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Turkey, BoE and ECB in focus, along with UK retail

A more positive session in Asia this morning after reports surfaced that US Treasury Secretary Steven Mnuchin was attempting to restart talks with Chinese officials in an attempt to move beyond the current impasse in trade negotiations. These reports appear to have put off the prospect of the imminent implantation of an extra $200bn of US tariffs on Chinese imports.

While by themselves any talks won’t bring a solution any closer, the fact that a dialogue is being sought suggests that an escalation isn’t imminent for the moment.

European markets don’t appear to be showing the same positivity in the wake of Asia’s rebound, with a slightly weaker open, however that’s probably down to the fact that they had a decent session yesterday, and are close to one week highs anyway.

On the earnings front today UK bellwether John Lewis stunned the markets today by reporting a 98.8% fall in first half profits to £1.2m. Its guidance for the remainder of the year was no less bleak, saying it expected full year profits to be substantially lower. The company blamed margin pressure and the decision not to pass on all cost price inflation price rises, and price matched their closest competitors on electronic goods. The company was also investing in new shops as well as facing higher IT costs, in the form of cyber security and data protection.

Given its place and reputation on the high street this is not a happy omen and brings into sharp relief, if any were needed, the severe problems facing UK retail. This is likely to increase calls for the UK government to reform business rates which appear to decimating the UK retail sector.

Also on retail we got a more positive story from Morrisons as it continued its turnaround from its woes of a few years ago. First half revenues met expectations coming in at £8.8bn, a rise of 4.5% with pre-tax profits at £142m. Like for like sales saw a rise of 4.9%, and the company raised the interim dividend to 1.85p a share, as well as paying a special dividend of 2p a share.

Royal Bank of Scotland shares are also higher today on reports that the bank could pay a one off special dividend to shareholders of up to 33p a share. The shares also got a boost in the last 24 hours by way of an upgrade to buy from Goldman Sachs with a target of 345p a share. This is welcome news for UK taxpayers who finally appear to be starting to get a return for their majority stake in the bailed out bank, however it still remains small change when set against the amount of money injected into the bank over the last ten years.

Three central bank meetings are set to dominate proceedings today, though only one is expected to move the dial in terms of future policy expectations, with most of the focus on Turkey and the prospects for the Turkish lira.

Turkey’s central bank gets set to meet today with speculation that they may well push up rates from the current 17.75%, up 4 to 5 basis points to over 20%, something that some would say that should have been done a few weeks ago when the lira was in freefall over widespread concern about the fiscal stewardship of the Turkish economy.

The failure to act in July along with President Erdogan’s power grab of some of the main economic levers of Turkish monetary policy by appointing his son-in law as economy chief caused the lira to drop to all-time lows against the US dollar. The currency has stabilised since then but nonetheless all eyes will be on Ankara today to see the type of policy response, if any, given the sharp rise seen in inflation last week, when producer prices surged 32%. A failure to act or even a piecemeal hike is likely to see the lira come under further pressure.

Having raised rates at its August meeting the Bank of England aren’t expected to make any changes to their current policy or guidance, with new MPC member Jonathan Haskell replacing the outgoing Ian McCafferty as one of the external members on the policy making committee. A unanimous vote to keep rates unchanged is expected. The MPC will have a slightly more dovish slant now with the departure of McCafferty, given that he was a regular hawkish dissenter throughout his tenure

This week’s surprise jump in wages growth will be a welcome relief to the central bank as it more or less vindicates their decision to push up rates last month, against some significant criticism that they were being too hasty. Bond markets already appear to be pricing in the prospect of another rate rise within the next twelve months, Brexit concerns notwithstanding, and any positive commentary with respect to the UK economy, could well help support the pound.

It’s also the turn of the European Central Bank as they return from their summer holiday to oversee the beginning of the tapering of the asset purchase program which is due to be reduced to €15bn a month from €30bn a month in October. The big concern for policymakers, since the June meeting has been a significant softening in the economic data on both prices as well as economic activity.

Will the ECB acknowledge these changes in its latest forecasts and will it also make reference to any concerns policymakers have about the trade outlook. It also seems fairly likely that Mario Draghi will be asked if the ECB still sees the likely timing of a rate rise to be in the late Q3, early Q4 camp, in light of the recent softness in the data. He could also be asked about a succession plan given that it remains all too likely that he will be the first ECB President to have never overseen a rise in interest rates. It’s quite likely he’ll dead bat that last question, to use a cricketing metaphor.

Apple’s latest product launch saw a raft of new iPhones and a new Watch launched with various price points designed to appeal to a wider range of affordability. Initial market reaction saw Apple shares fall back and close the day lower yesterday, as markets absorbed how the differentiation would affect the company’s ability to meet its revenue targets for Q4.

The US dollar slipped back yesterday after producer prices dropped back sharply in August to 2.3% well below expectations of 2.7%. Last week’s payrolls report appeared to increase the prospect we could get another 2 rate rises by the end of this year, as wages start to show signs of life. Yesterday’s PPI numbers would appear to throw some shade on the prospect of a December move and if today’s CPI numbers show a similar trend towards a slowdown in inflation the US dollar could fall back further. Core CPI is expected to come in unchanged at 2.4% while headline is expected to drop from 2.9% to 2.8%. 

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