Brexit still remains the overriding factor affecting the UK market and value of the pound. Last week the Benn Bill was passed to avoid a no deal Brexit and the House of Commons rejected Prime Minister Boris Johnson’s call for a general election.
The pound gained in value after suggestions the UK Government could be softening its views on the Northern Irish backstop in order to agree a deal with the European Union ahead of the 31st of October deadline. Johnson is reported to be meeting with European President Juncker today. Whether a backstop deal that just covers Northern Ireland will gain support by the House of Commons is yet to be seen.
The next hearing in the Supreme Court is tomorrow as to whether Boris Johnson proroguing Parliament until 14th October was unlawful. If it is deemed unlawful, Parliament may be recalled early.
The upcoming Bank of England meeting is expected to vote for interest rates to remain unchanged while ongoing global growth and Brexit concerns prevail. The minutes of the policy meeting might give indications if there are likely to be any more interest rate considerations in the future. If we see upward pressure on wages in the labour market this may increase inflationary pressure, meaning policy makers will look for gradual and limited rises in interest rates.
The market will be looking closely at the Consumer Price Index data released on Wednesday which is currently expected to come in lower than the previous reading at 1.9% in July due partly to lower oil prices.
Consumer spending is still positive and a key factor of support for UK growth, however competition amongst online retailer is putting downward pressure on prices and suppressing goods price inflation.
Following the interest rate cut in the deposit rate last week by 10 basis points by the European Central Bank (ECB) to -0.5%, the value of the euro saw an initial period of weakness. However, the euro rebounded after it was clarified that the negative rates would only apply to a small amount of deposits held by banks at the European Central Bank.
Chief economist at Pantheon Macroeconomics, Claus Vistesen said “this multiplier has initially been set at six, which means that just under €800 billion worth of reserves can now “potentially” be stashed at the ECB at zero rates”.
A prolonged period of quantitative easing of €20 billion is expected to resume in November until inflation meets their target level. However, the ECB is facing a diminishing supply of bonds that it can buy, which could put limitations on the new asset purchase program.
Signs of progress in the US-China trade talks have given more support to the US economy and reduced some of the concerns about a slowdown in worldwide economic growth. US Treasury Secretary Munchin indicated the US and China had made “lots of progress” in recent discussions.
In response China exempted a number of US goods that had tariffs increased on them. Likewise, President Trump offered a small delay in the increase on tariffs with China and told reporters that he would prefer a long lasting deal that resolves all issues but might consider an interim deal that prevents new tariffs starting in October and December.
The market is still looking to central banks to stimulate economies against any global slowdown. Five central banks next week will announce their policy updates, with the main attention on Wednesday on the US Federal Reserve. A second interest rate cut of 25 basis points is expected but a 50 basis points cut could also be possible. Either way their rhetoric is likely to suggest the door will be kept open for further interest rate reductions in the future.
The New Zealand dollar weakened last week after an influential business survey indicated the New Zealand manufacturing sector may have contracted in the third quarter. New Zealand’s manufacturing Purchasing Managers Index remains below the significant 50 level at 48.4 in August. Elias Haddad, a strategist at Commonwealth Bank of Australia said "A reading below 50 implies a contraction in manufacturing output. The components of the manufacturing PMI survey also paint a fairly concerning picture about the state of New Zealand’s manufacturing sector".
In the 12 months to the end of March, Gross Domestic Product growth fell from 4% to 3.2%. The Reserve Bank of New Zealand is projecting growth to fall to 2.6% in the year to March 2020. They have already cut interest rates three times this year by 75 basis points to a new low of 1%, in the hope of stimulating the economy with lower borrowing costs.
The slowdown in global economic growth and adverse effects of the 18-month long US-China trade war are likely to weigh heavy on the New Zealand economy and currency, putting further pressure on the Reserve Bank of New Zealand to look at mechanisms to support their economy.
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