The Week ahead of 7 October 2019


The Week ahead of 7 October 2019

Published Date: 2019-10-09 | Source: INCE|Community | Author: Chris Gilmour

The Week ahead of 7 October 2019

The big feature of last week's data releases was the US ISM manufacturing data, which slipped further into contractionary territory, against expectations. The non-manufacturing ISM data also cooled, suggesting that the manufacturing slowdown is having a systemic effect on consumer spending as well. This data had an immediate, negative effect on the S&P 500. The S&P 500 finished the week 0.3% down at 2 952. The nonfarm payroll number of 136 000 in September was not only well below the consensus figure of 145 000 but was also significantly below the August figure of 168 000. However, the unemployment rate dropped to a 50-year low of 3.5%, a figure not seen since December 1969. Wages rose by 2.9% compared with a year earlier, which is the lowest increase since July 2018. The net effect of these three factors-ISM manufacturing, non-manufacturing and nonfarm payrolls- is likely to be that US Federal Reserve chairman Jerome Powell will be inclined to continue with the policy of cutting interest rates. Base case is that the Fed cuts rates one more time in Dec but there remains an outside chance that a cut could also be forthcoming in Oct.

The Trump administration announced a raft of possible new trade tariffs against EU products amounting to about $7.5bn, starting on Oct 18. Chief among these is a World Trade Organisation (WTO) ruling which means that the US can impose the tariffs as retaliation for illegal aid that the EU gave to Airbus in its competition with its American rival Boeing. This move could well be self-defeating, especially if it goes further that just Airbus. There are suggested tariffs on Scotch whisky, European olives and cheese, none of which are made in the US and so it is difficult to see how the US would gain from the application of such tariffs.

The insurrection in Hong Kong got significantly worse last week, with demonstrators resorting to new levels of violence. Beijing has been remarkably restrained in its engagement with the demonstrators, nothwithstanding the fact that a demonstrator was shot at near point-blank range with live ammunition last week. In a new development, the Hong Kong administration closed down the entire public transport system in an attempt to curtail the movement of the demonstrators. It is unclear as to how this will all end, as it has been going on unabated for many months now but the Beijing authorities must be urgently looking at ways of extricating itself from this mess without appearing to lose face.

The Brexit saga continues unabated in the UK, with prime minister Boris Johnson putting forward a deal that attempts to deal with the contentious issue of Northern Ireland after the UK exits the European Union. However, most opposition parties have dismissed it as a rehashed version of previous prime minister Theresa May's withdrawal agreement that was unceremoniously defeated in the House of Commons on three occasions earlier this year. Having said that, the numbers suggest that Johnson may have more chance than his predecessor of getting this deal through the UK parliament. Beyond that, he will still need to get the endorsement of the 27 remaining members of the European Union and there is no guarantee that this will occur. Meanwhile, it was demonstrated in the Court of Session in Edinburgh, Scotland's highest civil court, that the UK government has reluctantly accepted that if it is unable to achieve a deal with the European Union by October 19, it will be required by law to request a three-month extension to the article 50 deadline, currently at 31 October. This is in direct contrast to Johnson's utterances, for example when he famously said that he would "rather be found dead in a ditch" than request an extension from the EU.

The JSE All Share Index (Alsi) had a really bad week. The Alsi closed 2.2% lower on the week at 53 994. Since the recent low of 53 841, the index has now risen by only 0.3% at its current level. It is not clear what the catalyst will be for a turnaround in the Alsi. Even the weak rand is having precious little positive impact on the market. Stocks that are influenced predominantly by the local economy are showing outstanding value, though of course this doesn't mean that they can't still go lower. At its current level, the Alsi is 14.5% below its all-time high achieved on 25 Jan 2018.

Economic data releases this week;

  • 9 October 2019
    • US FOMC Minutes for 18 September rates decision
    • 10 October 2019
      • SA Mining Production, Manufacturing Production August

      An image of Chris Gilmour

Similar Stories