Businesses Expecting a Recession
This week there were no end of strange headlines, from Trump tries to buy Greenland to Trump declares himself the chosen one, but its likely they were all an attempt to obscure the one headline that really mattered; the latest survey of purchasing managers that suggests US businesses are expecting a recession. The PMI survey is an indicator of sentiment, but if enough people believe there will be a recession it can become a self-fulfilling prophecy. The markets and industry are now expecting a recession, if this pessimism spreads to the consumer, one could be here sooner than we think.
Elsewhere another strange headline has been spreading suggesting that Angela Merkel has given Boris Johnson 30 days to figure out the Irish Border issue in order to drop the backstop. It’s odd because anyone who has read the transcript knows she said nothing of the sort and the issue is as intractable as ever. It’s spread might well be connected to the fact that Boris Johnson keeps saying it despite it being obvious nonsense. Any Brexit negotiations now are probably just theatre and designed to help in the inevitable general election campaign.
Italy: Populist Coalition Collapses
Giuseppe Conte resigned as Italy’s Prime Minister this week bringing an end to a coalition between far-right Eurosceptic party the “League” and the anti-establishment party “Five Star Movement”. Conte, leader of Five Star, blamed deputy Prime Minister Matteo Salvini of putting his own and party’s interest ahead of the country’s as the reason for resigning. Salvini’s popularity has been on an upward trajectory after he refused to comply with the EU’s plans on curbing the country’s budget deficit. With Salvini starting to push for a new election to capitalise on his party’s growing popularity, Conte avoided a no-confidence vote.
It’s now up to President Sergio Mattarella to form a government. Potential scenarios include a tie up between centre left Democrats and Five Star, or if there is no political will to form one, a snap election will be called which would favour the League potentially creating the second most hard right, Eurosceptic party in Europe. Italy’s sovereign yields marginally rallied this week despite the political crisis.
US: Retail Earnings Remain Robust
Retail earnings this week proved US consumer spending is still going strong despite global headwinds. Following on from last week’s robust US retail sales report and Walmart (a bellwether of consumer spending) beating market expectations, this week both clothing store Target and home improvement chain Lowe’s followed up with more positive news. Target beat every earnings estimate with quarterly profit up 17 per cent driven by growth in same-day fulfilment services. Meanwhile, Lowe’s managed to minimise both the impact of a fall in lumber prices and mixed weather by “capitalising well on spring demand”.
Elsewhere, Federal Reserve (Fed) minutes published this week didn’t offer any clue as to whether the central bank will cut rates further at the next meeting in September. It did however show a growing divergence in opinions amongst committee members with some having preferred a cut twice as deep last July and others resisting any change at all. With trade tensions rising back up again, it is unclear if Jerome Powell will cut rates further.
UK: Turkish Pension Fund Set to Rescue British Steel
This week, Oyak, the Turkish Armed Forces Assistance Fund announced its intentions to buy British Steel, which currently languishes in compulsory administration, by the end of the year. The deal could save 5000 British Steel jobs and also ensure minimal disruption to another 20,000 jobs in the supply chain. Although there are conflicting reports stating that the pension fund could cut hundreds of jobs as the group look to boost productivity.
Oyak confirmed it will plan to boost steel production to 3m tonnes a year as well as seeking taxpayers support to push steel production from a coal to hydrogen gas-based model. Elsewhere and with a few months to go before the Brexit deadline, the UK has signed a “continuity” trade deal with South Korea. Trade between the UK and South Korea was worth £14.6bn last year. The terms of the agreement remain mostly the same as the existing agreement between the EU and South Korea.
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