What to expect next week ? (September 16 – September 22, 2019)

Highlights

> The Fed’s meeting (18) will be the important event of the week. We expect a 25bp drop in the Fed’s main rate and nothing on the balance sheet policy.
The important point will be Powell’s explanation of this move at his press conference. In July, the main explanations of the 25 bp drop were external factors (trade, global growth). Will these elements remain the principal explanation ? What will be the new growth forecasts consistent with this new monetary policy stance ?

> The US industrial momentum (17) will be an important data as the ISM synthetic index for August dropped below the 50 threshold at 49.1. The consistency between the two indicators suggests that the industrial production index YoY change could go in negative territory.  Will the industrial index follow this dynamics in August?
The Empire state (16) and the PhilyFed (19) will give information on the economic situation in September

> The ZEW (17) in Germany for September  will be key to anticipate the possibility of a German recession and therefore the possibility for a more proactive fiscal policy. Draghi, in his press conference last Thursday, said that a eurozone fiscal policy would be complementary to the ECB monetary policy to boost growth and inflation.

> Chinese number (16) will show how the economic policy efficiency of an arbitrage between an external negative shock and the necessity to feed the domestic demand to stabilize the economic activity. Industrial production was weak in July while retail sales were stronger than a few months ago.
> Retail sales in the UK (19) in the midst of a political mayhem. What has been consumers’ behavior ? Have they increased their stocks to prevent the impact of a no deal Brexit ?
> US housing market with Housing starts (18) and Existing home sales (19)? The market is quite stable.
> In Brazil, the Selic will not be pushed down at the next monetary policy meeting (18) as the Brazilian central bank has had strong intervention on the forex market to limit the depreciation of the real.

The detailed document is here
NextWeek-September16-September22-2019

What to expect next week ? (September 9 – September 15, 2019)

Highlights

> The ECB meeting will be the most important event of the week. Bazooka measures are expected with lower deposit rate (associated with a tiering depending on the size of the bank) and the resumption of the Quantitative Easing Program.
> The lower deposit rate with tiering will help the banking system. The EONIA may even be higher than what is currently seen.
The QE program will push down all interest rates and reinforce financial repression
We do not expect strong impact on the Eurozone growth momentum or on its inflation.

> External trade in Germany will highlight the impact of the world trade lower momentum. Lower exports have pushed the German GDP change in negative territory during the second quarter. An extended slowdown of the world trade (as expected when we look at the worldwide lower exports orders in the Markit survey) would push Germany in recession.

> Retail sales in the US for August (13) are the last good numbers expected. In September, tariffs on Chinese consumer goods imported in the US will have a negative impact on consumers’ behavior.
> JOLTS (10) will show the probable change in the US labor market trend
> The UK economy  had a negative change figure in the second quarter. This will have an impact of the labor market (10) for July.

The detailed document can be read here
NextWeek-September9-September15-2019

Referendum is the ultimate weapon for the UK

The UK House of Commons does not want Brexit, and on three occasions, it voted down the deal that Theresa May’s government negotiated with the European Union, which would have eased the country out of the bloc gently. However, MPs do not want a hasty no-deal exit either, and have also rejected Boris Johnson’s plans for leaving the European Union on October 31 do or die. 

However, MPs feel that there is not enough time left now before this date to come to a fresh exit agreement, different from Theresa May’s deal. So the deadline for leaving the European Union could now be pushed back to January 30, 2020, which according to Parliament, would be a better date for the UK to exit the EU with the agreement of the remaining 27.

It is worth raising several points on this issue:
1 – What has happened since the initial March 29 exit date to put MPs in this hasty situation less than two months from the new deadline? 
The quest for political balance right throughout the lengthy process to appoint a new prime minister ground all new initiatives to a halt and dwindled the chances of considering new options. The two months between Theresa May’s resignation on May 24 and BoJo’s appointment on July 24 were wasted time and took up a huge chunk of the extension granted by the EU.
2 – An extension beyond October 31 is only possible if the EU agrees. EU countrieswill be meeting on October 17 and 18 to discuss Brexit. Dissenters have already made their views known, with the French president, Spain and some others already expressing their frustration at the extension to October 31. As recently as September 5, Amélie de Montchalin, French Secretary of State for European affairs, again referred to a likely no-deal Brexit on October 31, soEurope could well take the wind out of British MPs’ sails. 
3 – At the European summit on April 10, the different countries did not seem to be united on the issue of the extension. So it would be preferable for the next summit in October to be able to set aside this issue, as the various member countries need to show a united front on October 17 and 18.
4 – It may be in Europe’s best interests to swiftly cut ties. The Brexit issue is at the forefront of everyone’s minds, it creates uncertainty and delays the potential economic impacts that could be felt depending on the final exit scenario. Europe needs to get this matter cleared up quickly. 
5 – The British economy is also hampered by this situation. The country’s growth is now much lower than the pace across the other G7 countries and corporate investment is 11% lower than it could have been without a referendum, so the price is high. 
6 – Boris Johnson has lost and his coup has failed. Parliament will not support him and in an ultimate humiliation, he cannot call an early election for October 15 just ahead of the crucial end-October deadline either (he will ask Parliament to call an election during the next sitting on Monday 9, but he will not win a two-thirds majority if the election date is too soon). From a London perspective, there can be no Brexit on October 31, whatever happens. 
BoJo no longer has a parliamentary majority after Phillip Lee’s defection and the 21 Conservative rebels had the whip withdrawn, so the whole system is now in deadlock.

It looks like there is no possible outcome for this political chaos. BoJo’s resignation may look like a potential solution, but there is the question of his successor and the time required to appoint him or her, so this would be a risky move given the state of the party and its shaky situation in the House of Commons. 
The whole situation needs a fresh start and this will probably involve a general election at a date beyond October 15 (the next general election in the UK must take place by May 5, 2022). 
However there is a risk that no party will win a majority: thiswill call to mind the latest election that Theresa May called on June 8, 2017, when she only managed to scrape together a majority with the support of a small group of MPs from the Northern Irish Democratic Unionist Party.
Achieving a clear majority looks like mission impossible in light of the sea change in British right-wing politics after recent events – both within the Conservative party and as a result of competition from Nigel Farage – as well as the rising influence of the Lib Dems, and wariness of Labour leader Corbyn, who wants to nationalize at any cost. The swift election that Johnson wanted would have forced each candidate to clearly state their remain or leave position. This would admittedly make the whole situation much easier for any new prime minister, but this majority would be Brexit-based and would only last a short time. Any elections taking place well after the October 31 date would raise different questions, although this would not make it any easier to establish a clear majority and choose a prime minister. The fundamental questions raised during the June 2016 referendum will not just fade away into the political background.
Against this backdrop and with no decisive majority to make a clear decision, it is in Europe’s interests to put paid to any further extension. In other words, political chaos would not be resolved by a general election, but rather a hard Brexit scenario would then be on the cards.

To eliminate all doubt, and in light of the government’s and MPs’ inability to come to an agreement that no-one wants anyway, a fresh referendum is needed. This time no-one can say they were unaware after the first vote on June 23, 2016. At the time, the UK voted 51.89% to leave the European Union. Now it is up to them to confirm their decision …or not. They must now take their future into their own hands, because the government and Parliament have failed to do so. 

Posted in French: 5 September 2019

BoJo and the general elections

This is a spectacular moment. BoJo has lost tonight and the final decision will be taken tomorrow as the Parliament will vote  for the possibility for it to take the lead in the negotiation in order to avoid a no deal Brexit. 
Then BoJo will convene general elections. 
Then we may have what everybody asks since the first referendum: a confirmation of the Brexit or not. 
That’s may be the best move to clarify the political situation as the vote at the general election will again be remain vs brexit. No one will no longer be able to say “we didn’t know”. 
The result is still random even if polls bend on Johnson’s side. 
The general elections results will definitely give the answer. Will the UK remain in the EU or will they exit. An exit vote would probably mean a no deal brexit. 
Therefore the pound will improve in coming hours but will follow polls’ results after BoJo convenes general elections. A poll in favor of Brexit will probably weaken the pound and conversely a stronger pound when polls are in favor of the remain side. The equity market will follow the same momentum. The point is that everyone will know that these elections will definitely close the referendum file. The huge uncertainty will be on the side the coin will fall. We can expect huge uncertainty and volatility if polls have the same volatility than before the referendum. Because investors know that this is the second chance. 
 This can be a source of a kind of sudden stop on the economic activity as no one will take strong bets on the future. 

What to expect next week ? (September 2 – September 8, 2019)

Highlights

> The global economy is slowing very rapidly and the world trade was contracting in June. To anticipate the immediate future on the economic activity, companies’ surveys are key. Next week, the Markit and ISM surveys will be released. On September the 2nd, manufacturing sector surveys for Markit will be out. The ISM will be out on September the 3rd. These number will highlight the short term momentum of the global activity and the future dynamics of world trade.

> On September the 4th the Markit service sector survey will be released and the 5th it will be the ISM survey on services. In the US, the services survey no longer re balance the weakness of the manufacturing sector. The flash estimate for the Markit survey is now below 51. Fragility leading to recession?

> US employment for August will be released on September the 6th. Recent numbers on jobs creation have been revised down (annual revision) leading to a lower dynamics. This change is consistent with the change in trend seen in the JOLTS survey.

> Industrial Orders in Germany for July (September 5) will be another source of information on the strength of the global momentum as this indicator has a profile consistent with the OCDE corporate investment. Recent data show a rapid slowdown.
> Recent developments in the Middle East with higher tensions, this week-end, between Israel, Lebanon and the West Bank. 

The detailed document is here
NextWeek-September2-September 8-2019

What to expect next week ? (August 26 – September 1, 2019)

Highlights

> GDP figures for the second quarter in the US (29), Germany (27), Italy (30) and France (29) will give details on the composition of growth in all these countries, providing a better understanding of the current situation. This will be particularly important at this stage of the business cycle, notably because there are fears of recession in Germany and Italy.

> Many surveys on economic activity. IFO in Germany (26), climat des affaires in France (27) and Business confidence in Italy (28). Risk of a weaker index in Germany and in Italy after the political mayhem seen in August.

> Consumer confidence in the UK (30), one month after Boris Johnson has been appointed as prime minister.
Consumer confidence in the US (August 27) will bring details on the labor market dynamics at a moment where the situation is changing in the US (Markit index for the manufacturing sector at 49.9 in August)
> CPI figures in the Euro Area for August and in the US for July that will bolster central banks in their will to become more and more accommodative.

The detailed document is available here
NextWeek-August26-September1-2019

Some thoughts on Hong Kong

Massive demonstrations in Hong Kong have set inhabitants of the Chinese-controlled territory (handover on July 1, 1997) against the Chinese government, with 1.7 million people involved in demonstrations on August 18, equating to 25% of the population.

The key issue at stake here is the shift in the political landscape in Hong Kong after the region’s government announced plans to amend its extradition law, as Hong Kong inhabitants fear Chinese control over the HK legal system, giving rise to concerns that they could lose their independence from Beijing. This means the risk that Hong Kong could lose some of its special status (one country, two systems since the agreement implemented in 1997), jeopardizing the personal safety of all HK inhabitants.

Hong Kong Chief Executive Carrie Lam stated on July 8 that the extradition bill was dead, but this did not appease demonstrators, who are calling for her resignation: not only was she was the instigator of the proposed amendment, but she is also not democratically elected – rather she is appointed by a 1,200-member election committee, mostly appointed by Beijing. The Chief Executive should be appointed via elections based on universal suffrage, but since the umbrella revolution in 2014, Beijing’s approach to HK has changed and the Chinese government no longer seems to want to comply with the initial democracy agreements. 
This public backlash against political changes in HK is also due to the fact that the Chinese government meddles in legislative elections, stepping in to rule against one candidate or another. 
China has taken a firm stand to quash this social unrest, and troops are barracked at the border with Hong Kong, involved in maneuvers although not intervening. 

It is interesting to look back in time to understand what is happening and gain some insight into the Chinese government’s heavy-handed reaction. 
During the UK handover of Hong Kong to China in 1997, it was agreed that there would be one country, two systems i.e. Hong Kong would remain subject to market forces and China would maintain a socialist system. China would be in charge of HK’s defense and foreign affairs, but the region would have its own constitution with a strong degree of autonomy from China, maintaining freedom of the press, freedom of assembly and the right to demonstrate, etc.
The agreement that came into force on July 1, 1997 was signed for a duration of 50 years – i.e. until 2047 – after which the one country, two systems set-up could become one country, one system.

But this is the very issue that is attracting concern in Hong Kong: the initial idea was that the two systems would converge, based on the assumption that China would develop economically and its political system would evolve towards the HK system, not vice versa. This was the idea put forward by Samuel Pisar i.e. greater economic affluence would lead to the gradual implementation of a more liberal and democratic political system.
However, judging by moves from Beijing, residents of Hong Kong look on as their system shifts and moves towards the Chinese political system. They are concerned that they will gradually be incorporated into this system and become just another Chinese province among others, which would mean access to information being more restricted and freedom of speech becoming much more limited than it is now: Hong Kong has a lot to lose.

The government in Beijing does not want to take the risk of allowing social unrest to gain a foothold, and has not shied away from repressing any demonstrations that take place across the country. To avoid this type of situation, the Chinese authorities take a very active approach to applying economic policy, and are strict in ensuring that social instability does not take root. This is one of the factors underpinning the widespread development of electronic surveillance in China, as facial recognition and the social credit system are ways of curbing these risks in a type of digital dictatorship engineered to avoid social strife.
This need for the authorities to curb unrest is exacerbated by the fact that growth is slowing and the Chinese economy is struggling to create all the necessary jobs.

In other words, the authorities in Beijing do not want the Hong Kong demonstrations to spread to the rest of China, which is fettered by more sluggish growth. This is a dangerous situation, as citizens in both Shenzhen and Guangzhou are closely watching how the Hong Kong-Beijing relationship pans out: a number of Shenzhen residents work in Hong Kong, so there is no longer a strict separation between the territory and the rest of China.

This battle of wills raises a number of questions.
Chinese military intervention in Hong Kong is one of the list of potential options, but this kind of political move could well draw parallels with the Tienanmen Square events in the spring of 1989.
This would be damaging for China as its international expansion has been exponential since 1989 and moves aimed at extending the country’s influence – such as the Belt and Road Initiative – would be threatened by military intervention. This would also be a major risk as that the country is involved in a stand-off with the US and is able to offer technological capabilities that could help skew the world balance in China’s favor: in this respect, the Huawei affair is symbolic as the company has the wherewithal to replace mobile telephone networks and swiftly migrate all European countries to Chinese 5G technology.
So this kind of move would trigger hefty risks at a time when China wants to challenge the US both economically and politically.
Meanwhile, a deterioration in Hong Kong’s status resulting from Chinese intervention and putting it on a par with other Chinese regions would increase mistrust of Beijing from all other world capitals. 

However, this mistrust may only last a short while, and China can hope that its economic and technological firepower would ensure that it emerges as leader over the years ahead, with intervention having a limited effect over time. After all, the events of Tienanmen Square did not stop China growing and extending its influence in the world over the past 30 years.

Ultimately, the issue at stake here is China’s role in the world, as the country stands against the US in a worldwide economic and political battle of wills. Technological, economic and political leadership is being played for, and Washington has not managed to put an end to its contest with Beijing after Chinese retaliation forced Donald Trump to back down last week when he delayed border tariffs on electronic consumer goods to December 15.
China is also currently finding its domestic balance, and keeping Hong Kong’s current status would mean maintaining access to the rest of the world and allowing the rest of the world to have access to China. This communication is vital, although HK admittedly only accounts for 3% of China’s GDP as compared with 20% in 1997. 
China could well be on the way to becoming the economic heavyweight it was before the industrial revolution in Europe. The choices it makes in addressing the demonstrations in Hong Kong will be a harbinger of just how it plans to act in this leadership role in today’s globalized world.