16 Oct 2017

Market Brief: Brexit stand-off

Emily Maguire

Dealing team

At the end of last week, on Friday evening Bank of England governor, Mark Carney, gave an interview with CNBC in which he warned that the UK economy is running out of both spare capacity and tolerance of above target inflation.

Today's data releases
  Key levels
10:00 EU trade balance   Support Resistance
13:30 US empire manufacturing GBP/USD 1.3120 1.3460
17:00 Hammond speaks in New York GBP/EUR 1.1120 1.1440
Market overview

Good morning all. To recap the end of last week, on Friday evening Bank of England governor, Mark Carney, gave an interview with CNBC in which he warned that the UK economy is running out of both spare capacity and tolerance of above target inflation. He did not specify a timing for any likely move, instead sticking with the existing mantra of ‘over the coming months’. However this has reinforced expectations of a 25bp increase in the Bank rate at the Monetary Policy Committee’s next meeting on 2 November. We also had US CPI inflation figures published on Friday, one of the most closely watched measures this year since price growth has remained tepid. The figures, likely boosted by hurricane effects, showed the CPI index rising by 0.5% m/m, slightly short of consensus. That took the annual inflation rate to 2.2% from 1.9% in September. However, the core reading was slightly softer than expected at +0.1% M/M (consensus +0.2%) too. Federal Reserve policymakers had previously discussed this measure at their September meeting, with some members remaining reluctant to raise rates further without signs that inflation is moving towards the 2 per cent target. The softer print caused the dollar to weaken on Friday afternoon but it has now mostly recovered.

Turning to the week ahead, political issues will again be to the fore for the UK government as it heads to next week’s EU leaders’ Summit. It does so without a recommendation from Michel Barnier that Brexit negotiations should progress to future arrangements i.e. trade access. A spokesman for Theresa May indicated that the UK would have more to say on what has become the major sticking point of financial settlement. Theresa May herself has personally urged Angela Merkel to end the Brexit stand-off at the summit in Brussels in a phone call yesterday. This comes after Berlin and Paris led moves to toughen the EU’s negotiating line in the next phase of talks. Turning to UK data, there are a number of key releases due through the week, including inflation data, retail sales, labour market statistics and the public finances. There are also several members of the Bank of England’s MPC appearing before the Treasury Select Committee tomorrow, including Governor Carney and new MPC members Sir Dave Ramsden and Silvana Tenreyro.

China is set to be a major market focus throughout the week. Firstly, Wednesday will see the start of the 19th National Congress, the five yearly event which selects China’s leadership. President Xi Jinping will open the Congress detailing the government’s work and the policy agenda for the next five years. But much of the wider attention will be on the appointments to the Politburo Standing Committee and the balance of power within the Communist party. Secondly, there are a number of data points including Q3 GDP and the monthly run of figures including CPI, industrial production and retail sales.

This morning there has also been a development in the ongoing Catalonian independence issue. Catalonian leader Puigdemont has just published a letter which is said to be ambiguous in whether he has declared independence for Catalonia. It does however defend Catalonia’s claim to independence and calls for Spain to end ‘repression’. Puigdemont is said to seek a meeting with Spanish PM Rajoy very soon. It is not clear how Madrid will respond to the letter given its ambiguity. Spain had last week said that any confirmation of a declaration of independence would likely lead to Article 155 being invoked, suspending Catalonia’s semi-autonomous status.

Thought of the day

Logan Doan, from Jacksonville Florida, a lover of spicy food went to his local South East Asian restaurant and requested that the chef made sure his order packed a punch. The meal he chose stated it was covered in chili flakes, but nevertheless, Logan wanted to make sure it was spicy enough. When Logan went to pay for his meal, he spotted the receipt had very specific instructions from the server to the kitchen. His receipt had 17 spicy notes printed on it, along with a note which read: "Make him regret being born." There may be a few ‘Brexiteers’ out there who are regretting their decision to leave the EU back in June of last year, a year on and consumers really are starting to feel the pinch. The UK releases headline inflation numbers tomorrow which is set to print a 3% YoY figure, the highest level since 2013. Although this may sound negative for average person, for the pound, it could be positive, as it will all but confirm an interest rate rise when the BoE meet on the 2nd November. To discuss hedging strategies that suit your tastes, please give your Investec Dealing team a call on 0800 055 6339.

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