Why manufacturing matters

Today's news headlines:

  • ‘Boris Johnson in new push for UK general election’. Yesterday, the Prime Minister signalled that he would call upon MPs to give him a December 12th general election, arguing that Parliament is at fault for the latest Brexit delay. If an election is approved this Monday, Johnson has pledged to bring his Brexit withdrawal bill back to the Commons, allowing lawmakers to secure the UK’s exit by approving his deal by November 6th. Early indications from the shadow cabinet are that Corbyn would prefer to wait until after the EU makes its decision on the length of delay to Brexit before deciding on an election. (Financial Times)
  • ‘Pence singles out Nike in speech critical of China’. US Vice-President, Mike Pence, criticised US corporations for their failure to challenge China’s ‘even more aggressive and destabilising’ nature over the past year. The VP singled out Nike for removing Houston Rockets merchandise after the NBA team’s general manager Tweeted in support of protestors in Hong Kong. He also criticised the NBA for siding with the authoritarian regime and silencing free speech. Pence’s comments come at a sensitive time when the US is trying to finalise a limited deal with China in an effort to ease trade tensions between the two. (Financial Times)

Crystallising risks

The spillover of weakness from the manufacturing sector to the consumer has been one of the biggest economic risks to developed nations this year, and it appears to be crystallising in the Eurozone’s largest economy, Germany.

The German Manufacturing Purchasing Managers’ Index (PMI) has been in contraction every month of 2019, and yesterday’s print of 41.9 is the second-lowest since the financial crisis (second to only last month’s reading). While German consumer data hasn’t posted decade lows just yet, the steep slide in the German GfK Consumer Confidence Index is not to be ignored. This morning’s release missed expectations and posted three-year lows of 9.6, signalling that German households are beginning to feel the brunt of the slowdown that has plagued the manufacturing sector.

Signs of consumer weakness are not as evident in other data—wage growth is resilient, and unemployment is still at multi-decade lows—but leading surveys influence expectations of future economic activity, and this morning’s GfK Consumer Confidence will stoke fears of impending German recession.

Bottom line: The outlook for the Eurozone is no brighter than it was earlier in the year and has prompted a controversial stimulus package from Draghi as he ends his stint as ECB Chief. Last month, the stimulus package divided ECB policymakers, but the economic data, as well as sustained downside risks, continue to back the policy decision. Perhaps a bigger worry should be how much the data will improve as the stimulus package channels its way through the Eurozone economy.

GBP/USD

Yesterday’s downside Sterling move was due to a lack of political clarity, as the prospect of a general election has added to the near-term uncertainty in the ongoing Brexit debacle. It could be a quiet day today, with a maintained bias on the downside until there’s a breakthrough on Johnson’s deal or an election.

GBP/EUR

Likewise, for the Pound against the single currency, risks are tilted to the downside until European Officials decide how long they are prepared to delay Britain’s departure from the European Union. The European Central Bank left monetary policy unchanged during yesterday’s meeting with Mario Draghi, highlighting the continued risk of an economic downturn to the Euro area. A key support level for the pair remains around 1.1550; a break below could meet little resistance down to the 1.14 handle.

EUR/USD

The pair is keeping afloat above the 1.11 level, having briefly dipped under following Draghi’s press conference yesterday. A weak reading in the German Gfk Consumer Climate Survey this morning compounded the miserable outlook for Europe’s largest economy.