Morning Report: 23 November 2017

November 23, 2017

GBP Yesterday marked seven consecutive sessions of sterling appreciation against USD, despite the Autumn Budget delivered by Chancellor Phillip Hammond featuring large downgrades to the official growth forecast. Phillip Hammond was dealt an exceptionally poor hand by the OBR, which downgraded its growth forecasts out to 2022 significantly. However, markets responded positively to the fact that the Chancellor responded with a bolder than expected spending package, with NHS funding and giveaways on fuel duties and first home buyers the focus. The net effect of the budget’s spending plan, combined with the lower growth forecast, means that government borrowing is expected to be substantially higher over the coming years, though should still fall in percentage terms relative to overall GDP. This morning’s data has included the second estimate of Gross Domestic Product in the second quarter, which confirmed the expected 0.4% growth.

EUR After a slow start to the week the euro made significant inroads against USD yesterday, and has maintained a firm tone this morning on the news that Germany’s second largest party, the SPD is ready to discuss a potential coalition with Chancellor Angela Merkel. SPD leader Martin Schulz had previously ruled out support for Merkel after their previous coalition had left the party suffering in the last election. Yesterday’s only data release of note was the Eurozone Consumer Confidence index, which came in at 0, which indicates no change. The figure seems somewhat more cheerful, however, when one considers the fact it is the best reading since 2007, and that a reading below 0 represents overall pessimism among survey respondents. This morning’s data has included some explosively strong French, German and Eurozone Manufacturing and Services Purchasing Managers Indices, with all of the readings exceeding expectations and suggesting extremely high confidence among the surveyed businesses. At 12:30 GMT meeting minutes from the European Central Bank’s most recent monetary policy meeting will be released.

USD The US dollar is on the back foot this morning, despite the release of the minutes last night from the most recent Federal Reserve policy decision meeting, which showed an overwhelmingly positive outlook for the US economy by policymakers. All but confirming the next interest rate hike in December, the Fed noted multiple areas of positive development, most notably the fact that the labour market is operating “at or above full employment” and that GDP being likely to “grow at a pace exceeding that of potential output”. Combined with the fact that the slowdown in inflation was attributed to “temporary or idiosyncratic factors”, the path looks set for multiple further interest rate hikes next year. However, the Fed did express concern that financial markets may be overheating, which would call in to question the wisdom of raising interest rates too quickly, and as a result, the greenback is being sold off against almost all its major pairs today.
CAD. The Canadian dollar had another positive day against USD, reaching its strongest point in two weeks. The Canadian dollar was helped by the fact that the price of oil continues to creep higher, currently sitting at close to the strongest levels since 2015. However, no progress seems to have been made on the North American Free Trade Agreement re-negotiation talks, which remains a medium term risk for the loonie. This afternoon retail sales figures for Canada will be released, which are expected to show 0.9% growth month on month.

UK news

  • Reuters: Waiting for May, Brussels eyes December Brexit deal. BRUSSELS (Reuters) – When Theresa May visits Brussels on Friday, EU negotiators will be listening intently for signs the British prime minister is preparing to risk a domestic backlash and raise her offer to secure a Brexit deal in December.
  • Telegraph: John McDonnell refuses to answer questions about figures because ‘that’s why we have iPads’ . John McDonnell has refused to answer questions about figures on Labour’s borrowing plans because MPs have “iPads and advisers” for that. The Shadow Chancellor accused the BBC of “trite journalism” after they asked him for specific figures on his party’s spending plans.
  • Guardian: Chancellor targets English regions with multibillion investment. English regions including the north and the Midlands will receive a multibillion-pound investment in an effort to reduce the weighting of the economy towards London. Speaking as he announced plans aimed at improving transport links and devolving more power to the regions, Philip Hammond said “far too much of our economic strength is concentrated in our capital city”.

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