Lipstick on a pig

Having experienced the Pound sell-off last week, it seems increasingly important to acknowledge the risks present in our current predicament. Our focus since the start of the year has rightly been on a response to Covid, but that has masked our Brexit woes and perhaps caused the assumption that our economic position is directly related to our crisis management. From a crisis management perspective alone, the UK is lagging far behind its contemporaries. Still, once we recall the painful Brexit mess lurking beneath the surface, it's clear there is a second serious blow awaiting the UK economy.

Last week’s Internal Markets Bill fallout has illustrated the scope of the dormant Brexit risk still waiting to hammer the UK. Boris Johnson’s bill is set to break international law—more specifically contradicting commitments made in last October’s withdrawal agreement—and has caused a backlash from virtually every quarter. Just this morning, we’ve learned that former PM’s Tony Blair and John Major have come out against the bill, as well as former Chancellor Norman Lamont. The criticism isn’t purely domestic either, House Speaker Nancy Pelosi has said there's no chance of a US-UK Trade deal if the UK pursues the bill, this time stressing the potential to undermine the Good Friday Agreement signed in 1998. While we’ve listed primarily high-level objections, numerous civil servants have also left because of Johnson’s actions. Only last week, Sir Jonathan Jones, the permanent secretary to the government's Legal Department, departed on principle. It's difficult to see how the PM can extricate himself from this impossible situation without a severe and lasting loss of confidence in his government.

Bottom line: The Institute for Employment Studies projects around 445,000 job losses will take place in the three months between July and September and at least another 200,000 before the end of the year. While we saw further strong gains in Construction Output, Manufacturing, and Industrial Production data on Friday, those figures will not account for the employment situation under the surface because they are backwards-looking measures. With theCovid furlough scheme set to expire at the end of October and the autumn statement likely to increase taxes on both labour income and consumption, Q4 could prove even worse than the reports suggest. This argues strongly for a weaker Sterling heading into the end of the year, regardless of where the policy action comes from—the Bank of England or increased taxes.


The week ahead

GBP

Last week was Sterling’s worst-performing week since March 2020 as its trade-weighted index fell almost 4%, clearing through the 100 and 200-daily moving averages. Sterling’s decline coincided with interest rates markets raising expectations of an interest rate cut next year. The market now sees a 60% chance of a rate cut from the Bank of England by May 2021 versus a 32% chance last Monday. While this Thursday’s Bank of England policy announcement is expected to bring no change to interest rates, financial markets are pricing in more monetary stimulus sooner rather than later.

  • Tuesday’s labour market data is forecast to show an uptick in the Unemployment Rate from 3.9% to 4.1% in July, while Average Weekly Earnings are expected to show a steepening decline at an annual rate of -1.3%.
  • Wednesday’s CPI figure for August is predicted to show -0.6% growth in the price level down from 0.4% in July while the year-on-year figure is expected to read 0.0%.
  • Friday’s Retail Sales for August are forecast to highlight 0.7% growth down from 3.6% in July.

EUR

The Euro remains elevated in its trade-weighted index, bouncing between a 1.6% range since the beginning of August. This week, the Euro opened near the top of the range after peaking on Thursday ahead of a quiet economic calendar for Eurozone nations. Last week’s European Central Bank meeting saw no change in monetary policy and the common currency climbed through the second half of the week after President Christine Lagarde spoke of a fastereconomic recovery than previously expected. However, over the weekend, Lagarde repeated that the ECB would adjust all policy instruments if needed, acknowledged that the Euro is dampening central bank efforts to spur inflation, and called for the need for continued fiscal support from Eurozone nations.

  • On Tuesday, the French Final CPI for August is predicted to show -0.1% growth in the price level.
  • Tuesday’s German ZEW Surveys for September are expected to read -72 for the Current Situation survey and 69.5 for the Expectations survey.
  • Thursday’s Eurozone aggregate Final CPI figure for August is forecast to come in at -0.4%, unchanged from previous estimates while the year on year estimate is -0.2%.

USD

The US Dollar index secured two consecutive weeks in the green last week for the first time since June 2020, but remains near multi-year lows ahead of the Federal Reserve policy announcement on Wednesday evening. No change in interest rates is expected this week, or even anytime soon, after Chair Powell said the central bank will allow inflation to overshoot the 2% target and unemployment to fall before tightening policy. The new monetary policy objectives could be discussed further this week and may be a catalyst for short-term volatility on Wednesday evening. However, the Dollar index’s 50-daily moving average is less than one percent above the current level, and may provide resistance for the Greenback this week.

  • Tuesday’s Empire Manufacturing Index for September is expected to read 6.5 up from 3.7 previously.
  • Industrial Production for August is expected to show 1.0% growth on Tuesday, down from 3.0% last month.
  • Wednesday’s Retail Sales for August are forecast to show 1.0% growth while the core reading is expected to show 0.9% growth. Both figures are predicted to be lower than last month.
  • Thursday’s Jobless Claims are forecast to show 850k people claiming unemployment in the last week.
  • Friday’s University of Michigan Consumer Sentiment survey is expected to read 75.0 up from 74.1 previously.

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