Getting what you want

Life is in the living, not the grave; joy is in hope, not receipt. Nothing is ever as fulfilling as we can imagine. And so it is with the stock markets that, at bottom, are a barometer of people’s moods.

Three-quarters of the S&P 500 has reported. About 80% have beaten earnings expectations, and 61% delivered higher sales than analysts assumed. Earnings growth is running just shy of 25%. As for the future, about 9% of the index has forecast lower earnings for the final quarter while 5% raised guidance. The rest are staying mum. And who could blame them? Any equivocation pushes even huge companies down the disappointment slide, and if they undershoot earnings forecasts the slide turns into a chute.

People have been worrying about growth in 2019. Stronger than expected GDP numbers, another blockbluster month for jobs and sky-high confidence measures have done little to assuage downbeat investors. Nonfarm payrolls showed 250,000 new jobs in October, just 190,000 were expected. This is a very volatile measure, but the scale of the beat is worth noting. The release also showed annual wage growth accelerated to 3.1%, the fastest pace since April 2009. Not only were more Americans working for better hourly wages, they were putting in more hours too.

Analysts have been lamenting the lack of better wages for consumers for years. And now it’s here, they’re of course worrying about whether higher wages will eat away at corporate profit margins or spur inflation higher, goading the Federal Reserve into keeping up the pace of its interest rate hikes. We believe wages should keep increasing, but over the past 20 years it has had precious little effect on core price inflation.

This deep feeling of foreboding has exacerbated other worries that may otherwise have lingered in the curiosity cabinet. Investors have started to notice oil prices are much higher than a year ago; rising wages are a cost concern, not another leg of growth for a consumer-driven economy; and the Fed’s increases are a dangerous hand brake rather than a judicious tempering of inflation that at one point was threatening 3% and which is still above the central bank’s target. Tariffs are also starting to bite some firms – as expected when they were implemented – but now people are worried about this weakness spreading to other parts of the economy too.

We thought the US economy would slow from its tax-break-fuelled 2018 speed, but would continue to post respectable growth next year. We felt that would flow through to worldwide GDP too. Tariffs will cause supply chain headaches for some multinationals, but we feel that alone will not be enough to push the world into recession.

Tomorrow’s US midterms, right after a market downdraught, are perfectly timed for a spooky set piece. Regardless of result, the S&P 500 tends to rise following the off-year elections, but people are wondering whether this time’s different …

For our part, we believe the Senate will be safe from Democratic clutches, but the House of Representatives may be at risk. Politicians in the House of Representatives only serve two-year terms so all 435 of their seats are up for grabs. Senators serve six-year terms and work a staggered system whereby a third are elected every two years. This year 35 seats are on the table, 26 of them belong to Democrat incumbents. Of those 26, 12 have a significant chance of swinging to the Republicans, but only six seats held by Republican incumbents have a chance of swinging to the Democrats. As for the House of Representatives, Republicans tend to lose about 7% of their seats when they have a president in the White House, according to our analysis. Their majority today is just 4%.

If the Democrats win the House they can’t do much with it but crow for a bit. Mr Trump’s agenda has largely been neutered by divisions within his own caucus (excepting the tax cuts), so a greater Democrat influence isn’t going to dismantle a legislative powerhouse.  

Source: FE Analytics, data sterling total return to 2 November


Speaking of legislative powerhouses, the UK was spurred by hopeful rumours of a deal with the EU last week.

Midcaps have languished for much of the year due to the shifting vagaries of Brexit and a general malaise about the British economy that not even respectable retail sales growth or better-than-forecast GDP can alleviate. While Britain isn’t exactly an enticing, dynamic marketplace right now, it’s certainly looking cheap in several places. There’s so much sadness baked into the country’s stock market that any sort of brighter news can lead to rapid upward moves. And so it went: a sniff of a deal – any deal – and sterling leapt higher to $1.30 (depressing as that sounds), helping the FTSE 250 jump 5.3%.

Putting aside the chance that this is all simply scuttlebutt and the two sides are still at loggerheads, the big question is, what sort of deal is on the table? We believe there is too much at stake for the EU and the UK to walk away without some kind of agreement. The future relationship of Britain and the Continent hinges instead on whether the government can sell it to a divided Parliament. That’s the 50/50 call here. And whether or not it will get past three readings depends on the concessions both sides make. It could go either way and we are reluctant to make guesses about what will be acceptable to MPs dealing with the most hot button issue of their careers.

In this context, what is there to be made of German Chancellor Angela Merkel stepping down from politics? A staunch ally of the UK at the EU table, Mrs Merkel was toppled by her 2015 decision to give safe harbour to 1 million Middle-eastern refugees. The move fuelled a right-wing surge in her country and eroded her hefty political capital in the following years. She has resigned as leader of her party, but will see out her current term to 2021 as long as a snap election isn’t called first. How susceptible will Mrs Merkel be to the background pressure of a newly minted leader angling for an electoral win in three years’ time? It’s fair to assume that her replacement is likely to be more in-tune with voters’ feelings on immigration, and European co-operation and finances. It would seem the UK and Germany have a lot in common. But whether that will lead to a better Brexit result is another story …


UK 10-Year yield @ 1.49%

US 10-Year yield @ 3.21%

Germany 10-Year yield @ 0.43%

Italy 10-Year yield @ 3.32%

Spain 10-Year yield @ 1.57%


Economic data and companies reporting for week commencing 5 November


Monday 5 November

UK: New Car Registrations, Services PMI

US: Market Services PMI, ISM Non-Manufacturing/Services Composite, MBA Mortgage Foreclosures, Mortgage Delinquencies

EU: Sentix Investor Confidence

Interim results: Totally

Trading update: Hiscox


Tuesday 6 November

UK: BRC Sales Like-For-Like

US: JOLTS Job Openings

EU: Services PMI, Producer Price Index; FRA: Services PMI; GER: Factory Orders, Services PMI; ITA: Services PMI

Final results: Associated British Foods, Connect Group, Imperial Brands, Up Global Sourcing Holdings

Interim results: Castleton Technology, First Derivatives

Quarterly results: Randgold Resources, Verona Pharma

Trading update: Georgia Capital, Direct Line Insurance Group, Morrison (Wm) Supermarkets, Purplebricks Group, Vesuvius, Weir Group, William Hill


Wednesday 7 November

UK: Halifax House Prices

US: MBA Mortgage Applications, Consumer Credit

EU: Retail Sales; GER: Industrial Production, Construction PMI

Interim results: Dairy Crest Group, Marks & Spencer Group, Sophos Group, Wizz Air Holdings

Trading update: G4S, Wetherspoon (J D)


Thursday 8 November

UK: RICS House Price Balance

US: Initial Jobless Claims, Continuing Claims, Federal Reserve Interest Rate Decision

EU: ECB publishes Economic Bulletin; GER: Trade Balance, Current Account,

Final results: Bowleven, Gattaca, Game Digital, Tracsis

Interim results: 3i Infrastructure, Auto Trader Group, Burberry Group, Halfords Group, JZ Capital Partners, National Grid, Renewi, Sainsbury (J), Tate & Lyle, Wincanton

Quarterly results: Arrow Global Group, AstraZeneca, Coca-Cola HBC, Esure Group

Trading update: Beazley, Hikma Pharmaceuticals, Howden Joinery Group, IMI, Inmarsat, OneSavings Bank, Superdry, TI Fluid Systems


Friday 9 November

UK: Trade Balance, Industrial Production, Manufacturing Production, Construction Output, GDP, Index of Services, Private Consumption, Government Spending, Total Business Investment

US: Producer Price Index, Wholesale Inventories, University of Michigan Sentiment

Final results: Diploma

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