European Commission says No to City Deal

Free movement and single market drive Brexit worries

It is difficult to understand why there was such optimism over the start of stage two of Brexit talks when there was little doubt that, on the major issues of access to the single market and free movement of labour, the two sides goals were naturally set to be virtual polar opposites.

The size of the task facing negotiators from both sides is now beginning to become a reality as first UK Prime Minister Theresa May, in China for trade talks, said that there would be no “special arrangements” for EU citizens who arrive in the UK during the transition period. This means that they will not have the same rights as those who arrive before March 29, 2019 and will be treated in the same way as all immigrants following the end of the transition period.

Then, the European Commission told the City of London that a proposal to allow British banks basically the same rights as EU banks across the EU would not be accepted. Added to these issues is a leaked Government report that states that no matter what deal the UK gets on trade, its economy will slump by up to 8% following Brexit.

So far, the pound has managed to retain its New Year rally versus the dollar and Euro closing yesterday at 1.4198 and 1.1437, which was in both cases, close to the high of the day.

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Powell takes over from Yellen at Federal Reserve

As befits his business-like persona, Jerome Powell took over from Janet Yellen yesterday as the Chairman of the Federal Reserve, becoming the most powerful Central Banker in the world, without fuss or ceremony. The Fed, as expected, left interest rates unchanged, allowing for December’s hike to take effect before deciding on future interest rate moves. On inflation however, the initial statement (the minutes will be published later in February) was a little more hawkish than the market had expected.The comment that inflation was expected to remain below 2% in the near term was dropped.

Gains in employment, household spending, business fixed investment have been solid; near-term risks to the economy appear “roughly balanced”. This led traders to believe that the Fed remains on track to hike rates again in March, a prospect that has 60% certainty according to interest rate futures markets. The statement also confirmed the previous language regarding the gradual nature of rate increases.

The dollar index remains mired near its recent lows unable to shake off the Treasury Secretary’s comments last week about a weaker dollar being in the best interests of the country in the short term.

Powell was unanimously accepted as Fed. Chairman by the committee and will take over officially on February 5 when he will make his first speech.

Eurozone inflation defies calls for tighter monetary policy

It seems that Mario Draghi and Jerome Powell have the same opinion on pre-emptive action by Central Banks, both preferring to see objective evidence of inflation before acting. This seems to be the “modern” post financial crisis approach, where the concerns, that bordered on the hysterical, from analysts, calling the additional measures that were taken “the debasing of the currency” and predicting runaway inflation are considered unfounded. Central Banks in the new era can be more considered in their approach, safe that inflation will grow gradually driven more by global growth than by stimulus.

Inflation across the Eurozone rose by 1.3% in the year to December down from 1.4% in November with core inflation down to 1% from 1.1%. This allayed any calls for a pre-emptive tightening of monetary policy despite Bundesbank models predicting “significantly” higher inflation later in the year.

The single currency rose to a high of 1.2475 yesterday, again approaching its medium target of 1.2520 but fell back on profit taking closing at 1.2415. The short-term path for the Euro will be determined by the dollar although as the Italian election campaign “hots up”, politics could start to play a role.