Crumbled Like Chalk

There once was a Minister Prime

Who found herself quite pressed for time

Without an accord

She’d be headed toward

The opposite of what’s sublime


So PM May crumbled like chalk

In order to break the deadlock

Hence now the UK

More cash will they pay

As backbenchers grumble and squawk


Undoubtedly, the biggest story overnight was the operation to remove British PM May’s spine the announcement that the UK and EU had agreed the framework for the settlement of the Brexit bill. At approximately 1:30 this morning, EU Commission President Jean Claude Juncker announced the fact to the world and explained he would be sending the details to each of the remaining EU nations for approval. This opens the way for the beginning of talks about the trade deal that the UK is desperate to put together with the EU. In essence, the UK caved on all the issues, although the money seems like the least of the problems. From what I’ve read, it appears that she just sold out Northern Ireland by agreeing that there would be no hard border between the two nations on the island, and, critically, that unless other arrangements are made to avoid that hard border, “the United Kingdom will maintain full alignment” with EU rules needed to maintain economic and political cooperation between Northern Ireland and Ireland. In other words, Northern Ireland will not have left the EU despite Belfast’s stated desire to do so. Needless to say, there will be much more of this story going forward as the details of the deal are worked out and the trade agreement begins to take shape. The pro-Brexit crowd is already quite worked up over the issue and it wouldn’t surprise me if May loses control, and her position, during the next few months. In fact, I kind of expect another election in the UK before the end of 2018. PM Corbyn anyone?

However, for our purposes the impact was pretty much as expected, the pound jumped sharply on the announcement, rising 0.5% and trading to 1.3520, its highest level since mid September. Interestingly, since the initial burst, the pound has actually given back all those gains and is now lower on the day, albeit by just 0.1%. I guess, in the end, the market was expecting a deal to occur. Going forward, this is certainly a benefit for the pound, but I expect there will be more than a few hiccups before everything is settled.

Aside from that news, a look at the dollar shows another day of broad-based but modest gains. The euro has traded down to three-week lows and feels as though there is further room for decline. Data from the Eurozone was mixed with French IP’s gains offset by weaker German trade data but I don’t get the feeling that is the issue. Of perhaps more importance is the ongoing stalemate in Germany regarding a new governing coalition with more talk of the creation of a minority government. Chancellor Merkel does not want that as it will result in a weaker administration, something that the rest of Europe is also loathe to see. However, younger members of her own party are clearly sharpening their knives and seem ready to push Merkel out if they can. I guess twelve years at the top has taken its toll on the next generation. At any rate, if Germany does wind up with a minority government, that is not likely going to help the euro. At the end of the day, though, political stories have had a limited impact on currencies lately, with the central bankers still the drivers. Next week we hear from both the Fed and the ECB, and it is their actions that remain the market’s key focus.

But before we get to the Fed next week, let’s look at today’s payroll data. Expectations are as follows:


Nonfarm Payrolls                 195K

Private Payrolls                    195K

Mfg. Payrolls                         15K

Unemployment Rate             4.1%

Average Hourly Earnings    0.3% (2.7% Y/Y)

Average Weekly Hours        34.4

Wholesale Inventories        -0.4%

Michigan Sentiment              99.0


Certainly if the data is close to expectations, there will be nothing to change the FOMC’s collective mind about raising rates next week. In fact, we would need to see a dramatic fall in NFP or a significant rise in the Unemployment rate for that to be the case, neither of which seems likely. In fact, what seems more possible would be an earnings uptick such that the ‘mystery’ of missing inflation starts to be answered. If we were to see more robust growth there then I think we might hear a bit more hawkishness from the FOMC next week. Remember, futures markets continue to price in just 40bps of tightening for all of 2018, a far cry from the 75bps the Fed is discussing. As we saw this year, the futures market and the Fed will converge at some point, with my continued belief being that the Fed is now on a path where they will raise rates every quarter for the next two years. In fact, the most interesting thing about next week’s FOMC is likely to be the forecasts and the dot plot. Strong data today combined with the ongoing positive global growth news could well result in higher terminal rate expectations. In other words, the Fed is likely to see a higher long-term equilibrium rate in the US, something that will certainly give the dollar a boost. So today’s data is quite important in the big picture. FWIW, my view is that we will see a headline number of 200K, but I am expecting to see the Earnings number higher. Anecdotal observation shows me that companies are paying lower wage workers more in order to get them and keep them, and that has to feed through to the data eventually.

With that, I expect the dollar’s recent modest uptrend to continue for now, as there is nothing obvious to derail it.


Good luck