Headline fall overshadowed by rise in wages

The U.S. employment lottery took place on Friday and true to form the headline number which, after all, is little more than an estimate showed that the U.S. economy shed 33k jobs in September. This was a major surprise but the market took it in its stride and the dollar finished the day higher following a fall in the unemployment rate to 4.2% and a rise in hourly earnings of 0.5%. This rise in earnings bettered market expectations of 0.2%/0.3%.

The overall report was sufficiently strong to confirm traders’ belief that the Fed will hike rates at its December meeting.  The market is close to convincing itself that despite any thoughts to the contrary, a hike in the short term is needed to ensure that the economy doesn’t react too severely when inflation starts to pick up. The question is, of course, when will inflation start to pick up but that is clearly a subject for 2018 which probably will be dealt with by a new Fed Chair.

The dollar index rose above the 94.00 level but was rebuffed by very strong resistance at around 94.20 and profit taking saw it fall back.

May on thin ice

Looking more every day like the Conservative Party’s Brexit sacrifice, Theresa May, the Prime Minister, fights on trying to find a policy on Brexit that will satisfy an impossibly large and diverse group. Her fellow Ministers, Government MPs, the Opposition, the British People and the EU are lined up ready to denounce any policy which doesn’t satisfy their needs, wants and desires. It is becoming more obvious with every speech that the task is beyond her and it is only a matter of time she is removed from the firing line.

Sterling had its worst week in two years as what “no deal” will look like for the U.K. economy began to be seriously considered. It fell by close to 2.5% versus the dollar and 2% against the common currency. The resilience of the Euro is starting to show through as the economic data shows good growth overshadowing political concerns that will always be present in such a large and diverse region.

Brexit talks, the fifth round, begin today in Brussels with no breakthrough likely and optimism fading visibly. The line taken by Paris and Berlin over the weekend in which they say they will veto and transition period until the amount the U.K. will pay is agreed shows that feeling within the EU is starting to harden.

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U.K. Rate hike still considered likely

The June meeting of the Bank of England’s Monetary Policy Committee was, at the time, considered to be the most difficult in its twenty-year history as there was a clear contradiction between economic growth and inflation. In the end, inflation fell back from 2.9% to 2.6% and no action was necessary.

On 2nd November, the MPC will meet and again the decision looks like being a tough one potentially even more difficult than the June meeting. The Quarterly Inflation Report will also be released on that day which will have a major influence on the vote as will this week’s NIESR GDP estimate and next week’s September inflation data. Any widening of the gap between wages and prices will almost certainly tip the vote in favour of a hike but the voting numbers will be crucial for any future change.

BoE Governor Mark Carney has distanced himself from the Brexit negotiations making only very generalized comments but his view of the economic impact of the U.K. leaving the EU must be on his mind as he continues to canvass his colleagues for no change despite his acknowledgement that rates will need to rise “in the coming months”

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