News & analysis


The UK labour market showed a there is a shining light in a bleak Brexit riddled economy yesterday as unemployment hit a 44-year low and wages continued to grow. But, Brexit May begin to take its toll on the UK labour force. Job-to-job flows, a gauge of the labour forces confidence, fell from a post-recession high in Q4 2018, while the latest BRC sales monitor shows consumers are tilting their spending towards essential food items. In Westminster today, 1,000 days after the referendum, Theresa May is expected to write to the EU to formally ask for an Article 50 extension ahead of the European Commission meeting on Thursday amid pressure from the Eurosceptic Tories to make the extension short. The letter to President Tusk is believed to ask for an extension of 3 months such that no-deal can firmly remain on the table. The market remains resistant to such speculation, however, as pound option traders show no rush to hedge a 3-month Brexit delay. 4-month implied volatility, which is used to price the premium of protection against volatility in the pound’s price, is at the lowest level since September. On the data calendar, the Consumer Price Index is released at 09:30 GMT.


EUR held the lines yesterday despite a softer Q4 wage growth figure, that may limit the prospects of strengthening consumer spending and rising core inflation. Eurozone Q4 Labour costs showed a growth of 2.3% year on year, below the 2.5% expected. The good news is this is still near decade high nominal wage growth and with inflation remaining low in the euro area, real wages feel the lift as well. The slower acceleration, however, does mean wage increases will exercise less pressure on the core inflation, while consumers will not find extra money in their pockets to boost consumption. In our opinion, this doesn’t mean euro weakness per se, although it does cap the upside for a hypothetical euro rally in coming months.


The greenback came under broad selling pressure yesterday as markets seemed to position themselves for a dovish Federal Open Market Committee tonight. An alternative explanation is that news about new trade talks between China and the US that have been confirmed for the end of April have softened trade worries somewhat, which reverses earlier safe-haven flows into the dollar. For tonight, the Federal Reserve is expected to downgrade its economic growth projections for 2019 from 2.3% towards 2.0-2.1%. Additionally, the dot plot that shows the expected rate path envisioned by voting FOMC members will be adjusted, though we will likely see the median FOMC member still expects one rate hike this year. Finally, more clarity is expected on when the Fed will stop the run-off of its balance sheet, which is one of the reasons why expectations for this FOMC meeting are so dovish. The Rate Announcement, plus fresh Economic Projections and Dot Plot,  are scheduled for 18:00 GMT, followed by the press conference at 18:30.


The loonie failed to hold most of its gains yesterday closing only 0.11% up on the dollar. Crude oil prices suffered the same fate, closing substantially below a fresh 2019 high recorded earlier in the day. Meanwhile, the Trudeau government unveiled its final budget prior to the fall elections. The budget proposed a fresh $22.8bn in spending over the next six years as the Finance Minister, Bill Morneau, stressed the need for government investment rather than austerity. The main areas of spending include the cut in interest rates on student loans, increasing opportunities for the youth to purchase housing and employment insurance benefits.