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Deal or No Deal, as UK cabinet meets to mull Brexit text agreement

This morning’s Chinese industrial production data for October doesn’t appear to have added that much additional insight into the health of the Chinese economy, aside from the fact that it continues to show signs of slowing, with little indication of a pickup in the short to medium term. 

Retail sales in October were disappointing coming in at 8.6%, well below expectations though given the success of “Singles Day” at the weekend, November could see a rebound.

Industrial production also remained subdued coming in at 5.8%, down slightly from September, while credit growth also slowed to an all-time low. This weakness suggests that we could see further targeted stimulus in the coming weeks.

Concerns about an economic slowdown in Europe’s largest economy could well be magnified in just over an hour, when the latest preliminary Q3 German GDP numbers are expected to show a contraction of 0.2%, a sharp drop from the expansion of 0.5% in Q2. They are also likely to provide an additional headache to the European Central Bank’s plans to pare back its asset purchase program by the end of this year. This in turn is likely to translate into a 0.2% expansion in the headline EU GDP number.

Away from concerns about a slowing Chinese and European economy today has the potential to be a defining moment in the timeline of the Brexit negotiations.

For all the talk of a deal between EU and UK negotiators over the last 24 hours, on the terms of Britain’s departure from the EU, any optimism will be for nothing if Prime Minister May can’t get it agreed by her cabinet, when they meet later today at 2pm UK time, let alone the various factions in the House of Commons, when it comes to any possible vote.

In a sign that the hurdles to acceptance remain huge, the various parties were lining up to criticise the plan even before the details had been made available, in a classic case of dogma trumping pragmatism.

The deal may well be unpalatable to one side or the either, or both, but to denounce the deal before the details have even been scrutinised speaks to an open mouthed and close-minded approach, something that is sadly typical of UK politics and politicians these days.

As far as markets are concerned it now appears that we are facing the moment of maximum danger, in that either side has the potential to pull the rug out from underneath whatever has been agreed.

Yesterday’s rise in UK average earnings data to an almost ten-year peak of 3.2% was welcome news for a UK consumer that has been squeezed consistently since the peak of the financial crisis in 2008. All that is needed now is for headline inflation to continue to fall back, as it has been doing since the peaks of 3.1% at the end of last year.

In September, headline CPI fell back sharply from 2.7% to 2.4% matching its lowest levels this year, helped in no small part by declines in food prices, as the discounters of Aldi and Lidl continued to cap the ability of the big four supermarkets to boost margins. The biggest squeeze on consumer income was fuel prices in September, however the recent falls in oil prices could well offer a significant respite as we head into the Christmas period.

Expectations for October CPI are for a modest rise to 2.5%, though core prices are expected to remain unchanged at 1.9%. While on its own a fall in headline inflation is likely to be welcomed by the Bank of England, as well as consumers more broadly it is unlikely to alter the calculus when it comes to expect the next rate rise.

Rising wages pressure is likely to dilute the focus away from the central banks inflation target in the longer term, especially if we get anything close to some form of resolution to the Gordian knot of the Irish backstop problem in the Brexit negotiations. Retail prices are also expected to tick higher to 3.4% from 3.3%.

Continuing the inflation theme to the US economy and the likelihood of further US rate rises today’s US CPI numbers are likely to reinforce the case for another Fed rate rise next month, which even now still remains an almost done deal, though we did get some shade on that from the new head of the San Francisco Fed, Mary Daly earlier this week.

In whatever way her comments about the prospect of future tightening are interpreted, and there seems to be some differences on this, one line was particularly notable when she stated that a December rate rise was “premature to say it’s definitely needed”.

This could simply be a case of keeping one’s options open, however with a rise a 76.5% possibility it’s still a surprising insight, and could perhaps signal some anxiety amongst some Fed officials about the recent strength of the US dollar. In any case US CPI for October is expected to show an increase to 2.5%, while core prices are expected to stay at 2.2%.

Fed Chair Jay Powell could well offer some further insight into the FOMC’s thinking when he speaks later today in Dallas along with Robert Kaplan, Dallas Fed President at 11pm UK time.

EURUSD – having fallen below the 1.1300 area we should now see a move towards the 1.1180 area. We need to see a recovery back above 1.1320 to stabilise or run the risk of further declines towards 1.1000.

GBPUSD – continues to be buffeted by the conflicting winds of Brexit sentiment rebounding to 1.3050 yesterday, filling the 1.2950 gap, after finding support at the 1.2820 area earlier this week. A move through the 1.2820 area retargets the recent lows at 1.2680, while a move through 1.3050 retargets last week’s peaks at 1.3170.

EURGBP – hit a new six-month low yesterday at 0.8655 we’ve managed to rebound a little, however we’re currently capped at the 0.8780 area initially, as well as the 200-day MA at 0.8840. Bias remains towards the downside while below these key levels.

USDJPY – continues to find the air a little thin above the 114.00 area with larger resistance behind that at the October peaks at 114.60. Pullbacks are likely to find support at the 113.40 area and below that at the 112.80 area.

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