Casting doubt on the spending-led economy

Today's news headlines:

‘Boris Johnson aims for Parliamentary vote on Brexit before Christmas’. Yesterday, Boris Johnson outlined what he will look to achieve in his first 100 days of power if the Conservatives win a majority at next week’s general election. Johnson would bring his EU withdrawal bill agreement before Parliament for an initial pre-Christmas vote, with a view to leaving the EU on Jan 31st. Britain would then enter a transition period, leaving Johnson until the end of 2020 to forge a lasting trade deal with the EU. The Prime Minister will also raise the national insurance threshold, which would enable him to give millions of workers an extra £100 a year. (Financial Times)
‘German orders resume slide, defying hope for factory rebound’. Weak demand for investment goods in October contributed to an unexpected fall in German factory orders, suggesting that Europe’s largest manufacturing economy is still feeling the fallout from declining global trade activity. The Bundesbank has forecasted stagnation for the German economy in Q4 this year and predicted muted growth below 1.0% for 2020. (Bloomberg)

Priming the engine

The Japanese Prime Minister has announced a stimulus package worth about $240bn in fiscal spending over the next few years, targeted to increase GDP growth by up to 1.6%. Up until now, the Bank of Japan has single-handedly kept recession at bay via its extensive asset purchase programme—accumulating more assets than the entirety of Japan’s economy—but has recently taken a more cautious tone around further stimulus. A sales tax imposed in October has been counterproductive to growth as well, and now forces the government to make a bigger move than if the ‘tax and spend’ had arrived together. Given that this spending package must be financed by government borrowing and should lead to higher interest rates, it's surprising to hear the response to the fiscal announcement has been muted. The rationale attributed to this dynamic is that the government will only spend a more modest sum and have little impact on both borrowing cost and, unfortunately, GDP growth.

The Dollar sell-off from the past several days is starting to be couched in domestic growth terms. Conveniently, some of yesterday's data points play neatly into this narrow world view. You might recall that the week started with a contractionary ISM Manufacturing Purchasing Managers’ Index (PMI) figure. Well, yesterday the ADP Non-Farm Employment Change (seen as a precursor to Friday's crucial Non-Farm Payrolls number) registered a disappointing 67k jobs added to the economy. To put this into context, it's the second-worst reading since 2011 and casts doubt on the solidity of the current consumer spending-led US economy. The icing on the cake was a miss on the ISM Non-Manufacturing PMI, though it did still register expansion.

Bottom line: Believers in the domestic view of the Dollar sell-off can probably expect the recent data points to extend the Dollar’s decline in the short-term. But it’s worth considering the broader world context. Japan is not the only government searching for simulative measures now that the US-China trade war has become multi-geographic and multifaceted. Apropos European Finance Ministers are meeting all day today and will hopefully yield some tangible policy goals and not turn defensive in response to Donald Trump's latest trade salvo.

GBP/USD

This week’s bullish run for Sterling continued yesterday as the pair gained over 1.0% on the day and now sits almost 2.0% higher than Monday’s low of 1.2896. The pair's 50-day moving average has now crossed the 200-day equivalent, raising the prospect of additional gains to close out this week. Positive momentum has been supported by an upward revision of UK services data along with fresh election polls pointing toward a Conservative majority next week.

GBP/EUR

Yesterday, Sterling moved beyond March’s high of 1.1803 against the common currency, breaking significantly higher out of its recent upward trend channel. This morning, we’re currently trading at levels not seen since May 2017, and a disappointing German Factory Orders release will mean little chance of a significant Euro recovery in today’s session.

EUR/USD