Purchasing Managers Indices (PMIs) released last week show that the UK economy is likely to slow more than expected in the final quarter. In particular, the services PMI was significantly weaker than anticipated, falling to 50.4 in November from 52.2 in October. While 50 is the theoretical balance between expansion and contraction, history suggests that any readings under 51 have pointed to a decline in economic activity. Given the dominance of the service sector in the UK economy, weakness in this area will suggest a poor performance from the economy overall. However, there is a possibility that these survey readings have been overly impacted by the current political uncertainty around the Brexit negotiations, a phenomenon that was seen following the referendum vote in 2016.
Equity Market Selloff
Significant falls were seen across global equity markets on Wednesday. With many markets seeing declines of over 3% in a single day of trading. Investor nervousness originated in the fixed income markets, where US Treasury yields began to signal that there was a potential recession on the horizon. The 5-year treasury yield was trading lower than the 2-year, suggesting that interest rates over the next couple of years will be higher than they are in the medium term. With US jobs growth and wage increases continuing, the Federal Reserve interest rate rise pencilled in for December looks set to go ahead, further supporting the short end of the yield curve.
Key Brexit Vote
With such a critical Brexit vote to be held in Parliament this week, domestic news has not strayed far from the topic. On Tuesday MPs are due to vote on Theresa May’s negotiated deal to leave the EU. With so much opposition to the deal from all sides, the Prime Minister is expected to lose the vote. The question most are asking is what the magnitude of the loss will be. With the death of the only deal on the table, opposing sides are lining up to push forward their preferred options. This includes everything from another referendum, Norway “plus”, managed no deal, a renegotiation of the current deal and the Labour party calling for another general election. The most likely outcome is, therefore, continuing uncertainty, as there is no majority consensus for any of these options.
|UK 10 Year Gilt Yield||1.36||1.27||-0.09||-6.62%|