An exciting week for the UK
It seems it's been ages since any UK political event resulted in a comfortable majority, so it was refreshing to see it happen last Friday morning. Don’t get us wrong, we may not entirely agree with the Tory line, and their leadership in the past few years has been arguably disastrous, but it's sometimes necessary to suspend the political in-fighting and give someone, anyone, a chance to govern. What the PM does next will, in fact, be the most important determinant of continued progress. Boris Johnson must now decide upon his Cabinet, get Brexit done, and announce his domestic agenda so that he can move on to the next step—agreeing on a trade deal with the EU.
Importantly, it seems the Tories under Boris are shifting towards the political middle and solidifying their base. The PM has already signalled massive spending in the north in order to stem discontent and, importantly, to head-off a second Scottish referendum on UK membership. Labour, on the other hand, is experiencing a crisis of both message and leadership; Jeremy Corbyn has declined to enter into any future contest. In some sense, Corbyn’s abdication solves quite a few problems for the considerable number of moderate Labour MP’s, who support the party but disagreed with Corbyn’s radical agenda. This creates a small window of opportunity for the new Tory leadership to repay voter trust with results, lest Labour reorganises under a moderate leadership and bleed the Tory majority.
Bottom line: There are numerous UK economic data points this week, but these readings might as well be from last decade for the significance they have in today's new world. Since the election, the landscape has changed massively, and the only thing that will truly tell us what's in store for the UK is, unfortunately, news headlines, once again.
As expected, last week proved to be monumental for both the current and future value of the Pound as polling data correctly predicted a landslide election victory for the Conservatives. From low to high, Sterling’s trade-weighted Index climbed over 3.0% as markets reacted well to the prospect of a Tory government, set on getting Brexit done as quickly as possible. In addition to a slew of data due out this week, Sterling price action should be affected by the Government’s plans to bring the withdrawal agreement bill back to Parliament either this week or early next week.
- Today, we’ve seen the UK’s flash Manufacturing and Services Purchasing Managers Indexes disappoint. Manufacturing fell 1.7 points short of the expected 49.1 figure and Services came in at 49.0 against the consensus 49.6. The results indicate that both sectors remain in contraction.
- The Bank of England’s financial stability report is due out on Monday and can provide some insight into the future of monetary policy, as well as an assessment of the health of the UK’s financial system and risks to stability.
- Labour data is due out on Tuesday, where the unemployment figure for October is forecasted to increase marginally from 3.8% to 3.9%. Average earnings in the same month are also predicted to fall to 3.4% from 3.6%.
- Wednesday will see the release of UK inflation data for the month of November. CPI and Core CPI are both expected to remain at 1.5% and 1.7% respectively.
- Retail sales figures are due on Thursday, measuring the change in the total value of inflation-adjusted sales in the retail sector in November. The forecasted figure is a 0.2% increase, turning positive from last month’s -0.1% read.
- Also due on Thursday is the Bank of England’s interest rate decision where the Monetary Policy Committee is expected to leave rates unchanged at 0.75%. It will be interesting to see if the voting mirrors last month’s surprise 0-2-7 vote, where two members unexpectedly voted to slash rates to 0.5%.
- Finally, UK GDP growth will be released on Friday and is expected to remain unchanged from the preliminary reading of 0.3%.
Unsurprisingly, the Euro piggybacked on the Pound’s rally against the US Dollar following the UK election, since a quick Brexit resolution provides some sense of certainty to the bloc as well as the UK. The Euro’s trade-weighted Index ended the week marginally higher, and the common currency gained almost 1.0% on the Greenback between Monday and Friday. Unfortunately, the US-China phase one deal has been treated with relative disdain by markets and has not produced the risk rally that might’ve been expected.
- Wednesday will see the release of Eurozone inflation data as the Final Consumer Price Index for November is expected to print at 1.0% - well below the region’s target of 2.0%.
- Also on Wednesday, the German Ifo Business Climate survey is due to improve slightly for the coming six-month outlook, from 95.0 to 95.6.
- On Friday, German Gfk consumer climate data is due to indicate a small improvement in economic conditions from 9.7 to 9.8.
The broad US Dollar Index fell over the course of last week as a march toward the US-China phase one deal meant that safe-haven Dollar appetite waned. Earlier in the week, the Dollar also fell as Jerome Powell, and the Federal Reserve delivered a ‘dovish’ hold on US interest rates. The Federal Open Market Committee signalled that a return to rate hikes are a distant prospect and it would take a significant and sustained move higher in inflation for them to support an interest rate increase.
- Flash Manufacturing and Services PMI’s are due out on Monday. Manufacturing is forecast to remain expansionary at 52.6 and services are expected to gain to 52.0 from 51.6.
- In addition, Monday will see the release of the Empire State Manufacturing Index, predicted to climb from 2.9 to 5.1.
- Philly Fed Manufacturing will be delivered on Thursday and is forecast to show a fall in business conditions to 8.1 from 10.4.
- Final US GDP is due out on Friday, measuring the country’s economic performance in Q3 of this year. The figure is predicted to remain at 2.1%.
- Lastly, the Federal Reserve’s preferred measure of inflation will also be released on Friday. Core month-on-month PCE is expected to remain at 0.1%, with the year-on-year unchanged at 1.6% - off the Federal Reserve’s 2% target.