Parliament deadlock after House of Commons defeat.
Sterling dropped sharply yesterday to a 5-month low against the Dollar going below 1.2000 and the UK August PMI construction index declined to 45.0 from 45.3, the fourth consecutive monthly contraction. New orders fell at the fastest pace for over 10 years with a slump in confidence, especially with political uncertainty intensifying.
The government were defeated last night in the House of Commons as rebel and opposition MPs voted to take control of Wednesday’s proceedings and vote today on legislation to potentially block any ‘no-deal’ Brexit. The government announced that it would call for a General Election if it is defeated, although the call for now is likely to be rejected by parliament, maintaining the deadlock.
Sterling gained some support from a net reduction in concerns over a disorderly Brexit, but severe uncertainty limited support. The UK currency settles at the time of writing near 1.2140 against the Dollar and the Euro around 1.1050.
German yields declined further in early Europe yesterday with the 10-year yield below -0.70%. With an underlying lack of confidence in the outlook, the Euro remained under pressure with fresh 2-year lows just below 1.0930 against the dollar.
According to sources, the European Central Bank (ECB) is leaning towards a cut in interest rates at this month’s meeting with enhanced forward guidance and it was likely that rates would also be tiered. Many members also support fresh bond purchases, although the situation was complicated by opposition from Northern countries. The ECB also wanted to leave some room for flexibility and manoeuvre for incoming President Lagarde and the Euro edged higher following the reports.
The ISM manufacturing index declined to 49.1 for August from 51.2 and below consensus forecasts of 51.1, the lowest reading since January 2016. New orders also declined sharply to 47.2 from 50.8 a 7-year low.
Employment declined significantly for the first time in almost three years with prices falling at a faster pace too. The report overall was notably weaker than expected, increased recession fears made the dollar weaker than expected. Future markets indicated a 7% chance of a 0.50% rate cut this month. St Louis Federal Reserve (Fed) President Bullard stated that a 0.50% rate cut this month would align the Fed with market expectations and that aggressive action is needed given trade wars and the slide in bond yields. Boston’s Rosengren stated that the Fed should cut aggressively if risks to the economy materialise, although he wanted to wait for now