat with little economics experience or training. The ECB has been largely quiet since Ms Lagarde took the reins, so investors will be poring over the minutes of last month’s meeting when they are released on Thursday.

The UK unemployment rate dropped back to the almost-45-year low of 3.8% last week, while average British pay growth declined to 3.6%. CPI inflation slipped even more than expected and now stands at 1.5%, markedly lower than the roughly 2% of the first half of 2019. As for UK shoppers, they have continued to cool. October retail sales were just 3.1% higher than a year earlier, continuing a trend of gradual deceleration from a strong start to 2019.

US healthcare stocks did well last week after Democratic hopeful Elizabeth Warren watered down her Medicare for All pledge. Senator Warren is trailing Senator Joe Biden by a reasonable margin, but there’s still a solid chance that she could overtake the former Vice President, particularly as contenders drop out of the race.

 

Index

1 week

3 months

6 months

1 year

FTSE All-Share

-0.4%

5.2%

3.2%

9.1%

FTSE 100

-0.6%

4.2%

2.6%

8.6%

FTSE 250

0.3%

10.3%

7.1%

12.7%

FTSE SmallCap

-0.1%

4.6%

0.7%

4.5%

S&P 500

0.1%

3.2%

9.9%

14.9%

Euro Stoxx

-0.3%

5.6%

8.2%

14.0%

Topix

-0.8%

5.8%

11.6%

9.6%

Shanghai SE

-3.6%

-3.4%

-3.9%

6.2%

FTSE Emerging

-2.5%

1.7%

4.7%

10.2%

Source: FE Analytics, data sterling total return to 15 November

 

The ‘Brexit Election’

The first televised debate of next month’s election will be on ITV tomorrow night, although only Conservative leader Boris Johnson and Labour’s Jeremy Corbyn have been invited on.  That will be followed by a Question Time special featuring the major parties’ leaders on Friday. Several more debates litter the path to 12 December.

Sterling got a boost from Nigel Farage’s announcement that the Brexit Party won’t be fielding candidates against Conservative incumbents. It is widely believed that the move will avoid splitting the right-wing vote. Currency traders took heart, thinking there is a greater chance of Mr Johnson forming a solid majority and moving forward with his Brexit deal.

According to Bloomberg, Mr Johnson plans to reveal a tax-cut for businesses to offset potential Brexit disruption. It also reports that a Conservative government would cut business taxes by £1 billion a year with a “fundamental review” of business rates and tweaks to employment taxes. The cuts would also increase tax relief on buildings and research and development. Meanwhile, Labour came out with another nationalisation scheme: this time providing free ultra-fast broadband to every home in the UK through a government-owned Openreach.

Will actual policies affect the ‘Brexit Election’? The parties seem to think so, with much of the campaigning focusing on two radically different ways of governing. The Conservatives are doubling down on supply-side stimulation that will trickle down to the hardworking families of Britain. Labour argues that the economic system is broken. The Liberal Democrats believe the status quo works just fine – albeit with more money needed for public services. As for the Scottish National Party, it rails against Brexit while angling for what is effectively one in miniature by hoping to secede from the UK.

We are working on an update to our Oh! Jeremy Corbyn investment report from early 2018. This will look at the economic effects of a Labour-led government, but we are still waiting on the party’s manifesto, so please bear with us!

 

Bonds

UK 10-Year yield @ 0.73%

US 10-Year yield @ 1.84%

Germany 10-Year yield @ -0.34%

Italy 10-Year yield @ 1.33%

Spain 10-Year yield @ 0.46%

 

Economic data and companies reporting for week commencing 18 November

 

Monday 18 November

UK: Rightmove house Prices

US: NAHB Housing Market Index

Final results: Diploma

Interim results: McKay Securities

Trading update: DWF Group

 

Tuesday 19 November

UK: CBI Trends Surveys

US: Building Permits, Housing Starts

EU: New Car Registrations, Current Account, Construction Output

Interim results: Big Yellow, Halma, HomeServe, Palace Capital, Scapa, Telecom Plus, Trifast

Quarterly results: MHP

 

Wednesday 20 November

UK: Unit Labour Costs

US: ECB Financial Stability Review, MBA Mortgage Applications, Fed Meeting Minutes

Final results: Mitchells & Butlers, SSP Group

Interim results: Alpha Financial Markets, Intermediate Capital Group, Liontrust Asset Management, United Utilities

Quarterly results: Inmarsat

Trading update: Direct Line

 

Thursday 21 November

UK: Public Finances

US: Philadelphia Fed Business Outlook, Existing Home Sales, Leading Index

EU: OECD Economic Outlook, ECB Meeting Minutes, Consumer Confidence

Final results: Euromoney, Residential Secure Income

Interim results: Charles Stanley, CMC Markets, Dart, First Property Group, Mitie, New River REIT, Severn Trent, Syncona

Quarterly results:

Trading update: Centrica, Close Brothers, Knights Group

 

Friday 22 November

UK: Manufacturing and Services PMI,

US: Manufacturing and Services PMI, University of Michigan Sentiment Survey, Kansas City Fed Manufacturing Activity

EU: ECB President Lagarde Speaks in Frankfurt, Manufacturing and Services PMI; GER: Q3 GDP (Final)

Total votes: 24

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