Morning Report: 2 December 2016

2nd December 2016 By: Ranko Berich

GBP Sterling saw a sharp burst of strength yesterday morning, only losing some of its gains in the afternoon before continuing to appreciate this morning. Favourable political headlines drove the move, Brexit secretary David Davis telling the House of Commons that the Government may be willing to continue contributions to the EU budget after Britain has left the Union. Davis’ comments were the first time a Government minister has openly acknowledged that contributions to the EU budget were on the table. Davis has been in the news wires again this morning after speaking to the Confederation of British Industry in Cardiff, where he hinted at a softer line on immigration, saying that “No one wants to see labour shortages in key sectors”. This morning Markit’s Construciton Purchasing Managers’ Index showed optimism rising slightly in the sector, with incoming new work increasing at the fastest rate since March. However, average costs rose at the fastest rate since 2011, reflecting sterling’s weakness relative to the beginning of the year.

EUR The euro has come close to disaster on several occasions this week, rallying each time before surpassing last week’s lows on EURUSD. This morning’s price action has seen EURUSD rise to its highest level for the week, suggesting that the single currency may be out of the woods for now. Plenty of firm economic data was released yesterday, including Manufacturing Purchasing Managers Indices which showed the sector in expansion across the euro area, and eurozone Unemployment figures, which showed joblessness at 9.8%, the lowest since 2009. This morning Spanish Unemployment was shown to have risen by 24,800, a surprise increase when a fall was expected, although joblessness remains down on a year on year basis. The Italian constitutional referendum will take place this Sunday, meaning that the euro’s week could begin with high volatility if Prime Minister Matteo Renzi’s proposed reforms fail.

USD USD weakened on a broad basis yesterday, including against GBP and EUR, despite a strong batch of fundamental data. Weekly Unemployment Claims rose to 268,000, which remains a low level compared to historical trend. Manufacturing Purchasing Managers Indices from Markit and ISM both reflected strong output growth in the sector, while Construction Spending rose 0.5% in October. Today’s Non-Farm Payrolls report at 13:30 GMT will be of critical importance to USD. If official jobs figures are as upbeat as the ADP estimate released on Wednesday, expectations of interest rates over the next year are likely to increase even further. Influential Federal Reserve Governor and voting FOMC member Lael Brainard will speak at 13:45, followed at 18:00 by her colleague Daniel Tarullo.

CAD The loonie extended its gains yesterday as crude oil prices continued to rally after this week’s historic OPEC deal to reduce crude oil output. The RBC Manufacturing Purchasing Managers Index rose slightly yesterday, mirroring the improvements seen in US manufacturing optimism. Today at 13:30 GMT, monthly Canadian labour market data including the Unemployment Rate will be released.

UK News

  • Reuters. UK factory growth cools as weak pound fuels cost pressures: PMI. A worker at perforating company Bion uses a machine at the factory in Reading, Britain September 22, 2016. British manufacturing growth cooled unexpectedly in November as factories grappled with soaring costs caused by sterling’s slump after June’s Brexit vote, even before this week’s jump in oil prices. Thursday’s Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) also suggested the weak pound failed to boost exports by as much as in previous months.
  • FT. UK household inflation expectations soar in October. A measure of UK inflation expectations has soared above its long-term average, in another sign that households are readying themselves for an upsurge in consumer prices after the Brexit vote. The European Commission’s 12-month consumer inflation expectations gauge hit 38.7 in October, climbing more than 20 points from the 18.1 balance reported in September.