GBP down on Brexit fears; US PCE deflators

Rates as of 05:00 GMT

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Market Recap

Once again GBP is at the bottom. The high for the day was right at the London opening, it then started moving down and kept moving down until the Asian day started. For some reason it got a brief fillip up when the results of the Bank of England meeting were announced, but people quickly thought the better of that and it resumed its decline. The last paragraph of the statement was identical to the one following the November meeting and the vote was the same, 7-2 to keep rates on hold (with two people voting to cut). The weakness in pound stems from Brexit worries, not monetary policy – the bill that was published yesterday includes a section that specifically prohibits agreeing to an extension of the end-December 2020 transition period. This means that if they haven’t reached an agreement by then – which seems likely to happen – it’s bye-bye Britain without any trade deal. In other words, the feared “hard Brexit” is still a possibility, indeed a likely scenario. GBP negative

Other than that, not much movement. JPY and CHF were the top performers, which is clearly a “risk off” move, but AUD came after that. US stocks hit a fresh record high and Asian stocks are mixed this morning, but even the markets that are down aren’t down all that much, so it seems to me to be neither a real “risk on” nor “risk off” day.

Instead it might just be a “weak USD” day, because of the weak US data out – the Philly Fed index was lower than all the estimates on Bloomberg and initial jobless claims were well above expectations, with the four-week moving average at its highest level since February. Plus existing home sales fell. Sad! I look for more USD weakness as people re-evaluate the strength of the US economy.

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Today’s market

We start off with the third revision of UK Q3 GDP. Probably a nothingburger, unless it’s revised dramatically.

After that, just sit around watching blips in the screen go up and down until the North American day begins. Then you can enjoy the Canadian retail sales. This is an important indicator, because the Bank of Canada said in its latest statement that it “will pay close attention to the sources of resilience in the Canadian economy – notably consumer spending and housing activity – as well as to fiscal policy developments.” In that respect, I would expect the figure to be negative for CAD. It’s expected to show only modest growth in spending still, even after six months during which there’s been only one month of healthy sales growth. The six-month moving average is around zero and the forecast for today isn’t far above that.

Next is perhaps the key indicator of the week: the US personal consumption expenditure (PCE) deflators. These are Fed’s preferred inflation gauges. The Fed particularly looks at the core PCE deflator. Fed Chair Powell referred to these indicators and not the more commonly known consumer price index (CPI) in the introduction to his press conference following the recent FOMC meeting.

Unfortunately for him, the yoy rate of change of the core PCE deflator is expected to slow marginally to further below their 2% target. However, it’s not clear that would worry him particularly. “Against the backdrop of a strong economy and supportive monetary policy, we expect inflation will rise to 2 percent,” he said, noting that “The median of participants’ projections rises to 1.9 percent next year and 2 percent in 2021.” Still, this may cause some concern that would be reflected in the fed funds futures. USD negative

As for the US personal income and personal spending figures, they’re supposed to be more or less in line with the recent trend – income exactly so, spending a touch higher. If the data comes in as forecast, it would reassure investors that the US consumer is willing and able to hold up his/her/their/its appointed role in keeping the US economy going. As Fed Chair Powell said last week, “The key to the ongoing favorable outlook is household spending, which represents about 70 percent of the economy and continues to be strong…” That would tend to be dollar positive.

So I’m not sure how the two would play out. My feeling is that the PCE deflators are more important for the dollar than the income & spending figures are, and that would take precedence. It also might depend on the currency pair. A good income & spending figure might be good for stocks and therefore promote a “risk on” environment in which the dollar could fall vis-à-vis AUD and CAD, but rise vs JPY.

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DISCLAIMER

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The information and opinions in this report were prepared by Marshall Gittler. Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable, the author makes no representation as to its accuracy or completeness. This report is provided for informational purposes only and does not take into account the particular investment objectives, financial situations, or needs of individual traders. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy.

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‘The key is not to predict the future, but to prepare for it.’ Pericles, 500 BCE

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