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Hello darkness our old friend

Today's news headlines:

  • ‘Johnson’s customs proposal falls flat along Ireland border’. Businesses along the Irish border are fearful of losing customers due to proposed customs checks that would come into force as part of Boris Johnson’s grand plan to break the Brexit deadlock. Johnson claims he has made a genuine attempt to find a solution that will keep Northern Ireland within Europe’s single market for goods while leaving the customs union. Meanwhile, Ireland’s deputy PM Simon Coveney told the Irish parliament that there would be no deal if Johnson’s plan is the final UK proposal. (Financial Times)
  • ‘Trump publicly asks China to probe Biden, even amid impeachment inquiry’. Yesterday, President Trump called for China to investigate his political rival Joe Biden and his son Hunter over alleged corruption. Trump, the subject of an ongoing impeachment inquiry, offered no evidence for his allegations and could now face further accusations of interfering in a US Presidential election. His appeal to China comes at a time when Beijing and Washington are locked in a bitter trade dispute with talks due to resume next week. (Reuters)

Trade war takes flight

It’s getting pretty dark out there. Manufacturing is quite visibly in the midst of a global slowdown which has really frightened markets because, at some stage, the pullback in manufacturing is going to start hitting jobs and potentially derail the one strong part of the global economy, the consumer. It’s broadly acknowledged that the record-low unemployment rate and low consumer debt load provide a healthy dose of assurance that demand in many sectors won’t evaporate at the first sign of disinflation. The problem is the scope of the manufacturing pessimism is causing fresh worries that the services sector, representing 80% of the US economy, may succumb to the darkness as well.

Yesterday the Institute of Supply Management Non-Manufacturing Purchasing Manager Index (PMI), a measure of firm views of the economy, order formation, expectation for the future, etc. came out way below expectations at 52.6, the worst reading since a freak drop in September 2016. While a reading over 50.0 still indicates expansion, the disappointment arriving so closely on the heels of this intensification of trade woes causes markets to fear the worst. The US economy has been performing at a markedly faster and more stable pace than most of the developed world. To see a dent in that hefty armour is disconcerting. Change in Non-Farm Payrolls data is perhaps the most widely anticipated US economic release, but today’s print will be under even greater scrutiny. It’s probably worth pointing out that at this high level of employment, additional payroll gains are naturally expected to slow. It has been estimated, by persons with more time on their hands, that 140k is approximately the pace at which employment remains stable.

Bottom line: While we agree that manufacturing could spell trouble for quite a few economies, the US consumer is in a very strong position, which means the survey data is probably more a reaction to the market than a true indication of economic reality. Bloomberg economics still estimates only a 25% probability of a recession in the US over the next 12 months. We should reserve judgement, at least about the US economy, until we have more objective evidence of deterioration.


Yesterday was another solid day of two-way price action for the pair as we saw Cable trade in a range of almost 150 pips. A sustained rally up to the 1.24 handle came following positive reports that Boris Johnson’s Brexit proposal was gaining traction with Conservative and DUP MPs. The pair pulled lower in the evening session as Irish officials signalled their resistance to Johnson’s current plan.


The day started badly for the Euro as data pertaining to the bloc’s service sector came in worse than expected. Despite this, the weighted Euro Index traded in a tight range throughout the day, meaning that movements in the pair were dominated by the Pound. UK services data also disappointed, but Brexit sentiment was enough to push the Pound briefly above the 1.13 handle before a similar pullback to Cable in the evening session.


The Dollar Index continued its move lower from recent two-year highs as the ISM Non-Manufacturing PMI figure disappointed, prompting fears that global trade pressures will spill over into the domestic US economy. Today’s price movements may remain muted before the headline Change in Non-Farm Payrolls data, due at 1.30pm.


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