May struggling to find common ground

Theresa May the British Prime Minister spoke to her (for now) fellow EU Heads of Government last evening in a desperate attempt to find common ground to allow her to move the Brexit process forward. The three prime issues that need to see substantial progress before the second stage of the exit process, the future relationship, are far from agreed. So far, the U.K has made a single financial offer that is considered almost derisory by Brussels, a “let’s carry on as we are offer” over the Irish border and a plan for EU citizens remaining in the U.K. following Brexit which leaves them under U.K. rule. This final offer is entirely plausible as the U.K. Government won’t allow a section of the community to fall under what will be foreign stewardship following Brexit.

The other members of the EU will meet today without Mrs May attending to discuss progress so far. When talks began, it was expected that this would be the summit where the approval was given for the process to move to stage two. Since there will be no further talks concerning the budget this year there is no chance of that happening in the foreseeable future.

Data and MPC comments dent rate hopes

Yesterday’s U.K. retail sales data was substantially weaker than had been expected falling by 0.8% month on month reversing the stronger number seen in August. The quarterly figure was the lowest since 2013. This dented the already shaky prospect of a rate hike at the November 2 MPC meeting. Interest rate futures still discount a hike but with data, other than inflation which is entirely due to a weak pound, failing to inspire, a rate hike this quarter looks unlikely.

The MPC vote remains very finely balanced and since there will be further discussion of the financial implications of Brexit Governor Mark Carney will be mindful of the deteriorating economic position.

Next week sees the release of preliminary Q3 GDP data for both the U.K. and U.S. Given the marked slowdown in business investment and the lack of wage inflation the prospects for GDP in the U.K. look grim. Anything above 1.5% year on year will be bring relief.

The pound is far more driven by macroeconomic developments than political issues since the difficulties over Brexit are priced in. A hard Brexit is now being viewed a most analysts base case.

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U.S. on track for rate hike despite mixed data

Next week’s U.S. Q3 GDP data will have a major bearing on the prospect for a rate hike in December. The initial release is likely to be around 2.6% a little lower than the final cut of Q2 but this is normal since corporate tax payments are not initially included.

The recent benign inflation data has led current Fed Chair Janet Yellen to dismiss data dependency as a major driver of rate increases preferring to act pre-emptively to head off any future need to act reactively and more aggressively than should be necessary.

There are still several FOMC members who remain concerned over the source of any major increase in inflation. Wage growth is benign at best as it is in the U.K. and headline job creation has hit a wall falling by 33k in September although this is still subject to revision.

The dollar index remains in a narrow range with little to push it decisively in either direction. The downside is protected by the prospect of widening interest rate differentials but there is a limit to upside potential given the lack of progress on President Trumps Fiscal and economic stimulus packages.

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