Morning Report: 29 September 2017

29th September 2017

GBP Sterling enjoyed a short lived rally after the UK and EU Brexit negotiators, David Davis and Michel Barnier respectively, praised the developments of the negotiations. The EU’s chief negotiator on Brexit has said that Theresa May has injected a “new dynamic” into exit negotiations, but warned that obstacles remain before Brussels agrees to start crucial discussions on transition. The final GDP and current account figures for the second quarter have been released a few minutes ago. The UK’s trade deficit is not showing any signal of improvement, not even after sterling’s significant depreciation. This is worrisome and a drag for the UK’s gross domestic product, which could not beat a 0.3% increase in the second quarter, the slowest pace of the European countries in the same period.

EUR The single currency is recovering from this week’s lows after positive consumer confidence data and political developments. The eurozone’s consumer confidence index rose again to new all-time highs highlighting the excellent situation of domestic consumption in the euro area which at the same time will impact positively the economic groeth of the area. Angela Merkel spoke yesterday in Tallin and said she was ready to work towards a more integrated Europe, encouraging France’s Macron ambitious agenda. Although there are many known unknowns in such process, markets reacted positively to the draft of an upcoming Franco-German alliance. France’s inflation data today showed the consumer price index jumping to 1.1%, above expectations, at the same time German unemployment fell to 5.6%, a record low, although the retail sales index of the same country contracted considerably in August. The eurozone’s overall inflation index will be released at 10.00 BST.

USD The dollar was stronger against G-10 peers and Treasury yields crept higher as Trump’s tax reform related optimism increases. Personal spending and income data, which will be released later today at 13.30 BST, may have been distorted by hurricanes in August. Consensus is for a tiny 0.1% increase in spending but other sources warn of a downside risk. The core PCE deflator, the Fed’s preferred inflation gauge, probably stuck at 1.4%. The hawkish FOMC view is that the weakness is temporary, idiosyncratic or not so important. In whichever case, the measure was at 1.9% at the start of the year.

CAD The loonie’s drop against the US dollar took a break yesterday and recovered slightly as the US dollar rally lost steam. The USD rally could not be sustained ahead of the end of the week with no upcoming data. The US gross domestic product (GDP) final estimate for the second quarter beat expectations at 3.1 percent leaving investors to wait until next week for another telling economic indicator. Gross domestic product data will be released today at 13.30 BST.

UK news

  • FT: Merkel signals readiness to engage with Macron on EU reform French leader’s speech set ‘important building blocks’, says German chancellor. Angela Merkel gave her strongest signal yet that she is prepared to engage with France in discussions about reforming the EU, saying there was a “high degree” of consensus between Europe’s two biggest countries. The German chancellor, who emerged victorious but bruised by the election result where her party lost seats, said the speech by French president Emmanuel Macron this week had set “important building blocks” for EU negotiations to come, although she cautioned the two countries still had “to talk about the details”. Ms Merkel was speaking in Tallinn, Estonia, where EU leaders gathered on Thursday evening for a dinner convened by Donald Tusk, EU Council president, to take stock of reform options following the German elections.
  • Reuters: UK on track for rate hike in ‘relatively near term’ – Carney Bank of England Governor Mark Carney said on Friday that Britain’s economy was on track for the central bank to start raising record-low interest rates in the “relatively near term.” “What we have said, that if the economy continues on the track that it’s been on, and all indications are that it is, in the relatively near term we can expect that interest rates would increase somewhat,” Carney told BBC radio. The British central bank surprised markets just over two weeks ago when it said most of its policymakers thought the first rate hike in more than a decade would be needed “in the coming months,” if inflation pressure continued to build. Carney has previously said he was one of those policymakers. Most economists now expect the BoE to raise its Bank Rate to 0.50 percent from 0.25 percent on Nov. 2, at the end of its next policy meeting.