The end of the beginning?

There have been rumours and counter-rumours of a deal between London and Brussels over the terms of UK’s departure from the EU that have been coming to a head for several weeks.

We now seem to be very close to an announcement according to Dominic Raab and Michel Barnier, the main protagonists in the Brexit saga.

However, as Winston Churchill said, “this is not the end, it is not even the beginning of the end, it is perhaps, the end of the beginning” There is still an inordinate amount of work to be done by both sides to convince their respective Parliaments that this is “as good as it gets”.

On the UK side, there are already dire warnings from the Ulster Unionists that they will bring the Government down if the deal does not treat Northern Ireland in the same manner as the rest of the UK. It seems incredible, following the near-fiasco of the previous attempt to solve the issue, that the DUP has not at least been “kept in the loop”.

The market, while still not 100% behind whatever is announced, now acknowledges that there will at least be an announcement. The pound rose to a three-month high yesterday versus the dollar reaching 1.3248 and remaining close to that level overnight.

Next week may be pivotal for the pound not just over Brexit. Employment and inflation reports for September will be released and following the BoE Chief Economist’s speech earlier in the week there will be an expectation for an increase in wage inflation from August’s 2.9% although the market’s prediction is for a marginal fall.

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Trump challenges the Fed over rates

President Trump, displaying his usual grasp of economics, seemed to take personally the fact that the U.S. is having to pay higher yields to finance its ballooning deficits saying that the Fed has “gone loco”.

Stock markets plummeted yesterday as higher borrowing costs finally began to hit home, the economic reality of it costing more to borrow to finance long equity positions finally took a toll.

The Dow Jones Index has rallied from a low of 21,712 in September last year to a high of 26,948 earlier this month, an increase of a little over 24%. That really has not been brought about by some economic miracle created by the President but by the availability of cheap funds.

It is more than reasonable, in fact, it is sound economic policy, for the Central Bank to take some of the heat out of equity prices to ensure that a bubble is not forming.

The dollar has reacted more to the news of mounting tension between the President and the Fed. than it has to the fact that the Dow fell by a further 2.13% yesterday bringing further falls to global stock markets.

The independence of the Fed is supposedly sacrosanct but as with many decisions made by the current administration, that has gone by the wayside. The Federal Reserve Act only permits the President to remove a Governor “for cause” and historically this authority has never been abused by the President, but there is always a first time.

The dollar index continued to fall yesterday, reaching a low of 94.98, closing just five pips off the low. It has remained weak overnight despite a rally in Far Eastern stocks.

Inflation data was released in the U.S., remaining unchanged at 2.2% year on year. CPI is not the Fed’s primary measure of inflation, but the market continues to use it as its benchmark.

Rome’s Budget deadline approaching

Italy has until Monday to submit its 2019 budget to the EU for approval. There has been no material change to the recent announcement that next year’s budget would create a deficit of 2.4%, which is three times what had been agreed by the previous administration.

Yesterday saw one of the first significant effects of the developing row between Brussels and Rome as new three-year notes issued by the Italian Treasury were sold at almost giveaway prices with the yield doubling from last month’s issue to 2.51%. There are still 35 billion euros of debt to be issued this year, and the yield is unlikely to fall with both sides in the budget discussion certain to remain unmoved.

Disapproval of the budget plans is spreading with the rating agencies starting to take an interest. Both Fitch and Moody’s have warned this week of the effect of the increased budget deficit on Italy’s credit rating.

Despite this issue not going away, the euro continues to retrace its recent fall, due in no small part to the current weakness of the dollar. Yesterday, it reached a high of 1.1600 and closed at 1.1593. It has broken yesterday’s high overnight, reaching 1.1611 (06.30).