Morning Report: 27 September 2017

27th September 2017 By: Ranko Berich

GBP Sterling continued to sell off against USD yesterday, amid broad dollar strength, and made only marginal gains versus the euro that came under threat overnight. Politics remained in the spotlight, as European Council President Donald Tusk struck a relatively optimistic tone in a speech following discussions with Theresa May. Tusk praised the constructive tone of discussions and May’s recent speech, but also made it clear that from his perspective negotiations had not progressed sufficiently to begin discussing the transition agreement sought by May.

EUR The euro continued to fall back yesterday, particularly against the US dollar, as speculation intensified over the possible outcome of German coalition negotiations and French President Emmanuel Macron gave an ambitious, pro-integration speech. The issue of Wolfgang Schauble as finance minister is emerging as a key touchstone of negotiations, with many of Merkel’s possible coalition partners potentially interested in demanding the position in exchange for coalition support. Macron’s speech outlined an ambitious wish list of pro-integration reforms for Europe, including issues such as defence, increased EU budget, and various social and economic ideas. Until Germany has a new government, it’s difficult to judge how far Macron’s proposals are likely to get.

USD USD strengthened yesterday and overnight, after Fed Chair Janet Yellen gave a speech arguing the Fed should continue its current gradual rate hikes, and anticipation built for the announcement of a new tax reform package by GOP lawmakers and the White House today. The core of Yellen’s speech was the inflation puzzle: the labour market has improved substantially over the last couple of years, to little inflation response of the sort predicted by most macroeconomic models, including those favoured by the Fed. Yellen acknowledged this uncertainty, but maintained that further gradual policy tightening was the appropriate response, and warned against a cautious approach as being too risky. The release of new tax reform plans is likely to dominate the news cycle and markets today, although Durable Goods Orders data will be released at 13:30 BST.

CAD The loonie had a sharp burst of strength yesterday evening after Finance Minister Bill Morneau said that the solid state of Canada’s economy would not prompt a change in current plans for deficit spending on infrastructure. Today at 16:45, Bank of Canada Governor Stephen Poloz will give a speech entitled “The Meaning of Data Dependence”, followed by a press conference. The main question for the speech is if the BOC Governor will maintain the hawkish tone of the Bank’s recent messaging. Two consecutive hikes is relatively drastic action by contemporary G10 central bank standards, but the Canadian economy certainly does seem to be providing plenty of justification for the central bank’s aggression.

UK news

  • FT: Labour plans for capital flight or run on pound if elected Party has to prepare for establishment backlash, says McDonnell. Labour has said it will be prepared for a negative reaction if it wins a general election, including a “run on the pound” or capital flight. John McDonnell, the shadow chancellor, told a fringe event at the party conference in Brighton that Labour was carrying out “war game-type scenario planning” in the event of an election victory so that it can “hit the deck running”. The opposition party is trying to “answer the question about what happens when, or if, they [the establishment] come for us,” he said. Jeremy Corbyn, Labour’s leader, told the BBC Mr McDonnell was “right to look at all these scenarios”.
  • Reuters: UK consumer lending growth slows in August, industry data shows British banks increased their lending to consumers in August at the slowest pace in at least five months, industry figures showed on Tuesday, a day after the Bank of England said banks had to bolster their defences against consumer loan losses. Lending by major British banks to consumers rose by an annual 1.5 percent in August, slowing from 1.9 percent in July and the lowest increase since April, when UK Finance, a group representing lenders, introduced a new data series. Bank of England data, which covers a wider range of lenders than the figures released on Tuesday, shows unsecured consumer lending growing at nearly 10 percent a year.
  • FT: US dollar makes broad rise ahead of Trump tax speech The US dollar pushed higher on Wednesday, rising against many of its developed market peers, ahead of eagerly awaited remarks from Donald Trump on tax reform. Investors eyed a speech late on Tuesday by Federal Reserve chair Janet Yellen, who suggested the central bank should avoid “moving too gradually” in tightening monetary policy despite consistently sluggish inflation. They were also awaiting remarks from President Trump due just after 3pm ET (8pm BST) on his tax reform agenda. Changes to the corporate tax code were one of the elements that left Wall Street feeling bullish after he won the election last November. But a barrage of scandals and schisms among Republicans in Congress has pushed back expectations for when, and if, the administration will push for the measures.