Trade frustration mounts
Developments in US-China trade talks remained important during the week. There was, however, growing frustration amid mixed rhetoric and a lack of real progress and currencies were held in relatively narrow ranges. Chinese officials invited the US delegation for further talks, but there were important tensions over the roll-back of existing tariffs. There were also reported tensions over Chinese buying of US agricultural exports.
There was some relief that Hong Kong local elections appear to have gone ahead without major incident.
US congressional hearings into the possible impeachment of President Trump continued, but with little clear impact on financial markets.
Federal Reserve minutes from October’s policy meeting had little impact with the overall rhetoric confirming market expectations that the central bank would take time to assess developments and hold interest rates steady in the short term.
This message was reinforced by Fed speakers during the week and markets considered that there was very little chance of a further rate cut at the December policy meeting.
Futures markets indicated that the chances of a cut in January 2020 were around 20%.
Business confidence data posted a 7-month high for the manufacturing index and a 4-month high for the services sector. Although growth was still relatively subdued and regional surveys were mixed, the data did support confidence in the US outlook.
Importantly, there were expectations that the US would again out-perform the Euro-zone with undermined EUR/USD.
The latest business confidence data indicated a dip in activity for November with both the manufacturing and construction sectors in contraction territory and the weakest overall reading since July 2016. Political uncertainty continued to deter activity during the month. The data pushed Sterling weaker amid speculation that the Bank of England would be pushed closer to a cut in interest rates.
There were no major political developments during the week with opinion polls continuing to register a significant Conservative Party lead.
Prime Minister Johnson stated that the revised Brexit deal would be brought back to parliament before New Year if he wins the election.
Sterling was unable to extend gains as markets had already priced in a strong Conservative performance and potential majority government.
The latest PMI business confidence surveys indicated a slight improvement in German manufacturing, but the sector was still in contraction and there was little evidence of a convincing recovery in the Euro-zone industrial sector.
The surveys also suggested that growth had slowed within the services sector. This would be a particularly worrying development, although other evidence indicated strong consumer spending.
Canadian CPI inflation held at 1.9% for October with core inflation remaining close to the 2.0% target. There were mixed central bank comments, but Governor Poloz stated that monetary conditions were about right. The Canadian dollar still registered net losses for the week.