Manufacturing Slowdown Continues as Boris Issues Brexit Ultimatum

Manufacturing PMIs disappoint, especially in the US, pressuring the dollar; as PM Johnson prepares to lay out his final Brexit plan to the EU

Previous Day's Market Highlights

October began on a disappointing note for the global manufacturing industry, as PMI data showed activity in the industry continuing to soften, and in some cases the slowdown deepening. Of most importance to the global economy was September's ISM figures, referencing the health of the US manufacturing sector. The index tumbled to 47.8 last month, the lowest level since June 2009, with the ongoing trade war significantly denting growth in the sector, as just 17% of industries reported expansion last month. However, as usual, and rather ridiculously, President Trump pointed the blame at a 'pathetic' Federal Reserve for allowing the dollar to get 'so strong'. This is clearly not the case, as can be seen in the eurozone, where a weak currency is hardly leading a manufacturing boom, with the PMI pointing to an 8th consecutive contraction last month, at 45.7. For markets, the disappointing US data resulted in the dollar sharply pulling back from a fresh 2-year high, settling 0.2% lower against a basket of peers. Furthermore, the chances of a 25bps rate cut at the FOMC's October meeting almost doubled to 63%, sending yields lower across the curve.

Turning briefly back to the eurozone, the common currency continues to be driven by external factors, namely the direction of the dollar, rather than local data releases. Tuesday saw yet another benign inflation print, with CPI falling short of expectations in September, increasing at just 0.9% YoY. Core inflation, which excludes food and energy prices, increased by 1% YoY, marking the first time that core CPI has outpaced the headline measure since 2016, evidencing that incoming ECB President Lagarde faces an uphill struggle in trying to turnaround eurozone inflation expectations. The single currency ended the day 0.3% higher, largely due to a weaker dollar.

Meanwhile, after a brief respite from Brexit news on Monday, sterling's attention turned back to politics yesterday; with market participants, and the EU, seemingly unimpressed by PM Johnson's rumoured Backstop alternatives, and nerves taking hold ahead of the PM's Conference speech tomorrow. Reports from Irish broadcaster RTE seemingly showed a leaked copy of the government's negotiating plan, aiming to replace the backstop with a series of customs checkpoints approximately 10 miles from the border - a plan that, unsurprisingly, went down like a lead balloon in Dublin. The pound did, however, stage a late resurgence on reports that the EU were considering a time-limited version of the backstop. Despite these reports being denied by various EU sources, sterling ended the day 0.1% higher against the dollar, while also paring losses against the euro, closing 0.25% lower, having earlier fallen to a 3-week low, below the €1.12 handle. 

Despite all of the above, Tuesday's major movers were the antipodeans, with both the Aussie and Kiwi dollars declining after the RBA's dovish 25bps rate cut. For the Aussie dollar, the RBA's dovish cut raised the prospect of not only further loosening, but also increased the chances of unconventional policy measures being introduced. As a result, the currency slid 0.75% over the course of the day, touching its lowest levels since early-2009. In a similar manner, the NZD also slid, with the RBNZ set to follow its Australian counterpart by cutting rates next month. The kiwi dollar closed 0.4% lower, also hitting its lowest levels since 2009.

Elsewhere in G10 FX, both the Japanese yen and Swiss franc benefitted from decreasing risk appetite, sparked by both poor economic releases and escalating protests in Hong Kong. Both currencies ended the day with gains of around 0.4%. Similarly, the Canadian dollar struck a firmer tone, settling 0.1% higher, largely shrugging off July's GDP data pointing to the economy stagnating on a monthly basis. 

Away from FX, equity markets on both sides of the Atlantic were dragged lower by the disappointing US manufacturing data. The pan-European Stoxx 600 closed 1.2% lower, with the US benchmark S&P 500 recording similar losses, the latter experiencing its worst one-day performance since late-August. Finally, oil prices also lost ground after the manufacturing figures dented the demand outlook. Global benchmark Brent and US WTI crude both settled 0.8% lower.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1230 1.1381 1.1092 2.54%
GBP/USD 1.2280 1.2583 1.2233 2.78%
EUR/USD 1.0935 1.1110 1.0879 2.08%
GBP/AUD 1.8285 1.8496 1.7937 3.02%
GBP/NZD 1.9635 2.0003 1.9113 4.45%
GBP/CAD 1.6220 1.6691 1.6105 3.51%

Today's Market Highlights

British politics will likely be today's primary focus, with PM Boris Johnson set to deliver the closing speech of the Conservative Party conference just before lunchtime. Market participants will, of course, be primarily focused on any comments regarding the ongoing Brexit negotiations, with the PM set to use the speech to set out his alternative plans to replace the Irish Backstop; while also issuing the EU an ultimatum - to negotiate Brexit on his terms within 9 days, or deal with a no-deal exit. Also in focus throughout the speech will be any campaign pledges or spending plans ahead of a likely winter general election, with Johnson also likely to reiterate his desire for an election. A word of caution however, Boris has reportedly written the speech himself, rather than using a speechwriter, hence anything could happen, especially after last week's eyebrow-raising address at the UN General Assembly.

Turning to economic releases, today's calendar is relatively quiet. The morning session's only notable release will be construction PMI figures from the UK, expected to show the sector contracting for a 5th straight month, with the index expected at 45.0. The data calendar remains barren throughout the afternoon, with only US ADP employment change data of note. The report is set to show the US economy added 140,000 jobs last month, though the correlation with Friday's official jobs report is doubtful at best.

Finally, central bank speakers will also be of interest, particularly from the Federal Reserve after yesterday's disappointing manufacturing data. Market participants will pay close attention to remarks from New York Fed President Williams, as well as non-voting FOMC members Barkin and Harker, for any signs of further policy easing on the horizon.

Today's Economic Calendar

Time Currency Release Consensus Previous
9.30am GBP Construction PMI (Sep) 45.0 45.0
11.40am GBP PM Johnson Delivers Closing Speech at Conservative Party Conference 47.0 47.4
13.15pm USD ADP Employment Change (Sep) 140k 195k