Rate hikes starting to be justified

The Employment report for October that was released on Friday was the subject of some “irrational exuberance” from analysts who were looking for more than 300k new jobs to have been created following a disappointing weather-related fall in September.

The actual number of +263k, which is still subject to revision in either direction, was sufficient to send the dollar index above 95.00 but there is still selling pressure above that level and it drifted back to close at 94.90.

The headline number from September was, predictably, revised up from -33k to +18K and the unemployment rate fell from 4.2% to 4.1%.

However, the FOMC will have been disappointed by the revision lower of the rise in hourly earnings growth in September from 2.9% to 2.8% and the October figure of 2.3% versus expectation of 2.7%. The Fed will be looking for earnings growth of more than 3% to provide a source of the inflation that analysts are predicting but has so far failed to materialize. Certain FOMC members are concerned that inflation remains benign and until it picks up a switch to a tightening bias followed by a concerted period of rate hikes are difficult to justify.

MPC destroys Sterling optimism

It is hard to imagine what was expected from the Bank of England’s MPC following their meeting on Thursday. Given the pessimism engendered by Brexit and the poor overall economic data and sentiment, Governor Mark Carney was never going to be able to give an upbeat assessment of the economy despite having hiked rates for the first time in ten years. The rise in rates has spawned a new term “the dovish hike” which sums up perfectly the outlook for monetary policy, if not the reason behind the rise in rates.

Sterling’s initial rise on the news that the vote was 7-2 quickly dissipated into the largest fall since the flash crash of October 2016 and the Brexit referendum outcome.

It is difficult to give even a vaguely optimistic view for the pound now since political headwinds, macroeconomic data and market sentiment are all weighing heavily against it.

Until there is a breakthrough in Brexit negotiations the pound will remain under pressure. It was clear from the Governor’s remarks that he sees the U.K.’s departure from the EU as an unprecedented event that his committee cannot either be prepared for or influence in any way.

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Brexit talks to recommence with optimism fading

Theresa May commented following her speech to the EU Heads of Government Summit that Brussels need not worry over the U.K. budget contribution since they would pay what was owed. The only issue arising from that comment is that the amount that is legally owed is disputed by both sides. In fact, if the U.K. were the pay the minimum sum that the EU is demanding it would be a source for disappointment to them. Despite bolstering her Cabinet support by appointing a remain supporter as new defence minister, Mrs May still faces opposition from her more hawkish colleagues over anything other than a hard-line approach were “no deal” remains an option.

The optimism engendered by the possibility of the commencement of stage two of the talks where the future relationship and trade agreement will need to be tested as the talks get back under way this week. If Jean Claude Juncker’s comments that everything has a price and that membership of the single market “doesn’t come cheap” are adopted as EU policy, it could turn out to be a long and bleak winter for Brexit.

Brexit, the economy and monetary policy are conspiring against the pound and with the economy foundering with GDP still weak and monetary policy set to be unsupportive for some time, it remains to be seen if David Davis and his Brexit team can provide Sterling with the lift it so clearly needs.

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