UK Purchasing Managers Index (PMI)
The forward-looking UK Markit/CIPS Services PMI indicates that GDP growth has slowed sharply at the beginning of the final quarter of the year. The reading of 52.2 for October was lower than expected and significantly down on the 53.9 recorded in September. The October reading is consistent with quarterly growth of 0.2%, down on the expected 0.6% in the third quarter. Forward-looking indicators in the survey also suggested that there was little improvement on the horizon, with both new orders and work backlogs lower. Companies are also indicating that cost pressures remain elevated, notably due to higher fuel prices and rising wages. Firms are eager to see the uncertainty of the ongoing Brexit negotiation cleared and appear to be holding back investment and employment decisions as a result.
Coming in at 0.6%, growth for Q3 was the highest since April 2016. Boosted by some temporary factors, such as the rebound in construction activity, which rose by a hefty 2.1% q/q, as firms made up for lost time earlier in the year thanks to poor weather.
Household spending was also strong, growing by 0.5% q/q as the hotter-than-normal weather in the summer helped to counteract lower car sales related to EU emissions testing. What’s more, the trade deficit dropped to its lowest level since 2013 largely thanks to lower car imports. As a result net trade provided a whopping 0.8% boost to growth in Q3 compared to a -0.6% drag in Q2. However, the release provided more evidence that Brexit-related uncertainty is starting to weigh more heavily, with business investment falling by 1.2% q/q.
US Mid Term Elections
The well-flagged US mid-term elections last Tuesday passed as analysts expected. The Democrats took control of the House of Representatives, while the Republicans held the Senate. Nevertheless, the market reaction was positive, taking comfort from the fact that there is one less uncertainty to consider. The split in control between the two parties will make it difficult for the President to continue with current plans for further tax and spending cuts. Furthermore, a Democrat controlled house will want open investigations into the Presidents own tax affairs and accusations of Russian collusion in the election. Partisan political wrangling will mean that little progress is likely to be made over the last years of the Trump Presidential term. This may be seen as a positive development.
Oil Price Slips
The Brent Crude oil price breached the $70 level last week (the first time since April), falling from $86 at the beginning of October entering now a technical bear market. Oil prices have remained volatile over concerns about the upcoming US sanctions on Iran and supply disruption in Venezuela. Nevertheless, continuing increases in production from the US and worries over global demand, particularly from China, have put downward pressure on the oil price over recent weeks. Falls in the oil price will begin to have an impact on global inflation figures as everything from fuel prices to shipping costs start to fall back. As a result, this should improve the outlook for consumers as incomes continue to run ahead of inflation.
Index Open Close Change % Change
FTSE 100 7094 7105 11 0.15%
S&P 500 2723 2781 58 2.13%
Dax 11518 11528 10 0.09%
Cac 40 5102 5106 4 0.08%
Nikkei 225 22243 22269 26 0.12%
UK 10 Year Gilt Yield 1.49 1.48 -0.01 -0.67%