Tag: finance

Authored by Lance Roberts via RealInvestmentAdvice.com,

In 2016, I first touched on the impacts of hiking the minimum wage.

“What’s the big ‘hub-bub’ over raising the minimum wage to $15/hr? After all, the last time the minimum wage was raised was in 2009.

According to the April 2015, BLS report the numbers were quite underwhelming:

‘In 2014, 77.2 million workers age 16 and older in the United States were paid at hourly rates,representing 58.7 percent of all wage and salary workers. Among those paid by the hour, 1.3 million earned exactly the prevailing federal minimum wage of $7.25 per hour. About 1.7 million had wages below the federal minimum.

Together, these 3.0 million workers with wages at or below the federal minimum made up 3.9 percent of all hourly-paid workers. Of those 3 million workers, who were at or below the Federal minimum wage, 48.2% of that group were aged 16-24. Most importantly, the percentage of hourly paid workers earning the prevailing federal minimum wage or less declined from 4.3% in 2013 to 3.9% in 2014 and remains well below the 13.4% in 1979.’”

Hmm…3 million workers at minimum wage with roughly half aged 16-24. Where would that group of individuals most likely be found?

Not surprisingly, they primarily are found in the fast-food industry.

“So what? People working at restaurants need to make more money.”

Okay, let’s hike the minimum wage to $15/hr. That doesn’t sound like that big of a deal, right?

My daughter turned 16 in April and got her first summer job. She has no experience, no idea what “working” actually means, and is about to be the brunt of the cruel joke of “taxation” when she sees her first paycheck.

Let’s assume she worked full-time this summer earning $15/hour.

• $15/hr X 40 hours per week = $600/week
• $600/week x 4.3 weeks in a month = $2,580/month
• $2580/month x 12 months = $30,960/year.

Let that soak in for a minute.

We are talking paying $30,000 per year to a 16-year old to flip burgers.

Now, what do you think is going to happen to the price of hamburgers when companies must pay $30,000 per year for “hamburger flippers?”

Not A Magic Bullet

After Seattle began increased their minimum wage, the NBER published a study with this conclusion:

“Using a variety of methods to analyze employment in all sectors paying below a specified real hourly rate, we conclude that the second wage increase to $13 reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs increased by around 3 percent.Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016.”

This should not be surprising as labor costs are the highest expense to any business. It’s not just the actual wages, but  also payroll taxes, benefits, paid vacation, healthcare, etc. Employees are not cheap, and that cost must be covered by the goods or service sold. Therefore, if the consumer refuses to pay more, the costs have to be offset elsewhere.

For example, after Walmart and Target announced higher minimum wages, layoffs occurred (sorry, your “door greeter” retirement plan is “kaput”) and cashiers were replaced with self-checkout counters. Restaurants added surcharges to help cover the costs of higher wages, a “tax” on consumers, and chains like McDonald’s, and Panera Bread, replaced cashiers with apps and ordering kiosks.

A separate NBER study revealed some other issues:

“The workers who worked less in the months before the minimum-wage increase saw almost no improvement in overall pay — $4 a month on average over the same period, although the result was not statistically significant. While their hourly wage increased, their hours fell substantially. 

The potential new entrants who were not employed at the time of the first minimum-wage increasefared the worst. They noted that, at the time of the first increase, the growth rate in new workers in Seattle making less than $15 an hour flattened out and was lagging behind the growth rate in new workers making less than $15 outside Seattle’s county. This suggests that the minimum wage had priced some workers out of the labor market, according to the authors.”

Again, this should not be surprising. If a business can “try out” a new employee at a lower cost elsewhere, such is what they will do. If the employee becomes an “asset” to the business, they will be moved to higher-cost areas. If not, they are replaced.

Here is the point that is often overlooked.

Your Minimum Wage Is Zero

Individuals are worth what they “bring to the table” in terms of skills, work ethic, and value. Minimum wage jobs are starter positions to allow businesses to train, evaluate, and grow valuable employees.

• If the employee performs as expected, wages increase as additional duties are increased.
• If not, they either remain where they are, or they are replaced.

Minimum wage jobs were never meant to be a permanent position, nor were they meant to be a “living wage.”

Individuals who are capable, but do not aspire, to move beyond “entry-level” jobs have a different set of personal issues that providing higher levels of wages will not cure.

Lastly, despite these knock-off effects of businesses adjusting for higher costs, the real issue is that the economy will quickly absorb, and remove, the benefit of higher minimum wages. In other words, as the cost of production rises, the cost of living will rise commensurately, which will negate the intended benefit.

The reality is that while increasing the minimum wage may allow workers to bring home higher pay in the short term; ultimately they will be sent to the unemployment lines as companies either consolidate or eliminate positions, or replace them with machines.

There is also other inevitable unintended consequences of boosting the minimum wage.

The Trickle Up Effect:

According to Payscale, the median hourly wage for a fast-food manager is $11.00 an hour.

Therefore, what do you think happens when my daughter, who just got her first job with no experience, is making more than the manager of the restaurant? The owner will have to increase the manager’s salary. But wait. Now the manager is making more than the district manager which requires another pay hike. So forth, and so on.

Of course, none of this is a problem as long as you can pass on higher payroll, benefit and rising healthcare costs to the consumer. But with an economy stumbling along at 2%, this may be a problem.

A report from the Manhattan Institute concluded:

“By eliminating jobs and/or reducing employment growth, economists have long understood that adoption of a higher minimum wage can harm the very poor who are intended to be helped.Nonetheless, a political drumbeat of proposals—including from the White House—now calls for an increase in the $7.25 minimum wage to levels as high as $15 per hour.

But this groundbreaking paper by Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office, and Ben Gitis, director of labormarket policy at the American Action Forum, comes to a strikingly different conclusion: not only would overall employment growth be lower as a result of a higher minimum wage, but much of the increase in income that would result for those fortunate enough to have jobs would go to relatively higher-income households—not to those households in poverty in whose name the campaign for a higher minimum wage is being waged.”

This is really just common sense logic but it is also what the CBO recently discovered as well.

The CBO Study Findings

Overall

• “Raising the minimum wage has a variety of effects on both employment and family income. By increasing the cost of employing low-wage workers, a higher minimum wage generally leads employers to reduce the size of their workforce.

• The effects on employment would also cause changes in prices and in the use of different types of labor and capital.

• By boosting the income of low-wage workers who keep their jobs, a higher minimum wage raises their families’ real income, lifting some of those families out of poverty. However, real income falls for some families because other workers lose their jobs, business owners lose income, and prices increase for consumers. For those reasons, the net effect of a minimum-wage increase is to reduce average real family income.”

Employment

• First, higher wages increase the cost to employers of producing goods and services. The employers pass some of those increased costs on to consumers in the form of higher prices, and those higher prices, in turn, lead consumers to purchase fewer goods and services.

• The employers consequently produce fewer goods and services, so they reduce their employment of both low-wage workers and higher-wage workers.

• Second, when the cost of employing low-wage workers goes up, the relative cost of employing higher-wage workers or investing in machines and technology goes down.

• An increase in the minimum wage affects those two components in offsetting ways.

  • It increases the cost of employing new hires for firms

  • It also makes firms with raise wages for all current employees whose wages are below the new minimum, regardless of whether new workers are hired.

Effects Across Employers.

• Employers vary in how they respond to a minimum-wage increase.

• Employment tends to fall more, for example, at firms whose sales decline when they raise prices and at firms that can readily substitute machines or technology for low-wage workers.

• They might  reduce workers’ fringe benefits (such as health insurance or pensions) and job perks (such as employee discounts), which would lessen the effect of the higher minimum wage on total compensation. That, in turn, would weaken employers’ incentives to reduce their employment of low-wage workers.

• Employers could also partly offset their higher costs by cutting back on training or by assigning work to independent contractors who are not covered by the FLSA.

Macroeconomic Effects.

• Reductions in employment would initially be concentrated at firms where higher prices quickly reduce sales. Over a longer period, however, more firms would replace low-wage workers with higher-wage workers, machines, and other substitutes.

• A higher minimum wage shifts income from higher-wage consumers and business owners to low-wage workers. Because low-wage workers tend to spend a larger fraction of their earnings, some firms see increased demand for their goods and services, which boosts the employment of low-wage workers and higher-wage workers alike.

• A decrease in the number of low-wage workers reduces the productivity of machines, buildings, and other capital goods. Although some businesses use more capital goods if labor is more expensive, that reduced productivity discourages other businesses from constructing new buildings and buying new machines. That reduction in capital reduces low-wage workers’ productivity, which leads to further reductions in their employment.

Don’t misunderstand me.

Hiking the minimum wage doesn’t affect my business at all as no one we employee makes minimum wage. This is true for MOST businesses.

The important point here is that the unintended consequences of a minimum wage hike in a weak economic environment are not inconsequential.

Furthermore, given that businesses are already fighting for profitability, hiking the minimum wage, given the subsequent “trickle up” effect, will lead to further increases in automation and the “off-shoring” of jobs to reduce rising employment costs. 

In other words, so much for bringing back those manufacturing jobs.

The makers of Oxycontin, Purdue Pharma, are now expected to file for bankruptcy after settlement talks regarding the nation’s opioid crisis have “hit an impasse”, according to ABC News. 

This impasse puts Purdue’s federal trial over the opioid epidemic on track to start next month and sets the stage for significant legal drama involving state and local governments. 

Purdue had been working for months to try and avoid trial by determining the company’s responsibility for the crisis, which has cost over 400,000 Americans their lives. But an email from the attorneys general of Tennessee and North Carolina revealed that Purdue and the Sackler family had rejected two offers from the states over how payments would be handled as a result of a settlement. 

Tennessee Attorney General Herbert Slatery and North Carolina Attorney General Josh Stein wrote in their message:

“As a result, the negotiations are at an impasse, and we expect Purdue to file for bankruptcy protection imminently.”

The failure to settle could set up “one of the most tangled bankruptcy cases in the nation’s history.” It would leave almost every state and 2,000 local governments that have sued the drugmaker to fend for themselves in bankruptcy court for the company’s remaining assets. Purdue had already threatened to file bankruptcy earlier this year, but was holding off while negotiations continued. 

The Sackler family is being sued separately in at least 17 states, and its unclear what the bankruptcy means for them. Meanwhile, the family is believed to have transferred most of its multi-billion dollar fortune overseas. 

Pennsylvania Attorney General Josh Shapiro says he will now sue the Sackler family, as other states have:

“I think they are a group of sanctimonious billionaires who lied and cheated so they could make a handsome profit,” he said. “I truly believe that they have blood on their hands.”

Purdue and the Sackler family had already settled for $270 million with the state of Oklahoma to avoid trial. Under one proposed settlement, the company would have entered into a structured bankruptcy that was said to have been worth $10 billion to $12 billion over time. This would have included $3 billion from the Sackler family, which would have given up its control of Purdue and contributed $1.5 billion more by selling Mundipharma, another company they own. 

Shapiro has said that what the company was offering was not worth $10 billion to $12 billion. In their latest offers, the states looked to assure that the $4.5 billion from the Sackler family would be paid, but the family “refused to budge”. 

Tennessee’s Slatery and North Carolina’s Stein said that states are already preparing to handle bankruptcy proceedings. They wrote: 

“Like you, we plan to continue our work to ensure that the Sacklers, Purdue and other drug companies pay for drug addiction treatment and other remedies to help clean up the mess we allege they created.”

The nearly 2,000 cases filed have been consolidated under a single federal judge in Cleveland. Most of these lawsuits also name other opioid makers, distributors and pharmacies, some of whom are working on their own settlements. 

Facing hundreds of other lawsuits in state courts, Purdue has sought a wide-ranging deal to settle all cases against it.

This impasse comes about six weeks before the scheduled start of the first federal trial under the Cleveland litigation. Filing for bankruptcy would “most certainly” remove Purdue from the trial and the bankruptcy judge would have wide discretion on how to proceed.

Authored by Irina Slav via OilPrice.com,

It’s not a secret: OPEC has painted itself into a corner by relying exclusively on supply control to be able to manipulate international oil prices in a way that is favorable for its members.

Right now, prices are depressed and that has nothing to do with supply. Could OPEC’s grip on oil prices be slipping irreparably?

When OPEC first announced that its members had agreed to put a cap on their production to reverse a steep drop in prices, it worked. Prices had been pushed to lows last seen more than a decade ago by the U.S. shale boom and OPEC’s own attempt to halt it by turning the taps on to maximum flow. When OPEC said it would reduce this flow, prices rebounded, providing much-needed relief to oil-reliant economies in the Gulf—it also provided relief to oil producers around the world, including the U.S. shale patch.

The shale patch recovered so well that now U.S. oil production is at an all-time high with the country last year becoming the world’s largest producer. Meanwhile, OPEC and its partners led by Russia decided to cut again. This time, however, the cuts didn’t work. Prices remained subdued save the occasional short-lived rally. While it’s true Brent and WTI are both higher than they were before the second round of cuts was announced, the international benchmark is much lower than OPEC’s largest producers, notably Saudi Arabia, need it to be.

The reason these cuts aren’t working is that market movers are not watching them. They are watching the tariff match between Washington and Beijing—a match that could hurt global oil demand. According to forecasters, it is already hurting it and as a result, it is hurting prices.

“OPEC’s burden is to show that it still has the appropriate tools to arrest price declines driven in no small part by White House policy,” RBC’s head of commodity strategy, Helima Croft, said in a note to clients as quoted by CNBC this week.

“It may prove easier to clean up the physical market than to overcome skepticism about the ultimate efficacy of its strategy in the age of Trump,” Croft added.

“The recent crash of 2014-16 demonstrated the reduced impact that OPEC now has on oil prices. While OPEC was announcing production cuts, the US onshore shale boom easily counteracted any upward price pressure. Currently, sanctions on Iran and Venezuela continue to undermine the influence of OPEC,” Jason Lavis, partner at oil industry platform Drillers.comtold Oilprice.

When OPEC+ met last December, the partners agreed to take off a combined 1.2 million bpd from the global oil market. This July, they agreed to extend the cuts to the end of the year or even early 2020. Yet the cartel’s total production is actually down by more than 1.2 million bpd: U.S. sanctions on Venezuela and Iran have hurt these countries’ production rates severely. Even so, Brent is stubbornly hovering around $60 a barrel. The trade war worry, coupled with the relentless rise in U.S. production, has played a bad trick on OPEC.

It seems the only way to achieve higher prices would be to cut deeper. It is the only way that would make sense seeing as the maximum-production strategy failed spectacularly. However, deeper cuts would mean loss of market share, and any change in prices might not be substantial enough to justify this loss. In this context, it is highly doubtful that some OPEC members—and Russia, too—would agree to reduce their oil production by much more. This means OPEC might just need to sit on the sidelines and watch the trade war developments hoping for a deal: that could be the miracle the cartel needs to get the higher prices its members’ economies rely on. Whether a trade deal would push prices up to the $80 level Saudi Arabia needs is doubtful but in the end, anything higher would be better.

Two weeks after the first significant Israel-Hezbollah exchange of fire since the 2006 war, Hezbollah announced Monday it has downed another Israeli drone in southern Lebanon, The Washington Post reports. 

A Hezbollah media statement said the group had “confronted” the Israel drone with “appropriate weapons” near the southern town of Ramiyeh, indicating the small drone was shot down. The paramilitary group now has the drone in its possession.

However, the Israeli Defense Forces (IDF) denied its surveillance drone was shot down, only saying it had crashed in the pre-dawn hours of Monday morning. The IDF affirmed it had been conducting a reconnaissance mission in the area. 

Simultaneously a separate IDF statement claimed Iran’s elite Quds Force had fired multiple rockets from Syria toward Israel, but noted all failed to hit their targets. While no proof or video was immediately offered to back it, the statement added, “We hold the Syrian regime responsible for events taking place in Syria” — which strongly suggests Israeli could be preparing to retaliate on sites in or near Damascus, or on positions in southern Syria. 

Hezbollah has recently vowed to shoot down any Israeli aircraft violating Lebanese airspace after late last month twin Israeli drones mounted an attack on Hezbollah offices in south Beirut, and after another drone assassinated the commander of a Palestinian militant group (PFLP-GC) in the Bekaa Valley.

“I tell the Israeli army on the border — be prepared and wait for us,” Hezbollah Secretary-General Hassan Nasrallah said in a subsequent address. Indeed a week ago on Sunday Hezbollah’s retaliation began with an anti-tank missile attack on an Israeli military vehicle near the border, which video of the operation shows suffered a direct hit. 

Many analysts have read the mounting tensions and new exchanges of fire as holding the potential to escalate into a renewed all-out Israeli-Lebanese war, similar to the month-long 2006 war.

Meanwhile, also on Monday there are as yet unconfirmed reports of possible Israeli airstrikes targeting Iranian forces in eastern Syria, specifically in the city of Albukamal on the Iraq border. A number of explosions were heard inside Albukamal city overnight; however, it’s unclear if foreign aircraft or drones were behind it. 

Syrian opposition media outlets are reporting casualties from the alleged attack. As Haaretz summarizes of the unconfirmed reports:

Eighteen Iran-back militia members were killed in the strike, the British-based watchdog said on Monday. The Assad regime and Syrian state media didn’t report the incident.

If true we could be preparing to witness yet more build-up to major war between Israel and Iranian allies in the Middle East. 

 

The euro and bund yields are rising this morning following Reuters headlines suggesting Germany is considering a “shadow budget” with the aim to increase public investments beyond restrictions of national debt rules.

Government officials are flirting with the idea of setting up independent public entities that would seize the historic opportunity of zero borrowing costs and take on new debt to increase investment in infrastructure and climate protection, said the officials, who all spoke on condition of anonymity.

The debt-financed spending of those independent public bodies would not be accounted for under the strict fiscal rules of Germany’s constitutionally enshrined debt brake, but only under the more lenient rules of the European Union’s Stability and Growth Pact, the sources said.

Which raised more than a few eyebrows (as @ljzaz summed up perfectly):

“What’s to stop Italy from creating their own ‘shadow budget’ then? (said everyone with half a brain)”

Additionally, as Bloomberg reports, deputy finance minister, Bettina Hagedorn, confirmed that the German government’s 2020 budget and financial planning through 2023 foresees balanced budgets with no new debt:

“Should there be a need for adjustment because of overall economic developments or external factors, it will be decided in the context of the budget planning and taking the coalition agreement into account.”

Perhaps it is this official statement (that merely echoes the same rhetoric Germany has used for years) that explains the market’s lack of enthusiasm…

Bund yields briefly rose…

Source: Bloomberg

But Euro is up 20-30 pips and fading back…

Source: Bloomberg

Notably, these headlines come ahead of the German lower house of parliament debating the 2020 budget and finance plan through 2023 on Tuesday.

Blain’s Morning Porridge, submitted by Bill Blain of Shard Capital

“There is a time to every purpose under heaven…”

It feels like Autumn has arrived.  There is a chill in the air and cold rain, and that’s a real shame as I’m taking some very important clients out for a day’s sailing.  The sun never shines on the righteous!  Not only will they get cold and wet, but will have to listen to me blather on all day..

Is the changing of the seasons the theme for the coming week?  Could be. Step back and look past the noise, and the global picture is all about long-term change. 

In the US I’d argue the numbers show an economy slightly wobbled by the global trade ructions, but broadly on course.  Trump may scream at the Fed to for ease – but is it needed?  There are bigger long-term issues to address: themes such as income inequality, infrastructure, social programmes and education to resolve – but these have all been identified.  If it wasn’t the partisan division in Washington and the chaotic leadership, they’d probably get addressed.  They will in the future. 

Is the US economy going to collapse on the back of trade war with China?  No. There will be manageable inflation, some supply chain uncertainty and long-term the US will suffer a slowing effect from the Chinese economy no longer driving global growth.  Addressing the long-term bubbles that have developed in equity markets, corporate and zombie debt, are going to be challenges. A turn around in the bond market will really hurt!  A stock market reversal – they happen, and the sun comes up the next day.

China is in a more difficult position.  Attitudes against it are polarising. Trump picked his moment to declare a trade war – just a time when poorly managed debt diplomacy was exposing the inequity of China’s plans to create its own global trade ecosystem.  The fact China is now perceived as a global power makes it easier for the US to contain them – it’s not some poor third world nation they are looking to corral!  The next few years will be as much about how China is increasingly contained, as about slowing growth.  What the US really wants now is a Great Wall of China to keep them in as trade war morphs to cold-war.

China isn’t going to suffer and economic collapse on US tariffs, but it is sub-optimal and likely to push China growth lower earlier than the party strategists hoped, reducing the likelihood the nation can get rich before it gets old.  The implications of a slowing China will be felt across whole globe. If China isn’t growing 6%, then that’s going to slow global growth. It will be felt most obviously in nations like Australia and other primary suppliers, but also elsewhere. 

I’m tempted to say political risks may rise in China as it attempts to become increasingly self-reliant behind the walls the US will try to erect around them – the issues of the party delivering wealth, prosperity and critically, a clean environment, will be challenging, and could result in more aggressive China moves externally.  Does that mean its time to invest in the US military industrial complex?  Maybe. 

What about Europe? This week the market is expecting big things from the ECB – I can’t imagine what they think they are going to change by further juicing the market?  Sure, another boost to bonds, and infinity buying appetite? Whatever the ECB does in terms of a) cutting rates, b) reopening buy programmes, or c) promising to do (a) and (b) next month, will have precisely zero effect on European growth prospects.  On the basis doing the same thing and expecting different results is just daft – the ECB needs to try something new. 

Just how different will be the new Legarde regime at the ECB?  Draghi must be thanking the gods he did a good job holding the Euro together – but didn’t face the impossibility of moving it forward politically with some form of fiscal agreement on how to genuinely reflate Europe.  If they don’t then Europe sinks into increasing economic irrelevance.  Speaking to a US hedge fund last week they told me they see Zero opportunities in Europe worth chasing.. they are waiting for a new crisis to buy it cheap.

And then there is the UK…

There is nothing more I can usefully add about the parliamentary Brexit shambles.  Who resigns next?  What will Boris surprise us with?  Which Ditch? (Best suggestion on that one so far is HMP Ford (the open prison).  Jeremy Corbyn anyone?  Or the end of UK Politics?

What is more worrying is the long-term effect on the investibility of the UK as a result of the current shambles.  I was speaking to a good chum who is a very successful real economist at a proper University last week. He asked about the risks of the UK losing its quasi-reserve/hedge status.  That’s actually a really scary thought.  At the moment the UK is perceived to be a reserve asset far out of proportion to our small population and low productivity economy. 

The UK’s position in the global economy is boosted by factors such as London being the global centre of finance, our mercantile history, the fact English is the basis of contract and business law, the UK winning more than its fair share of Nobel prizes and our reputation for invention, and the fact the UK still owns the keys to money printing presses. (Europe does not – the ECB does.)

What happens to the UK’s above market weight if the currency continues to collapse on the back of the Brexit stramash, and the government starts to borrow heavily to cover the costs? Currency tumbles and deficits rise – not attractive.  Could it ultimately result in the UK being seen as a failing state, and cost Sterling its reserve status?  That could get very nasty….

It’s worth thinking about.

As Deutsche Bank’s Jim Reid puts it, “If last week was back to school with a bang with Brexit and a bond market sell-off the highlights, this coming week has plenty more potential ‘boom’ moments.” The main highlight will be the ECB’s rate cut/QE restart on Thursday but today’s trip to Dublin from UK PM Johnson and the subsequent election vote later in Parliament (highly likely to be defeated) will be a “riveting” watch, especially with UK parliament set to be suspended later today; in data terms the highlights are US CPI (Thursday) and Friday’s US retail sales and UoM consumer confidence which last month fell to the lowest since October 2016.

With regards to what the ECB is expected to do, Reid reminds us that this will be President Draghi’s penultimate press conference before his term comes to an end. Deutsche economists expect the ECB to cut interest rates by 10bps at Thursday’s policy meeting, and they also anticipate a new system of reserve tiering, where some subset of reserves are exempted from the cost of negative interest rates, plus an enhanced version of forward guidance. While a shift to a symmetric inflation target or to a price level target would almost certainly be too radical for them to consider without a deeper policy review, they are likely to commit to some form of “lower for longer” rate guidance. There are also risks that they cut by more than 10bps, given the apparent lack of pushback by hawkish members of the Governing Council against a rate cut. There was more public pushback over the last few weeks against asset purchases, so that may be harder to agree on. DB’s economists nevertheless think a €30 billion per month purchase program is possible, though they could also see a more generous form of TLTROs if the ECB wants to focus on credit easing instead of measures that may flatten the curve.

Turning to Brexit, events are expected to continue to journey into the unknown this week. A vote in the House of Commons to hold an election will likely get defeated on Monday, with the opposition parties trying to force Johnson into asking the EU for an extension. The weekend papers were full of talk about the government working out whether they could sidestep the law with the Sunday Times reporting that the PM wants to even use the Supreme Court as an option. There was also talk of a PM resignation as one option being considered and even talk of the PM actively disobeying the law and perhaps facing a potential prison sentence if he does. As for the polls, after a torrid time in Westminster for the PM last week and over the weekend with another cabinet and party resignation, the Conservation Party have generally maintained their lead (between 3 and 14pts lead over 6 polls) but one poll suggested that if Brexit didn’t happen by October 31st then the lead would reverse and Labour would take a 2 point lead. This highlights why the opposition are gambling on denying an election this side of that date. The polls also show that hard tactics in Westminster are not necessarily damaging the governments support. However, the collateral damage to the party is significant so it’s high stakes for everyone.

Below is a daily breakdown of key global events, courtesy of Goldman Sachs:

• Monday: United Kingdom, GDP (Jul). GS +0.1%, consensus +0.1%, last 0.0%, all %mom. We expect GDP growth of +0.1%mom in July, a touch above growth in June. We see this marginal pickup as largely driven by services. Construction may contribute positively sequentially, while manufacturing is expected to decline, given recent PMI reports.
• Tuesday: France, Industrial Production (Jul). GS +1.7%, consensus +0.5%, last -2.3%, all %mom. After a sharp decline of French industrial production in June, we expect a rebound in July in line with recent survey data pointing to an increase in sales and orders against decrease in inventories on the month; Italy, Industrial Production (Jul). GS -0.9%, consensus -0.1%, last -0.2%, all %mom. We expect Italian industrial production to contract further in July, given a sharp contraction in German industrial production and Italy’s trade links with Germany, notably in transport equipment. We expect the fall in Italian IP to reflect lower export orders in the auto industry, as noted by PMI reports last month.
• Thursday: USA, CPI Inflation (Aug). GS Core CPI Inflation +0.24%, consensus +0.2%, last +0.3%, all %mom-sa. We estimate a 0.24% increase in August core CPI (mom sa), which would boost the year-on-year rate by two tenths to 2.4% on a rounded basis. Our monthly core inflation forecast reflects a modest further boost from the tariffs implemented in May and June, which we expect to manifest in the household furnishings, auto parts, and personal care categories. We also expect a large rise in the apparel category related to methodological changes earlier this year. On the negative side, we expect a pullback in airfares reflecting lower oil prices, and we expect a further deceleration in monthly used car inflation, which we nonetheless expect to remain positive. We estimate a 0.11% increase in headline CPI (mom sa), reflecting lower gasoline prices;
  • Euro Area, Industrial Production (Jul). GS -0.1%, consensus -0.1%, last -1.6%, all %mom. We expect Euro area industrial production (ex-construction) to show a small contraction on the month in July, in line with consensus. We expect the drop in German production as well as the expected contraction in Italian and Spanish production to weigh upon area wide IP;
  • Euro Area, ECB Monetary Policy Decision. Deposit Facility Rate: GS -0.6%, consensus -0.5%, last -0.4%. We expect ECB officials to deliver a three-pronged easing package at this meeting. First, we look for a 20bp deposit rate cut, flanked by a tiered reserve system, which we expect to focus on excess reserves. Second, we expect a QE programme within the current constraints and a clear time limit. Third, the Governing Council is likely to enhance its forward guidance with a stronger link to inflation and an emphasis on the symmetry of the inflation aim.
• Friday: USA, Retail Sales (Aug). GS Core Retail Sales flat, consensus +0.3%, last +1.0%, all %mom. We estimate that core retail sales (ex-autos, gasoline, and building materials) were flat in August (mom sa), reflecting mean reversion in the non-store category following a record Amazon Prime Day in July. We also estimate a flat reading in the headline measure, and a 0.1% decline in the ex-auto measure, reflecting a rebound in auto sales but lower gas prices.

And visually:

 

Finally, focusing on the US, Goldman notes that the key economic data releases this week are the CPI report on Thursday and the retail sales report on Friday. There are no scheduled speaking engagements from Fed officials this week, reflecting the FOMC blackout period.

Monday, September 9

• There are no major economic data releases scheduled today.

Tuesday, September 10

• 06:00 AM NFIB small business optimism, August (consensus 103.5, last 104.7)
• 10:00 AM JOLTS Job Openings, July (consensus 7,311k, last 7,348k)

Wednesday, September 11

• 08:30 AM PPI final demand, August (GS flat, consensus flat, last +0.2%); PPI ex-food and energy, August (GS +0.1%, consensus +0.2%, last -0.1%); PPI ex-food, energy, and trade, August (GS +0.1%, consensus +0.2%, last -0.1%): We estimate a flat reading in headline PPI in August, reflecting relatively soft core prices as well as weaker energy prices. We expect a 0.1% increase in the core measure excluding food and energy, and also a 0.1% increase in the core measure excluding food, energy, and trade.
• 10:00 AM Wholesale inventories, July final (consensus +0.2%, last +0.2%)

Thursday, September 12

• 08:30 AM CPI (mom), August (GS +0.11%, consensus +0.1%, last +0.3%); Core CPI (mom), August (GS +0.24%, consensus +0.2%, last +0.3%); CPI (yoy), August (GS +1.81%, consensus +1.8%, last +1.8%); Core CPI (yoy), August (GS +2.37%, consensus +2.3%, last +2.2%): We estimate a 0.24% increase in August core CPI (mom sa), which would boost the year-on-year rate by two tenths to 2.4% on a rounded basis. Our monthly core inflation forecast reflects a modest further boost from the tariffs implemented in May and June, which we expect to manifest in the household furnishings, auto parts, and personal care categories. We also expect a large rise in the apparel category related to methodological changes earlier this year. On the negative side, we expect a pullback in airfares reflecting lower oil prices, and we expect a further deceleration in monthly used car inflation, which we nonetheless expect to remain positive. We estimate a 0.11% increase in headline CPI (mom sa), reflecting lower gasoline prices.
• 08:30 AM Initial jobless claims, week ended September 7 (GS 220k, consensus 215k, last 217k); Continuing jobless claims, week ended August 31 (consensus 1,678k, last 1,662k); We estimate jobless claims increased by 3k to 220k in the week ended September 7, after increasing by 1k in the prior week.

Friday, September 13

• 08:30 AM Retail sales, August (GS flat, consensus +0.2%, last +0.7%); Retail sales ex-auto, August (GS -0.1%, consensus +0.1%, last +1.0%); Retail sales ex-auto & gas, August (GS +0.1%, consensus +0.3%, last +0.9%); Core retail sales, August (GS flat, consensus +0.3%, last +1.0%): We estimate that core retail sales (ex-autos, gasoline, and building materials) were flat in August (mom sa), reflecting mean reversion in the non-store category following a record Amazon Prime Day in July. We also estimate a flat reading in the headline measure, and a 0.1% decline in the ex-auto measure, reflecting a rebound in auto sales but lower gas prices.
• 08:30 AM Import price index, August (consensus -0.5%, last +0.2%)
• 10:00 AM University of Michigan consumer sentiment, September preliminary (GS 89.5, consensus 90.4, last 89.8); We expect the University of Michigan consumer sentiment index declined by 0.3pt to 89.5 in the preliminary September reading, as recent economic misses could weigh on sentiment.
• 10:00 AM Business inventories, July (consensus +0.3%, last flat)

Source: DB, Goldman Sachs

AT&T stock is up almost 10% in pre-market trading to its highest level since April 2017 after Elliott Management released a letter outlining what they call “a compelling value-creation opportunity” at AT&T.

The activist fund argues could see the telecommunications giant trading at $60 a share or more and investors appear to be buying into that idea…

The New York hedge fund, run by billionaire Paul Singer, outlined a four-part plan for the company in a letter to its board Monday (full letter). As Bloomberg reports, the plan would call for the company to explore divesting assets including DirecTV, the Mexican wireless operations, pieces of the landline business, and others.

It focuses on increased strategic focus, improved operational efficiency, a formal capital allocation process, and enhanced leadership and oversight.

Elliott’s plan also calls for aggressive cost-cutting measures that aim to improve AT&T’s margins by 300 basis points by 2022. Elliott said in the letter it has identified opportunities for savings in excess of $10 billion but the plan would only require cost cuts of $5 billion.

Elliott is also calling for a series of governance changes, including separating the role of chief executive officer and chairman — currently held by Randall Stephenson — and the formation of a strategic review committee to identify the opportunities at hand.

Full Elliott Letter below:

Four crew members of a large international transport vessel went missing Sunday off Georgia after the boat began listing violently and caught fire. The vessel, identified in reports as the 656-foot Golden Ray, had 24 crew members aboard, 20 of which were rescued in a high risk US Coast Guard operation. 

CNN has reported that four South Korean crew members are still being looked for after rescue efforts were temporarily disrupted when a fire broke out on the ship.

Dramatic coast guard images showed that the boat had capsized early Sunday, tipping on its side in the Port of Brunswick near St. Simons Island.

The U.S. Coast Guard is searching for four crew members after a cargo ship caught fire and capsized off the coast of Georgia. https://t.co/BrxS8jHQOR pic.twitter.com/Q8nKjRjklZ

— ABC News (@ABC) September 9, 2019

Given the Golden Ray was reportedly a car carrier, this could have contributed to its destabilizing and severe listing before the accident, though a specific cause has yet to be identified. 

#Update Evacuations of the Golden Ray’s crew continue. All vessel traffic in the Port of Brunswick is currently suspended unless approved by the @USCG Captain of the Port. #HappeningNow pic.twitter.com/F7JbdGCShU

— USCGSoutheast (@USCGSoutheast) September 8, 2019

According to CNN, citing Coast Guard commander, Capt. John Reed: 

Officials are working to stabilize the leaning vessel, he said. Once that’s done, rescue efforts will continue.

“The other outcome could be that it may be deemed more appropriate to go ahead and right the vessel and de-smoke and de-water before we are able to actually get in there and locate the four individuals,” Reed told CNN’s Fredricka Whitfield in an interview Sunday.

The tanker tracker site MarineTraffic.com indicated the ship was sailing under the flag of the Marshall Islands and had been bound for Baltimore.

An aircrew from Coast Guard Air Station Savannah lifts members from the capsized 656-foot vehicle carrier Golden Ray in the St. Simons Sound. @WTOC11

Credit: U.S. Coast Guard District 7 PADET Jacksonville pic.twitter.com/xtSXlrpCYK

— Andrew Gorton WTOC (@AndrewGortonWx) September 8, 2019

The Coast Guard published dramatic rescue footage involving stranded crew members being lifted off the large cargo ship via helicopter, as well as some dropping into rescue boats. 

When it comes to overnight stock market levitation, there are two catalysts: hopes of an “imminent” trade deal (this has been the case for the past year) and hopes for central bank easing (this has been the case for the past decade). Overnight, it was the latter that pushed US equity futures by another 7 points, sending the Emini just shy of 3,000, trading at 2,987 last, and Global stock markets broadly higher.

European markets opened higher after data showed a surprise rise in German exports and on expectations of stimulus by the ECB later this week, including even lower rates and a restart of asset purchases. The pan-European STOXX 600 index was fractionally higher just after 7:00 EDT, while the MSCI All Country World Index was up 0.05%.

Germany’s trade-sensitive DAX index rose 0.2% after data showed seasonally adjusted exports rose 0.7% in July. A Reuters poll of economists had pointed to a drop of 0.5%. The report was a much needed green shoot for an economy that is currently in a technical recession and amid gloomy data from major economies since Friday, which heightened expectations of stimulus from central banks.

The strong German trade data came after the US reported that August jobs slowed more than expected, while data over the weekend from China showed the country’s exports unexpectedly shrank as shipments to the U.S. slowed.

“If all the currently proposed tariffs are implemented, we foresee that growth in the first half of next year will slow toward the brink of a recession,” said UBS chief investment officer, Mark Haefele, emphasizing a report we discussed last week.

Of course the worse the data, the better for stocks, and the prospect of central-bank support kept risk sentiment alive and well. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.2% and E-mini futures for the S&P 500 index rose 0.3%.

Asian stocks advanced, heading for a fourth day of gains, as China cut reserve ratios for banks and the country’s weak trade data fueled speculation for further easing. Most markets in the region were up, with Japan and China leading gains. Technology and industrial firms were among top performers. The Topix climbed 0.9% to a five-week high, led by electronics makers and pharmaceutical companies. Despite a downward revision to second-quarter growth, Japan’s economy is estimated to remain strong enough for an upcoming sales-tax hike. The Shanghai Composite Index closed 0.8% higher for a sixth day, with PetroChina and 360 Security Technology among the biggest boosts. India’s Sensex added 0.4%, driven by Housing Development Finance and Larsen & Toubro, as investors awaited more government stimulus

As a reminder, on Friday, China’s central bank cut reserve requirements for a seventh time since early 2018 to free funds for lending, while Fed Chairman Jerome Powell said the Fed would continue to “act as appropriate” to sustain U.S. economic expansion.

And while the European Central Bank is expected to cut rates this week, Euro-area bonds fell as investors showed less conviction that the Central Bank’s policy meeting Thursday will result in bold steps for more monetary stimulus. Longer-dated euro zone government bond yields ticked higher, with most yields up 3 to 4 basis points in early trade, while US 10Y yields rebounded from Friday’s plunge, trading around 1.60% last.

“There has been a tremendous rally in bonds and the central banks are the key determinant of what’s going to happen with the rates market,” Frances Hudson, global thematic strategist for multi-asset investing at Aberdeen Standard Investments, told Bloomberg TV. “With equities there is still an element of self-determination.”

Chinese sovereign bonds fell after the central bank disappointed investors by not rolling over maturing medium-term loans. The People’s Bank of China drained a net 56.5 billion yuan via monetary policy tools on Monday, selling 120 billion yuan of seven-day reverse repos, while 176.5 billion yuan of medium-term lending facility matured, Bloomberg reported. Paradoxically, that move came just one business day after the PBOC eased financial conditions, when it announced on Friday it was cutting the amount of cash banks must hold in reserve to the lowest since 2007, injecting liquidity into a domestic economy facing a slowdown and headwinds from the trade war with the U.S. “It seems like the PBOC is continuing its balancing act,” said Tommy Xie, economist at OCBC Banking Corp. in Singapore. “The inaction in MLF today to some extent offsets the impact of the RRR cut.” 

Separately, data released on Sunday showed that exports decreased 1% in dollar terms from a year earlier in August as the trade war with the US is grinding China’s mercantilist apparatus to a crawl.

In currencies, the euro fell to a five-day low but recovered ground by 0820 GMT to trade 0.1% higher at $1.1036 as the dollar traded near a two-week low as the focus turned to whether the Federal Reserve will cut interest rates again this month. Aussie and kiwi both edged higher as Asian risk assets were boosted by some follow-through buying from China’s decision Friday to cut banks’ reserve ratios. The pound shrugged off earlier losses to rise to the highest level since July after the U.K. economy grew surprisingly fast in July, and after the latest defection from Prime Minister Boris Johnson’s Conservative party which will soothe fears Britain was facing a pre-Brexit recession.

In commodities, oil rose on expectations that Saudi Arabia, the world’s largest oil exporter, will continue to support output cuts by OPEC and other producers to prop up prices under new Energy Minister Prince Abdulaziz bin Salman.

Market Snapshot

• S&P 500 futures up 0.2% to 2,986.00
• STOXX Europe 600 down 0.06% to 386.91
• MXAP up 0.4% to 156.83
• MXAPJ up 0.3% to 507.72
• Nikkei up 0.6% to 21,318.42
• Topix up 0.9% to 1,551.11
• Hang Seng Index down 0.04% to 26,681.40
• Shanghai Composite up 0.8% to 3,024.74
• Sensex up 0.4% to 37,122.70
• Australia S&P/ASX 200 up 0.01% to 6,647.96
• Kospi up 0.5% to 2,019.55
• German 10Y yield rose 3.8 bps to -0.6%
• Euro up 0.06% to $1.1036
• Brent Futures up 0.4% to $61.78/bbl
• Italian 10Y yield fell 6.8 bps to 0.537%
• Spanish 10Y yield rose 3.0 bps to 0.203%
• Brent futures up 0.7% to $61.96/bbl
• Gold spot up 0.2% to $1,509.12
• U.S. Dollar Index little changed to 98.39

Top Overnight Headlines from Bloomberg

• Boris Johnson is refusing to back down and pushing on with his hardline Brexit strategy despite the risk of being taken to court. Johnson is in Dublin on Monday for talks with his Irish counterpart Leo Varadkar, who demanded “realistic, legally binding and workable” arrangements for the Irish border if an agreement is to be reached
• European Central Bank President Mario Draghi will test the composure of global policy makers this week as he unleashes a barrage of stimulus to shore up economic growth
• Apple Inc. and manufacturing partner Foxconn violated a Chinese labor rule by using too many temporary staff in the world’s largest iPhone factory, the companies confirmed following a report that also alleged harsh working conditions
• The contraction in China’s trade in August underscored what economists were already saying about the government’s stimulus efforts: they’re not yet enough to put a floor under the slowing economy
• Oil extended gains after Saudi Arabia ousted its long-time energy minister before an OPEC+ committee that monitors compliance with output cuts meets this week in Abu Dhabi

Asian equity markets traded mostly positively but with gains relatively mild as the region digested the latest developments from the world’s 2 largest economies including the PBoC RRR cut announcement, mostly weaker than expected Chinese trade data and US NFP. ASX 200 (U/C) was choppy as upside in tech was counterbalanced by continued weakness in gold miners and after soft Chinese trade data which showed a surprise drop in Exports, while Nikkei 225 (+0.5%) remained afloat after Final GDP figures for Q2 printed inline with estimates. Hang Seng (Unch.) and Shanghai Comp. (+0.8%) were mixed as the mainland reacted to the PBoC’s 50bps RRR cut and further targeted 100bps reduction for qualified banks which is expected to release CNY 900bln of liquidity, although advances were limited by the weak trade figures and with Hong Kong dampened after further violent protests over the weekend. Finally, 10yr JGBs were higher despite the mostly positive risk tone and reclaimed the 155.00 level, although prices later stalled amid mixed results in the enhanced liquidity auction for 2yr-20yr JGBs.

Top Asian News

• Chinese Food Producers Have World’s Richest Valuations
• Chinese Automobile Sales Decline for 14th Time in 15 Months
• Nissan CEO Saikawa Says Ready to Resign Once Successor Is Found
• Towngas China Surges Most in a Decade as Citi Predicts Takeover

Major European indices are mixed this morning but overall little changed [Euro Stoxx 50 +0.1%], as markets struggle for clear direction amidst a relatively quiet schedule and no further updates to the US-China trade situation. Unsurprisingly, sectors are painting a similar picture this morning though the energy sector outperforms amidst strength in the broader complex. In terms of individual movers, ProSiebensat (+5.5%) lead the Stoxx 600 after being upgraded to buy at UBS and the Co. stating they are to remain focused on their free-to-air business. At the other end of the spectrum are ThyssenKrupp (-2.3%) after the Co’s CEO states he would prefer a minority stake sale in their elevator division which has the potential to be valued at over EUR 15bln. Elsewhere, Lloyds (-0.4%) are slightly subdued after suspending their GBP 1.75bln share buyback scheme due to a substantial inflow of PPI claims, as such the Co. need to make an incremental charge of GBP 1.2-1.8bln on top of their prior Q3 provisions.

Top European News

• Italy Prepares to Tap Debt Market Just as Europe Demand Stutters
• Ireland’s Bonds Seen Increasingly Risky as Brexit Nears Endgame
• Thyssenkrupp CEO Said to Prefer Minority Sale for Elevators

In FX, Pound Sterling survived and bout of selling pressure that pushed Cable down through 1.2250 and Eur/Gbp up above 0.9000, but was already recouping and reversing gains before a raft of UK releases that beat expectations across the board. This raised eyebrows and speculation about some being privy to the numbers or nature of the data beforehand, but others also pointed to the fact that the bill ensuring another Brexit extension rather than now deal is due to receive Royal Assent later today and reports that PM Johnson may have conceded that he may have to accept another 3 months if he fails to strike an accord with the EU before October 31. Meanwhile, opening remarks from his meeting with Irish PM Varadkar were largely upbeat and confident on the subject of resolving the Irish border backstop, including alternatives to the current WA proposal as he claimed there are many prospective options, but not for public consumption. In response and/or follow-through from the aforementioned encouraging data, Cable cleared 1.2300 more convincingly on its way over the 55 DMA (1.2328) and above last Friday’s post-NFP high (1.2338) to circa 1.2360, while Eur/Gbp reversed through the big figure and 0.8950, eyeing 0.8900 next.

• AUD/NZD/NOK/CAD – The Antipodean Dollars have extended recovery gains vs their US counterpart in wake of the latest PBoC RRR cuts, a sub-forecast rise in US payrolls and despite Chinese trade data revealing an unexpected decline in exports. Aud/Usd has now advanced towards 0.6870 and Nzd/Usd is approaching 0.6450 as the Aud/Nzd cross pivots 1.0650. Elsewhere, strong Norwegian GDP for the month of July and firm oil prices are underpinning the Nok as it rebounds through 9.9000 vs a steady Eur overall, while the Cad is inching closer to resistance ahead of 1.3150 against its US rival on the back of Canada’s labour report and a bumper jump in the jobs tally.
• EUR/JPY – Both narrowly mixed vs the Greenback around 1.1025 and 107.00 respectively, and well flanked by heavy option expiry interest as 1.8 bn rolls off at 1.1000 and 1 bn at 1.1050 in Eur/Usd, while 1.5 bn, 1.3 bn and 1.3 bn are layered in Usd/Jpy from 106.50-60, through 106.85-95 to 107.25-30. Note also, the Euro and Yen are not deriving much from the Buck indirectly as the DXY trades within a tight 98.512-309 band.
• CHF – The G10 laggard as the Franc retreats from its post-NFP peaks towards 0.9900 again and Eur/Chf climbs towards the top of a 1.0930-1.0890 range amidst firmer risk sentiment overall and expectations that the SNB will respond to likely stimulus from the ECB this week and Fed next week at its September Quarterly Policy review.
• EM – The Lira continues to underperform or hand back recovery gains following more dovish prompting from Turkish President Erdogan ahead of this month’s CBRT policy convene where forecasts range from 225-275 bp worth of easing after the significantly bigger than anticipated -425 bp in July. Usd/Try is back above 5.7300 in contrast to Usd/Zar that is now under 14.7500 irrespective of more warnings from the ratings agencies about aid for SA’s power company Eskom and S&P advising caution when restructuring the firm’s bonds.

In Commodities, Brent and WTI prices are firmer this morning, with both WTI and Brent having successfully surpassed the USD 57.00/bbl and USD 62.00/bbl marks at best thus far. Nothing too fresh in the way of fundamental news flow this morning, but weekend reports showed that Saudi Energy Minister Al Falih has been replaced by Prince Abdulaziz; PVM indicate that no changed is to be expected in the current strategy of OPEC and if anything this may strengthen their resolve to balance markets. Other energy minister comments from Secretary General Barkindo that the JMMC could debate potential new production targets, meeting is scheduled for September 12th. The complex may have derived some support this morning from renewed geopolitical tensions via Iran, who have told the IAEA that they intend to produce enriched uranium with advanced centrifuges and as such would breach the nuclear deals imposed ban. Although, gold has failed to generate too much in the way of support from these comments with the yellow metal little changed on the day and still holding above the USD 1500/oz mark going into a critical week for markets courtesy of the ECB on Thursday. Separately, China’s Iron imports increased 6% YY to their highest since January 2018, which ING note is due to increasing shipments from Australia and amidst a recovery in Brazilian exports.

US Event Calendar

• 3pm: Consumer Credit, est. $16.0b, prior $14.6b

DB’s Jim Reid concludes the overnight wrap

I hope you had a good weekend. We had a joint 4th birthday and house warming party and after having 50 plus toddlers creating havoc I think it might be easier to just get the builders back in and start again with the refurb rather than tidy up. This weekend might go down as the one where Maisie lost all sense of reality though as every parent brought her a present. She now has a room full of gifts ahead of her actual birthday next week. Also given we invited 50 kids I’m worried that we’ll get invited back to around 50 4th birthday parties over the next year. There goes my weekly game of golf… and my savings!!

If last week was back to school with a bang with Brexit and a bond market sell-off the highlights, this coming week has plenty more potential ‘boom’ moments. The ECB on Thursday will be hard to top but today’s trip to Dublin from UK PM Johnson and the subsequent election vote later in Parliament (highly likely to be defeated) will be fascinating and in data terms the highlights are US CPI (Thursday) and Friday’s US retail sales and UoM consumer confidence which last month fell to the lowest since October 2016.

With regards to the ECB, this will be President Draghi’s penultimate press conference before his term comes to an end. Our economists expect the ECB to cut interest rates by 10bps at Thursday’s policy meeting. They also anticipate a new system of reserve tiering, where some subset of reserves are exempted from the cost of negative interest rates, plus an enhanced version of forward guidance.While a shift to a symmetric inflation target or to a price level target would almost certainly be too radical for them to consider without a deeper policy review, they are likely to commit to some form of “lower for longer” rate guidance. There are also risks that they cut by more than 10bps, given the apparent lack of pushback by hawkish members of the Governing Council against a rate cut. There was more public pushback over the last few weeks against asset purchases, so that may be harder to agree on. Our economists nevertheless think a €30 billion per month purchase program is possible, though they could also see a more generous form of TLTROs if the ECB wants to focus on credit easing instead of measures that may flatten the curve. Their full preview is available here .

Staying with our economists views, on Friday, Matt Luzzetti and the US econ team updated their economic forecasts to reflect the latest trade news (full note here ). Though they had included a trade war escalation in their forecasts, the current conflict has exceeded their expectations and they now expect growth to slow more sharply. They forecast Q4/Q4 GDP growth of 1.9% and 1.8% for this year and next, down from 2.0% and 2.2%. As a result, they expect unemployment to rise a bit to 4.3% next year which will translate to below-target inflation for the next several quarters. To combat this, they add another 50bps of Fed rate cuts to their expectations; they now see 100bps of cuts over the next several months, including cuts at the September, October, December, and January meetings. The most interesting comment in the piece is that they believe trade developments have neared a tipping point. Their baseline expects that data and risk assets will weaken enough over the coming months to pull the US administration back from further escalations. If not though they think a mild recession is possible and taking the Fed Funds rate to zero.

Turning to Brexit, events are expected to continue to journey into the unknown this week. A vote in the House of Commons to hold an election will likely get defeated today with the opposition parties trying to force Mr Johnson into asking the EU for an extension. The weekend papers were full of talk about the government working out whether they could sidestep the law with the Sunday Times reporting that the PM wants to even use the Supreme Court as an option. There was also talk of a PM resignation as one option being considered and even talk of the PM actively disobeying the law and perhaps facing a potential prison sentence if he does. As for the polls, after a torrid time in Westminster for the PM last week and over the weekend with another cabinet and party resignation, the Conservation Party have generally maintained their lead (between 3 and 14pts lead over 6 polls) but one poll suggested that if Brexit didn’t happen by October 31st then the lead would reverse and Labour would take a 2 point lead. This highlights why the opposition are gambling on denying an election this side of that date. The polls also show that hard tactics in Westminster are not necessarily damaging the governments support. However, the collateral damage to the party is significant so it’s high stakes for everyone.

Turning to Asia, over the weekend we got China’s August trade data with the trade balance reportedly standing at $34.8bn (vs. $44.3bn expected) primarily due to exports declining unexpectedly(-1.0% yoy vs. +2.2% yoy expected) while imports fell -5.6% yoy (vs. -6.4% yoy expected). In terms of trade with the US, exports stood at $37.3bn (-16.0% yoy) while imports stood at $10.4bn (-22.2% yoy) bringing the trade balance to $26.7bn (-13.2% yoy). Meanwhile, in Japan, this morning the final Q2 annualized GDP growth rate came in line with expectations and 0.5pp lower than the initial read at +1.3% qoq.

Although China’s trade data was soft, Friday’s RRR cut by the PBoC has helped equity markets to post modest gains this morning with the Shanghai Comp (+0.36%) and CSI 300 (+0.27%) both up. The Kospi (+0.45%) and Nikkei (+0.67%) have also risen while the Hang Seng (-0.08%) is struggling for traction a little. Meanwhile, futures on the S&P 500 are up +0.20% and WTI oil prices are up +1.11% following the news that Saudi Arabia has replaced its long-time energy minister before an OPEC+ committee meeting this week in Abu Dhabi.

As for markets on Friday, the two big risk events passed without really rocking the boat. The August jobs report showed a slightly weaker-than-expected headline number at 130,000, plus downward revisions of 20,000 to the previous two months. However, wage growth was stronger than expected at +0.4% mom and +3.2% yoy. So a bit of a wash, though yields did fall several basis points from their earlier highs. Separately, Fed Chair Powell spoke in Switzerland, the last official communication before the Fed’s media blackout period before their September 18 meeting. He said the latest payrolls report is consistent with a good economic outlook, but highlighted “significant risks.” That basically confirmed expectations for a 25bps cut later this month.

The S&P 500 ended the week +1.79% higher (+0.09% Friday), while the DOW posted a similar gain of +1.49% (+0.25% Friday). The NASDAQ gained +1.76% on the week, but lagged on Friday (-0.17%) as large-cap tech firms were hit by new reports of antitrust investigations. The NYFANG index ended +2.19% on the week (-0.72% Friday). European equities outperformed, with STOXX 600 and DAX up +2.02% and +2.11% (+0.32% and +0.54% Friday) respectively. Bank stocks were helped by higher rates, with indexes of European and US bank shares up +3.93% and +1.74% (+0.01% and -0.42% Friday).

The move in yields wasn’t eye-watering outside of a big move on Thursday, but it was still the biggest weekly selloff in eight weeks for the major benchmarks. Bunds, treasuries, and gilts ended +6.2bps, +6.4bps, and +2.7bps (-4.4bps, +0.02bps, and -9.4bps Friday) respectively. Front-end US rates increased less, with the 2-year yield up +3.6bps (+1.4bps Friday), taking the 2y10y yield curve back into positive territory after last month’s brief inversion. It ended +2.8bps steeper at 1.4bps (-1.5bps Friday). The dollar weakened -0.91% (-0.41% Friday), while EMs outperformed, with an index of EM currencies gaining +1.36% (+0.21% Friday). Credit yields were tighter in the US, with HY cash spreads -12bps narrower (-5bps Friday), though they widened in Europe by +9bps (+6bps Friday). US IG spreads traded flat, despite the largest week of issuance on record. Staying with credit on Friday Craig published a piece on US HY where he highlights the quite amazing statistic that is 2019 YTD is the only year where by HY has returned at least 10% but BBs have outperformed CCCs, both in total and excess return terms. The note touches on some of the reasons why and looks at whether the CCC/BB is a reliable leading indicator.