The Week Ahead: Back to school with taxes and prorogation…

It’s set to be a crucial week for markets as Summer draws to a close, with a full hand of risk events on the calendar. These include central bank meetings, important economic data releases and political risks, which in the UK’s case move to the next phase in the high-risk Brexit house of cards.

Suspending Parliament so close to (another) momentous Brexit deadline may or may not be peremptory and heavy-handed, cynical and anti-democratic. But it means ahead of a no-confidence vote, we will see whether lawyers or lawmakers can inform on the next steps to potentially reassert Parliament’s authority and thus on hard Brexit risks that have risen markedly of late. 

With radical measures by the government to disrupt these legislative efforts being rumoured, and the Halloween deadline brought that much closer by the proroguing, it very much looks like this may well go to the wire in the final weeks of October. This is especially the case when you consider how EU politics historically operates with last-minute, late night decisions the norm in recent times.

Tariffs and key data in the US will be a major focus, even though the week is shortened by Labor Day on Monday. President Trump’s next round of tariffs – a 15% rate on 122 pages of individual items, including school text books, listed at about $110 billion worth of imports – took effect yesterday, as the two sides eye formal talks later in the month. Additional tariffs are slated on October 1st and in December so random policy risk will hang over markets, via tweets no doubt. It seems President Trump will need to up his trade war threats to prompt the Fed into a 50bp hike later in September.

The US labour market has throttled back in recent months so Friday’s employment growth will be closely watched, as this is another important recession indicator. This year’s average of 165k is still ahead of the monthly pace needed to keep the unemployment rate steady but is a notable deceleration from the 200k+ monthly gains over the past 8 years.

Wage growth may also slow from its peak of 3.4% back in February. We also note that as Hurricane Dorian threatsFlorida, hiring effects could distort the next nonfarm print for September.

The central banks in Australia, Canada and Sweden reveal their latest monetary policy decisions and even though none of the three are expected to cut interest rates this week, the general trend is still towards more easing among G10 central banks. 

Markets are pricing in nearly a 70% chance of a cut in rates by the RBA at its next meeting in October. A key signal around the Governor’s Statement will be if he continues with the wording ‘ease monetary policy further if needed’. Concerns about global developments offset the positive job creation in July; remember that labour markets are a key consideration to the RBA.

The Bank of Canada has so far not felt the need to follow this global dovish tilt but trade tensions, the global growth slowdown and the softening tone to US data indicate that momentum may start to slow. However, a potential language adjustment may not come until October’s full forecast reassessment.