Week Ahead: Brexit talks resume, ECB zones in on exchange rate

Brexit talks resume this week for another round of horse trading that has so far resulted in very little progress. Will the two sides break the deadlock or will headlines weigh on sterling? Meanwhile the European Central Bank meeting comes after a significant rally for the euro that has got policymakers worried. 

Brexit Talks

The next formal round of talks between the EU and UK are due to take place in London this week and introduce event risk for GBP crosses and the FTSE by implication. The underlying mood is not very positive. The last round of discussions in August produced very little progress.

Afterwards Michel Barnier, the EU’s chief negotiator, said an agreement seems ‘unlikely’ and is concerned about the state of play. David Frost, his British counterpart, said talks were useful but little progress had been made. 

Informal talks last week delivered nothing more, with Barnier saying he was “worried and disappointed” over the UK’s approach to the talks. 

Grappling with the competing concerns of sovereignty (UK) and integrity of the single market (EU) goes to the very heart of the talks. Both sides need to make philosophical compromises before the practical compromises can follow. This is where I start to become concerned about a big, comprehensive deal being done. 

ECB Meeting

The European Central Bank (ECB) meets amid a sharp rally for the euro that has left policymakers concerned. It looks like 1.20 was the line in the sand for the central bank – a level that prompted chief economist Philip Lane to comment that while the ECB does not look at the exchange rate “the euro-dollar rate does matter”.

This was the ECB attempting to intervene in the rally – a stronger euro will make it harder to stoke inflation and will hurt growth. Lane simply let the market know the exchange rate does matter. The last thing we need right now is a currency war, but the ECB may be about to start one. We await to see what Christine Lagarde has to say on the matter.

Meanwhile we should also look to see whether the ECB follows the lead of the Federal Reserve and signals its intention to not let inflation (should it ever materialise) get in the way of recovery.  

The big question is whether the ECB strives for a dual mandate like the Fed has. In actual fact, it already has a wider mandate. In addition to its primary objective to support price stability, it has a mandate to support the EU’s ‘general economic policies’. If this is not a green light to support employment, then what is?  

At Jackson Hole the Fed announced a policy shift that has a material impact on expectations around rates and inflation. The Fed has taken a more rational approach. Instead of saying that the economic outcomes need to fit its models – which have always been nothing more than a best guess – it will let the outcomes drive the policy.

Some would say this is a step towards fully embracing MMT, even if Powell has been against this approach in the past. The fact is that the crisis has thrown MMT from the hinterland of economic theory to practice without any real debate. Powell has embraced a central tenet of MMT – why should millions of people be thrown on the economic scrapheap and left unemployed as the price to pay for low inflation.

I think the ECB will be following this direction and this meeting will prove very interesting. 

Economic data to watch

Besides the above, watch out first for the US Labor Day holiday on Monday which will keep cash equity markets closed. The UK house price index from Halifax is published the same day just before the Eurozone Sentix investor confidence report.

On Tuesday look for the NAB Business Confidence report for Australia as well as spending and GDP data for Japan. Wednesday sees the Bank of Canada interest rate decision and Japanese preliminary machine tool orders, an interesting leading indicator of demand. Aside from the ECB meeting on Thursday there is the US PPI inflation numbers and weekly crude oil inventories. Friday ends the week with UK GDP figures, US CPI inflation numbers and the start of Eurogroup meetings of European finance ministers.

Earnings to watch

Among the major companies reporting earnings this week are Lululemon, Oracle, Richemont and Slack. But perhaps the main focus should be on Covid-winner Peloton, whose shares have surged in recent weeks to all-time highs. 

JPMorgan last week raised its price target to $105 from $58 and added the stock to its top picks list.  

“Peloton’s biggest near-term challenge in our view is keeping up with elevated demand, with Bike order-to-delivery times of ~6-7 weeks on average across the top 20 US DMAs as of our checks on 9/1,” said analyst Doug Anmuth. 

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Highlights on XRay this Week 

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