Caution is the watchword

Inflation looming

In the Item Club survey released on Sunday, focus was mainly on growth prospects for next year. The fall in Sterling is expected to give a strong boost to exporters but become a depressant for investment and consumer spending. We have been here before notably in the seventies when the J curve theory failed to work and in the early nineties when it most certainly did. The Item club forecasted Growth of 0.8% for 2017 (almost all export) and a small bounce in 2018 to 1.4%. 

More interestingly they forecast inflation to be at 2.6% by the end of next year. Further research shows HSBC forecasting 4%, that coincides with their bearish forecast for £/$ of 1.05 by then. Later this week we will get the RPI for September and every chance it will rise close to 1%.

Trade weighted index reached a record low

Despite the £ being almost 20 cents above its lowest point reached in 1985 the trade weighted index against a basket of currencies surpassed the previous low of 73.495 reached in December 2008 when it finished the week at 73.307. Unless the top members of the government show a more united front then the index could easily fall toward 70.00. The autumn statement due on 23rd of November becomes key and hopefully Philip Hammond will still be around to deliver it!

If you cross Margaret Thatcher with Theresa May you might arrive at Maggie May. The Prime Minister has been jetting around the world meeting the leaders of China, India and the Antipodes all of whom will be massively important to the UK if indeed we arrive at a hard Brexit. 

Europe wobbles

Signs are growing that the expected tapering of European QE may be put back. Europe is far from out of the woods with a Banking system that is creaking at the knees. Reform is required but more likely QE will continue with negative consequences for the €. If borne out this will place €/$ in a new range of 1.05 to 1.10 and could put a floor under £/€. 

Some signs that emerging markets (including China) are showing signs of strain. With the Fed nailed on to raise rates in December their ‘new world’ partners are showing some ominous signs of strain. Look for weakness in the Yuan, Korean Won and the Rand. On the whole caution is the watchword.