September was another busy month on the policy front, with the Federal Reserve and European Central Bank (ECB) both cutting rates and the latter also announcing open-ended quantitative easing (QE) from November, despite many questioning its efficacy.

This has led to growing calls for fiscal stimulus – either to support or replace monetary – and we wait to see how governments around the world react over the coming months: are they ready to cast austerity aside in a bid to generate growth?

As widely predicted, the ECB cut its deposit rate to a record low -0.5% from -0.4% and pledged to restart bond purchases of €20 billion a month. With inflation falling, Germany skirting recession and the ongoing US/China trade war sapping confidence, the ECB had all but promised more support to the economy and the only question was how extensive stimulus would be. Taken by many as a tacit acknowledgment of how these measures will hit the financial system, the ECB also eased the terms of its long-term loans to banks and introduced a tiered deposit rate to help these businesses.

As for the Fed, controversy surrounded a widely trailed and priced in 0.25% cut, with President Trump contributing his usual commentary and growing divisions emerging within the Federal Open Market Committee (FOMC) itself. Commentators described this as a hawkish cut, presented in such a way as to douse expectations for future reductions this year: markets continue to price in another 25 basis points reduction by the end of 2019 however, further highlighting the differences between policymakers and investors on prospects for recession in the coming months.

This latest cut – on top of another in July – was never likely to satisfy a president who appears to feel personally betrayed by Fed chair Jerome Powell, and Trump greeted the announcement with “No guts,” no sense, no vision! A terrible communicator”. While seven of the 10 FOMC members voted for the 25bps cut, two dissenters argued not to reduce at all and one called for a 0.5% drop. Such disagreement is unusual and obviously makes it difficult for Fed-watchers trying to predict which way policy will go.

Coming finally to the UK, the Bank of England kept rates on hold but said the ‘entrenched uncertainty’ caused by Brexit and trade will keep rates lower for longer and could prompt a cut in short order. Monetary Policy Committee member Michael Saunders said that even if the UK avoids no deal, rates may still need to be cut, with uncertainty surrounding the UK’s departure from the EU persisting and acting as a kind of “slow puncture” for the economy.

With Parliament prorogued for most of the month, Brexit debate continued at a slightly less manic pace but things erupted again as the Supreme Court judged the suspension illegal and MPs were summoned back to Westminster for a fresh bout of incendiary back and forth.

In some parts of the press, this was compared to the 1803 Marbury versus Madison in US, a Supreme Court case that established the principle of judicial review, meaning American courts have the power to strike down laws and some government actions that violate the Constitution.

A month away from the scheduled Brexit date of 31 October, all options still appear to be on the table and it is hard to see what can change to resolve this mess: politicians appear to know what they don’t want but cannot say what they do.

Beyond the usual hum, there was little major movement on the trade picture over the month, with other events taking precedence. White House economic adviser Larry Kudlow said there was slightly more positive music in the air mid-month – highlighting the alarmingly casual nature of the debate on the US side – and trade principals from America and China will meet in mid-October to continue talks.

Elsewhere, tensions rose in the Middle East, with attacks on oil facilities in Saudi Arabia wiping out 5% of global supply and causing the price to spike 20%. This actually helped the US – notwithstanding Trump’s ‘locked and loaded’ twitter madness directed towards Iran – with Chinese oil buyers having to turn to America in the face of reduced Saudi supply. As we reported last month, China recently imposed a 5% tariff on imports of American oil and recent events will help offset this to some extent although news the former has signed a new $400bn oil deal with Iran are unlikely to please Trump.

Overall, recent data highlight a fairly muted impact on China from the trade war so far, with the country proving able to offset any shocks with timely stimulus and an exchange rate depreciation. With the US economy now slowing more than China, Trump has a large incentive to reach a truce before the start of his re-election campaign – and this supports our ‘too many powerful entities having too much to lose’ view on why recession predictors may be moving too bearish, too early.

That said, we have all seen how unpredictable this President can be when cornered so it is unwise to assume how he will behave in any circumstances, especially with talk of impeachment gathering pace.

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