Post date: 30/09/2019 09:11

Last week started on a bad note for the Euro, as flash PMI indices of business activity out Monday came out worse than expected and gave further signs that Germany may be entering recession. The Euro fell on the news and never recovered, finishing the week down against every major currency save Sterling, beset by problems of its own. This week the spotlight is back on data releases. The key ones are Eurozone flash inflation on Tuesday and the US payroll report Friday. However, we will also be paying attention to political developments around possible German fiscal stimulus and, as always, the EU/UK Brexit talks.


Sterling reacted badly last week to further signs that British politics is becoming chaotic ahead of the Oct 31st Brexit deadline. The Supreme Court dealt prime minister Johnson a serious blow, ruling that his suspension of Parliament was illegal. While the immediate prospect for a no-deal Brexit have receded further, there are increasing signs that the uncertainty is starting to take its toll in the British economy. Today’s PMI index of business activity should confirm this trend.


The key PMI indices of business activity for the month of September painted a bleak picture. The manufacturing recession intensified, and while services are still expanding, overall the numbers are consistent with an economic near-stall. With the economy growing at best modestly, and inflation nowhere near the upward trend that the ECB wishes to see, the stimulus measures announced this month appear to be fully justified, and calls for fiscal stimulus in the core countries, particularly Germany, are going to get lauder.


As Congress moves toward a Trump impeachment, financial markets appeared to ignore completely political developments. Instead, the focus is on the decent news flow coming from the US economy. Buoyed by low rates, massive deficit spending and a solid job market, expectations for a downturn have come to nothing. We expect to see further confirmation of this optimistic view in Friday’s payroll report, where we expect to see yet another upward surprise in wages.