Morning Report: 25 October 2017

25th October 2017 By: Ranko Berich

GBP Sterling fell yesterday after comments from Jon Cunliffe, member of the Bank of England’s Monetary Policy Committee, pointed towards cautiousness with regard to interest rate hikes in the UK. However, the UK’s GDP figures released a few minutes ago, showed the UK’s economy growing above expectations in Q3. Therefore, economic growth concerns at the Bank of England should ease now, whilst inflation concerns are increasing. A recent research report from the central bank, published earlier this week, showed that the drop in the pound after Brexit could lift inflation significantly above target for much longer than the initial estimates pointed out. As a result, the case for an interest rate hike is now stronger than ever.

EUR The euro remains resilient to political concerns in the euro area. Markets are focused on the ECB’s most important meeting of the year tomorrow, when the Governing Council is expected to announce a “recalibration” of the QE programme. There are many question marks to be answered tomorrow, but the key one will be the extent to which the Eurozone’s economy has recovered, from the ECB’s point of view. The best case scenario markets are pricing in is a reduction of the total assets purchased a month from €60 billion to €40 billion. Therefore, the reaction in the euro will depend on how the ECB’s decision diverts from current consensus.

USD The USD maintains its upward trend as the chances of a hawkish Federal Reserve Chair are increasing. Donald Trump is asking senate republicans who should be the next chair, and the name of John Taylor appears to be resonating persuasively. John Taylor is a well-known economist and academic famous for his Taylor rule research, which can be used as a guide for interest rate decision making and which currently suggest the US should have rates above 2.5%. As a result, US bond yields continue to sell off as expectations build up for a hawkish Fed chair.

CAD The loonie continues to weaken as markets await today’s interest rate decision by the Bank of Canada. We don’t expect the Bank of Canada to hike at today’s meeting. The key however will be how the Bank of Canada sees the economy’s performance in the near future, as it appears they are walking back new interest rate hikes. The decision will be announced at 15.30 BST.

UK news

  • FT: UK GDP growth picks up in Q3. The UK economy expanded by 0.4 per cent in the third quarter of this year, new early estimates from the Office for National Statistics show, a shade above the previous quarter’s reading and also ahead of forecasts. The result brings the year-on-year growth rate to 1.5 per cent, in line with the previous quarter and also a nose ahead of forecasts. It will likely embolden the Bank of England to raise interest rates next month. The ONS pointed out that service sector growth remained 0.4 per cent in the quarter. while manufacturing grew by 1 per cent, bouncing back from a weak second quarter of the year. “Construction has contracted for the second quarter in a row, although the industry still remains well above its pre-downturn peak,” the ONS said.
  • Reuters: UK economy picks up speed in third quarter, puts BoE rate hike firmly on track. Britain’s economy picked up speed unexpectedly in the third quarter, according to figures on Wednesday that likely cement expectations that the Bank of England will raise interest rates next month. Quarterly gross domestic product growth rose to 0.4 percent compared with 0.3 percent growth in the three months to June 2017, the Office for National Statistics said. A Reuters poll of economists had pointed to growth of 0.3 percent. The vast services industry was behind the bulk of Britain’s economic expansion in the third quarter, but manufacturing also contributed, helped by a rebound in car production. The BoE is widely expected to return rates to 0.50 percent from 0.25 percent on Nov. 2 after its next meeting, due to concerns that the economy cannot grow as fast as it used to without generating excess inflation.
  • FT: Toyota urges UK to lift ‘fog’ on Brexit negotiations. Carmaker warns curbed Europe access could prompt it to reconsider its Burnaston plant. Toyota has urged the UK government to lift the “fog” around Brexit negotiations, to safeguard the competitiveness of the Japanese carmaker’s factories in the country. The drawn-out process surrounding the UK’s plan to leave the EU was creating “a lot of uncertainty”, said Didier Leroy, executive vice-president at Toyota, warning that an inability to secure free access to the European market could prompt the carmaker to reconsider the future of its Burnaston plant in the UK. “Today they [Burnaston] export 80-85 per cent of their production to continental Europe, so if we move to something like an import tax, trade tax or any kind of additional penalty, it will create a big negative impact in terms of competitiveness for this plant,” he told reporters at the Tokyo Motor Show on Wednesday.