Good morning,

UK: A pressured consumer

Retail sales fell to their lowest level in 4 years in September figures released yesterday showed. It is not a surprise that the retail picture is weak although a 4 year nadir obviously raises uncomfortable questions about just where UK growth is going to emerge from in Q4. Consumption is the engine of the UK economy and the retail sector, hammered by a weak pound, tighter margins and customers beset by real wage declines are in the eye of the storm at the moment.

This slackening could of course be a number of things. We will find out in the coming months whether this is consumers holding off on purchases in preparation for Christmas or whether the Bank of England’s messaging on interest rate rises has been enough to keep some hands in pockets.

We can but hope that this weakening sales pattern is also bringing about a slowing of the consumer credit expansion; as we have noted extensively before retail sales in the past have been powered by a ‘buy-now-pay-later’ mentality and we continue to worry about a ‘buy-now-default-later’ reality. We won’t obtain the latest consumer debt numbers for another 6 weeks or so.

The economic calendar is quiet in the UK today although the latest government borrowing numbers will come into focus as we get closer to next month’s Budget.

EUR: Madrid take another step toward suspending Catalan autonomy

Through Article 155 of the Spanish constitution, Madrid can suspend the autonomous status of Catalonia, despite the region voting for independence in an unofficial referendum. While threats to declare unilateral independence have been made, it appears Madrid will move first and withdraw all authority of Catalan parliament this weekend. How this situation eventually resolves is still unclear, but the euro’s taken the news in its stride and sits close to the week’s high against the dollar.

The EU Commission meeting moves into its 2nd day today and Brexit is the dominating subject. Chancellor Merkel said yesterday that there’s “zero indication” that Brexit talks won’t succeed and she “truly” wants an agreement rather than an “unpredictable resolution.” She added that “now both sides need to move”. Merkel also stated that she is “very motivated” to get talks on trade begun by December. A deal on the divorce settlement must be agreed before then however.

USD: Taxman

Tax news is good news for the US dollar with the US Senate adopting a Budget resolution for next year that will open the door to Donald Trump’s plans for tax cuts. This is the very easy, first step in getting a tax plan agreed, voted upon and adopted. Republican members will have to be kept sweet on deficit measures given the widespread disbelief that the growth in US GDP will make up for the lack of governmental income.

Donald Trump’s closest advisers are steering him toward choosing either Stanford economist John Taylor or Federal Reserve Board Governor Jerome Powell to be the next Fed chief, according to several people familiar with the process, both would be seen to be more supportive of the USD than Janet Yellen has been.

Have a great day and a better weekend.

Jeremy Cook, Chief Economist