UK economy unlikely to grow in Q4

Following data for manufacturing earlier in the week, which showed surprising strength, services data was released yesterday. With the UK economy far more based on services in recent years, this data takes on more significance. The data was poor, showing that services activity fell from 52.2 in October to 50.4 in November.

Overall, the data points to an economy that is barely growing. The uncertainty over Brexit that existed prior to this week has been exacerbated by the events that have taken place in Parliament.

The economy is inextricably linked to the Brexit outcome but despite that, the three most significant areas of the economy; industry, manufacturing, and services, are suffering from a lack of investment directly due to the uncertainty that surrounds how the landscape will look after the end of March next year.

In Parliament yesterday, the full text of the Government’s legal advice over the backstop was published and MP’s had their chance to give their opinion, which they are never shy to do.

The two sides of the argument are; 1) there may be a possibility of the UK not being able to unilaterally leave the backstop but that is apparently not its purpose and 2) do we trust the EU sufficiently to allow the UK to depart the backstop should trade negotiation stall or collapse completely?

The market remains convinced that Brexit is going to be bad for the pound no matter what form the departure takes. As the chances of the UK withdrawing Article 50 rose yesterday (from zero to 0.0001) the pound had a positive reaction. That didn’t last long and as reality kicked in Sterling fell back into its familiar range. Having made a high of 1.2798, it drifted back to close at 1.2731.

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Draghi fails to inspire euro

It is somewhat surprising, given his enigmatic personality, that the market hangs on every word that ECB President Mario Draghi utters in public since he barely makes comments that can inflame the markets.

He spoke yesterday and despite market anticipation which saw the single currency rally, he said nothing that could be construed as either supportive or negative for the Eurozone economy. He reiterated that monetary policy remains frozen despite significantly higher producer prices released earlier in the week which heralded a rise in inflation down the road.

The euro and dollar remain a balancing item in each other’s fortunes due to the relatively large percentage the euro makes up of the dollar index.

Italy, in trying to avoid sanctions from Brussels, is apparently amending its “people’s budget”. There is still a hawkish element to the discussions which demands that Rome digs its heels in, and while Prime Minister Giuseppe Conte may be something of a firebrand, he is also pragmatic in his approach and will look for compromise if that is possible without a climbdown.

The euro traded a 1.1361/1.1310 range yesterday, closing at 1.1344. Unless there is another flare up between Rome and Brussels or the UK changes tack over Brexit the market is likely to slow as the year-end approaches.

Employment report to provide short-term direction

Tomorrow’s employment report for November, commonly called the non-farm payroll (NFP) report, since it tries to filter out the seasonality which farm workers tend to bring, is seen as being a deciding factor in the probability of a rate hike later in the month.

Since the U,.S manufacturing base was decimated by production shifting overseas, the NFP has taken on a significance over trade. President Trump is championing trade’s comeback, giving the market a sound-bite almost daily.

The importance of the report is overshadowed somewhat by revisions which also happen on an almost monthly basis since several of the components are estimates. This month’s report is issued on the 8th day of the month, which is late, but research shows that it makes little difference to the size of any revisions whether the report is released on the 1st or 8th day of the following month.

This is the time of year when analysts stare into their crystal ball to provide salient advice on market movement in 2019.

It is best to start with themes and the overriding one is the FOMC and how it performs. It is not necessarily the headline which brings a reaction, it is often any deviation from the market expectation that drives the dollar. Put simplistically, market expectation is for three hikes in 2019. If the Fed were to then hike four times and provide advance notice of that change, markets would react significantly.

The dollar index traded in a 97.21 / 96.83 range as markets were subdued in following the funeral of former President George Bush Snr.