Global Macro – Manufacturing remains in doldrums as export contraction deepens –The global manufacturing PMI slipped somewhat further in July, dropping to 49.3 from 49.4 in June. The good news in the survey was the rise in overall new orders (to 49.3 from 49), while the output index was flat (at 49.5). However, both indicators remain at very depressed levels, consistent with contraction. In addition, there was a further deterioration in the new export orders index (to 48.3 from 48.8) to the weakest level since October 2012 (which was the aftermath of the euro crisis). The new export orders index tracks world trade growth and at current levels is consistent with an annual decline of more than 1%. In addition, the employment index fell further (to 49.2 from 49.8) adding to evidence that the weakness in manufacturing could spill over into domestic demand. Leading indicators for the PMI – such as M1 money supply growth have improved moderately over recent months and signal that manufacturing should bottom out towards the end of this year. In any case, it looks like the weakness in manufacturing and trade will persist during the second half of this year. The ongoing slowdown in the manufacturing sector was also underlined by the US ISM manufacturing index (the global PMI includes the Markit US PMI rather than the ISM). The ISM index fell to 51.2 in July from 51.7. As with the global aggregate, there was an improvement in new orders but a significant slowdown in the employment index. In the press release, the ISM suggested that uncertainties related to the trade conflict continue to weigh on sentiment, which is in line with our base scenario. (Nick Kounis)
UK Politics: Election risks to maintain pressure on UK assets – Since our last update on 15 July, Boris Johnson has become UK Prime Minister, and has adopted a predictably harder line on Brexit, raising the risk of a no-deal exit from the EU on 31 October – and thereby pressuring UK assets (particularly sterling). However, while defections among his Conservative Party MPs have failed to materialise so far, a by-election in the UK today could bring PM Johnson perilously close to losing his majority in parliament, raising the risk of a near-term election. In combination with its DUP partner, the Conservative Party has a majority of just three. Should it lose today’s election to the pro-Remain Liberal Democrats – as polling suggests – that majority will fall to one. The leader of the opposition, Labour leader Jeremy Corbyn, has the ability to call a vote of no confidence, but has so far been reluctant given the risk that he would lose it. This could change following today’s by-election outcome. There also remains the ever-present risk of defections.
Alternatively, PM Johnson might himself choose to pre-empt events and call an election himself given that his party is currently enjoying a bounce in the opinion polls. While he has repeatedly ruled out such a move so far, former PM May also did so before calling an early election herself in 2017. While an election would raise the prospect of a pro-Remain government, the UK’s first-past-the-post electoral system, combined with the four-way split in the vote share going to various parties, makes the outcome of fresh elections unusually difficult to forecast. Indeed, one scenario is that PM Boris increases his majority and is then able to push a no-deal Brexit through parliament (at present, a majority is opposed to a no-deal Brexit). This is particularly likely if the Conservative Party enters a pact – formally or informally – with the Brexit Party to unite the pro-Brexit vote (something pro-Remain parties are doing in today’s by-election). Given these election-related risks, we expect downward pressure on UK assets to persist for the time being. (Bill Diviney)
By Nick Kounis
Head Financial Markets Research
By Bill Diviney
Senior Economist
PUBLICATION,
Source: ABN AMRO