Weekly Brief

Weekly Brief

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Trade talks on the rocks

GBP

Both the UK and EU highlighted this week’s Brexit trade talks as critical in terms of progression towards a free trade deal. As it turned out, the talks broke up without any substantive progress being made and both sides increasing the intemperate language towards the other. EU Chief Negotiator, Michel Barnier, described the UK’s position as “significantly different” to the EU’s and on some matters the UK was disengaged. The UK’s Chief Negotiator, David Frost, suggested that the UK’s position has always been fair, however, and both sides agreed to meet again in Brussels next week.

The pound slumped on the lack of progress on trade, as well as the news that the UK intended to alter elements of the Withdrawal Agreement relating to Northern Ireland. It wasn’t helped by the announcement of renewed restrictions on social gatherings, to be enforced in England from Monday morning, or the turnaround in risk appetite. Equity markets sold off further, despite some respite on Wednesday, leading to a drop in bond yields across the curve. The UK 2 year gilt yield hit a record low on Tuesday and repeated that feat on Wednesday. Stronger data from the UK housing market (Halifax and RICS) showing faster house price growth was insufficient to lift the pound’s funk either. This morning’s GDP, industrial production and index of services figures for July were mixed, but GDP growth was broadly in line with expectations, up 6.6% in July. Industrial production rose by 5.2%, services by 6.1% and construction output by 17.6%. Services output was a poorer outturn than expected, which was a surprise given the reported success of the ‘Eat Out to Help Out’ scheme.

Following the Bank of England, the ONS August retail sales figures will be released today. None of the data looks likely to turn the pound around, and only an unlikely compromise or act of contrition on trade talks seems to have the potential to reverse sterling’s recent slump. Next week’s key event is the Bank of England Monetary Policy Committee meeting on Thursday. The BoE are not expected to cut interest rates or announce additional quantitative easing. However, the vote and the minutes of the meeting could indicate a willingness to consider further easing at the 5th November meeting.

 

EUR

The ECB Governing Council meeting was eagerly awaited. Ahead of it, the Chief Economist, Philip Lane, indicated that the value of the euro (specifically against the US dollar) would be a factor in policy setting decisions. There had also been a surprise return to deflation in the August Eurozone consumer price inflation figures. For that reason the markets thought that the ECB’s inflation forecast would be revised down, if only a little, given the concerns expressed and the data surprise. The ECB pulled a surprise though. Despite the statement, which highlighted risks to growth and prices from the recent Covid-19 surge across Europe, the ECB’s forecasts revised up the inflation reading for 2021. At the same time, it also suggested GDP would fall less in 2020, but grow more slowly in 2021 and 2022.

The euro has made little sustained progress in either direction against the US dollar. EUR tested lower during the first half of the week, through Wednesday morning, and then rebounded. The data and surveys released weren’t much help, recording a slightly better Q2 GDP outturn for Eurozone than initially reported, whilst August industrial production figures from Germany were far less promising.

Next week’s key release is the September German ZEW survey, released on Tuesday. Modest progress is expected in terms of both the current situation and expectations indices. However, the former will be of greater interest to investors, since Germany has experienced an increase in Covid cases, which could undermine activity. Meanwhile, France has seen case numbers rise by almost 10,000, a new high for the pandemic. Could restrictions tighten again as Europe battles another wave of coronavirus?

 

USD

This week has seen the US equity markets turn lower. In a shortened week due to the Labor Day holiday, the equity markets have still managed to shed between 2.1% (Dow Jones) and 3.4% (NASDAQ) from last week’s close. That prompted some retrenchment into safe havens, which offered the US Treasuries market some support along with the US dollar. The dollar continues to struggle to make sustained headway, with political and diplomatic headaches, such as with China, prompting ongoing uncertainty. Data and surveys are also not providing consistent clues regarding the speed of recovery, with the latest week claimant count figures failing to make any additional progress, and claims continuing to rise in the week ending 29th August.

Today’s consumer price inflation figures for August could record a rise in the headline rate, after yesterday’s producer price inflation figures pointed to additional price pressures. Will these have fed through the price chain, or is consumer demand still so weak that retailers are prepared to take the risk?  

Next week is all about the Federal Reserve’s monetary policy meeting and decision. Industrial production and retail sales data, both for August, are unlikely to provide much additional insight for Fed members mulling their options.

 

CAD

As highlighted last week, the Bank of Canada meeting wasn’t expected to result in a rate cut, and sure enough the BoC stood still on rates and all other monetary loosening. The statement accompanying the decision was insightful, as the BoC quietly dropped the language towards additional quantitative easing. This was a nod towards the improved economic data and surveys seen recently, and in particular the employment figures for August last Friday, which recorded a 245,800 net increase in employment. The Canadian dollar has depreciated a little against the US dollar over the course of this week, but is less than 1.5% weaker than where it started the week.

August consumer price inflation figures, released on Wednesday, are next week’s key release. Will inflation remain as subdued as the 0.1% YoY reading in July, or will it surprise with a higher reading? Also due on Friday of next week are July retail sales figures. June’s retail performance was impressive, with sales values leaping 23.7% MoM, to a new series high. There are few countries in the developed Western world that can boast such an impressive rebound, but can Canada sustain it?

 

AUD

Australian headlines this week were less about the economy and more to do with politics. Diplomatic relations between Australia and China have deteriorated in recent months after Australia’s Foreign Minister called for an investigation into the exact origins and causes of the Covid-19 pandemic. Those relations soured further this week with Chinese authorities seeking to interview two Australian journalists, causing them to flee. The Australian dollar has been broadly unchanged this week, and counterbalancing forces to the heightened diplomatic tensions came from confidence surveys and housing market data. Business and consumer confidence indicators rose in August and September respectively, somewhat surprising the markets given renewed lockdowns across parts of Australia. The housing market loan figures for July were also a surprise, rising by far more than expected, with the value of home loans up 8.9% in July over June.     

For next week, Thursday’s labour market data for August should be a focus, as will the minutes of the RBA’s recent monetary policy meeting, released on Tuesday.    

 

NZD

Parts of New Zealand’s economy entered a second phase of lockdowns in August, as concerns over the spread of coronavirus grew. That played out in a renewed sharp drop in debit card spending in that month, with spending down 7% on July. The NZ dollar is only marginally weaker than when it started the week, down less than 0.5%, despite the drop in commodity prices and reduction in risk appetite. The postponed general election is now firmly back in focus, having been delayed from the 19th September to the 17th October.  

Next week’s Q2 GDP figures are likely to be closely watched with the election in mind. New Zealand are one of the last countries to announce the Q2 figures and they are expected to be fairly dismal, with output forecast down by 12.5% on Q1 after a drop of 1.6% in that quarter. That should be baked into market psyche already, but a materially better or worse return could create some volatility.

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