GBP plunges as fear of “hard Brexit” returns; UK employment, JOLTS report

Rates as of 07:00 GMT

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Market Recap

Wow! I thought the GBP bounce would last a bit longer than that. Obviously, looking at the day’s price action, someone was buying EUR/GBP big time, despite the fact that the euro-area PMIs were much worse than expected (as were the UK ones, so maybe those canceled each other out). This was probably due to a report that UK PM Johnson intends to change the law so to ensure that the Brexit transition phase cannot be extended past the end of 2020. Many people had thought that Johnson would use his big majority in Parliament to isolate the more extreme factions within the Brexit coalition and negotiate a “softer” post-Brexit relationship with the EU, i.e. one where UK law was more in line with EU law and therefore a closer trading relationship could be maintained. However, a comprehensive agreement is likely to take years, not months, to negotiate (the EU-Canada one took about seven years, for example), and so a hard deadline like this makes it extremely difficult to reach such an agreement in time. That raises the possibility of either a “bare bones Brexit” more or less on WTO terms, or yet another cliff-hanger next December. As I’ve said time and time again, Brexit isn’t the end of Brexit, just the beginning. GBP negative

(Note: I have been reliably informed that the saying I tried to quote from memory yesterday is actually “There’s many a slip twixt cup and lip.”)

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Today’s market

We start off the day with the UK employment data. We noticed yesterday that when the UK manufacturing PMI came out much worse than expected – in fact, the worst in seven years – the effect on the currency didn’t last that long. GBP/USD maybe dropped 20 pips in 15 minutes, but then started rallying and quickly regained more than it lost. The big move came later in the day in response to Boorish Johnson’s maneuver. So it seems to me that when trading GBP, the market is paying a lot more attention to politics than to economics.

In this case, the employment figures are expected to be so-so. The unemployment rate is expected to rise back up to 3.8% — it’s been vacillating between 3.8% and 3.9% all year – and the number of people in employment is forecast to fall for the third consecutive month.

Some people (for example, Fed Chair Powell) are now arguing that the real test of a “tight” labor market is not the unemployment rate but rather wages – if wages aren’t rising, then the labor market isn’t tight yet. In that respect, the expected slowing of UK wage growth, which seems to have peaked in July, is ominous. That was also the last month that employment rose. And wouldn’t you know, it was also the last month that the monthly GDP figures rose. So today’s figures, if they come in, are another indication that UK economic activity topped out a few months ago and has been receding ever since. If people are paying attention to the UK economic data, then that’s probably GBP negative.

That’s all for Europe. You can take a break until the US comes in, whereupon US housing starts and building permits are announced. Starts are expected to be up but permits are expected to be down. The question is how much were the figures affected by the wildfires in California? Yesterday’s National Association of Home Builders (NAHB) sentiment index was much, much stronger than expected – rising to 76 from 70, whereas it was expected to be unchanged (plus the previous month was revised up to 71). Today’s figures should be positive for the dollar after discounting for the effect of the fire.

The US industrial production figures are a biggie for the stock market but not so much for the FX market. The figure is likely to be up sharply, but that’s in part because of distortions caused by the GM strike. The Fed estimated that the strike subtracted roughly 30 bps from the headline figure in October, so it’s natural that the end of the strike would add something similar back in this month. In any case though even adjusting for that distortion it’s a pretty robust figure, which should offset to some degree yesterday’s slightly worse-than-expected Markit US manufacturing PMI – USD positive

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Next comes one of my favorites – the Job Openings and Labor Turnover Survey (JOLTS) report. It’s the mirror image of the unemployment figure – that’s the number of people looking for jobs, this is the number of jobs looking for people. The forecast is for the number of jobs to be pretty much unchanged during the month.

Since the number of unemployed persons rose a bit during the month, that means the “job offers to applicants ratio” — a Japanese economic indicator that they don’t actually use in the US, but should – fell a bit. Nonetheless, there’s still a healthy gap between the two, indicating that any slowdown in hiring isn’t because of a lack of jobs but rather because of a skills mismatch.

Overnight, Japan’s trade is expected to continue in deficit on both an unadjusted and seasonally adjusted basis. The slight widening of the SA figure should not be particularly concerning however, especially in light of the fact that the global trade picture is likely to improve in the next few months as US-China trade tensions rachet down. JPY neutral

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

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