- Monday: EU Finance Minister Meeting
- Tuesday: UK Spring Statement, US CPI
- Wednesday: US PPI & Retail Sales, DoE Weekly Inventories
- Thursday: US Import/Export Prices, Empire Manufacturing
- Friday: EU CPI (F), US Michigan Sentiment, Quadruple witching
A fairly tame start to the week as markets take stock on the latest US wage data which saw US equities surge into the close on Friday. Asia responded in an equally positive manner as inflation fears from several-weeks ago were put on ice, at least for the time being.
Before we get onto some of the key themes for the week ahead a friendly reminder that US clocks changed at the weekend and as such the time difference between London and New York is just 4-hrs until UK clocks change on the 25th March 2018.
Brexit news flow starting to heat up…
One thing we do know about Brexit is that media interest, and subsequent market focus, will intensify over the coming weeks as the key EU summit draws near (22nd/23rd March). An interesting article in the Independent on Sunday talked about people crossing the Irish border would have to register in advance to avoid checks and delays on a proposal to tackle the border issue. To me the subject remains one of the most contentious issues of the Brexit talks that could have far reaching consequences for Theresa May and the Tory government. According to the press reports both CCTV and cameras would be necessary to track vehicle number plates at crossing points which goes against the PM’s insistence that the border will have no physical infrastructure. This then brings about some key risks to the current status quo ranging from a breakdown in talks, a Conservative leadership election or a general election, as depicted by Credit Suisse below.
Aside from Brexit developments we also get the Spring Statement from the UK Chancellor on Tuesday. In summary, this is likely to be a dull affair with the recent move to just one budget per year in order to refrain from meddling in the tax system and the government’s plans resulting in just minor amendments rather than any far reaching reforms. Recent economic data should warrant an upbeat assessment on the economy and tax receipts have performed better than expected but reading too much into the OBR’s forecasts I think would be a mistake with any forward looking projections to be taken with a large pinch of salt given the political and economic uncertainty on the horizon.
When looking at Cable and EUR/USD this week attention is likely to be more on the USD rather than anything UK or European specific with US CPI and on-going focus on trade rhetoric likely to remain the dominant factor. Here are some key levels in focus on GBP/USD this week.
Continued tightening of the US labour force still yet to translate into meaningful gains in inflation…
Headline change in US non-farm payrolls came in substantially higher than expected on Friday printing above 300k for the first time since the summer of 2016, while US unemployment remained at 4.1% for the fifth straight month in a row.
Despite this the market reacted in a manner suggestive that participants had got slightly carried away with the inflation scare that spooked traders just 5 weeks ago. The catalyst of course was the wage numbers which failed to substantiate the notion of surging inflation resulting in US stocks taking back the entire move seen at the beginning of February.
Looking ahead to this week the US CPI data due on Tuesday is particularly important. The data will define whether the FOMC meeting on the 21st will sound the alarm that ‘sooner rather than later’ the current communication of three interest rates hikes for 2018 will become four. A core reading of 1.9%, albeit just 0.1% higher than previous, would mark the highest reading since April 2017 giving the hawks vindication for their optimism in that an on-going pick-up in economic activity combined with continued tightening of the labour force will result in higher inflation.
At this point even with a slightly higher reading I find it hard to believe that the Fed would act so aggressively to materially alter their language so soon and without more compelling evidence. As we saw last year nearly every interest rate hike was accompanied with dovish tones in order to keep the market confident that the incline in rates would be taken in a cautious manner, a strategy I don’t see changing in the immediate future. This consistency of approach would then allow the Fed time to digest incoming data with the plan likely to be an off-cycle hike in the latter part of the year if the rate hike trajectory were to increase.
If you missed the briefing this morning you can access the recording HERE.
Have a good week ahead.