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Italy proving to be a thorn in the side of the EU

Published: Friday 09 November 2018

  • Sterling poised for Gross Domestic Product growth data
  • Aussie base rate on hold, but there are headwinds
​​By David Johnson
Italy was in the news yesterday, I suspect that was unwelcome in the halls of Brussels. The EU is still riled about Italy agreeing a 2.4% budget deficit target; especially as the International Monetary Fund (IMF) is warning that Italy needs structural reform to get its finances in order and grow the economy. The European Central Bank (ECB) President reported that the Eurozone economy is still in a broad based expansion phase. Euro traders failed to pick up on his positive vibe and the Euro remained on the back foot.
Sterling remained well supported as the pace of hints of a Brexit deal accelerated within a few days. The British cabinet will meet over the weekend to finalise the proposed agreement, but there are still plenty of dissenters. Not least, the Democratic Unionist Party (DUP), who is threatening to topple the government if they don’t get their way over the wall-less border between Eire and Northern Ireland.
And the EU’s chief Brexit negotiator has warned that the EU is under threat. He mentioned that there is, “a Farage in every country” and that the “clock is ticking”. Interestingly, some of those EU Farages have been elected, so the clock might be ticking a little faster than he thinks.
US Dollar strengthens on stronger data
US data showed 214,000 fresh jobless benefit claimants and that was exactly what the markets had forecast. The Federal Reserve chose to leave their base rate on hold when they met late on 8th November, but hinted that rate hikes are fairly imminent. Many believe they are playing catch up and a December rate hike is already almost fully priced into the market now. The US Dollar strengthened on the strength of the Federal Reserve’s statement. American currency traders will be watching Producer Price Indices today, but not a lot else. The only place to look is the Twittersphere for hints on USD movement…
Reserve Bank of Australia decisions on hold, but there are headwinds
Overnight, we got sight of the Reserve Bank of Australia’s (RBA) quarterly statement. They appear to be twiddling their thumbs awaiting a decline in the unemployment rate and a rise in the inflation rate before they pull the trigger on an interest rate hike. However, many are very concerned about falling property prices, especially in some of the major cities of Australia and that could cause the RBA to maintain this historically low 1.5% base rate for a very extended period, or even to cut the base rate further if the pace of home price decline accelerates. The Aussie Dollar is a little stronger this morning, but remains susceptible to volatility.
We also had Chinese inflation data overnight. That was largely in line with expectations. However, I always feel suspicious when the month on month figure is very buoyant but the annual rate doesn’t change. In any other economy, that might involve revisions when the next data is released, but China doesn’t tend to do that.
UK Gross Domestic Product sets the tone for GBP
The big news for the UK this morning is the economic growth data. We were expecting a rise compared to Q2, as well as a rise in business investment and a slight improvement in industrial and manufacturing production; contrary to all the gloom and doom being bandied about. Happily, it seems that the UK economy has grown the most in two years and at a faster rate than expected, up by 0.6% in Q3 of 2018 – although September and August figures showed no growth at all. The quarterly results seem to rely on a very buoyant month in July, with strong retail sales and, of course, the World Cup to boost the economy. All sectors showed growth for the last quarter, including industry, services, agriculture and construction.
Sterling is already pretty strong compared to previous months as rumours of a deal with the EU circulate. Slips and cups and lips spring to mind though, so it would be very sensible to protect yourself against the worst of the volatility if you have Sterling to sell.

We Will Remember Them

And the weekend brings the commemoration of the end of the First World War. I know I am not alone in thinking the 11th November should be a national remembrance day in the UK, as in other countries, no matter which day it falls upon within the week. As fate would have it, the Sunday Services around the country will incorporate a silence exactly 100 years - to the minute - after the guns fell silent and the death and mayhem ceased for all those young men and the loved ones they left behind.
The line, ‘We will remember them’ is seen a lot, because the Royal British Legion have adopted it as a motto of sorts, but the full poem written by Robert Binyon is perhaps less well known. To me, it feels like remembrance rather than a contemporaneous piece. I found it very surprising when I found out that it was written soon after the commencement of hostilities, in September 1914, after the British Expeditionary Forces suffered significant casualties at Mons and Le Cateau. Timing aside, it is incredibly poignant; and I make no apologies for showing the full text.
For the fallen
With proud thanksgiving, a mother for her children,
England mourns for her dead across the sea.
Flesh of her flesh they were, spirit of her spirit,
Fallen in the cause of the free.
Solemn the drums thrill: Death august and royal
Sings sorrow up into immortal spheres.
There is music in the midst of desolation
And a glory that shines upon our tears.
They went with songs to the battle, they were young,
Straight of limb, true of eye, steady and aglow.
They were staunch to the end against odds uncounted,
They fell with their faces to the foe.
They shall grow not old, as we that are left grow old:
Age shall not weary them, nor the years condemn.
At the going down of the sun and in the morning
We will remember them.
They mingle not with their laughing comrades again;
They sit no more at familiar tables of home;
They have no lot in our labour of the day-time;
They sleep beyond England's foam.
But where our desires are and our hopes profound,
Felt as a well-spring that is hidden from sight,
To the innermost heart of their own land they are known
As the stars are known to the Night;
As the stars that shall be bright when we are dust,
Moving in marches upon the heavenly plain,
As the stars that are starry in the time of our darkness,
To the end, to the end, they remain.

Today's Major Economic Releases

Market BST Data/Event Previous Expected
GBP 09:30 UK: Gross Domestic Product 0.0% 0.1%
GBP 09:30 UK: Preliminary Gross Domestic Product 0.4% 0.6%
GBP 09:30 UK: Manufacturing Production -0.2% 0.1%
GBP 09:30 UK: Goods Trade Balance -11.2b -11.4b
USD 13:30 US: Producer Price Index 0.2% 0.2%
USD 13:30 US: Core Producer Price Index 0.2% 0.2%

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