Reading the signs of recession

​​​​​Today's news headlines:

  • 'Conservative rebels defeat Johnson's Brexit strategy'. Last night, UK lawmakers took dramatic steps to pass an emergency law to stop a no-deal Brexit. 21 Tory MPs led by former Chancellor Philip Hammond voted against the Prime Minister and were subsequently told their 'whip' was being removed. This leaves Boris Johnson with an unstable minority government, and he's promised to call a snap general election if the anti-no deal movement is passed into law. (Financial Times)
  • 'Hong Kong's Carrie Lam to formally withdraw extradition bill, SCMP says'. Reports have emerged saying Carrie Lam will formally revoke legislation to allow for extraditions to China. The move could help ease months of tensions in the region that have culminated in some of the most violent clashes between protestors and riot police. However, protests may continue; the withdrawal of the bill was only one of the five core demands, which includes an inquiry into police violence and democracy for the region. (Bloomberg)

A reading to unite the Fed?

The latest US manufacturing data has stoked fears that the world's largest economy is headed towards a recession, which may help to bring Federal Reserve policymakers in line with each other on future monetary policy. Yesterday, August's ISM Manufacturing reading of 49.1, indicated the sector moved into contraction for the first time since 2016. Any reading below 50.0 suggests a contraction, and what's perhaps more surprising than the reading itself is that forecasts were moderately bullish at 51.2. Bloomberg Economics predicts that future ISM Manufacturing readings will continue to come in under 50.0, but stressed that it takes readings in the low 40s to be consistent with a broader economic downturn in the US

The data will have investors eagerly awaiting comments from policymakers as various members of the Federal Open Market Committee (FOMC)—the committee that makes key monetary policy decisions in the US—will be speaking this week. Last month, the release of the Fed's minutes exposed divisions in the central bank over policymakers' preferred direction of interest rates in the short-term, but the latest round of weak data may align their views towards another interest rate cut. However, the question remains by how much? Futures markets are currently pricing in a 75% chance of a 25-basis point cut and a 25% chance of a 50-basis point cut this month. Fed members leaning towards a 50-basis point cut could see the Dollar's trade-weighted index continue its recent slide from two-year highs.

Bottom line: Certainly, the Fed's monetary policy decision is delicately intertwined with the Trump administration's ongoing trade war with China. If the Fed cuts interest rates, Trump might take a more aggressive stance with China, knowing the Fed will accommodate him. However, if the Fed doesn't cut rates, it risks the US economy falling into recession as the trade war has started to translate into weaker US economic data. 

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Source: Bloomberg

GBP/USD

The Pound rallied overnight after slipping below 1.20 for the first time since 2017 on heightened fears of a no-deal. The bounce for Sterling was in the wake of a Parliamentary vote that defeated the government and paved the way for legislation that precludes a no-deal. Another major source of uncertainty could be Boris Johnson calling a snap election which may happen this week.

GBP/EUR

The pair is trading back above the 50-day moving average this morning allowing scope for another move higher. The potential of this could be helped by the prospect of an interest-rate cut and renewed fiscal stimulus from the European Central Bank when policymakers next meet.

EUR/USD

The trade-weighted Dollar Index fell from over two-year highs yesterday following disappointing US ISM Manufacturing data. If the broad Dollar pullback continues, the next level of resistance for the pair will be at 1.10. Later today, ECB Presidential nominee Christine Lagarde will be speaking followed by ECB Chief Economist Philip Lane.