Morning Report: 3 November 2017

November 3, 2017

GBP In spite of market speculation that the Bank of England would use its interest rate decision yesterday, and accompanying Inflation Report and Press Conference, to paint a bullish picture of the UK economy- in a bid to talk the pound up and stave off the inflationary effects of the weak pound on the UK economy- the reality proved very different. Upon release of the rate decision, inflation report, and meeting minutes, it became clear that the voting members from the Bank remain cautious about the economy’s growth prospects, and sterling immediately sold-off. BoE Governor Mark Carney’s press conference saw further losses, as he emphasised that the Bank would prefer to undershoot interest rate hikes, and potentially have to deal with the economy starting to overheat, rather than risking choking economic growth. Indeed, the Bank’s official forecast only see two more hikes in the next three years. Aside from this, yesterday also saw the release of the Construction Purchasing Managers Index, which showed a mild recovery from last month’s index, although optimism about future business remained dismal. This morning, Services PMI rose to 55.6, reflecting a decent rate of expansion in the sector and an improvement from August’s figures.

EUR The euro closed marginally higher against the US dollar, and like all major currencies much higher against sterling . Political tensions in Spain remained elevated, as eight members of the Catalan government were taken into custody by the orders of the Spanish court of justice for their collaboration in organising the referendum that later led to the declaration of independence of the Catalan region. Spain issued a European arrest warrant for the Catalan leader Catalan Puidgemont as well, who is currently in Brussels and rumoured to be considering an asylum claim.

USD The US dollar experienced a rather choppy session as markets tried to decide what to make of the details of the tax bill, released by the Republican party after much political wrangling. On the whole market participants appear to have been far from overwhelmed by the bill and it’s prospects for passage. The other big news coming from the US was the nomination of Jerome Powell by president Trump for the position of Fed chair. He is seen as the status quo candidate that will be much alike his predecessor Janet Yellen, who was perceived to be a cautious dove. This afternoon at 12:30 BST we will see the release of monthly Non-Farm payrolls and the change in Average Hourly Earnings, followed by the non-Manufacturing Purchasing Managers Index at 14:00.

CAD The Canadian loonie made some minor gains against the dollar by a day that was mostly characterized by a broad data scarcity for the Canadian markets. Today promises to be a more exciting day for CAD with labour market data and the Trade Balance being published at 12:30 BST. After Consumer Price Index inflation and Gross Domestic Product growth fell short of expectations in recent weeks, a miss on today’s jobs data is likely to place significant further pressure on the loonie.

UK news

  • FT: BoE’s Broadbent emphasises need for further rate rises. Ben Broadbent, deputy governor of the Bank of England, sought to reinforce the central bank’s message that it had not gone soft on future rate rises on Friday, saying “we will need a couple more interest rate rises”. Speaking on the BBC Today programme, the deputy governor fought against the financial markets’ impression that Thursday’s rate rise was “dovish”. Sterling fell more than 1 per cent against the dollar and the euro after the decision, when the BoE dropped its previous reference to markets underestimating the need for further interest rate rises. But officials in the central bank, both publicly and privately, said there had been no change in view and the reason that language was not needed was because the financial markets had taken notice of the BoE’s previous comments and finally priced in future interest rate rises.
  • Reuters: UK services sector grows at fastest rate in six months – IHS Markit/CIPS Britain’s services sector enjoyed a sharp pick-up in growth last month but companies were nervous about Brexit, a closely watched survey showed on Friday, a day after the Bank of England raised interest rates for the first time in a decade. The IHS Markit/CIPS services purchasing managers’ index (PMI) jumped to 55.6 in October from 53.6 in September, its highest level since April and its biggest one-month rise since. August 2016. The reading exceeded all forecasts in a Reuters poll and moved further above the 50 mark that separates growth from contraction. The services survey follows relatively upbeat PMI readings for the smaller manufacturing and construction sectors in October, and taken together they suggest the economy is growing at a quarterly rate of 0.5 percent, IHS Markit said.

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