Last week, UK Prime Minister Theresa May grabbed all the headlines as she wriggled and squirmed and ran away; firstly, avoiding a humiliating House of Commons defeat for her Brexit Plan on Tuesday by aborting the vote; secondly, suffering the ignominy of a vote of no-confidence on Wednesday for her leadership of the Conservative Party- which she won by 200 votes to 117: and then, thirdly, on Thursday with echoes of “run-away Prime Minister” sarcastically directed her way by Opposition leader, Jeremy Corbyn, she rushed to Brussels for more meetings with the European Union, to try and alter a deal that has variously been described as “dead in the water” (also by Jeremy Corbyn) or just plain “dead” by former UKIP leader, Nigel Farage! The European Union refused to budge! All of which means, another week passes, and the UK is no closer to achieving a deal which will be approved by the House of Commons, leaving “no-deal” as a hugely unfavorable option or perhaps even a second referendum, which is gaining traction as a possible outcome. This option is helped by the fact that The European Court of Justice ruled on Monday that UK can unilaterally change its mind and withdraw its Article 50 application to leave the European Union. Needless to say, the uncertainty, rancor, indecision and just plain politics of it all, led to the British Pound suffering with GBPUSD closing the week at 1.2584.
US equity markets had a topsy-turvy week with major indexes all losing about 2% on Friday, despite a relatively strong Consumer Price Index at 2.2% Y/Y for November released on Wednesday and better than expected Retail Sales at 0.2% M/M (Nov) released on Friday. The two main concerns are US/ China trade tensions and rising US interest rates. It is to the latter where we turn our attention this week as the FOMC interest rate decision on Wednesday is the highlight of this week’s economic announcements.
Without question, the volatility encompassing US markets is in a large part driven by “Fed watching” and trying to gauge the final level to which they increase interest rates. This is affecting longer term assessments of US interest rates which in turn is affecting the yield curve. Market historians reflect that yield curve inversion- that is short term interest rates being higher than longer term interest rates- is a recessionary indicator. Coupled with this, the very fact that short term rates are rising, in turn affects stocks of companies with weak balance sheets and poor cash positions. Rising interest rates also affect equilibrium levels in currency pairs with money tending to flow into currencies which pay higher rates of interest. Lastly, rising US interest rates can be harmful to some emerging market currencies which are pegged to the dollar as those markets are obliged to adjust their monetary policy too.
The Fed’s language has changed over the last month or so and there has been much speculation that this current “tightening cycle” will ease off next year. Ten-year bond yields have fallen from their highs of above 3.2% and are trading nearly 0.5% lower at 2.73%- hence the worries about yield curve inversion and recession. More worrying is the influence that politicians have on what is supposed to be an autonomous organization. US President Trump’s constant jaw-boning and hostile references to the Fed’s tightening policy are putting into question its impartiality and ability to act according to its mandate. Next Wednesday, in all likelihood will see a rise in US interest rates. It has been factored into markets for months. Anything less will be questioned as weak leadership on the part of Fed Chair Jerome Powell. US data remains strong, with historically low levels of unemployment and this Friday’s GDP number is likely to remain at 3.5%. The Fed should hike, in my opinion, because when markets do eventually fall, the Fed will have the luxury to lower interest rates in the future as part of a more accommodative policy.
Elsewhere, in a busy week for data, we have inflation numbers out of the Eurozone- expect 2.0% Y/Y (Nov) on Monday, the UK- expect 2.3% Y/Y (Nov) on Wednesday, Canada- expect 1.9% Y/Y (Nov) also on Wednesday and Japan- expect 1.4% Y/Y Nov on Thursday.
The UK also releases its Retail sales data- expected at 0.3% M/M (Nov) on Thursday, shortly before the Bank of England’s interest rate decision which is expected to remain unchanged at 0.75%
The Eurozone is expected to publish a new set f “no-deal” preparation documents late on Tuesday night/ Wednesday morning.
New Zealand announces its third quarter GDP number- expected at 2.8% Y/Y on Wednesday night followed by Australian employment figures early on Thursday morning set to show +20,000 for November. Two important numbers from Canada on Friday, namely GDP (M/M October) expected at 0.2% and Retail sales (M/M Oct) expected at 0.3% round off the week.
Good luck and good trading. Watch out for me on video on Wednesday and Thursday. Ben Robson