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The Early

02 Oct 2019 08:29

Markets: signals flipping

It was a testing day for traders of sterling on the foreign exchanges, with the messages from the Brexit discussions in Brussels was shifting every few minutes. The pound was near its high for the day when equity markets closed in much more cautious fashion; investors are understandably awaiting greater clarity. The FTSE 100 was a predictable underperformer with transport -2.4%, non-life insurance -1.9%, mining -1.1% and pharmaceuticals -1.1% all struggling. The UK mid/small caps were only flat; travel & leisure +1.0% and industrial goods +0.7% stood out among our PHySiCS sectors as basic materials lagged -1.0%. The value rally continued with the good/bad value trade adding another +94bp; its has now gained +17% since the end of July.

The Eurozone benchmarks were flat. Encouraging vehicle registrations data boosted the autos sector by another +1.5%, led by VW and Renault. The Q3 results season remains a potential headwind, with consensus expectations implying that Euro Stoxx index EPS will decline by -7% YoY in the quarter; yet CY20 projections still imply growth of better than +10% YoY.

Overnight. The US session saw the boost from some positive earnings news (Bank of America, Utd Airlines) offset by some macro jitters after the retail sales data. The major indices ended lower on light volumes. Energy -1.5% and technology -0.7% were the struggling S&P sectors. Asian indices were just about in positive territory for a sixth straight session. Sterling dipped slightly from yesterday's peak ahead of today's EU summit. A surprise build-up in US crude stocks weighed on the oil price. European indices are called easier first thing.

Early numbers. Dow -0.08%, S&P -0.20%, NASDAQ -0.30%, VIX 13.68; US 10-yr 1.74%; Nikkei +0.07%, Hang Seng +0.74%, Shanghai Comp -0.07%; £=$1.2816, £=€1.1569, Brent $58.97/bbl, Gold $1487.89, FTSE 100 indication +4 (at 6.25 UK).

Macro: inflation fading

UK headline CPI inflation remained at +1.7% YoY in September, after a +0.1% MoM increase, a shade below consensus; the core reading increased by +0.2% MoM, +1.7% YoY. The biggest downward influences were motor fuels and used car prices; they were wholly offset by higher contributions from furniture, household appliances and hotel rooms. The PPI readings suggested that pipeline pressures are moderating. Input price deflation intensified to -2.8% YoY, the weakest in three years, due to a fifth straight monthly decline by crude oil (now at -14.6% YoY). Output prices fell by -0.1% MoM and the +1.2% YoY annual increase was the weakest since September 2016. If sterling continues to strengthen (which depends on the Brexit outcome), inflationary pressures should be further reduced. Even in the event of a deal, and the associated brighter growth outlook, the UK inflation dynamics suggest no urgency to tighten monetary policy.

September’s Eurozone headline CPI inflation rate was downgraded to a final reading of just +0.8% YoY, the lowest since November 2016. However the core reading was higher at +1.2% YoY with the ex-food, energy, alcohol & tobacco measure at +1.0% YoY. Energy prices were lower by -1.8% YoY, while services sector inflation was +1.5% YoY.

The headline reading of US retail sales for September was superficially disappointing, with a -0.3% MoM decline the first fall in seven months. However, the August data were revised higher, maintaining annual growth at a solid +4.1% YoY. Core volumes (the closest proxy for consumer spending) were flat in September, so consumption growth in Q3 seems bound to slow , to round +2.5% QoQ saar. The Fed's Beige Book report suggest most US businesses expect the expansion to continue, but they have lowered their growth expectations due to the uncertainty over trade policy.

Today’s events. UK Sep retail sales (9.30) +0.1% MoM, +3.2% YoY, core -0.1% MoM, +2.8% YoY; US Sep housing starts (1.30) 1.32m, -8.6% MoM; US Oct Philly Fed manufacturing (1.30) 7.3; US Sep industrial production (2.15) -0.1% MoM, capacity utilisation 77.7%.

Ian Williams
Economics & Strategy
020 7418 8819
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