News & analysis


Sterling has had a profoundly inconsequential week so far and is trading broadly unchanged against both EUR and USD compared to the start of the week. Little Brexit news has been forthcoming, aside from a series of anonymously sourced reports about the state of trade talks. This morning’s data included gross domestic product for August, which showed a disappointing 2.1% growth. The median forecast submitted to Bloomberg was 4.6%. The result will raise eyebrows at the Bank of England, which had previously taken an optimistic view on the strength of the economic bounce in Q3 and Q4 based on alternative data sources. Today’s release flies in the face of those expectations – more than half of the reported output growth in August was due to a 69.7% month-on-month increase in food services and accommodation. This was a direct result of the now discontinued Eat Out to Help Out subsidies. The Bank of England’s Monetary Policy Committee’s latest forecast was for Q3 GBP to be only 7% below its Q3 2019 level. This expectation now looks wildly optimistic – a 10% jump in September would be necessary.


The euro has been benefiting from dollar weakness since yesterday’s late trading session as fiscal stimulus headlines were back in scope. Despite the eurozone’s effort to contain ever surging virus case counts by imposing renewed lockdown measures throughout the bloc, cases keep rising at an unprecedented pace. Given the high reproduction number estimated from eurozone data series, this should not be a total surprise, however. In the Netherlands, the r-value was estimated at 1.3 late September. With any r-value higher than one, the number of cases increases exponentially and the case count will snowball in no time. Despite the looming virus risks, however, the euro remains on a firm footing as US politics have taken centre stage in FX markets with talks of fiscal stimulus ongoing and the US elections being around the corner. In terms of economic data, this morning’s French industrial and manufacturing production printed below expectations and well below the prior month-on-month reading. Industrial production rose 1.3% month-on-month in August, compared to the 1.7% consensus and 3.8% prior reading, while manufacturing production only increased by 1.0% vs a 2.4% consensus and 4.5% prior reading. The data calendar remains sparse for the remainder of the day, shifting the focus back to USD dynamics and changes in risk sentiment.


Dollar downside was the main theme of yesterday’s market as the news flow continued to circulate conflicting rumours about the prospects of fiscal stimulus. Yesterday’s newsflow concentrated on the increasing prospect of concessions by Republicans to pass a wider bill than initially anticipated after House Speaker Nancy Pelosi rejected the possibility of individual stimulus bills aimed at airline industry bailouts and another round of direct checks. “There is not going to be any stand-alone bill unless there is a bigger bill and it can be part of that, or it could be in addition to these negotiations,” Pelosi said to reporters, stating later that the broader bill didn’t have to happen at the same time, but assurances have to be made. The narrative over fiscal stimulus seemingly supports the Democrats prior to the election, with fiscal stimulus needed to help the recovery along the way while Pelosi’s $2.2trn stimulus bill remains on the table awaiting Senate approval. The onus now seems to be firmly on the Republicans to find a way to bridge the gap between their $1.6 trillion proposal and the Democrats $2.2 trillion prior to the election. Failure to do so would seemingly be consequential for the outcome of November’s vote. With limited data scheduled to be released from the US, the focus will remain on negotiations in Washington ahead of the Thanksgiving weekend.


The loonie advanced on broad USD weakness yesterday, while the Bank of Canada’s Governor, Tiff Macklem, stated that negative interest rates aren’t actively being discussed as a potential monetary policy tool in the near-term. Speaking at the Global Risk Institute’s 10th anniversary, Macklem highlighted the Canadian economy’s robustness to recent economic crises, highlighting that action by the central bank hasn’t needed to be as severe as in other major economies. With the BoC only embarking on a QE programme this year, as opposed to their balance sheet expanding in the wake of the 2008 financial crisis like most of its peers, the discussions of negative interest rates in Canada seem premature. This was reiterated by Macklem, but it was duly noted to “never say never” as the progression of the economic recovery remains unclear at present. Besides the discussion of negative rates, Macklem outlined the risks to the economic recovery and financial sector, owing to the nature of the speech at a risk institutes event. The speech confirmed our view, that Canada’s housing market poses the biggest risk to the economic recovery and the biggest headache for the central bank. While at present, the housing market remains buoyant, many of the driving forces behind this are transitory and are set to fade. The Bank isn’t concerned just yet with the current housing market data as the mortgage market is yet to pose financial risks, but Macklem stated that the central bank will be keeping a close eye on housing market dynamics and household incomes. Today, the governing council will receive additional information on this matter in the form of September’s labour report. Released prior to Canada’s long weekend for thanksgiving, today’s report is likely to show the slowing recovery of Canada’s labour market and the increased concentration of job gains towards permanent work. The structural adjustments in Canada’s labour market will begin to become apparent as of today’s report in this sense, with the shift towards permanent job gains and sectoral transitioning likely to be visible. Today’s report will be the last that is tainted by the sweeping CERB income support scheme, meaning the dynamics in the labour market as they shift under a new economic environment are set to be clearer heron in.



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