Economic and Strategy Viewpoint - October 2019

Recovery hopes and de-leveraging cycles

• Hopes of a trade deal between the US and China have helped risk assets of late, but there is little evidence of recovery in the survey data. There is evidence though that investors had became too gloomy in the US where data is now surprising on the upside.
• This US cycle has been long, but also weak as households have spent the decade de-leveraging. Key to the success of the Federal Reserve's monetary policy will be household willingness to reverse this trend. Otherwise stronger activity may have to wait for fiscal support after the presidential election.

The Rocky Horror Brexit Show

• A hostile mood has descended in Westminster as we approach the 31 October Halloween Brexit deadline. The government has lost its majority, and every vote since Johnson became prime minister.
• The Benn Act should ensure a delay to the deadline unless a new deal is agreed, that is assuming Johnson does not attempt to circumvent the law. Betting markets show the probability of a no-deal Brexit in 2019 has fallen sharply, helping to lift sterling.
• We explore the most likely potential paths for the next few months, including what a general election could mean, and the economic impact of the different Brexit scenarios.

Should, would or could China aggressively devalue?

• While a devaluation of the renminbi might appear an obvious counter to rising tariffs from the US, China would face prohibitive costs in doing so and with no guarantee that it would prove a panacea.
• Equally, though its resources are limited, China’s central bank is unlikely to be forced to abandon the defence of the currency altogether. However, commitment to even a floating peg will tie its hands in other ways.

Please find the full Viewpoint below