LAST WEEK – KEY TAKEAWAYS
US ECONOMY GROWS AT FASTEST RATE SINCE 2014
- Gross Domestic Product grew by 4.1% in the second quarter, its fastest rate in four years, as tax cuts propelled consumption and business investment;
- US President Donald Trump claimed credit for what he called ‘an economic turnaround of historic importance’, as he hailed the impact of his ‘America First’ policies;
- Economists questioned whether the growth is sustainable, citing rising interest rates and suggesting the latest figure was inflated by foreign importers of American products trying to get ahead of trade tariffs;
- Omnis view: Trump’s priorities appear contradictory, as sustained growth clashes with his quest for a weak dollar. Nonetheless, the success of his first round of tax cuts may help him justify further fiscal measures.
TRADE TENSIONS EASE BETWEEN THE US AND EUROPE
- Donald Trump and European Commission President Jean-Claude Juncker agreed to put new tariffs on hold and discuss reducing other trade barriers;
- Trump promised billions of dollars of aid for farmers suffering as a result of tariffs imposed by China and the EU;
- The US Chamber of Commerce claimed that trade tariffs are erasing the economic benefits of the tax cuts approved by Congress last year;
- Omnis view: The President’s stance on global trade stretches back 30 years, so it’s unlikely to shift dramatically. However, his posturing seems to have produced results with the EU, and improved cooperation could give him greater leverage when negotiating with China.
PRIME MINISTER TAKES OVER BREXIT NEGOTIATIONS
- Theresa May took control of Brexit negotiations, as she attempted to put an end to rivalries which have slowed progress;
- The EU rejected the UK’s proposal for an enhanced ‘equivalence’ model for financial services, arguing it would devalue access to the European market;
- Wall Street executives warned the UK government it must lower taxes and cut back on regulation if the city is to remain competitive after Brexit;
- Omnis view: Mrs May surprised everyone by announcing that she was taking over Brexit negotiations, although whether or not she manages to overcome divisions within the Tory party remains to be seen.
BUSY WEEK FOR CENTRAL BANKS
- As expected, the European Central Bank left interest rates unchanged following its meeting on Thursday and confirmed it will halt its bond-buying programme at the end of the year;
- The People’s Bank of China (PBOC) pumped $74 billion into its banking system to bolster the economy in the wake of trade tensions with the US, and the Chinese government announced fresh tax cuts and infrastructure spending;
- Ahead of the Bank of Japan’s (BoJ) meeting at the end of July, speculation it may scale back its stimulus programme rattled the global bond markets;
- Omnis view: The PBOC’s actions suggest trade tariffs are taking their toll and may nudge China closer to the negotiating table, and they could also lift emerging markets. Meanwhile, expect close scrutiny of any comments from the BoJ once its meeting ends tomorrow.
FACEBOOK WARNS OF SLOWER SALES GROWTH
- Facebook shares fell after it warned of a slowdown in sales growth in the second half of 2018 and announced the platform lost one million European users in the last quarter;
- Of the other tech companies reporting, shares in Alphabet and Amazon jumped as Alphabet experienced an unexpected drop in costs, while Amazon beat forecasts to record quarterly profits of $2.5bn;
- Shares in General Motors and Fiat Chrysler also dipped as they cut profit forecasts, citing higher commodity costs and Chinese trade tariffs;
- Omnis view: Facebook’s results drew most of the headlines, although warnings from the auto industry provide a more constructive outlook for the US economy.
LOOKING AHEAD – TALKING POINTS
INTEREST RATE DECISIONS IN THE UK, US AND JAPAN
- The Bank of England (BoE) could raise rates on Thursday, following a six to three split in the Monetary Policy Committee at its June meeting;
- The Federal Reserve is expected to leave rates unchanged when it meets on Wednesday, and the non-farm payroll report comes out on Friday;
- The BoJ also announces its latest rate decision, although no change is forecast;
- Omnis view: The Fed may not change rates at its meeting this week, but it cannot afford to slow the pace of hikes with economic growth above 4%. Meanwhile, the BoE looks set to raise rates despite mixed economic data, which could hinder growth as uncertainty about Brexit persists.
ANOTHER BUSY WEEK FOR CORPORATE EARNINGS
- Earnings season continues following mixed results for some of tech’s major players last week;
- Any impact of trade tariffs on ‘accessories’ revenue will be monitored closely when Apple reports results on Tuesday;
- Some of the biggest names in the UK banking sector report results too, including Barclays, Lloyds, Royal Bank of Scotland and Standard Chartered;
- Omnis view: Apple’s results should indicate the effect of trade tensions on US supply chains, while positive news from the UK banks may not be enough to overcome concerns about Brexit and political uncertainty.
US SECTOR-LEVEL EARNINGS SURPRISE % FOR Q2 2018
Source FactSet Research Systems, July 2018
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