Watching for signs of a technical recession
Today's news headlines:
‘Boris Johnson urges Brussels to compromise on Brexit’. On Sunday, Boris Johnson reiterated that the UK would leave the EU on October 31st if an agreement cannot be reached, telling French President Emmanuel Macron this was the ‘final opportunity’ to secure a deal. Johnson continues to stand by his ‘leave with or without a deal’ approach, despite Parliament passing law demanding a Brexit extension if an agreement is not reached by October 19th. (Financial Times)
- ‘China narrows scope for trade deal with US ahead of talks’. High level talks between the US and China are due to occur this week, but China have slashed hopes of a truce by significantly reducing the range of topics open for discussion. More specifically, the issue of Chinese industrial policy and government subsidies will not be included in trade commitments—two highly contentious issues for Trump’s administration. (Bloomberg)
Sound the alarm
Last week, a slew of negative data intensified fears that the global manufacturing contagion had spread to the US and, more importantly, the services sector which dominates the domestic economy. After reasonable US labour market data on Friday, most of this story had lost its momentum. This morning, the focus shifted back to Europe, and more specifically, a faltering Germany. The manufacturing recession in Europe’s largest economy looks to be worsening and could mean that the overall German economy slips into a technical recession in Q3. Factory orders that had plunged in July failed to rebound in August, posting a month-on-month decline of 0.6%, twice as much as expected by economists. On an annual basis, orders have now posted their 15th straight month of declines.
The German government has indicated its willingness to provide economic stimulus if conditions continue to deteriorate and Bloomberg Economics now predicts that the 0.1% decline in Q2 GDP will be repeated in Q3; two consecutive quarters of negative growth is defined as a technical recession. Economic prospects for the country continue to be uncertain due to the increased possibility of a no-deal Brexit and soft demand caused by the protracted US-China trade war. Going further, business expectations have already fallen to the lowest in a decade and markets are forecasting a third straight decline in Industrial Production data tomorrow. If the WTO clash becomes another tit for tat tariff trade-off, it could be much worse yet.
Bottom line: The signs look worrying. Global trade uncertainty has certainly been a major factor in the deterioration in growth. However, German weakness could provide the catalyst for much needed fiscal stimulus. After all, Germany has brought its debt to GDP ratio down to just 60%, leaving plenty of space to act.
Last week, the pair closed above its 50-daily moving average—a level that supported Cable throughout the week. This level may come under pressure today as hard-line Brexit comments from Boris Johnson emerged over the weekend. Johnson’s remarks have caused Sterling to come under pressure in the London open.
Last week, a relatively flat Euro meant the Pound was the driving force behind movements in the pair. With a light day of data ahead, Brexit sentiment is likely to be the biggest contributor to intra-day movements. GBP/EUR may test the 1.12 level again, after finding support at the figure multiple times last week.
Last week, the pair rebounded off multi-year lows of 1.0879, reaching resistance at 1.10 and trading in a tight 50-pip range towards the end of the week. Monday has begun with weaker-than-expected German factory order data, so the common currency may drift lower throughout the day as economic sentiment continues to deteriorate.