Morning Report: 18 October 2017

18th October 2017 By: Ranko Berich

GBP The big news from the UK yesterday was a Consumer Price index report, showing that inflation has now reached its highest point in five and a half years, at 3%. Despite the reading being at such a historically high level, markets had speculated that the number could be even higher, which drove sterling higher before the release. Given that the 3% reading that transpired was in line with the average market forecast, sterling subsequently retraced some of these gains after the release. This bout of sterling selling accelerated later in the day after dovish remarks from the Bank of England’s Sir David Ramsden, who stated that he was not intending to vote in favour of a rate hike in the next BoE meeting. Today at 9:30 BST the UK unemployment and Average Weekly Earnings data will be made public. The Average Weekly Earnings will be particularly closely watched by markets, as it continues to lag behind inflation levels, meaning British workers have been losing money in real terms. This has an impact on longer term Consumer Spending levels, which had been a key drive of the UK’s economic performance over the past two years, thus sterling is susceptible to another bout of selling should the number be disappointing.

EUR The euro edged slightly lower against the dollar for the fourth day of trading in a row yesterday. The latest justification for the market selling of the euro stemmed from an underwhelming final Consumer Price Index reading for the Eurozone, which showed annualised inflation at 1.5%, demonstrating that the European Central Bank is still far remote from achieving its 2% inflation target. The German ZEW economic sentiment also disappointed. Although a reading above 0.0 indicates optimism, the 26.7 number was below both last month’s reading of 31.7, and the forecast figure of 34.2. Aside from the economic data points, markets are still fervently speculating on how and when the ECB’s Quantitative Easing programme will end. Our expectation is that the ECB will begin by tapering the monthly amount of purchased assets from €60bn to €20bn, but keep the program running until the end of 2018. Tonight the European Council meeting will start in Brussels. In this EU summit European leaders gather to discuss a wide array of topics ranging from migration to Brexit.

USD USD was rampant yesterday, being up against most of the G10 currencies. This dollar march was captained by rumours that Trump would appoint John Taylor, who is perceived to be a hawkish option, as the new Fed chair. Meanwhile Industrial Production and Capacity Utilization data points disappointed slightly, but the NAHB index of homebuilders showed a nice uptick after the hurricanes, reaching a five month high. Meanwhile United States Trade Representative Robert Lighthizer continues to take aim at both Mexico and Canada over the North American Free Trade Agreement, urging them “to give up a little bit of candy”. This afternoon at 13:30 BST the September Housing Starts and Building Permits will be released.

CAD The loonie regained some ground in the second half of yesterday’s trading, as it became clear that NAFTA talks will still continue beyond 2017, according to ministers involved, allaying some market nervousness. CAD was given a further small boost by crude oil seeing a spike in price to ongoing tensions in Kirkuk in the Kurdish region of Iraq. Aside from this, Deputy Governor of the Bank of Canada Carolyn Wilkins spoke yesterday, but she didn’t tell us anything new on the direction of the Canadian economy, or of the monetary policy. Today at 13:30 BST the monthly Manufacturing Sales will be with us.

UK news

  • Reuters. Bank of England still faces growth-inflation trade-off – Carney Bank of England Governor Mark Carney said on Tuesday the central bank still had to balance the need to support job creation and growth with an inflation rate that is running above its target. “Inflation rising potentially above the 3 percent level in coming months is something that we have anticipated,” Carney told MPs in parliament, saying the Bank had said before last year’s Brexit vote that a fall in sterling would push up prices. “As a consequence we faced a trade-off, and we still face a trade-off, between having inflation above target and the need to support, or the desirability of supporting, jobs and activity.” The Bank has said most of its rate-setters think they will need to raise interest rates “in the coming months” to head off a build-up of inflation pressure. Carney has previously said he is part of that majority.