The U.S. saw modest but steady economic growth while Britain seems to be headed for a hard Brexit. Read on to see how these stories could impact the market.
Hard Brexit Becomes More Likely – With the appointment of Prime Minister Boris Johnson, the probability of Britain leaving the European Union without a trade deal in place moved higher. But actions this week make the reality of a “hard Brexit” seem almost inevitable – Prime Minister Johnson asked permission from Queen Elizabeth II to shut down Parliament for five weeks through mid-October, all but assuring that opposition lawmakers would be prevented from blocking a no-deal Brexit. Shutting down Parliament for five weeks – when there are only eight weeks left to before a hard Brexit – all but assures that Britain will be confronted with the consequences of not having trade and customs agreements with one of their largest trading partners: the European Union. The pound sterling (Britain’s currency) continues to slide against the dollar as the deadline approaches (see chart). The date to watch is October 31, when a divorce from the EU would be final with or without a deal.1
Source: Federal Reserve Bank of St. Louis2
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U.S. Q2 GDP: Modest but Steady — The U.S. Bureau of Economic Analysis (BEA) generally releases U.S. GDP growth data in three iterations, with the first iteration usually being the least reliable. As the Bureau has more time and more information to make GDP calculations, the GDP growth figure gets revised to more accurately reflect the complete data set. As applied to Q2 2019, the BEA has revised their initial estimate down by just 0.1%, which offers a safe assumption that U.S. GDP grew 2.0% in Q2. In the first quarter, real GDP rose 3.1%. Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $105.8 billion in the second quarter, in contrast to a decrease of $78.7 billion in the first quarter. 4 On balance, we view this as modest – but quite steady – economic growth.
New NAFTA Remains Stuck in Congress – Remember the new trade deal between the U.S., Canada, and Mexico known as the USMCA? Many believe that the trade deal is over and done with, and on the books, but in fact it hasn’t even been brought up for a vote in Congress. Given that Mexico is Texas’ biggest trading partner, and Canada is its second (as measured by Texas’s exports), a Congressman from Texas is leading a renewed push to bring the trade agreement up for a vote in the House. As it were, the United States is mired in two trade dilemmas with no clear path forward, the resolution of which could arguably bring back enough economic certainty to give the expansion more room to run.5
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Disclosure
2 Board of Governors of the Federal Reserve System (US), U.S. / U.K. Foreign Exchange Rate [DEXUSUK], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DEXUSUK, August 29, 2019.
3 ZIM may amend or rescind the “7 Secrets to Building the Ultimate DIY Retirement Portfolio” guide for any reason and at ZIM’s discretion.
4 BEA, August 29, 2019. https://www.bea.gov/news/2019/gross-domestic-product-2nd-quarter-2019-second-estimate-corporate-profits-2nd-quarter
5 The Wall Street Journal, August 27, 2019. https://www.wsj.com/articles/swing-district-democrats-push-for-vote-on-north-america-trade-pact-11566898201?mod=djem10point
6 ZIM may amend or rescind the “7 Secrets to Building the Ultimate DIY Retirement Portfolio” guide for any reason and at ZIM’s discretion.
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