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European elections fallout
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European elections fallout

Richard Conway Weekly bulletin May 2019
It is too soon to tell the outcome of last week’s European parliamentary elections but populism appears to be the order of the day based on preliminary results. The UK’s Brexit Party and Italy’s League both made gains while centrist parties such as the European People’s Party (EPP) and the Progressive Alliance of Socialists and Democrats (S&D) appear to have lost hold on their coalition position.
A hawkish ECB ahead?

Views of course differ, but there appear to be three main talking points:

  • The ECB: Angela Merkel would like to see fellow German Manfred Weber get the top job at the European Commission. However, results of the parliamentary elections suggest that support for this may be lacking. With this in mind, Merkel may therefore focus her efforts on pushing for a German head of the ECB instead – the hawkish Jens Weidemann.
  • Brexit: There is now an increased likelihood of a hard exit for the UK as Farage’s Brexit party gains ground, with the potential for a further shakeup in the event of a UK general election.
  • Populism: A general populist shift in the European parliament could increase pressure on spending and put upward pressure on sovereign yields.

Should all three come to pass, expect some discomfort as ECB policy normalisation confronts a populist push for more monetary support.

Economic weakness

Politics aside, there’s plenty to keep market participants busy.

German PMIs remained weak, with manufacturing in particular remaining uncharacteristically low in the sub 45s. Broader European and US figures were little better by comparison, although UK officials will take some hope that the headline Purchasing Managers Index remained north of 50 as the effects of Brexit stockpiling waned.

US capital goods spending figures will have done little to raise the mood either. Durable goods orders stagnated or fell, depending on which flavour you choose, while nondefense capital goods spending was down almost a percentage point in the month – even after we strip out the aircraft industry (read: Boeing’s continued woes). This is further justification, if needed, for the Fed’s policy pause.

Consumers are key

This lacklustre picture warrants a return to a familiar theme.

Against the backdrop of growth worries in developed markets and an uncertain political outlook, consumer spending will once again be expected to take up the slack.

However, with the prospect of rising rates from hawkish central bankers along with higher tax burdens from populist tax rises, policy makers will have to be careful not to upset the apple cart. It looks like we’ll need households’ support for some time still.

Upcoming data releases

A quiet start to the week with markets closed in the US for Memorial Day and in the UK for the late May bank holiday.

Wednesday will see the release of German unemployment figures for May as well as a rate announcement from the Bank of Canada. Consensus suggests little change in either case.

Thursday will see the release of preliminary Spanish inflation figures in the morning followed by a first look at US GDP for Q1 at lunchtime. Advance figures at the end of April suggested US growth was running at a healthy rate of 3.2% (annualized), and consensus suggests this may slip slightly to closer to 3.0% on the second reading.

The core PCE price deflator – the Fed’s preferred inflation measure – is due Friday. Figures are expected to show inflation slightly below target at 1.6%. Q1 Canadian GDP should round off the week, with consensus pointing to a 1.2% quarterly rate.

For more information, please contact Richard Conway, Associate Director at JCRA, at richard.conway@jcrauk.com.

 

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