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The UK: Inside (but somehow also outside) the EU
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The UK: Inside (but somehow also outside) the EU

Lionel Kruger Weekly bulletin November 2017

Brexit noise, and the resultant political turmoil, are building to a crescendo, with both sides playing an increasingly high-stakes poker game. The question is: who has the best game face? Unfortunately, it doesn’t seem to be Team GB. In-fighting and political scandals continue to weaken the Government’s negotiating position, with more reports of pending action against Theresa May by members of her own party and a possible vote of no confidence. We mere mortals, charged in the end with dealing with the fallout, must try to make the best of a bad situation and ignore the spurious claims and counter-claims.

The latest verbiage would suggest that Britons should be extremely concerned that we won’t be able to take our dogs with us on holiday excursions to the EU. However, we have bigger issues to worry about. It really seems to be time for people to take a step back and remind themselves of the long and close relationship that Europe and the UK have enjoyed, and will need to continue to enjoy. We are more than just casual neighbours, as was witnessed over the weekend with the Remembrance Day celebrations across the UK and Europe.

A French gentleman on the panel at an Infra Finance breakfast meeting in London recently had a very pragmatic response to a question regarding Brexit: “Before Brexit, Britain was in the EU but somehow outside the EU, and post-Brexit Britain will be outside the EU but somehow inside the EU”.

London is deeply important to EU capital markets and will continue to be so post-Brexit. We have committed enough self-harm. Both sides need to show flexibility and negotiate in the best interests of all citizens.

Brexit noise notwithstanding, UK economic data have been surprisingly upbeat, with growth being reported in almost every corner of the UK. Demand is rising, and low unemployment of just 4.3% is feeding through to higher nominal wage growth – although real earnings (for now) continue to fall. Manufacturing has been the largest contributor, expanding at 2.7%. The latest trade figures also provided good news, with the UK’s trade deficit in goods narrowing to £11.3bn in September from £12.4bn in August. The consensus view had been for a rise to £12.8bn. The BoE must also be feeling slightly more confident with the growth outlook, which it indicated by lifting rates back to the pre-Brexit vote level. Sterling remains vulnerable to Brexit speculation and is currently selling off as trouble mounts for May.

The EU economy is looking more positive: economists surveyed by Bloomberg have raised their growth forecasts eight times this year. The European Commission has raised its 2017 growth forecast to 2.2%, up from 1.7% estimated in May this year. Monetary policy will remain expansionary, with the ECB announcing in October that it will continue to buy public and private sector debt for most of 2018, and will keep rates low for longer.

Across the pond, US figures remain strong, although concern grows regarding the flattening of the US Yield Curve. Bloomberg reports that billionaire fund manager Bill Gross says we’re rapidly approaching a point at which the trend will induce an economic slowdown. The Fed still looks set to hike rates next month, and this view was supported earlier today by Philadelphia Fed President Patrick Harker who said he has “lightly penciled in” a December rate hike. He did, however, flag that he had slightly less conviction about the policy decision than he had last month. The inflation number remains key. Harker expects the Fed to raise rates three times next year as long as inflation remains on track.

For now, US tax reform remains the focus.

Yellen, Draghi, Kuroda and Carney all speak tomorrow.

UK CPI data are due tomorrow and expected to show a rise to 3.1% over the past 12 months to October. Economists believe this will be the peak, and price growth should start to slide later this year and into 2018. Rising oil prices may negatively impact this view. Brent Crude is currently trading at $63.41 per barrel.

Tuesday will see Chinese retail sales and production data for October, and the market will be looking for any further signs of a slowing economy and whether there is any indication of a hard landing.

On Wednesday we can expect US CPI and retail sales data for October, and the CPI figure will be watched closely by the Fed. A print below 2% would start to question the anticipated rate hike in December. In the US industrial Production is also due on Thursday, followed by housing stats on Friday.

 

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