Morning Report: 25 September 2017

25th September 2017 By: Ranko Berich


GBP European leaders welcomed Theresa May’s speech in Florence last week where she ensured the rights of EU citizens living in the UK, left the door open for a +£20bn/year contribution to the EU finances and also said there would be a 2 year transition period after the UK officially leaves the EU in 2019. UK businesses also welcomed the announcement of a transition period, as it would avoid activity immediately falling off a cliff once Brexit is officially triggered in March 2019. As a result, it is more likely that the second stage of the Brexit negotiations will begin in autumn this year. These are likely to include critical issues such as bilateral trade agreements. Sterling rallied somewhat on this week’s opening as a result. No major data is due for release this week and Mark Carney’s speech on Wednesday will be the next milestone for sterling.

EUR The single currency gapped lower after Merkel won this weekend’s German elections. The CDU’s fourth consecutive victory came at a price however, as the far-right party became the third strongest in Parliament, after the centre-left SPD. Merkel, who has secured a fourth mandate, needs to decide now what parties she will choose to form a coalition with. In order to avoid a coalition with the far right, which we believe is unlikely, she would have to join the SPD, to form a two-party coalition; or a three-party coalition with the greens and FDP. We believe the latter will be the final outcome. Nonetheless, the result is slightly negative to both European risk assets and the euro. There is a slight chance of another election, although it remains very remote for the moment. In terms of macroeconomic data, the consumer price index is in focus this week which will be released on Friday at 10.00 BST.

USD The dollar remains somewhat out of the spotlight at the beginning of the week as markets have plenty to digest elsewhere. Consumer price data is also in focus this week, with the Personal Consumption Expenditure index being released on Friday alongside the Eurozone’s price data. The PCE index is the Fed’s preferred gauge of inflation and an increase this week would well support a third hike in interest rates this year, in line with the Fed’s latest monetary policy meeting. The Fed’s Bill Dudley will speak today at 13.30 BST.

CAD The loonie pared Friday’s early gains in the afternoon after disappointing inflation and retail sales data cooled sentiment for the Canadian dollar, which now trades near three-week lows against USD. Inflation rose 0.1%, slightly below the 0.2% expected. The biggest disappointment however, came from retail sales, which grew 0.2%, which was half of the projected growth. The previous month’s solid 0.7% increase, was slashed to 0.4% on August’s report. As a result, markets are taking more seriously the Bank of Canada’s prudency in the latest monetary policy report.

UK news

  • FT: Merkel wins fourth term but far-right populists make gains. AfD to be first rightwing nationalist party since the Nazis to enter German parliament. Angela Merkel has won her fourth term as German chancellor but saw a sharp fall in support for her conservative Christian Democrat-led alliance and advances by the country’s far-right populist party. Her win was marred by her party’s worst election result since 1949 and a bigger-than-expected success for her nationalist opponents — the anti-immigration Alternative for Germany. The AfD capitalised on Germany’s refugee crisis and will surge into the Bundestag as the first substantial rightwing populist party since the second world war. Turnout was more than 76 per cent compared with 71.5 per cent in 2013. Ms Merkel put a brave face on the result, saying she had wanted “a better” outcome but that her CDU bloc remained “the strongest force” and would lead the next government. AfD supporters were jubilant. Alexander Gauland, a party leader, pledged to “hunt” Ms Merkel in parliament and said: “We will take our people and our country back.”
  • Reuters: Outlook for wage growth in Britain cools. Hopes for higher wage growth across Britain are receding, apart from in a few sectors of the labour market that suffer from acute skill shortages, according to a report published on Monday by recruitment company Hays. Difficulties faced by most British employers in hiring the right workers decreased compared with last year, although still remained high, according to Hays’ annual Global Skills Index, compiled with consultancy Oxford Economics. Earlier this month the Bank of England stuck to its view that pay growth will pick up over the next few years as it signaled that it was likely to raise interest rates in November for the first time more than 10 years. But official data so far has shown annual wage growth stuck around 2.0 percent, despite Britain’s unemployment rate falling to its lowest level in more than four decades.