12 Sep 2017
As Parliament reconvened to debate the European Union withdrawal bill, the fractious Brexit discussions were overshadowed by the devastating impact of Hurricane Irma as it swept across the Caribbean. A fortnight after Hurricane Harvey had disrupted Texan oil and gas facilities, Florida ran short of gasoline to fuel the escape of coastal evacuees, who had already seen Caribbean islanders lose homes and lives.
The cut in Texan refining capacity in Harvey’s wake depressed demand for crude and reduced the supply of refined products; so, West Texas Intermediate Crude futures remained below $50 per barrel as the week closed, while gasoline prices shot up. However, they were widely expected to ease as refinery output recovered.
Source: FE Analytics, data sterling total return to 8 September
Brexit circus set for extended run?
After struggling to hold their depleted audience during the summer recess and ensuing hurricane season, the key Brexit performers were keen to get down to serious business. In Westminster, introduction of the withdrawal bill inevitably brought clashes between Brexit Secretary David Davis and his opposition counterpart Keir Starmer, who described the bill as a huge power grab. Davis in return claimed the country would never forgive Labour if it blocked Brexit’s progress.
Adding to the Brexit Secretary’s discomfort were rumblings from his own back benches about some aspects of the withdrawal bill and a leaked Home Office document mooting plans for a cutback in low-skilled EU worker numbers to boost local recruitment and training. The latter point links to the unusual situation of declining real wages, with CPI inflation above 2.5% and wage growth around 2%, at a time when unemployment has been falling for several years.
UK unemployment peaked at 8.5% in 2011 and has fallen since, reaching just 4.4% in June. Yet the base rate has been kept low (and was even cut again in August 2016) and remains at 0.25%, with continuing inaction on interest rates partly down to Brexit uncertainty. The Monetary Policy Committee, split 6-2 against a rate rise in August, meets this coming Thursday. We are less dovish than those predicting a 2019 increase, with our view being that the second half of 2018 is the most likely point for the next interest rate rise.
Uncertain times for central banks
Returning to the battered US, where parts of Miami were under water at the time of writing, the exceptional hurricane season has (on top of all the human tragedy) taken an immediate economic toll. The oil supply chain disruption is a major part, with spin-off into energy-intensive businesses. US unemployment claims have already risen due to Harvey (the next set of figures from the Bureau of Labor are due Thursday) and third-quarter GDP could also suffer, though we anticipate these effects could be reversed in the fourth quarter. The better news is that hurricane emergency aid was agreed and a US government shutdown at least temporarily averted.
But for markets, the important question of when the next US rate hike is coming is increasingly uncertain after Federal Reserve (Fed) vice-chair Stanley Fischer’s early departure and a brutal hurricane season.
The Fed’s counterparts at the European Central Bank (ECB) also have issues to grapple with, not least the strength of the euro. It closed near a three-year high against the dollar on Friday, buoyed by an accelerating EU growth rate. The ECB is planning to unwind its quantitative easing (QE) programme but wants to apply the monetary brakes gently; some commentators expect bond market volatility when its QE unwinds.
A meeting last Thursday could only decide to defer the QE tapering question until the next meeting in October. Meanwhile, the ECB looks to be at the mercy of the foreign exchange markets – as the euro goes up, inflation goes down, making it hard for them to exit QE…and then the euro goes down.
UK 10-Year yield @ 0.99%
US 10-Year yield @ 2.05%
Germany 10-Year yield @ 0.31%
Italy 10-Year yield @ 1.96%
Spain 10-Year yield @ 1.53%
Chief Investment Officer
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