Morning Report: 1 November 2017

November 1, 2017

GBP Plenty of political headlines dominated UK news yesterday, but the most significant for sterling was the news that lead EU Brexit Negotiator Michel Barnier was ready to speed up negotiations. Sterling crosses popped higher on the news, which arrived after midday, and extended their gains through the afternoon. The week’s key event remains tomorrow’s Bank of England meeting, and yesterday’s only major release was GfK consumer confidence, which remained negative overall. Today’s main data release will be the Manufacturing Purchasing Managers’ Index at 09:30 GMT, but with tomorrows potentially historic rate announcement looming the release may have a muted impact on sterling.

EUR The euro had an uneventful day against USD, and weakened further to sterling. The morning’s data releases were a mixed bag, with eurozone Gross Domestic Product growth beating expectations for the second quarter, printing at 0.6%. Estimates of Q1 growth were also revised upwards, to 0.7%. The results underlined the impressive improvement in eurozone economic conditions this year, but inflation data released yesterday showed the lack of effect the growth increase has had in inflation. The Core Consumer Price Index rose just 0.9% year on year, a result typical of the last three years or so, and less than expected. No headline euro data will be released today, with many important economies enjoying All Saints day holidays.

USD USD traded sideways in a broad sense yesterday, trading weaker against GBP and giving up early gains versus the euro. There were no developments in the week’s two headline political stories of the ongoing probe into the Trump administration’s potential involvement with foreign interference in last year’s elections, and the announcement of the next Federal Reserve Chair. The afternoon’s data included strong prints for the Chicago Purchasing Managers Index, a manufacturing output survey, and the CB Consumer Confidence Index, which spiked sharply in October. Today at 13:15 GMT ADP will release its monthly estimate of Non-Farm payrolls, followed at 15:00 by ISM Manufacturing PMI and Construction Spending. Total Vehicle Sales will also be released throughout the day, providing a partial but timely look at the health of consumer spending. At 19:00 GMT the Federal Reserve’s latest rate decision will be announced, although without a press conference to explain a potential rate hike, the Fed is likely to hold on rates tonight.

CAD The loonie weakened sharply yesterday as monthly GDP data showed the economy, which has been posting strong growth figures recently, hit a screeching halt in August, contracting 0.1% after flat growth in July. Declines in manufacturing and resource industries were behind the decline, while services increased slowly. A full 1% contraction in the manufacturing sector was recorded. Monthly growth data are volatile, but the disappointment was enough to put the loonie firmly on the back foot. Bank of Canada Governor Stephen Poloz testified to lawmakers yesterday and reinforced themes from previous formal statements on monetary policy, saying that although household debt levels were a concern for the economy, they were a second order consequence of getting the economy back on track. Poloz will speak again to lawmakers tonight at 21:15 GMT, and will be preceded by the Manufacturing Purchasing Managers Index, which is likely to be dismal if yesterday’s growth figures are anything to go by.

UK News:

  • FT: US monetary tightening set to endure after Yellen. Fed chair will pass on most benign economic outlook America has seen for a decade. Janet Yellen will on Wednesday chair what may be one of her final meetings at the helm of the US Federal Reserve as the spotlight falls on whether monetary policy will shift after her expected departure. President Donald Trump is expected to nominate a replacement for Ms Yellen this week but the central bank’s slow but determined course towards tighter monetary policy seems set to endure, as Jay Powell, her most likely successor, inherits an established strategy and strengthening recovery. The next Fed chair will nevertheless be forced to face some significant decisions soon after taking the helm, including deciding how to combat the next economic downturn at a time of intense hostility among congressional Republicans to many of its stimulus tools.
  • Reuters: NIESR expects BoE rates to peak at 2 percent in 2021. Britain’s National Institute of Economic and Social Research said it expects the Bank of England to start a sustained rate-tightening cycle on Thursday, which will lead to interest rates peaking at 2 percent in 2021. NIESR’s forecast is more hawkish than almost all the economists polled by Reuters last week, and comes a day before economists expect the BoE to raise interest rates for the first time in more than a decade. Three months ago, NIESR brought forward its expectation for a first BoE rate rise to February 2018, at a time when most economists still expected the BoE to wait until 2019 before beginning to raise rates. In September the BoE surprised markets by saying most of its policymakers expected to back a rate rise “over the coming months”. BoE Governor Mark Carney said this largely reflected a weaker outlook for productivity – which has stagnated in Britain since the financial crisis and reduced the rate at which Britain’s economy can grow without creating excessive inflation.

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