Morning Report: 23 October 2017

23rd October 2017 By: Ranko Berich

GBP The preliminary reading of the third quarter Gross Domestic Product for the UK will be announced on Wednesday. If this meets the expectations of the Bank of England at 0.3%, then a rate hike in 2017 will be as good as set in stone. Disappointing recent data however indicate that some risks to the downside are present, which would spoil the party for the BoE and instead would serve them a bitter cocktail of doubts. Not all is gloom and doom for the British isles though. German chancellor Angela Merkel and President of the European Commission Donald Tusk spoke encouraging words on the progress of the Brexit negotiations on the summit of European leaders last week.

EUR The euro weakened slightly over the weekend due to the rising political tensions across the continent, with the prosperous Italian regions of Lombardy and Veneto claiming victory this weekend in non-binding referendums in favour of more autonomy. Elsewhere the Catalan parliament is planned to meet at 10:30am GMT to discuss the recent intentions of Madrid to activate Article 155, which would strip the regional government of its power. The Spanish government would shape the execution of this article by suspending the parliament, taking over the police force and the public media. The continued unrest has already led the Spanish government to cut their own growth forecast.

USD The USD enjoyed an excellent week on the back of rumours of John Taylor as a potential new hawkish Fed chair, which was topped off by news on Friday that a new budget made it passed the Senate. This budget clears one more hurdle towards a tax reform that will in likelihood provide a fiscal stimulus for the US economy on the short run. In a tight labour market such as the US is experiencing right now, a fiscal stimulus would be inflationary as well, giving renewed hope to forecasters who had optimistically been predicting a continued steady rise in interest rates in the US next year.

CAD The Canadian loonie had a blast of a week, but then came Friday with the Retail Sales and Consumer Price Index to take away the punch bowl. CAD was up against the majority of the G10 currencies last week on the back of rising prices for crude oil, but had its gains pared back a modicum on the disappointing Retail Sales and CPI. These numbers might blow some realism back into the outlooks for the Canadian economy, which were getting ever more bullish, despite the Bank of Canada warning that growth in the second half of the year is likely to be lower than it was in the first year. On Wednesday the Bank of Canada rate announcement is the release of this week to look forward to. Market forecasts are only for a 16% chance of a hike.

UK news

  • FT: Juncker and May allies clash publicly over private dinner account. Ex-aide Timothy blames Selmayr for leak of pre-summit meeting to German newspaper. Top allies to Jean-Claude Juncker and Theresa May have engaged in a public clash over an account of a private Brussels dinner between the two leaders that portrayed the British prime minister as despondent over Brexit fights at home and begging for help from the EU. Nick Timothy, Mrs May’s former co-chief of staff, accused the European Commission president’s powerful chief of staff, Martin Selmayr, of leaking details of last week’s meeting to a German newspaper, saying it was symptomatic of EU efforts to derail Brexit negotiations.
  • Reuters: Now talk nice – EU script to help May settle Brexit bill. Diplomatic theatrics at last week’s Brussels summit revealed how European Union leaders will coax British Prime Minister Theresa May over the next two months into parting with tens of billions of euros in return for a post-Brexit trade deal. May gave away nothing hardliners in her Conservative cabinet can beat her with. She stuck to earlier vague concessions about honouring commitments and insisting a “Brexit bill”, which the EU reckons at around 60 billion euros ($70 billion), must be part of a package deal on what Britain’s relationship with the EU will be once it leaves in March 2019. Sticking to their own script, the other 27 states gave May until the next regular summit in eight weeks to improve an offer officials estimate at about 20 billion euros if she wants them to start discussing future trade ties. Miss that deadline and, the EU says, time will be running out for any deal.
  • BBC: Brexit: Business leaders call for swift transition deal. Britain’s five biggest business lobby groups are calling for an urgent Brexit transition deal, or they warn the UK risks losing jobs and investment. In a joint letter being sent to Brexit Secretary David Davis, the groups, including the Institute of Directors and CBI, will say time is running out. Sources told the BBC the letter is still in draft form, but will be sent in the next day or two. A government spokesman said the talks were “making real, tangible progress”. The other lobby groups backing the letter are the British Chambers of Commerce, the Federation of Small Businesses, and the EEF manufacturing body. Together they represent companies employing millions of workers.