Morning Report: 20 October 2017

20th October 2017 By: Ranko Berich

GBP Sterling fell yesterday as retail sales data dramatically missed estimates. The retail sales index showed what inflation has been telling markets over the last few quarters: volumes of goods purchased are falling rapidly, although the amount of pound spent is actually increasing in a year-on-year basis. Therefore, the Bank of England now faces a huge dilemma. The BoE has to decide whether hiking rates, which would help controlling inflation although it might ease consume demand; or keep rates on hold, risking inflation overshooting estimates but boosting demand. It appears that the first alternative is the best choice, since at least one consequence offsets the other, whereas keeping rates on hold is proving to be detrimental for the UK economy. Elsewhere, Theresa May successfully begged the European Union leaders not to push her too far. Her words were designed to tame Germany’s Chancellor Angela Merkel who said “there will be a good outcome” to talks.

EUR The euro dodged the Catalonia leader Carles Puigdemont’s gambit yesterday, who not only failed to clarify whether he had declared independence or not, but backed himself saying the Catalonian referendum gives him the authority to do so. He also said that the independence will be declared if Article 155 was triggered. Markets are now awaiting the decision from the Spanish national government, with leader Mariano Rajoy’s government is finishing the details to go ahead and suppress Catalonia’s autonomy. The German producer price index increased above expectations earlier today to 0.3% month-on-month vs 0.1% expected.

USD The dollar has strengthened against most of the G10 currencies this week, with the exception of the loonie, at the time of writing. Optimism in the manufacturing sector remains buoyant after the Philly Fed manufacturing index posted a reading of 27.9 versus 21.9 expected, its highest reading since May. Existing home sales data will be released today at 15.00 BST and, importantly, Federal Reserve Chair Janet Yellen gives a speech titled “Monetary Policy Since the Financial Crisis” tomorrow, whilst markets are closed. Questions from the audience are expected, which could lead to a volatile opening on Monday’s trading session.

CAD The loonie is the strongest currency this week so far as it has been boosted by manufacturing sales earlier this week and a broad positive momentum in crude oil prices. Today’s data will be critical for CAD with the release of inflation and retail sales figures at 13.30 BST.

UK news

  • FT. Theresa May asks EU not to back her into corner on Brexit. PM seeks green light for transition talks but bloc expected to say progress not sufficient. Theresa May has implored European leaders not to back her into a corner on Brexit, saying that there was a “clear and urgent” need to move exit talks to the next phase as her Eurosceptic critics began to mobilise. The UK prime minister on Thursday night told EU leaders that she had taken a big risk by making an opening €20bn financial offer and accepting that a transition deal would be on the EU’s terms, including budget contributions and European Court jurisdiction. The conciliatory tone received a response in kind from Angela Merkel, the German chancellor, who called for patience and stressed her certainty that “there will be a good outcome” to talks.
  • Reuters. Merkel sends positive signal to May on Brexit. talks German Chancellor Angela Merkel, in a markedly positive response on Friday to an EU summit appeal by Prime Minister Theresa May for help with Brexit, said talks with Britain were moving forward and were unlikely to break down. Merkel made her comments at the end of the first day of a European Union summit and after May had appealed to her fellow leaders to help her silence critics at home and break a deadlock in the talks. “In contrast to how it is portrayed in the British press, my impression is that these talks are moving forward step by step,” Merkel told a late-night news conference, dismissing as “absurd” suggestions in Britain that the talks should be broken off. “I have absolutely no doubts that if we are all focussed … that we can get a good result. From my side there are no indications at all that we won’t succeed,” she said.