Sterling under pressure
It is hard to imagine that anyone is fooled by the “breakthrough” that was apparently achieved in Brexit negotiations last week, which should allow for the move to stage two to be ratified at this week’s EU Heads of Government Summit.
The capitulation will be hailed by Theresa May in Parliament later today. She will confirm her optimism about future negotiations. This will demonstrate the nonsense of placing an essentially remain Cabinet in change of Brexit.
Next, we will have the entirely ridiculous idea that we will be able to negotiate a trade deal when it is becoming clear that it is quasi-membership of the single market at all costs.
There was finally some sense from the market, which sold the pound versus both the dollar and common currency following the announcement. It has reached 1.1332 versus the euro and 1.3362 against the dollar and with a wholly unsupportive set of data releases and an MPC meeting that will simply provide further evidence that the rate hike was a “one off”, Sterling is set to end the year on the back foot.
It’s week three!
The third week of the month means it is “U.K. time” for macroeconomic data. The inflation and employment reports are unlikely to provide any support for the pound.
Inflation is likely to remain at 3% which will lead to some interesting questions for BoE Governor Mark Carney following the MPC meeting which also takes place this week. Back in July, the Quarterly inflation report commented that inflation would peak at 3% in October no mention of the necessity for a rate hike.
The employment report has become noteworthy for the lack of wage increases that have been attributed to concerns over Brexit and its effect on business investment. Wages are rising at around 2.2% on an annual basis, well below the rate of inflation which could lead to the consumer withdrawing support for the economy as the cost of the holidays is factored in in the New Year.
The MPC meeting will be interesting primarily for the press conference. Mark Carney is going to be asked if the hike was premature. Of course, he will say no, but it is the reason he gives that will provide most insight.
U.S. rate hike all but confirmed
The U.S. employment report released on Friday gave little encouragement to the hawks on the FOMC who want to see a rate hike this week. As has happened a lot during the term of Janet Yellen, the Fed has seemed to paint itself into a corner with a little too much advance guidance.
There is little doubt that the hike will take place on Wednesday but the gap to the next one may be a little longer than had been anticipated. Friday’s employment report provided a 228k increase in November and an employment rate already well above what is considered full employment. However, wage inflation remains benign which flies in the face of the theory of inflation beginning in high levels of employment.
With Jerome Powell taking over in February the fed is set for a period of uncertainty as new members bed in but also because Powell will bring a lawyer’s eye rather than an economists pro-activity to the job. As such a rate hike before the end of Q2 would be very unlikely.