Rate hike in the Balance

Johnson Lights Leadership Fire

The U.K. economy grew at its slowest rate in four years in the second quarter of the year as the strains of Brexit started to take hold. Business investment continues to fall with SME’s worried about access to the single market post-Brexit and an increase in their cost base from the administration of a widening of the destination of their exports.

Despite the uncertainty,the pound ended Q3 at its highest level against the dollar since the Brexit referendum. Versus the common currency the pound has been mixed, the future path of interest rates has started to influence all G7 currencies. Speculation about a hike for the dollar at the Fed’s December should see the dollar firmly on the front foot in Q4. The pound has good support versus the greenback at 1.3280. Analysts are unsure whether a rate hike will happen at November’s meeting which takes place on the 2nd. That meeting will coincide with the release of the latest BoE quarterly inflation report which is likely to predict inflation starting to top out as the pound levels off and wages growth remains weak. Mark Carney the BoE Governor has confirmed that he feels rates will “rise on the coming months”.

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MPC Member Vlieghe turns Hawkish

As members of the ruling Conservative Party meet for their annual conference, they are no closer to providing the definitive Brexit proposals demanded by Brussels before stage two of the talks can commence. It seems the U.K. attitude is “we are leaving, the details can be worked out down the road, but for the sake of our businesses we need to agree the terms of our remaining in the single market now.” The EU’s response is simple “go as soon as you like but until we have agreement over the three vital questions, no discussion over the single market will take place.

Boris Johnson, the Foreign Secretary and the “leader” of the “Hard Brexiteers” in an interview over the weekend continued to pressure the Prime minister. He had four main demands; The transition period must be not a second longer than two years, the U.K. must refuse any new European Court of Justice decisions during the transition, there must be no payments for single market access once the transition ends and there must be no agreement to shadow EU laws to gain access to the single market.

Johnson’s performance has been seen as a thinly veiled prelude to the start of his campaign to lead the party. Brexit could look very different with Johnson “driving the bus”.

EU facing major political upheaval

Following closely on the heels of the German election which saw a major upswing in support for the Far-Right AfD Party and its nationalistic policies comes an illegal referendum in the Catalan region of Spain into whether Catalans wish to secede from the rest of Spain.

In an often-violent day of voting which saw more than 750 Catalans injured by riot police ordered to disrupt the process in any way they could, 90% voted in favour of secession.

The referendum was illegal since it wasn’t sanctioned by Madrid. However, there will now be a period of social unrest and defiance of Madrid. The Regional Governor said that conditions are now in place of a unilateral declaration of independence which Madrid clearly cannot allow.

As confirmation of the coalition in Germany continues to be awaited, ECB leader Mario Draghi’s caution over uncertainty that has delayed both the removal of additional stimulus and a hike in interest rates has been proved correct. The intertwined fabric of the EU now means purely domestic issues as we are seeing in Germany and Spain are affecting the other countries of the region bringing uncertainty from Tallinn to Lisbon.

This week’s events of note

A data driven week will culminate in the eagerly awaited but flawed U.S. employment report.