Growth upgraded for this year then cut for next two years

As the two main Political Parties pledged to “spend spend spend” in a bid to woo voters in next month’s General Election, the Bank of England’s Monetary Policy Committee expressed concern over the state of the UK economy going forward.

The MPC confirmed that their forecast for growth in 2019 is now 1.4%, which is an improvement over the 1.3% they previously estimated. However, they downgraded their forecasts for 2020 and ‘21 to 1.2% and 1.8% from 1.3% and 2.3% respectively. These estimates are based on Boris Johnson’s Brexit plans so presupposes that the government will win the forthcoming election. That is far from certain.

It is rumoured that Bank of England Governor Mark Carney is under pressure from the Treasury to extend his tenure for a second time to provide continuity with the election and Brexit continuing to bring economic concern. The truth is more likely that a suitable candidate has not so far been identified. Given the uncertainty over the next Government any prospective candidate is likely to be cautious.

The outlook for the economy is in any case shrouded in uncertainty given the number of possible outcomes from the election so forecasting growth for the economy is difficult to put it mildly.

Yesterday’s MPC meeting voted by 7-2 to leave rates unchanged with two members voting for an immediate cut. It now seems likely that there will be a cut in short-term rates early in the New Year if the economy continues to perform as it has over the past few quarters. The estimate for GDP in Q4 has also been downgraded to flat.

The pound only marginally weakened on the news, falling to 1.2794 versus the dollar and closing at 1.2829

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Range bound for rest of year with trade deal

The dollar looks a little “jaded” as it continues to trade in a relatively narrow range. The constancy of rumours of progress in trade talks between Washington and Beijing are beginning to wear a little thin and as I have alluded to before it could be that both sides are doing little more than “keeping the pot boiling” as it is in their interests to do so.

With an election due next year, traders will be beginning to wind down activity for this year looking to book profits and consider options for 2020.

President Trump is still favourite to be re-elected but that does discount the fact that it is possible that he could face impeachment proceedings. Trump’s approval rating is in the low 40’s, it hasn’t really changed since the whole “Ukrainegate” issue came to light.

Next week sees the release of inflation data, producer prices and retail sales all of which will provide further evidence to support the FOMC’s decision to pause the recent rate cutting cycle.

Unless there is real and significant progress announced in the ongoing trade talks, the dollar is unlikely to be firmly driven one way or another in the coming weeks by further rumour.

With Thanksgiving just a few weeks away and the Holiday Season then beginning, traders may simply decide that what has hardly been a vintage year is best consigned to history. (Famous last words!).

Yesterday, the dollar index rallied to a high of 98.23, ending the day at 98.13. It is unable to hold above 98.20 and if that continues, it could lead to a bout of profit taking and a shallow correction.

Outlook still for slower than trend growth

Yesterday was all about growth forecasts with the Economists at the European Commission causing concern by downgrading estimates for both Germany and the wider region, much to the market’s dismay.

The week began with a certain optimism and the view that the economy is bottoming out beginning to take hold. However, with growth forecast to be just 1.1% this year and a paltry 1% in both 2020 and ‘21, any optimism may be short-lived. This means that any recovery will be extremely shallow and add to concerns that any economic shock will tip the region into recession.

There are those who see these estimates as being overly ambitious and that the region is already in recession in all but name.

Over the past couple of weeks, rumours regarding Germany “going it alone “and breaking growth and stability pact rules have largely gone away but with their growth forecast at just 0.4% in 2019 and 1% next year those rumours could easily resurface.

There is a row brewing between France and Germany as French President Emmanuel Macron seemed to say that NATO’s days could be numbered. He cited the seeming indifference of the U.S. to the alliance, a view not shared at all by German Chancellor Angela Merkel.

The euro continues to trade between 1.10 and 1.12 versus the dollar falling to a low of 1.1035 yesterday and closing at 1.1052.