Good morning,

Juppé rise outlasting Korean missiles

Riskier assets are being sold this morning following a weekend of missile tests and political news. Yen has been the main beneficiary of the risk off environment despite three of the four North Korean missiles that were fired landing within Japan’s territorial waters. There has no news about whether the North Koreans deem the test a success or a failure as a result.

Euro has also popped higher as the French elections become ever the more intriguing. Former French Prime Minister Alain Juppé, who so far has not declared his candidacy for the Presidency, is currently polling in 2nd place behind Emmanuel Macron according to some polls. This would mean that the threat of Marine Le Pen’s Front National would be eliminated in the first round of voting. Juppé has called a press conference for this morning and although many may want him to run, he was not the candidate chosen by his party. The nomination went to Francois Fillon whose campaign has been beset by a scandal relating to payments to his wife and family for jobs that they never undertook.

The euro will trade one way or the other on the Juppé press conference; higher if he says he is running, lower if he rules it out. As we have said before; currency is politics at the moment and will continue to be throughout 2017 and beyond.

March rate rise seems nailed on

Janet Yellen’s speech on Friday evening saw the Fed Chair endorse the idea of a rate rise in March. Our thoughts were that the Fed would only hike rates twice this year and we think that remains appropriate but the schedule has changed. Our original forecasts were that the hikes would come in June and December. We are shifting to March and September now with a risk of another in December.

Yellen was merely the cherry on top of the cake and most of the heavy lifting of expectations was done by other members of the Fed. As such there was little dollar reaction to her words.

High St and UK slowing

Sterling’s weakness into the end of last week was data driven – all three of the PMI surveys (manufacturing, construction and services) missed their estimates. If you have been reading our thoughts on the UK economy this should come as a galloping shock to precisely no one especially within the services sector. The consumption driven expansion of the past few years is coming to a rather sharp stop.

Inflation within the sector is rising at its highest level in 8½ years and although some of this may be coming from higher wages the majority is from higher commodity prices and a lower pound. We have doubts about how much longer a meaningful increase in wages can maintain pace with the rises in prices amid an atmosphere of tightening margins and likely lower investment.

Optimism does remain high however and while a reading of 53.3 is not drastically poor, should the weakness of the last few months continue, then fears will increase of an overall contraction in the sector. The UK lives and dies by its services sector and while the weather may be improving, the health of the High St and the wider services industry does not look so encouraging.

No fireworks from the Budget

The Budget this Wednesday has been dutifully leaked to the Sunday papers and there are no shocks within it. Thursday also sees the beginning of the EU leader’s meeting in Brussels wherein Theresa May had hoped to trigger Article 50. The vote in the Lords last week may have damaged that timeline as another vote to overturn the Lords amendment must now be held. We see any delay to Article 50 as a positive for the pound.

Today’s data calendar is rather quiet but two members of the Bank of England – Chief Economist Haldane and new Deputy Governor Hogg – speak at 09.30 and 11.30 respectively.

Have a great day

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