Tuesday 21 November 2017

Daily Market Update: Carney warns of Brexit risks to UK

Gareth Fuller/PA Wire
Gareth Fuller/PA Wire

Simon Barry

In an at-times testy exchange with lawmakers at yesterday’s Treasury Select Committee hearing, BoE Governor Mark Carney said that a vote by Britain to leave the EU could have adverse effects on the UK economy.

Carney made it clear that the BoE would not be making a recommendation on whether the UK should leave or stay in the EU and indicated that the Bank’s analysis was limited to the areas of its remit (i.e. price and financial stability) and to a short-run perspective on possible outcomes. However, he did cite the possibility of “lower levels of activity because of the degree of uncertainty that could affect investment and household spending” and highlighted the risk that some financial services companies could relocate from London; weakness in sterling and upward pressure on bond yields were also mentioned as possible impacts of a Brexit. Unsurprisingly, Carney was accused of having a pro-EU bias by some Eurosceptic MPs, though the Governor stood firm in his defense of the Bank’s perspective, denying it was influenced by the PM or anyone in government.

Renewed focus on Brexit saw sterling generally on the back foot as yesterday, weakening to around 77.9p vs. the euro at one point. But those losses proved shortlived with the pair opening at around 77.25p this morning, little changed on net over the past 24 hours. Elsewhere, the dollar is trading firmer, having chalked up gains of 0.6% and 0.4% against the euro and pound respectively, to open at $1.0965 and $1.4195. The slight underperformance of the euro is possibly linked to expectations for further policy easing from the ECB at its eagerly-awaited March policy meeting tomorrow.

Meanwhile across the Atlantic in the US, the NFIB Small Business Optimism index unexpectedly fell, from 93.9 to 92.9 in February. Although it is not regarded as a top tier indicator, it does provide some insight regarding the small business sector. While the index is still holding up at reasonable levels, it has continued to edge lower from its December 2014 cycle high of 100.3, so we will be keeping tabs on this indicator in the months ahead as we track the evolution of growth momentum in the US economy more generally.

Turning to the day ahead, industrial production is announced in the UK. Industrial production is expected to expand 0.4% m/m in January following a 1.1% decline, while expectations are for manufacturing production to advance 0.2% m/m in January after -0.2% in December. Following the weaker than expected February PMI figures released last week, analysts will be looking for clues in the official data regarding the health of economic growth momentum in early 2016. The February NIESR (unofficial) GDP estimate for Q1 2016 will also get some attention for similar reasons following a reading of 0.4% q/q in January.

Finally, Bank of England Deputy Governor Andrew Bailey speaks today at an event in London.

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