Macro insights

US GDP beats expectations, Fed cuts rates and UK Parliament agrees to December election

Last week was a big one for the US. Third quarter (Q3) GDP came in at 1.9%, modestly above our own 1.8% forecast and firmer than the consensus expectation of 1.6%. At the Federal Reserve’s Wednesday meeting, interest rates were cut by 0.25% to a range of between 1.5% and 1.75%, and the central bank stated that it expected rates to “remain” at an appropriate level over the coming meetings. Thursday saw another soft inflation number arrive, with ‘core’ PCE easing back to 1.7%.

Friday saw payrolls ‘beat’ expectations by 43,000 in October – adding a relatively soft 128,000 jobs over the month – while September’s report was revised up by 44,000 to a solid 180,000. In addition, October’s ISM survey rose to 48.3 – hinting at some stabilisation, if falling short of expectations of a rebound to 48.9. The short-term outlook for US activity and policy remains tied to developments in trade. With talks between the US and China continuing to be “constructive” ahead of an expected meeting this month, there is cause for optimism.

If a “Phase 1” deal is agreed, short-term risks to the US outlook should fade and we would see less need for a final Fed rate cut this year. Our attention will shift to a separate risk – the House took a step closer to impeachment last week by passing a vote (along partisan lines) on the process. There is a growing expectation for a formal House vote on the Articles of Impeachment between Thanksgiving and New Year. However, this process is likely to have less direct impact on the economic and policy outlook.

The UK also witnessed a week of significant developments, with Parliament finally agreeing to hold an early election, now scheduled for Thursday 12 December. Despite having passed the preliminary hearings of the Withdrawal Agreement Bill, the government believed that this Parliament would continue to try and delay Brexit. Hence all progress on Brexit has been superseded by the election, which remains a close call despite a significant Tory lead in the polls. The Bank of England will have to juggle this last-minute adjustment to the Brexit timetable to its next quarterly forecasts, published in this coming Thursday’s Inflation Report.

Broadly, the short-term uncertainty will likely leave the Bank comfortably on hold for policy this month.

Looking ahead, markets are hoping the election will deliver a Brexit resolution. This could either happen with a Conservative majority delivering the current deal, or a Remain-focused government holding a second referendum to deliver a customs union-based deal, or even possibly revoking Article 50. Some certainty, combined with a modest recovery in the global economy would put the prospect of a rate hike back on the UK agenda.

Deputy Governor Ramsden made this point recently and we continue to forecast a 0.25% rate hike in the first half of 2020. However, there is a risk that this election does not deliver a majority to enable a Brexit resolution – and there is the threat of ongoing deceleration in the global economy. The Bank may well also allude to this uncertainty as it leaves its options open again for now.

Upcoming events
US: Durable goods orders (Monday), trade balance, ISM non-manufacturing index, Services PMI (Tuesday), preliminary Michigan consumer sentiment (Friday)
Euro Area: Final Eurozone and German manufacturing PMI, ECB President Christine Lagarde speech in Berlin (Monday), final Eurozone composite PMI, German new manufacturing orders (Wednesday), ECB publishes economic bulletin, German industrial production (Thursday)
UK: Services PMI (Tuesday), Monetary Policy Committee decision and Monetary Policy report published (Thursday)

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