Morning Report: 2 February 2017

2nd February 2017 By: Ranko Berich

GBP Sterling strengthened yesterday, as survey data pointed towards rising cost pressure in the economy, and the Government’s successful passage of the European Union (Notification of Withdrawal) Bill through the House of Commons. The Bank of England will release its latest Inflation Report today at 12:00pm GMT, accompanied by a rate decision, and followed by a press conference at 12:30pm. After years of MPC meetings basically boiling down to ‘there’s no inflation and we don’t know when it’s coming back’, the Bank of England can finally see the whites of inflation’s eyes and has some important issues today. Now that the BoE finally has some upwards price pressure to deal with, the question for the MPC is how much of the coming increase in inflation the Committee will be willing to look through, and if the Bank will need to beat a hasty retreat from last year’s aggressive easing measures.

EUR After a midday wobble, the euro regained its footing overnight to remain trading near the year’s high this morning against the US dollar. Strong fundamental data is becoming a theme for the eurozone: yesterday’s Manufacturing Purchasing Managers’ indices showed manufacturing sectors across the eurozone expanding at a strong rate. Spanish Unemployment was released this morning at 57,300, in line with the consensus forecast. Later this morning at 10:00 GMT the latest Eurozone Producer Price Index will be released, and at 12:15 European Central Bank President Mario Draghi will speak in Slovenia.

USD The US dollar continues to loiter this morning, after a day of unconvincing price action yesterday that saw a half-hearted and short lived spot of strength yesterday afternoon amid the release of a surprisingly strong jobs estimate from ADP. The research company’s monthly estimate of Friday’s official Non-Farm Payrolls increase was 246,000. Manufacturing Purchasing Managers Indices from Markit and ISM were also fairly strong and reflected strong reported output growth. The Federal Reserve kept interest rates unchanged and once again steered well clear of giving any more certainty about the size and pace of future interest rate hikes. The lack of additional new information suggests that the rate setting Federal Open Market Committee is for now comfortable with it’s current, loose guidance of approximately three interest rate hikes this year. Elsewhere, Iran and Australia joined the list of countries President Trump has recently chastised or spoken out against, with regards to military activity and a refugee resettlement deal, respectively. Today at 13:30 GMT weekly Unemployment Claims will be released alongside Productivity and Unit Labour Cost data.

CAD The loonie opened yesterday on the back foot but quickly regained momentum, despite several indications storm clouds are gathering over crude prices in North America. Media reported widely on statements from ExxonMobil, the world’s largest oil company, that it will be able to more than double output in the Permian Basin region of the United States, at a time when the regional market remains strongly supplied. As if to underline this point, US crude oil inventories rose yet again, by a whopping 6.5m barrels. The RBC Manufacturing Purchasing Managers’ Index showed an increase in reported output among the surveyed companies.

UK News

  • Theresa May wins Article 50 Commons vote – FT. Approval for Brexit trigger with warning talks could turn into diplomatic ‘fist fight’. Theresa May on Wednesday night comfortably won a historic House of Commons mandate to start Britain’s divorce from the EU amid warnings that the looming exit negotiations could descend into a diplomatic “fist fight”. Mrs May is on course to start the two-year Brexit process next month after MPs voted by 498 to 114, a government majority of 384, for the bill that gives her the power to invoke the EU treaty’s Article 50 exit clause. The vote saw Mrs May lead virtually all Conservative MPs through the voting lobbies alongside Labour leader, Jeremy Corbyn, who had instructed his MPs to respect the Leave vote in last year’s EU referendum. Parliamentary approval was required after the Supreme Court ruled that Mrs May could not trigger Article 50 using royal prerogative.
  • US objections revive European criticism of German trade policy – FT. Anger in EU capitals over Berlin’s use of euro reignited after Trump aide speaks out. A senior White House adviser’s attack on Germany for using a weak euro to gain trade advantages over the US has inflamed a long-running debate in the EU about German economic policy and its approach to monetary union. The comments by Peter Navarro, head of Mr Trump’s National Trade Council, on German exploitation of the US prompted a fierce response from Jeroen Dijsselbloem. The Dutch president of the eurogroup of finance ministers told the FT that “clearly Navarro has no clue about the eurozone”.
  • BoE faces Brexit balancing act on growth and rates – Reuters. The Bank of England will probably try on Thursday to avoid adding to speculation about a first interest rate hike in nearly a decade, even as it acknowledges the resilience of Britain’s economy since last year’s Brexit vote shock. After Britain surprisingly outgrew the world’s other big rich economies last year, the BoE is expected to raise its 2017 growth forecast for the second time in three months, according to a Reuters poll of economists.