Week Ahead: “Constitutional Eruption of Volcanic Proportions” expected…

We had numerous central bank meetings to get our teeth into last week, including the FOMC last Wednesday. The data flow picks up again over the next few days with several Fed speakers to listen out for as well, plus more Brexit developments including the Supreme Court’s ruling scheduled for the early part of the week.

The domestic UK calendar is light on data; instead focus will be on the ‘momentous verdict’ by the UK Supreme Court on the lawfulness of PM Johnson’s suspension of Parliament. After other mixed rulings by courts in both Scotland and the UK, it is not clear which way the decision will go, although the weekend press was leaning towards the decision going against the government. It also isn’t obvious whether Parliament would immediately reopen or stay open should the government seek to close it by other means.  

Last week’s ‘doji’ in cable says it all as indecision and consolidation has stalled sterling’s advance. The rally looks tired near-term and the market may be prone to a corrective dip, having hit the long-term trendline from the 2016, 2017 and 2018 lows.

The bigger prize of course is the government’s negotiations with the EU over a solution to the Irish backstop which is the main sticking point in striking a deal. Despite the positive comments from European Commission President Juncker last week, this still appears unlikely. Ultimately much depends on Parliament as the PM still faces an uphill battle to get a deal approved by lawmakers.

The 25-basis point cut delivered by the Fed at their September meeting last week was widely expected and so of little market consequence. While traders took the accompanying guidance and broadly unchanged economic forecast as a hawkish surprise, many believe there is still strong case to anticipate more rate cuts in the coming months. Global risks have certainly deteriorated, and employment growth is slowing with other forward indicators signalling a further worsening in domestic demand. 

However, it seems there is a limited appetite amongst Fed officials as only seven members of the Committee forecast another rate cut by year-end, and this depends on growth remaining above trend due to continued strength in the labour market and so consumption. Seven different Fed officials are scheduled to speak over this week so markets will focus on more detail around their thinking. 

As we said in our midweek update, it is the trade war which is the largest determinant of monetary policy currently, but news may be fairly thin on this front. High-level talks are expected in early October while a trade deal between the US and Japan could be signed soon.

Stateside data this week will be interesting as investors grow increasingly concerned about the macro outlook. Manufacturing PMIs are expected to stay above the all-important 50 threshold but will still point to the weakest pace of expansion in a decade. We also get core PCE, the Fed’s preferred measure of inflation released on Friday. Interestingly, the spread between core CPI and PCE is near record wides but as core CPI has beaten forecasts for two straight months, many analysts expect convergence soon.