Keep a close eye on wednesday's Autumn Forecast Statement...
Week Commencing Monday 21st November 2016
UK: Inflation surprises but rises on the way!
UK inflation slipped unexpectedly last month as Bank of England Governor Carney warned higher prices are on the way.
Despite the surprise release, cost pressures at factories already appear to be ballooning thanks to sterling post-Brexit slump. Annual CPI weakened to 0.9 percent during the month of October from its previous high of 1.0 percent in September.
Within the Inflation Report, Mark Carney highlighted the cost of materials and oil for factories, which have posted the biggest monthly jump since records started in 1996, leaping by 4.6 percent in October.
This has led to prices for goods leaving factories rising by 2.1 percent on the year, the biggest increase since April 2012. The Bank of England now forecasts that inflation will rise to about 2.7 percent around this time next year. Interestingly, inflation expectations around the world have also surged in the past week, driven in part by U.S. President-elect Donald Trump's plans to increase government spending. It’s just one thing after another these days!
EUROPE: Like it or not, populism is not just an Anglo-Saxon thing!
German Chancellor Angela Merkel announced that she will run for a fourth term, despite horrendous poll ratings for her ruling Christian Democratic party.
Already chancellor for 11 years, she faces a daunting task given the shifting tides in the Transatlantic relationship, coupled with European troubles at home. In order to succeed on the international stage in a fourth term, Merkel must first heal divisions over her refugee policy, effectively allowing over one million migrants enter Germany, that has alienated the Bavarian wing of her nation-wide conservative alliance.
European problems do not end there, the rise of Marine Le Pen's far-right National Front will leave the next French president ruling over a deeply divided country.
More immediately, Italian Prime Minister Matteo Renzi risks losing a referendum on constitutional reform next month on which he has staked his political future. These are tumultuous times for Europe and the big question on everyone’s mind is, will the bloc survive?
UK: Hammond to deliver first post-Brexit budget.
The UK’s first budget plan since the Brexit vote will not include a big new spending push, owing to a high level of public debt.
The most significant part of the statement should be the “new fiscal framework”, effectively ditching George Osborne’s policy of austerity for something more relaxed. This could be viewed in two ways, potentially as a positive as the government can be more reactive with the fiscal levers in a post-Brexit world.
However with ballooning debt, there is little room for further borrowing, and borrowing will further strain the country’s uncertain credit rating. Phillip Hammond has a tight rope to walk, let’s see if he can make the distance!
Continued declines in EUR/USD have pushed the pair into a new range, with key levels of support now placed at the 1.0460 level. As momentum continues to the downside, coupled with the lack of Eurozone data this week, we expect further losses. It is unlikely to break through the support mentioned above, however geo-political events continue to dominate the pair.
GBP/USD lost its momentum last week and has finally pushed through the 1.2370 level of support. Despite its current bearish stance, significant Sterling support now gathers at the 1.1946 low, and given the light data week for Sterling it is unlikely we will see a break. Should we see a decent UK GDP print, and/or softening of Brexit stance, expect to see Sterling’s fortunes reverse.
GBP/EUR remains reasonably high given the current geo-political environment. Given the recent poll ratings for both the Italian referendum, French Presidential Elections we expect further pressure on the Euro. Although we expect the pair to trade the range this week, Sterling should have a small advantage.
Economic Calander for the Week
We have a relatively light week for the UK with GDP to only economic data release of note. Friday’s GDP figures should confirm Q3 GDP at 0.5 percent for the quarter, which on an annual basis puts UK GDP at 2.3 percent.
This is a decent print and remains far above the European average, so expect a strong Sterling on the back of it. Another key event is the mid-term budget on Wednesday, which should cause some volatility, especially should the chancellor give up on debt reduction targets.
We have a busy week of US data with Existing Home Sales kicking off the show on Tuesday. We expect to see around 5.43 million units sold in October, which is a solid number and in line with last month’s 5.47 million print.
The FOMC headlines Wednesday with the release of their minutes, and as usual any hint of policy shift will impact market sentiment. Core durable goods should show a marginal increase to 0.2 percent for October while New Home Sales should come in at 593 thousand.
Finally Thursday is Thanksgiving day, so expect light Dollar markets towards the end of the week.
We have little in the way of European data this week, with most eyes focusing on Mario Draghi’s speech at the European Parliament on Monday, Questions about how a Trump presidency will affect the Eurozone are expected to dominate the day, and any outlandish statements will likely be capitalised on by markets.