‘Canada Plus Plus Plus’ model for the UK?


Yesterday morning the UK released their second estimate Q4 GDP figures. They were revised down to +0.4% from +0.5%, whilst the broad consensus and our own economist forecast had been for it to be unchanged at 0.5%.

Latest Rates
1.1351 1.7855 1.7760 1.3058
149.35 10.9331 16.2369 1.2313 0.8810
Investec currency forecasts as at 5 January 2018
Q1'18 Q2'18 Q3'18 Q4'18
GBP/USD 1.40 1.38 1.39 1.40
GBP/EUR 1.14 1.15 1.15 1.15
Data releases
10:00 Eurozone Inflation
Key Levels
1.3800 1.4020
1.1200 1.1500

Market overview

Yesterday morning the UK released their second estimate Q4 GDP figures. They were revised down to +0.4% from +0.5%, whilst the broad consensus and our own economist forecast had been for it to be unchanged at 0.5%. The UK statistics office pointed to a number of very small revisions across a few categories pushing the GDP estimate down. The release yesterday also provided our first glimpse into the expenditure breakdown of growth. That showed household spending remaining relatively subdued in the final quarter of the year whilst net trade acted as a drag on UK growth and business investment figures were flat on the quarter, the weakest showing since Q4 2016. The revisions, which included a 0.1pp upgrade to Q3 GDP to 0.5%, pushed 2017 GDP growth for the full calendar year down to 1.7% from 1.8% previously, with that representing the slowest UK growth rate since 2012. Following the release Sterling moved relatively little, movements were being driven by FOMC meeting minutes released the night before.

The ECB followed with its release of the ECB meeting minutes for January. It highlighted how nervous the ECB was about getting its policy steps and messages wrong as it edges closer to the policy exit. The minutes did mention that ‘some’ on the Governing Council expressed a preference for dropping the easing bias on QE (i.e. to increase bond buys if necessary), but as we saw in the policy statement last month, any move to adjust this language was overruled by the majority. The overall tone was one of caution with the minutes flagging that policy will evolve to avoid abrupt, disorderly adjustments later – perhaps giving yet another pointer to the prospect of the ECB opting to taper QE purchases once it gets to its current QE end point of September 2018. Policymakers also ‘expressed concern’ about the euro’s volatility so presumably would also want to avoid being the source of any more of this through its policy communications and actions.

Last night’s gathering of key Brexit ministers appeared to help to stitch differences in the Cabinet together. It is widely reported that those at the Chequers meeting endorsed Brexit Secretary David Davis’s ‘Canada plus plus plus’ model for future trading arrangements whereby the UK would seek a free-trade agreement similar to the EU-Canada, but with add-ons like securing better access to the single market for goods and services through close cooperation/alignment on regulation. Despite the positive tone emerging, reports are that the talks are still at a high level. Furthermore, as we edge closer to the March EU Summit at which the UK was hoping to get agreement on a transition arrangement, there are further signs that the Brussels side of the negotiations will not readily rollover and accept the UK’s proposals. Additionally, on the trade deal front, just a day ago, Dutch PM Mark Rutte was at Downing Street urging PM May to ditch the idea of a ‘three baskets’ approach (where the UK maintains the same regulation as the EU in one area; where in another it uses rules of its own for the same outcomes; and a in third where the UK takes a totally different approach). Note that Theresa May is set to deliver a big speech on Brexit next week (possibly on Friday) whilst Labour’s Jeremy Corbyn is set to outline the Labour party position on Monday; he is expected to say that Labour would seek to keep the UK in ‘a’ customs union with the EU. Sterling was little moved by developments over the past 24-hours.

The day ahead

Looking at the day ahead, there is the final revisions to January CPI in the Euro area. Away from that, EU leaders are scheduled to hold an informal meeting in Brussels to discuss the composition of the European Parliament and also the bloc's next budget. Over in the US, Fed's Williams, Mester and Dudley are due to speak. The Fed is also expected to publish Monetary Policy Report ahead of Fed Chair Jerome Powell delivering his testimonies to Congressional committees next week.

Thought of the day

Last night investors experienced one of the scariest nights of the year. Shares in Snap Inc, the American technology and social media company who are best known for the creation of Snapchat, dropped almost 8% before closing 6% down on Wall Street. The reason for such a dramatic fall? Poor earnings report? Sector downturn? A global equity sell off? Or how about a tweet from reality TV star Kylie Jenner? Yes, it was the latter of these events which wiped almost $1.3bn (£1bn) off Snap's stock market value. Specifically, Jenner concluded her in depth analysis of the image messaging and multimedia mobile application by tweeting "Sooo does anyone else not open Snapchat anymore? Or is it just me... ugh this is so sad”, and her 24.5 million Twitter / Stock Market followers clearly took this as a reason to sell the stock. It would appear no company, nor market is safe from the power of social media and the insightful messages it displays. To discuss the crazy world we now live in, please console in your dealer today on 0800 055 6339 who can, at the very least, pretend everything is going to be ok.

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