Morning Report: 4 January 2017

4th January 2017 By: Ranko Berich

GBP Sterling is mostly weaker this morning, although it has managed to pare yesterday’s losses against the dollar. British’s EU ambassador Sir Ivan Rogers resignation yesterday caught the country off guard, and the general perception is that the move weakens the UK’s negotiation power with Brussels, just a few weeks before the Brexit talks kick off. The ambassador decided to leave as he felt that his repeated warnings in relation to the complexity of the Brexit negotiations were broadly ignored by 10 Downing Street. As a result, Theresa May needs to find not only a good delegate to carry on the negotiations, but one whose stance is more pro-Brexit yet still knows the entrenched interconnections of the European Union. In other news, the construction PMI was released earlier today, showing a robust and accelerated upturn in new work. The output grew at the fastest pace since March 2016, although cost inflation levels are at the highest level since 2011.

EUR The euro remains a mixed bag despite of positive data in the Eurozone. Yesterday’s better-than-expected manufacturing PMIs showed a fast-growing sector in the single currency area, where France and Germany both showed growth at multiyear highs; today’s services PMIs also beat expectations. Spanish unemployment decreased in December by 86.800, almost double than expected and closing 2016 with a 19.2% unemployment rate, down from 23.6% in April. Germany’s inflation rose a whopping 1.7% year-on-year in December, the quickest pace in three years, propelled by food prices and fuel. All considered, the latest bout of eurozone’s data suggest that the economy is entering 2017 in good shape. The eurozone’s inflation data is released at 10.00 GMT today, and expectations show increased price pressure from higher fuel prices in December.

USD The dollar is taking a breath after the dollar index DXY, which measures the buck against a basket of currencies, reached yesterday a 14-year high. The dollar was favoured by strong economic data and a rally of US equities on the opening of the US session, at the same time that European government bonds were falling sharply (probably due to the jump in German inflation growth). EURUSD touched its lowest level since 2003 but bounced back afterwards. Today’s data includes a number of important releases: Friday’s private estimate of Non-Farm Payrolls by ADP at 13.15 GMT, Unemployment Claims at 13.30, and Markit and ISM services PMIs at 14.45 and 15.00 respectively.

CAD The loonie has reached a 2-week high against the dollar this morning, favoured by positive data and crude oil prices expectations. The rally of the dollar yesterday sent crude oil prices lower, but this should not change the outlook for crude oil in the short-term. The RBC manufacturing PMI, published yesterday, showed a slight improvement. No data will be released today in Canada, but North America’s crude oil inventories will be released in the US at 16.00.

UK News

  • May faces calls to appoint pro-Brexit EU ambassador – Financial Times. Sir Ivan Rogers’ resignation as Britain’s EU ambassador has prompted demands that he be replaced by an official with a more positive view of Brexit. But Sir Ivan’s supporters, including senior former civil servants, claim Theresa May is about to embark on Brexit without seasoned EU negotiators and surrounded by aides who do not want to hear bad news. The ambassador’s colleagues say he grew “frustrated” that his warnings on the complexity of Brexit were being ignored. In a resignation email, he urged diplomats in Brussels to continue to deliver messages that are “disagreeable to those who need to hear them”.
  • UK construction PMI touches nine-month high in December, costs jump – Reuters. Activity in Britain’s construction sector expanded at the fastest rate in nine months in December, boosted by more house building, but sterling’s weakness drove the biggest rise in costs in over five years, an industry survey showed on Wednesday. The Markit/CIPS purchasing managers’ index (PMI) rose to 54.2 in December, its strongest since March and well ahead of expectations in a Reuters poll for it to hold steady at November’s reading of 52.8. Coupled with Tuesday’s strong manufacturing PMI, the figures offer signs that Britain’s economy maintained momentum through the end of 2016, though the picture will become clearer once data for the far larger services sector appear on Thursday.
  • UK consumer credit growth hits fresh 11-year high (BoE) – Reuters. British consumer borrowing picked up pace to grow at its fastest rate in more than 11 years in November, and the mortgage market retained solid momentum, Bank of England figures showed on Wednesday. Consumer credit in November alone jumped by 1.926 billion pounds – well ahead of forecasts in a Reuters poll – to push the annual growth rate in borrowing of 10.8 percent, a rate not seen since October 2005. The data confirm the picture given elsewhere that Britain is likely to have been one of the fastest-growing advanced economies last year, but shed little light on how well consumers will withstand an expected rise in prices in 2017.