In the Friday session, the British pound has posted slight losses. Currently, GBP/USD is trading at 1.3094, down 0.18% on the day. On the release front, British Halifax HPI gained 0.8%, well above the forecast of 0.0%. BoE Chief Economist Andy Haldane will speak at an event in London, and the markets will be looking for clues regarding a rate move in November. The US releases key employment numbers, so we could see some movement from the dollar. The markets are braced for a sharp slowdown in Nonfarm Payrolls, with an estimate of just 85 thousand, while Average Hourly Earnings is expected to improve to 0.3%.
The British pound continues to struggle. GBP/USD has posted losses over five straight daily sessions, and the pair is down 2.4% this week. Investors were not impressed with this week’s PMIs, which are key gauges of economic activity. Construction and manufacturing PMIs both slowed down in September, raising questions about the health of the British economy ahead of the dark cloud of Brexit. Construction PMI dropped to 48.5, pointing to contraction in the construction sector for the first time since August 2016, shortly after the Brexit vote. Manufacturing PMI slipped to 55.9 in September, down from 56.9 points a month earlier. Although this indicates expansion, the indicator missed expectations. The weak PMI reports could delay plans by the BoE to raise interest rates. BoE Governor Mark Carney has hinted that the Bank will raise rates in the near future, but not all BoE policymakers are on board. Proponents of a rate hike have cited low unemployment and high inflation as reasons to raise rates, but weak data such as the PMIs have raised doubts about whether the economy needs a rate hike at this time.
The crisis in Catalonia continues, as the Spanish and Catalan governments show no signs of backing down. The Catalan parliament has scheduled a meeting for Monday, saying it will consider declaring independence. However, Madrid has obtained a court order suspending the Monday meeting, which would mean that any Catalan lawmakers that defy the court and hold a parliamentary session could be arrested. Which side will blink first? The national government has yet to invoke article 155 of the Spanish constitution, which would allow the government to disband the Catalan parliament. This "nuclear response" could trigger a sharp reaction from Catalonia, which is still seething from the harsh crackdown by police which injured 900 civilians on Referendum Day.
As more Federal Reserve policymakers express support for another rate hike in the near future, the odds of hike continue to climb. On Thursday, Kansas City Federal Reserve Bank President Esther George weighed in, saying that further rate hikes were needed in order for the labor market to remain close to full employment and raise inflation to the Fed’s target of 2 percent. The markets have been taking note of the Fed’s message, as the odds of a December hike have climbed to 81%. Just a few weeks ago, Federal futures had priced in a December hike at below 50 percent. The Achilles heel in an otherwise strong economy is weak inflation, which remains well below the Fed’s target of 2 percent. In addition to a December hike, the markets are keeping a close eye on a possible changing of the guard at the Federal Reserve. Janet Yellen’s term as Fed Chair expires in February 2018, and President Trump may decide not to ask her to stay on. The current front-runner for the position is Kevin Warsh a former FOMC member, who is considered hawkish by the markets. Other candidates for the Fed Chair include Federal Governor Jerome Powell and Trump economic adviser Gary Cohn.
