Daily Market Update: Deal done now for campaign ding-dong
A deal between the EU and the UK government was finally agreed on Saturday.
However, rather than the end of the process Saturday’s agreement fired the starting pistol for the UK In/Out referendum on the 23rd June. Following a Cabinet meeting on Saturday six ministers came out in support of the ‘Leave’ campaign, with Michael Gove being the most high profile one. Yesterday they were joined by Boris Johnson. Following Johnson’s announcement yesterday, Betfair, the bookmakers, raised the chances of a Brexit from 29% yesterday morning to 36%.
Sterling has also seen plenty of price action following the latest developments. This morning sterling is heading for its biggest single-session loss since August. On Friday cable closed just above $1.44. This morning it has been testing $1.415. Sterling has also given up its recent gains against the single currency. EUR/GBP is currently changing hands at 78.3p which is up over 1p from Friday’s close. Meanwhile EUR/USD is back below $1.11 as I write.
While UK politics has been under spotlight over the weekend there were a couple of key UK data releases on Friday. UK retail sales rebounded strongly in January with a 2.3% m/m gain, almost three times the rise anticipated by analysts and the largest monthly gain since December 2013. January’s retail sales figures were 5.2% higher than the corresponding period a year ago. Meanwhile the latest public finance data highlights that George Osborne has a few fiscal headaches ahead of next month’s Budget.
Friday’s figures revealed the largest January budget surplus since 2008. January is normally a surplus month due to self-assessment tax return receipts. The £11.2bn surplus was around £1bn above last year’s figure but over £1bn below what analysts had pencilled in. With two months of the fiscal year remaining, Osborne has so far borrowed £66.5bn out of the £73.5bn forecasted last November. The last time government borrowing totalled less than £7bn in the final two months of the year was 2003/04.
While government borrowing isn’t coming down as quickly as Osborne would like, the Chancellor will take some comfort from another fiscal metric. The UK’s debt-to-GDP ratio fell to 82.8%, marking the first annual decrease in the debt-national income metric since September 2002. Looking to the week ahead, the UK data calendar is fairly light. The latest estimate for Q4 GDP on Thursday is the most noteworthy. This will allow financial markets time to digest the ongoing political developments linked to the EU referendum.
Fed policymakers will have been cheered up by Friday’s inflation figures. US core-CPI, which excludes the volatile energy & food components, accelerated to 2.2% y/y in January. Rising rents and health care costs helped to push the annual rate of underlying inflation to its highest level in almost 4½ years. By way of context, the 2.2% print compared with an average annualised increase of 1.9% over the last 10 years.
Meanwhile the headline CPI rate doubled from 0.7% y/y in December to 1.4% y/y in January. The latter was slightly above the 1.3% y/y print expected by analysts. Inflation will remain in focus this week in the US with the Fed’s preferred measure of inflation, the core PCE deflator, due on Friday. Before then there is a raft of housing data and Markit’s flash PMIs today (manufacturing) and Wednesday (services). The latest Q4 GDP estimate (Friday) and durable goods orders (Thursday) will also be closely watched.
On Friday it was confirmed that consumer confidence in the Eurozone fell to a 14-month low in February. The flash PMIs are in focus today in the Eurozone with both the manufacturing and services PMIs reporting a slowdown in February. As with the UK, it is a relatively quiet week for Eurozone economic data with CPI inflation due on Thursday. In today’s session, markets are likely to mull over the forthcoming EU referendum and Brexit risks.