Good morning,

Balances shifting

The balance of power in the Senate ebbed a little further away from President Trump last night as the Democrats won a seat in Alabama for the first time in over 20 years.

Legislation has been one way of strangling the Trump administration, but revoking the hold over both parts of Congress will go some way to stopping his reform agenda. We think it very unlikely that the Democrats will be able to meaningfully change the Senate, although the result overnight helps that fight – but they need only 25 seats to flip in their favor to take back the House.

Trump won Alabama by 28 percentage points in the 2016 General Election, and last night’s moves may show that Trumpian candidates are not so in favor in US politics anymore (although the allegations against Roy Moore certainly didn’t help). The dollar initially slipped as traders parlayed the result into an increased chance that the tax bill currently being worked on in Congress will fall apart.

Weakness has continued following a poor inflation report showing that core prices are not building as they should.

The Fed is expected to increase interest rates by 0.25% in today’s meeting, however the key focus will be on comments around lower than expected inflation and the stimulus created by proposed tax cuts. The Fed is currently eyeing three hikes next year. Will there be a move to four?

The planned tax cuts could bring stimulus and boost the Fed’s economic outlook, so they may be more hawkish. The variable will be Janet Yellen as her countdown clock is almost up. Will her comments be far more open and honest about her concerns and the outlook?

Higher pay for fewer people

Sterling is confused this morning following the latest run of jobs data showing that the strong drive of employment that characterised the recovery of the UK economy since the Global Financial Crisis is stuttering.

While wages were higher than expected, they are still below inflation, and, more crucially, 56,000 fewer people had jobs in Q3 than they did in Q2. In short, those with jobs are getting poorer at a slightly slower rate than those without jobs. While these numbers could possibly signal a positive shift in productivity, that is little consolation against a backdrop of the largest employment fall in three years.

Brexit will once again be debated in Parliament this evening with the government facing defeat on an amendment bill to allow the House of Commons to vote and reject the terms of the deal with the EU before the UK leaves.

Italy adds to the risk people

Early this morning Italy announced that a general election will take place on March 4th. Throw in the Catalonian situation and the need to form a government in Germany, and we could easily be starting 2018 talking about political risk more than the recovering economic picture. In the meantime we must wait on what happens at tomorrow’s ECB meeting.

Have a great day,
Jeremy Cook, Chief Economist