• The Fed

In the U.S, we are seeing a softening from the Fed over its interest rate forecast. Thankfully, last month’s ‘dot chart’ -which showed Fed board members consensus view that the next change in rate will be a hike in 2021- looks less likely by the day. Expectations of another rate cuts this year have grown after the Fed’s Jerome Powell spoke last week of the need to insure against uncertainties over ‘trade, Brexit and other issues’. Note that Brexit is now being considered a potential source of harm to the U.S, and by extension to the global economy.

• Trade talks

A limited U.S/ China trade deal may be signed off next month by Presidents Xi and Trump, after a ‘sort of’ deal was agreed by trade negotiators last Friday. China agreed to buy more agricultural goods from traditionally Republican-voting states, it is seeking a ‘skinny’ deal, limited to addressing its trade surplus with the U.S. The U.S is seeking a broader agreement covering technology transfer, state subsidies, and security issues, which China is resisting. China hopes that Trump’s need to secure any deal ahead of the presidential election campaign will force him to accept the skinny deal. Trump and Xi are expected to meet a the Asia Pacific Economic Conference in Santiago, Chile, on 16-17 November where a final agreement may be signed if Trump does, indeed, feel pressured into getting any deal possible.

• German fiscal policy

Germany is finally, and slowly, looking at a fiscal policy stimulus to soften the blow coming from a sharp downturn in manufacturing exports. Its budget surplus of 0.5% of GDP sits oddly, some argue, with an economy that contracted at an annualised rate of 0.3% in the second quarter and which is likely to report a similar contraction for the third quarter (which would make it a recession). However, even if politicians can summon the courage to break the balanced budget rules, it is unclear if the country has the spare capacity to engage in the infrastructure projects that many are calling for. Unemployment stands at 3.1% and the construction sector has full order books. Perhaps the economy has to deteriorate further before fiscal policy medicine can be usefully applied?

• Brexit

There is an improved tone to the U.K’s Brexit negotiations with the E.U, following breakthrough talks with the Irish government last week. The risk of a damaging no-deal Brexit appears to be reduced. At a heads of state E.U summit this Thursday and Friday, Boris Johnson is likely to explain his complex proposal regarding the Northern Ireland customs border, and also to request re-writing of parts of the political declaration that Theresa May signed up to. These will be in areas relating to taxes, state subsidies and product standards, which the U.K government argue limits national sovereignty. It is possible a deal emerges, for the House of Commons to vote on this weekend. But whether MPs will vote for a deal is another question, and appears unlikely given the strength of opposition to a hard Brexit in Parliament. Therefore, I’m assuming there will be no deal passed by Parliament by 31^st October.

According to the Benn Act, the U.K government must seek an extension to Article 50 if no deal is approved by Parliament by Saturday. This will probably be granted by the E.U, who will regard the likely general election and/or second refendum that follows as an opportunity for the U.K to gain a political consensus as to what it wants to do. But for investors, a general election opens another risk: that 1970s style socialism returns to Britain. The Labour party leader, Jeremy Corbyn, is a puppet of a Trotskyite tendency which has taken over control of the party.

• Gilts

Sterling has long been a barometer of sentiment towards Brexit, falling when fear of a no deal Brexit increases. Gilts have joined in, but showing an opposite response. Their prices rise (ie, yields fall) on news stories that make a no deal Brexit more likely. This is because of the damage such an event would do to the economy, with low -or negative- economic growth likely to limit inflation. Gilt prices drop back (and yields rise) when there is talk of a deal to be done, and the risk to the economy lessens.

The ballooning of the U.K budget deficit under the current Johnson-led government, with further spending likely to be announced in a 6^th November pre-election budget, may be acting as a floor to gilt yields. But the market has reacted surprisingly coolly to the steady increase in spending commitments in recent months. This was highlighted in last week’s warning from the Institute for Fiscal Studies that the government’s current spending plans ‘are closer to what Labour had in its 2017 manifesto than what the Conservatives had in theirs’. That’s the price the government is paying to woe northern Labour-voters, who voted for Brexit and whose support at the next election might help make up for the loss of remain-voting Tory voters, who appear likely to desert to the Lib Dems.