Morning Report: 3 January 2017

3rd January 2017 By: Ranko Berich

GBP The new year has begun and broad volatility comes back to financial markets. Levels of activity fell beyond usual standards during the Christmas and end of the year holidays, reflected amid extremely thin liquidity volumes. Sterling is strengthening this morning against most crosses after the manufacturing sector grew in December at the highest pace since June 2014 (UK Manufacturing PMI was 56.1 vs 53.3 expected). Sterling’s depreciation after the referendum has boosted competitiveness. However, the lower sterling is also expected to fuel inflation in 2017. This has already been reflected in production costs and output prices, which rose for an 8th consecutive month in December. The construction PMI tomorrow, and the Services PMI on Thursday complete the UK’s economic picture at the end of last year, although markets will remain cautious ahead of the Supreme Court’s final decision as to whether the British Parliament has to decide on Brexit negotiations or not.

EUR The euro’s been on a bumpy ride the last few days, rallying towards the end of the year and falling sharply on the first trading day of 2017. The drop seems to be somewhat unsupported by today’s macro data. The latest French and German manufacturing PMIs showed the highest readings since June 2011 and July 2014 respectively, whilst the Spanish and Italian readings also showed better-than-expected growth. The eurozone’s manufacturing sector appears to be consolidating its growth, favoured for the lower euro. China and various Middle East countries are demanding large amounts of European products, as the euro area current account shows. The eurozone’s economic picture in December is completed later this week with the release of the Services PMIs. German and French inflation data is also published tomorrow.

USD The USD is advancing on the first trading day of the year against most of the G10 currencies, with the exception of some commodity based currencies such as CAD and AUD. US financial markets start the year facing a number of uncertain outcomes, particularly the transition that takes place in the Oval office. Markets, so far, have reacted to Trump’s election in a decidedly bullish manner, but the current optimism in US indexes suggests that they have perhaps become too much so. We believe uncertainty could start to be seen in markets, and the dollar, across the next few weeks as Donald Trump takes the Oath of Office towards the end of the month. In the meanwhile, Markit and ISM publish December’s manufacturing and services PMIs figures this week alongside the FOMC’s latest meeting minutes, where the Fed hiked rates for the second time in nearly a decade. Non-Farm payrolls data on Friday completes this week’s economic data.

CAD The loonie is strengthening since mid-last week, favoured by crude oil prices consolidating above $53/barrel, which today hit a new 17-month highs. Oil traders comment that OPEC countries are responding well to the agreed oil production cut announced last month, with Kuwait implementing cuts and Oman expected to follow suit. Kuwait has cut production by 130.000 barrels/day to 2.75M b/d, and Oman is expected to reduce output to 970.000 b/d this month. Canada’s economic data this week includes labour market figures on Friday.

UK News

  • UK manufacturing activity hits highest since June 2014 – FT. A stellar end to the year for British manufacturers. UK factories enjoyed their best month in two and a half years in December, according to a key survey of the country’s private sector firms which showed evidence of soaring new orders, helped along by a weaker pound.
  • UK business morale hits 18-month high, but outlook murky – Reuters. Morale in large British companies hit an 18-month high in the fourth quarter, bolstered by robust economic growth and recovering fully from a slump that followed the Brexit vote, a survey showed on Thursday. However, uncertainty about Britain’s divorce from the European Union meant businesses were still loath to increase investment spending, according to Deloitte’s quarterly survey of chief financial officers (CFOs) at major British firms.
  • Weaker pound expected to reduce immigration – FT. Immigration to the UK may fall from its near record high in 2016 as the weakness of sterling, anti-immigrant rhetoric and uncertainty about the future makes the UK a less attractive destination for EU migrants, economists predict in the FT’s annual survey. Net migration to the UK was at a near record level of 335,000 in the year to June 2016. Economists expect migration to remain high in 2017 but, on balance, predict a small fall.