Market beginning to look forward to year end
The typical mid-fourth quarter scenario where traders want to start to protect their P&L is beginning as the final slew of data is released. Inflation data for several G7 economies has proven what we already knew. Apart from the U.K. which is a special case, despite releasing encourageing unchanged price data this week, inflation is not proving to be the problem analysts had predicted,
Conventional wisdom has dictated that as the economies that had adopted quantitative easing started to grow at trend, the amount of accommodation and liquidity in the market would send inflation soaring. Inflation in the Eurozone is at 1.4% and in the U.S., 2%. Hardly a cause for concern which is why FOMC members are starting to doubt the need for a rate hike next month and the ECB, despite a few mumblings remain behind Sr. Draghi’s view on easy monetary policy.
The dollar is starting to take on board the possibility of no change next month and a more objective Fed. as Jerome Powell takes over from Janet Yellen. Just how much advance guidance Powell will give remains to be seem but the number of Fed Presidents now willing to give their own view provides sufficient guidance.
U.K. consumer continues to confound concerns
There is anecdotal evidence that the U.K. is suffering as stores start their end of year sales early as, it is rumoured, sales are lower by as much as 5% in some areas. Yesterday’s retail sales data in the U.K. failed to confirm that as they grew month on month by 0.3% although a year on year fall of a similar amount was recorded.
The growing gap, which is becoming a chasm, between wages and prices shows no sign of shrinking although there was slightly encouraging news for inflation this week as an unchanged reading of 3% was announced. If there is no fall in inflation when the November report is issued next month, the rate hike will again be called into question and the pound will suffer accordingly.
Sterling has recovered a little poise this week as data has been in line with, admittedly quite low, expectations. The passage of the EU Withdrawal Bill through Parliament has also lent some support to the currency although it will be harder to convince the EU’s Brexit negotiators that Brexit is on track as prevarication continues over the U.K.’s contribution to the EU budget in particular..
Central Bank Minutes to provide an insight
Next week the minutes of the latest FOMC and ECB meetings will be released. The contrast will be hard to miss as Janet Yellen will be trying to convince her colleagues that proactivity and advance guidance are what markets expect while Mario Draghi continues his relaxed pose and tells his colleagues that inaction is the best form of action.
There is a non-monetary policy ECB meeting and it is probably going to be dominated by Brexit and how the fiscal position is going to be affected by the U.K.’s departure. There is little doubt that activity will slow particularly considering the volume of trade between the U.K. and EU. Seven of the U.K.’s top import providers are EU countries with Germany far and away the largest.
At some point, most likely as stage two begins and the future relationship is considered there will be serious lobbies from large EU firms looking to make their dealing with the U.K. as seamless as possible. They will adopt a more pragmatic and less politically motivated stance to business which will play into the U.K. negotiating position.
