- U.S. ISM manufacturing index expected to move sideways
- U.S. vehicle sales expected to slow
- UK Conservative Party politics and the Brexit process start to clear up a little in supportive developments for the markets
U.S. ISM manufacturing index expected to move sideways — The market is expecting today’s June U.S. ISM manufacturing index to be unchanged at 51.3 following May’s +0.5 point increase to 51.3. Today’s ISM report will be a bit stale because of last Thursday’s Brexit vote, which could have caused a significant change in sentiment among U.S. manufacturing executives that will not be fully reflected until the July ISM report.
The U.S. ISM manufacturing index was in contraction territory below 50.0 for the 5-month period from Oct 2015 through Feb 2016 and has only been mildly above 50.0 in the last three reporting months of March-May. The May level of 51.3 indicated only modest optimism amongst U.S. manufacturing executives. The U.S. manufacturing sector continues to be weighed down by weak overseas export demand and the weak petroleum and mining sectors. In addition, the U.S. auto sector has been slowing with weaker sales, which does not bode well for U.S. auto manufacturing activity.
Meanwhile, the market is expecting today’s final-June Markit U.S. manufacturing index to be revised slightly lower by -0.1 points to 51.3 from the early-June level of 51.4. The Markit manufacturing PMI report for early-June showed a +0.7 point increase to 51.4, which was a potentially positive leading indicator for today’s ISM report.
U.S. vehicle sales expected to slow — The market is expecting today’s June total vehicle sales report to ease slightly to 17.29 million units from 17.37 million units in May. The May sales level of 17.37 million was relatively strong and was only moderately below the 10-3/4 year high of 18.12 million units posted in Oct 2015. However, the prospects for vehicle sales look lackluster for coming months since auto sales have been weak in recent months and were down by -11.6% y/y in May. Vehicle sales have recently been held up mainly by very strong truck sales thanks in part to low gasoline prices. However, the slow rise in gasoline prices in the past several months is likely to take some of the shine off those truck sales figures.
UK Conservative Party politics and the Brexit process start to clear up a little in supportive developments for the markets — Conservative Party politics started to clear up a bit on Thursday after the deadline arrived for nominations for the new Conservative Party leader. The new Conservative Party leader will become the new prime minister when current PM David Cameron steps down. The new PM is expected to be announced by early September.
The leading candidate for Conservative Party leader is long-time Home Secretary Theresa May. Ladbrokes has Ms. May at 4/6 odds (60% probability) of becoming the next PM. Ms. May is viewed as a compromise candidate since she favored “Remain” in the Brexit vote but was low-key in her support and has now promised to execute the will of the British people by obtaining the best Brexit deal possible from the EU. She has now committed to the Brexit process by saying that “Brexit is Brexit” and that “There can be no attempts to rejoin through the back door and no second referendum.”
The markets were pleased to hear something decisive about Brexit from a key British politician either way and were also pleased to hear that Ms. May would not hold new elections and would instead seek to govern until 2020. If the new PM were to instead call for a general election soon to gain a mandate from voters, that would extend the political and Brexit uncertainty for at least another few months during the election campaign and that uncertainty would be negative for the markets.
However, Ms. May also said that formal Brexit talks with the EU should not start before the end of this year, suggesting that she might not invoke the Article 50 EU exit notification until early 2017. In one sense, it would be better for the markets if the UK would just get on with Brexit and get it over with as quickly as possible. A delay in invoking Article 50 until next year would mean that the specified 2-year Brexit negotiation period would also be delayed, which would be negative for the markets. However, it could also be argued that any delay in invoking Article 50 increases the chances that it might never be invoked at all, meaning that the UK ends up staying in the EU, which would be beneficial for the markets. A delay in invoking Article 50 is therefore somewhat of a wash for the markets.
Meanwhile, Ms. May’s main competitor for the PM position is Justice Secretary Michael Gove. Ladbrokes has Mr. Gove has at 3/1 odds (25%) of becoming the next PM. There was shocking news on Thursday when Mr. Gove announced that he would stand for PM himself and that he would not support former London Mayor Boris Johnson. After losing the support of Mr. Gove and other important former allies, Mr. Johnson made the surprising announcement on Thursday that he would not stand for PM. Mr. Johnson had previously been the odds-on favorite to become the new PM but he made too many enemies in recent weeks, including current PM David Cameron, and it turned out that he didn’t have enough support to become PM.
Mr. Gove argues that he should become the new PM because he was one of the leading voices supporting “Leave” and only he has the legitimacy in the eyes of the British public to negotiate a Brexit deal. The markets will continue to closely watch the Conservative Party leadership contest to get a better idea of how the British government will handle Brexit negotiations.
