Leo’s Brexit pathway
UK GDP declined 0.1% in August despite forecasts of no change, although quarterly data was solid. August industrial output dipped 1.8% for the year, although construction output beat expectations. The figures may have been buoyed by the usual Summer factory shutdowns having already been held in early April. Bank of England Governor Mark Carney stated that recent data is consistent with soft underlying growth and the reaction was muted.
Boris Johnson and Irish Prime Minister Leo Varadkar’s positive rhetoric “that there was a pathway to a possible Brexit deal” caused a Sterling spike to the 1.2280 area against the Dollar. Irish sources also reported progress had been made on three key issues and that Brexit negotiations will resume. Varadkar’s concerns surrounding customs and consent didn;t prevent the Pound extending gains and UK gilt (Govt Bond) yields recorded the largest one-day gain since the end of 2015. Sterling pushed to near 1.1325 on the Euro and above 1.2450 on the Dollar, with the sharpest overall gain for seven months.
EU Chief Negotiator Barnier’s comments will be key today with position adjustment also likely.
US consumer prices were unchanged for September compared with consensus forecasts of a 0.1% increase with the year on-year rate holding at 1.7% compared with expectations of 1.8%. The core increase was slightly below expectations at 0.1%, although the annual rate held at 2.4% and equalling 10-year highs. Initial jobless claims declined to 210,000 from 220,000 previously. There was little change in futures markets with the chances of an October rate cut still seen around 80%.
Dallas Federal Reserve President Kaplan stated that market rates showed that policy was too tight before the rate cuts. He also stated that downside risks would reduce if there was an easing of trade tensions, but he remained vigilant and would prefer not to make the mistake to seeing weaker consumer spending before taking action. Cleveland head Mester opposed the July and September rate cuts and indicated that she would not back an October reduction The dollar retreated to 2-week lows as defensive demand decline.
German bunds (govt bonds) weakened sharply ahead of the New York market open with higher bond yields helping to support the Euro as it moved above 1.1000 on the Dollar. September’s ECB meeting minutes revealed considerable opposition to re-introducing the bond purchasing scheme with some seeing it as an instrument of last resort. Although the majority favour the move, the fervent opposition will make it tricky for incoming ECB President, Christine Lagarde, to sanction further easing.