There was a little more calm in the markets through yesterday’s session. European stocks traded a little lower (Stoxx 600 -.1%) through much of the day, while in the UK a warning from high street retailer Next saw it plummet over 14% with other high street retailers with UK exposures also pulled lower as the weaker pound, higher costs and Brexit uncertainty all impacted their guidance. The US session saw some gains as markets awaited the FOMC minutes however, the advance was limited as minutes showed the Fed were concerned that growth stemming from Trumps policies would require additional rate hikes to reduce inflationary risks. The USD however was less than convinced, the USD index traded lower on the day with the greenback losing ground to the Euro, Yen, GBP, NZD, AUD and especially CAD (to name just a few), the USD is in fact now down over 1.75% from the weeks highs thus far. Overnight we saw Japanese stocks track lower as a stronger JPY through yesterday’s session carried through into the overnight as JPY advanced following stronger PMI data and encouragement from PM Abe for businesses to raise wages in the New Year.
The USD has been trading under some heavy selling since yesterday morning. Last night’s FOMC minutes were about as hawkish as expected and one of the key talking points was Fiscal policy to be introduced by Donald Trump. The impact of these policies was the key reason behind the upward revisions of the FOMC’s growth and inflation expectations, however there was also “heightened uncertainty about possible changes in Fiscal and other economic policies”. There were also some downside risks to inflation highlighted including the strengthening USD, which may well appreciate faster than the Fed expect thus weigh on inflation. The committee also saw a modest risk of undershooting both inflation and growth targets, however members felt there was time to react to data, with changes to Monetary policy if necessary. So while the face of the meeting was hawkish, there is still some trepidation from the Fed and with projections based on Fiscal policy and a great unknown quantity in a new presidency, we still see USD strength as an opportunity to sell. Focus now is back on the data however and we have a big couple of days of key releases for the greenback. ADP employment report headlines today’s releases as a pre-courser to tomorrow’s NFP print. The ADP report suggests 175k jobs were expected to have been added through December, down from 216k in November. We also have services data due across the wires today in the form of Non-Manufacturing ISM and Markit services PMI, due to have declined/remained unchanged which could weigh on USD through the afternoon if correct.
GBP has struggled for any meaningful traction following some concerns that once again Brexit will be taking a hard line. Britain’s EU ambassador quit in headline grabbing fashion earlier in the week, to the applause of those hard liners who felt that he was on the EU’s side. The reality however is likely somewhat different, the UK have lost one of their key contacts in Brussels, someone who has forged strong relationships with key players across the EU as well as someone with a deep understanding of the political workings and desires of the EU. Instead Sir Tim Barrow, a “seasoned and tough negotiator” has now taken the position and while there is no doubt the UK government will need someone with that specific skill set, the shift has led markets to believe that the UK will be taking a hard line on Brexit negotiations, and as such increases the uncertainty for what will unfold next.
Data however continues to be favorable as services and composite PMI data both beat expectations this morning, rising to 56.2 (vs 54.7 expected) and 56.7 (vs 55 expected) respectively. There are plenty saying the UK economy is going great and Brexit has had no impact, we are keen to point out that in reality the UK economy is in the exact same position as they were on May 1st, the economy was already firmly positioned and growing at a moderate pace, now we have lower interest rates and a considerably weaker currency and considerable accommodation from the BOE to further support the economy. Brexit has not started, that is the key point here and while there is still uncertainty and issues arising, for the most part its business as usual, and will continue that way until PM May eventually invokes Article 50. This is when the big questions will be asked.