Persistent uncertainty takes its toll
* Today’s briefing summarises the findings of the latest Deloitte survey of Chief Financial Officers which was released overnight. The full report is available at:
https://www2.deloitte.com/uk/en/pages/finance/articles/deloitte-cfo-survey.html
* Against a backdrop of slowing growth and persistent uncertainty Chief Financial Officers (CFOs) of the UK’s largest businesses are adopting an intense focus on cost control. Cost reduction is their top strategy, with a record 58% of CFOs rating it as strong priority, higher even than when the economy was emerging from recession in late 2009.
* Brexit again tops the list of risks and, in the last three months, CFOs have become significantly more concerned about the risks posed by slowing growth in the UK and the euro area.
* Research by the Bank of England, based on anonymised data from the CFO Survey, sheds light on the corrosive effect of uncertainty on business activity. In a speech* drawing on the research, Michael Saunders, a member of the Bank’s Monetary Policy Committee, notes that whereas previous spikes in CFO uncertainty have been temporary, current uncertainties have become entrenched with roughly one-third of CFOs reporting high or very high uncertainty for four quarters, a previously unprecedented level of persistence.
* The Bank’s analysis shows that CFOs reporting elevated uncertainty are far less likely to prioritise expansionary strategies such as increasing capital expenditure. The speech was widely seen as making a case for lower interest rates and contributed to a marked decline in market expectations for rates over September and early October.
* So far corporate caution has had its greatest effect on investment which has slowed dramatically since the EU referendum. The labour market has shown resilience with further falls in unemployment and earnings rising at the fastest pace in more than ten years. Now, with a sharper focus on curbing costs, 70% of CFOs expect hiring to decrease in the next 12 months and just 3% expect it to rise.
* With CFOs firmly focussed on cost control the UK looks set for weaker job and wage growth ahead. The brunt of the UK’s slowdown in the last year has been borne by the corporate sector with the jobs market remaining buoyant. That disconnect is unlikely to last.
Brexit opinion polls betting odds
Note: Probabilities derived from betting odds from bookmaker Smarkets at 1700 last Friday
* The implied probability of a no-deal Brexit this year is 13%, down significantly from over 40% in August.
* The probability of a general election taking place this year has risen sharply in recent months, and is now 58%. Odds suggest a 11% chance of it taking place in November and 47% in December.
* The opinion polls show the Conservative Party with a 10 percentage point lead over Labour averaging across the last five polls. The two parties were neck and neck in late July, before Boris Johnson became prime minister.
* Betting odds imply a 69% probability of the Conservative Party winning the most seats in a general election.
* However, betting markets see the most likely outcome, with an implied probability of 59%, is a hung parliament. Betting markets assign a probability of 38% to a Conservative majority and 6% to a Labour majority.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 1.3% at 7,247.
Economics and business
* The UK economy is on course to avoid a recession after it grew by a better-than-expected 0.3% in the three months to the end of August
* The IMF and World Bank warned that growing trade uncertainty could lead to them revising their growth forecasts further downwards
* The new IMF managing director Kristalina Georgieva urged countries “with room in their budgets” to use fiscal stimulus
* The US imposed trade restrictions on 28 Chinese companies, claiming their involvement in human rights violations in China’s Xinjiang province
* US president Donald Trump is to meet the Chinese vice-premier Liu He, raising hopes that the two countries could reach a limited agreement on trade
* China offered to increase purchases of US agricultural goods in anticipation of trade talks with the US
* The US Federal Reserve announced that it would increase its purchases of short-term treasury bonds to stabilise repo markets, but said this did not amount to quantitative easing
* Economic think-tank Bruegel estimates that ten-year government bond yields adjusted for inflation are negative in all EU countries except for Romania
* The OECD proposed a new international corporate tax system to combat the profit-shifting of multinationals and make it easier for countries to tax activity that takes place in their territories
* After a team official from the US National Basketball Association tweeted his support for the Hong Kong protests, Chinese sponsors suspended deals with the official’s team and Chinese broadcasters stopped airing NBA games
* US car manufacturer General Motors estimated losses of over $1bn and temporary lay-offs of almost 60,000 stemming from a four-week worker strike
* Climate-change protestors launched two weeks of civil disobedience in cities around the world
* HSBC may cut up to 10,000 jobs as part of a cost-cutting plan
* US inflation was unchanged at 1.7% in September, remaining at the lowest level since January and below the US Federal Reserve’s 2% target
* German industrial production rose by 0.3% in August, above expectations, following months of bad data from the German manufacturing sector
* Dyson has abandoned its project to build electric cars with Sir James Dyson saying it was not “commercially viable”
Brexit and European politics
* UK prime minister Boris Johnson and Irish prime minister Leo Varadkar said they can “see a pathway to a possible deal” after talks on Thursday
* The EU’s chief negotiator Michel Barnier said the UK and EU had agreed to intensify discussions following constructive talks with the UK’s Brexit secretary Stephen Barclay
* EU council president Donald Tusk said he had seen “promising signals” regarding the chance of a Brexit deal but said the UK has still not put forward a “workable, realistic proposal”
* Earlier in the week a source from No 10 Downing Street said German chancellor Angela Merkel had told Mr Johnson a Brexit deal would never be possible unless Northern Ireland stayed in the customs union
* The FT reported that at least 50 Conservative MPs would revolt against a general election manifesto that committed to a no-deal Brexit
* Mr Johnson reportedly reassured the MPs that he would not fight an election offering a no-deal Brexit as the default option
* Recent Conservative leadership candidate Jeremy Hunt urged EU foreign ministers to compromise with Mr Johnson
* Labour Party leader Jeremy Corbyn said a Labour government would hold a Brexit referendum soon after winning a general election
And finally… a man has been arrested by customs officials at Kochi international airport in India after he was found trying to smuggle over one kilogram of gold concealed under his wig. The man had shaved a major portion of his hair to make room for the precious metal. He was perhaps inspired by the story earlier this year of a Colombian man stopped in Barcelona trying to smuggle cocaine under his wig – gold-i-locks