The UK's Brexit Endgame

BREXIT NEGOTIATIONS IN FOCUS The EU summit at the end of next week (Thu/Fri) is shaping up to be a key date for Brexit negotiations. UK PM Johnson has threatened to end talks between the UK and the EU on their future relationship if the outline of a deal is not clear by that point. Negotiations will continue for now and while recent reports have been more optimistic, it seems that key sticking points including policy on fishing have yet to be resolved. Meanwhile, sterling continues to be at the bottom end of its recent trading range against the dollar and the euro as the market waits for progress. The Summit will also discuss a range of other topics and the main one will inevitably be Covid-19. Leaders agreed on a fiscal support package at a previous meeting but some of the details are proving to be sticking points delaying progress on the final agreement in the EU parliament. So given growing concerns about the downside risks to growth they may want to give the process fresh impetus.

COVID-19 NEWS CONTINUES TO DOMINATE HEADLINES The past week has again been dominated by news around further rises in Covid19 cases, announcements of new restrictions and reports that further support measures will be introduced in the near future. Across Europe, the rules have been tightened in Belgium, France, Germany and Italy. In the UK, Scotland announced stricter controls, which were described as a ‘circuit breaker’, including the temporary closure of pubs and restaurants in the ‘central belt’ and strict controls elsewhere. Further controls are expected to be announced in England with media reports suggesting that a three tier-system for local lockdowns will be introduced, with the North facing particularly tighter restrictions. In anticipation of that, UK Chancellor Sunak has announced a new ‘local’ furlough scheme. Meanwhile, some economic reports disappointed this week suggesting that the initial post-lockdown rebound in activity is losing momentum. UK August GDP growth at 2.1% was down sharply from the 6.4% gain in July. More than half of that rise was attributed to the temporary schemes introduced to boost growth in the hospitality sector. There was also disappointment in the Eurozone where German industrial production fell in August for the first time since April. However, on a more positive note, output rose in France and surged in Italy. Strong rises in GDP are still likely in Q3 for both the UK and the Eurozone. However, with restrictions on the rise across Europe, concern is growing about what happens after that. The coming week’s sparse data calendar, however, will provide little in the way of timely indications for economic conditions. For that markets may have to wait for the following week’s October PMI readings.

GERMAN ZEW TO PROVIDE FIRST OCTOBER INDICATIONS The coming week’s economic data calendar is light in the UK and the Eurozone but busy in the US. The only UK official data is Tuesday’s labour market report. That is forecast to show a further modest rise in the unemployment rate in the three months to August to 4.3% (from 4.1% in July) and a fall in employment of 30k. That would still leave unemployment at a very low level considering the ongoing impact from the pandemic. However, it will tell us little about what will happen when the government’s furlough scheme closes at the end of this month. It is hoped that the government’s replacement scheme will help prevent a significant rise in unemployment but the outlook is cloudy, particularly given recent developments. Also, on Tuesday, the British Retail Consortium’s September measure will provide an update on whether retail spending remains buoyant for now. In the Eurozone, the German ZEW survey (Tue) will provide the first indications of October economic trends. As a survey of financial analysts, it is regarded as a less reliable indicator of activity than the PMIs, which are not published until the week after. However, its expectations component has often proved to be a good leading indicator. In September, it climbed to a 20-year high and so it would not be a huge surprise if it fell this month. We forecast a slip to 71.0 from 77.4 but a rise in the current situation reading to -58.0 from -66.2. Significantly worse readings would add to the concerns about the economy. Eurozone industrial production is forecast to have risen by 0.6% in August after very mixed readings for individual countries. In the US, the economy has continued to grow despite concerns through the summer of a possible negative impact from the rise in Covid-19 cases. Retail sales have been a key source of strength since lockdown restrictions were eased. We forecast another rise of 0.6% in September (Fri) the same rate as in August. Industrial production (Fri) is also predicted to be up again in September and we forecast a 0.8% increase, which would be a fifth consecutive monthly gain. The October readings for the New York Fed and Philadelphia Fed’s surveys will provide some of the first indications on October trends but bear in mind that these can be very volatile. Finally, annual CPI inflation is forecast to be up modestly in September but not by enough to suggest that inflation is back close to the Fed’s target

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