The Federal Reserve should confirm on Wednesday evening that it is in wait and see mode after its mid-cycle policy adjustment in the summer when interest rates fell at three consecutive Fed meetings between July and September.
No change looks inevitable when the final rate-setting decision of 2019 is announced this week, especially after last week’s non-farm payroll employment data emerged much stronger than expected. The creation of 266,000 new jobs in November has taken the pressure off the Fed to ease policy any further despite ongoing worries about the Sino-US trade war.
Trade is also in the spotlight this week as Sunday is the day a fresh round of tariffs is due to be imposed on Chinese imports. It is not clear whether those taxes will be confirmed or delayed, with hopes for a partial trade deal before Christmas just about still alive, even if China is also upping the ante this week by ordering all government offices and public institutions to remove foreign computer equipment within three years.
Also this week, the Fed will update on its growth and inflation expectations as well as the so-called dot plots which lay out the open market committee members’ forecasts of the future path of rates. And there will be a press conference too, giving Fed chair Jay Powell the chance to clarify his thinking as we head into the New Year.
If that doesn’t give investors a clear enough picture of where the US is heading inflation and retail sales figures this week should provide some more detail on the outlook.
On this side of the Atlantic, it’s the ECB’s turn to announce any monetary policy changes on Thursday. Again the expectation is no change following the implementation of new measures in September. The focus will rather be on Christine Lagarde, who is in charge for the first time after taking over from Mario Draghi at the head of the European central bank.
Attention will be on the consistency of her approach with that of her predecessor. It is widely assumed that her monetary policy will be cut from the same cloth but there may well be changes in the ECB’s processes after Lagarde invited suggestions for how to do things differently.
The ECB is made up of representatives of the 19 central bank heads from each Eurozone member state. In the past there have been some ill-disguised disagreements and dissent from senior officials, with the absence of regular votes on interest rates a particular bone of contention.
In September, the ECB’s monetary easing measures were opposed by about a third of the governing council and divisions may make it hard for Ms Lagarde to deliver the further easing that markets are pricing in for next spring.
On this side of the English Channel, the focus is all on politics this week with the third general election in less than five years taking place on Thursday.
The main financial markets barometer of the ups and downs of the election campaign has been the pound, which tends to prefer stability over other considerations and so has risen when the polls have pointed towards a clear-cut Conservative victory as they currently do. The pound is now at a seven-month high above $1.30 as the clock counts down to voting this week.
Although a sizeable majority for Boris Johnson would leave some serious questions about our future relationship with Europe unanswered, in the short term at least it would reduce uncertainty. It would lead to the withdrawal agreement being passed by parliament, probably before the end of the year and to departure from the EU by the end of January.
That would allow businesses to start planning for their future investments in a way they have not been able to for the past three and a half years and could lead to more consumer confidence too. Some investors are talking about a Brexit Bounce in the markets if the Tories do indeed win as expected.
However, given the failure of the pollsters to predict either the referendum in 2016 or the last election in 2017, no-one is yet willing to discount either a hung parliament or, less likely, a Labour majority.
Even when there is agreement on what the result of the election will be there is disagreement on what the implications might be. That’s leading to some widely diverging views of what the outlook holds for Britain next year. For example, Capital Economics describes a Conservative majority as ‘the best result for the economy’ while Citigroup says a win for the Tories would result in ‘a recession in 2021 and a shallow recovery thereafter.’
Differences of opinion focus on the state of the UK economy today, the UK’s capacity for growth in the short term, what the main parties might do from a fiscal perspective, how they will deal with Brexit and what the Bank of England will do in response to all of that with interest rates.
In particular, there is real uncertainty about whether the Conservatives promise of no extension to the 2020 transition period is realistic. Even disregarding the doubt over whether 11 months is long enough to strike a trade deal with Europe, an internal Government document this week suggested a ‘major challenge’ in achieving a new customs arrangement for Northern Ireland in time.
This is the most polarised election for nearly 40 years since the early days of the Thatcher Government pitted unrepentant socialists against the new breed of right-wing reformers. And the polarisation of the economic argument has been further complicated by the overlay of the Remain/Leave Brexit debate which cuts the electorate in a sometimes very different direction.
The long and the short of it is that this Thursday’s election is likely to solve very little.
One apparent victim of Brexit uncertainty has been the commercial property sector, and in particular the retail segment of that market where Brexit doubts have been compounded by the unstoppable assault on our High Streets by the online shopping websites, open all hours and able to deliver almost as quickly as a trip to the shops itself.
Last week, one of the biggest investors in UK retail property, the M&G Property Portfolio, shut its doors to investor redemptions after an increase in withdrawals ran down its cash buffer.
Property funds are particularly vulnerable to this kind of liquidity squeeze because the assets underpinning their portfolios are themselves extremely illiquid. You cannot sell a small piece of a building to meet redemption requests, so you have to hold plenty of cash as a cushion and at times even this is not enough.
The suspension of the M&G fund is an unwelcome reminder of the spate of similar closures that occurred in the wake of the EU referendum in 2016. Back then M&G was one of a handful of funds that shut their doors in order to protect investors who were staying put in the funds.
Three years ago, there was talk of the unsuitability of open-ended funds which promise investors daily liquidity for an asset class which cannot be traded on those terms. In the period since, it could be argued that no lessons have been learned with exactly the same issues affecting the funds today.
It remains to be seen if M&G is a one-off or if other fund management groups will follow its lead in the near future.
Another asset class in focus this week is oil, after Saudi Arabia moved to prop up the market for crude by sealing a new production deal with OPEC and its allies.
Further curbs on top of the 1.2m barrels a day agreed last year were put in place. Output is to be reduced by another 500,000 barrels a day with Saudi Arabia pledging an additional 400,000 barrels of voluntary cuts.
It’s not hard to see why Saudi Arabia is keen to keep the oil price high, having just floated a small slide of its state oil company Aramco. The kingdom has already accepted a lower valuation than the $2trn it had targeted, and it will not want the price to fall further in the aftermarket.
The total cuts since Opec and Russia first got together in 2016 to manage the oil price now amount to 2.1m barrels a day, about 2% of global demand. In response, the cost of Brent rose by 1.4% to $64.25 a barrel last week.