Market Commentary March 2019
The UK services sector looks set for its weakest quarter since 2012 as a subdued start to the year continued last month. Business activity expanded marginally in February but new work fell for a second consecutive month, according to the IHS Markit / CIPS purchasing managers’ index (PMI). Having said this, the UK employment rate soared to a new high this month and unemployment fell to a fresh 44-year low as the labour market shrugged off Brexit concerns. The employment rate hit 76.1% in November 2018 to January this year according to figures released by the Office for National Statistics (ONS).
The Organisation for Economic Cooperation and Development (OECD) cut predictions for the UK’s growth to 0.8% in 2019 and 0.9% in 2020, even if a ‘no-deal’ outcome is avoided with a Brexit breakthrough. The OECD warned that the economy could contract by 2% and push the country into recession if Britain quits the EU without a deal and crashes out on World Trade Organization (WTO) rules. On a slightly more positive note, figures released by the ONS this month showed that the UK economy grew faster than expected in January with GDP expanding 0.5%.
The Prime Minister’s Brexit deal has suffered further defeat in the Commons this month and the way forward is still unclear. Discussion to delay Brexit beyond the current 29th March departure date provided some support to Sterling in the hope that a soft Brexit or even a second referendum would ensue. But this subsequently unraveled as domestic warnings that the UK are on the verge of a no-deal exit mounted. The 27 EU leaders have agreed to move the Brexit cliff-edge back to 12th April on the proviso that May can seal the proposed withdrawal deal next week or “indicate a way forward” by the 12th.
The UK chancellor Philip Hammond announced in his Spring Statement this month that the Office for Budget Responsibility (OBR) had cut the country’s 2019 growth forecast to 1.2%, down from the 1.6% in the autumn budget.
The Bank of England unanimously voted to leave rates unchanged, as forecast, citing political uncertainty and “mixed” economic data.
The Trump Administration stated that they are closer to a revised trade deal with China although the deadline for talks has been extended. Beijing has offered to lower tariffs and other restrictions on American cars, farm equipment, chemicals and other products in exchange for Washington removing most of the sanctions imposed against Chinese products since last year. China’s commerce minister meanwhile commented that the situation was becoming more ‘complicated’.
America’s trade deficit soared to a decade-long high in 2018, despite US President Donald Trump’s attempts to narrow the gap with higher tariffs and a belligerent approach to relations with key trading partners. The US trade deficit jumped 12% last year to $621bn which is the largest deficit since 2008.
The Federal Reserve cut its outlook for US interest rate rises this year and laid out plans to cease trimming its balance sheet, reinforcing the central banks dovish tone after raising rates four times in 2018. The market is now broadly anticipating no interest rate hikes for the US in 2019 with possibility of cuts in 2020 should economic data disappoint.
The European Central Bank (ECB) said that the Eurozone would see sluggish growth of 1.1% in 2019 which is down 0.7% from its December 2018 forecast. President Mario Draghi announced this month that the ECB pledges to pump more cheap money into the banking system until at least March 2020. The news comes just three months after the ECB ended its bond-buying programme. Interest rates will remain at record lows of 0% and rate hikes have been delayed until at least next year. Contagion risk remains as Brexit continues to unfold.
International standard Brent Crude reached a 2019 high of over $68 this month following the oil producing cartel Opec cutting production to respond to the near 40% price drop in the last few months in conjunction with the US flooding the market with shale. Opec next meet in June.
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