|Today's data releases||Key levels|
|09:30||UK Public Finances||Support||Resistance|
|09:30||UK Public Sector Net Borrowing||GBP/USD||1.3012||1.3338|
|14:00||EU leaders meet in Brussels||GBP/EUR||1.1064||1.1438|
|15:00||US Existing Home Sales|
A vote on a budget resolution passed the Senate last night, with lawmakers voting 51-49 in favour of the proposal. The vote passing is seen as a key stepping stone in the US administration advancing its tax reform proposals because it provides the fiscal headroom to push the tax reformproposal through and paves the way for these to be passed with a simple majority in the Senate. Indeed, the Senate resolution actually envisages up to $1.5tn of tax cuts over a 10-year horizon. An earlier House version sought a deficit-neutral tax framework (over 10-years) alongside spendingcuts, but the Senate also last night approved an amendment that paved the way for the House to adopt its version of the budget, pushing forward a more fiscally supportive tax package (at least within a 10-year window). Given that it looks as if the Senate amendment could eliminate the needfor a conference committee (to narrow down the differences between the House and the Senate version), this might speed up consideration of tax reform by several weeks, according to House GOP sources. The dollar is firmer this morning after the news of this step forward on tax reformtrading at the 1.31 level.
Meanwhile, the Catalonian parliament refused to back down in its bid for independence before yesterday’s deadline set by Prime Minister Rajoy. Spanish authorities have subsequently convened a cabinet meeting for Saturday at which they look set to approve plans to invoke Article 155 to suspend Catalonia’s semi-autonomous status.
Yesterday morning saw UK retail sales volumes shrinking 0.8% m/m in September following a strong (revised) 0.9% m/m rise in August. This was the biggest fall in six months and undershot both consensus and our own forecasts (consensus -0.1%, Investec -0.3%). Predominantly non-foodstores sales provided the greatest downward pressure, decreasing 1.5% m/m. The disappointing figures knocked half a cent off sterling against the euro to €1.1190, while GBPUSD dropped from $1.3180 to $1.3130. Despite the September sogginess, the robustness of the July and Augustfigures means that for Q3 as a whole, retail volumes posted growth of 0.6% q/q. Taken with the other ONS releases this week, which showed CPI inflation at the top of the Monetary Policy Committee’s target range and that the labour market remains incredibly tight, today’s release is unlikely to deter the Bank from raising the Bank Rate to 0.50% on November 2.
The other big ticket issue this week, the EU summit, has yielded some positive comments for Brexit, although the prospects of a significant breakthrough are not considered to be high. Before the start of the summit, German Chancellor, Merkel, and French President, Macron, seeminglygoing out of their way to be filmed making "animated conversation" with May. This comes in stark contrast to previous summits where the UK PM has been seen to be largely shunned by her European peers. Further vocal support came from Merkel, who dismissed Fleet Street’s gloomyportrayal of the divorce talks in the British press and said that “my impression is that these talks are moving forward step by step”. The German leader was also dismissive of suggestions from some eurosceptics who have called for the talks should be broken off as "absurd", countering that she had no doubts: “we are all focussed... that we can get a good result. From my side, there are no indications at all that we won't succeed".
Meanwhile, May’s speech over dinner (butternut gnocchi and pheasant supreme, reportedly!) made clear she was disappointed at the EU’s expected announcement on Friday that talks have not yet made enough progress to move on to a discussion of future trade ties, with Dutch Prime Minister Rutte later telling reporters that she had made no new proposals.
The day ahead
A quieter day ahead on the data front this week compared to the rest of the week, with only UK Public Finances out at 9.30am and Existing Home sales in the US at 3pm. The EU leaders meet in Brussels this afternoon, however, there is little hope from most observers of significant progresson this front. Finally, we have Federal Reserve Chairman Janet Yellen speaking to National Economists Club in Washington during the early London hours (00:30am).
Thought of the day
If the fireworks on show last night made you think bonfire night came early, you would be mistaken as they were in fact in celebration of Diwali. Diwali is the five-day festival of lights, celebrated by millions of Hindus, Sikhs and Jains across the world. The festival, which coincides with the Hindu New Year, celebrates new beginnings and the triumph of good over evil and light over darkness. The biggest celebration outside of India was in Leicester where tens of thousands of people descended on Leicester's Golden Mile last night to see the city's Diwali lights being switched on. As the market looks anxiously to developments at the EU summit in Brussels, we bet Mrs May will be looking to avoid any fireworks as she seeks to make a significant breakthrough in Brexit negotiations. It may be premature but we hope to catch some scenes of celebrationwhich should spark Sterling back to life!