Another week of procrastination with regards to UK/EU trade talks, with news continuing to ebb and flow between positive and negative rhetoric. Brexit talks are set to resume on a face-to-face basis as they enter what has been widely described again as a crucial week. EU chief negotiator Barnier is reported to have had a briefing with EU fishery ministers on Friday, which has prompted speculation that a compromise on a key area of contention is imminent. However, there was no official confirmation from either side over the weekend, with both highlighting this as a sticking point. Some analysts are saying that a deal must be done next week to allow time for votes in the UK and European parliaments before year-end. However, there are reports that suggest that preparations are being made for emergency voting sessions post-Christmas which could warrant more time.

In the meantime, question marks over the UK fundamental picture remain fragile. The services sector declined to 45.8 from 52.3 previously, showing that the sector contracted. This also stated that unemployment continued to decline sharply, although overall business confidence strengthened to the highest level for over five years amid optimism over vaccine developments. In addition, Bank of England chief economist Haldane noted optimism over a recovery in the economy for 2021, although he also warned that there would be permanent scarring present.

Chancellor Sunak, in his spending review stated that the economic emergency had only just begun and there would need to be a further £55bn in Coronavirus support for the next financial year.

According to the Office for Budget Responsibility (OBR), UK GDP will contract by 11.3% for 2020 and, despite forecasts of growth exceeding 5% in the next two years. The review also stated that the economy is not expected to regain pre-COVID levels until the end of 2022. The government borrowing requirement was forecast at £394bn for the current year (19% of GDP) with a decline to £164bn next year. OBR expects unemployment to peak at 7.5% by the end of Q2 next year.

The Euro pushed sharply higher on Wednesday, with a more determined break above the 1.1900 level amidst prolonged USD weakness. This was despite Germany reporting that the partial lockdown measures would be extended until December 20th.

ECB minutes from November’s meeting expressed reservations that the pandemic might have longer-lasting effects on both demand and supply within the economy. It was also likely that inflation would stay in negative territory for longer than expected, and that surge in infections and containment measures served as a warning that the recovery path would be a long one.

Focus for the week ahead is mainly on US economic data and Fed Chair Powell’s testimony in front of Congress. The headline US labour will be the focus in terms of data with supporting data also release in the days leading up to its release on Friday. In the meantime, UK/EU trade talk developments are likely to dominate newswires in the UK as well as exiting lockdown this week.

Monday

  • UK Mortgage Approvals
  • UK net lending to individuals
  • ECB President Lagarde Speaks

The market will focus on the UK housing sector today as mortgage approvals and net lending figures are released. The mortgage approvals have been on an upward trend increasing for the last 4 months so it will be interesting to see if the trend continued ahead of November’s lockdown. ECB President Lagarde is due to speak at an online event hosted by the European Policy Centre. Lagarde’s rhetoric will be closely monitored for subtle clues regarding future monetary policy. In addition, with UK/EU trade talks resuming the market will continue to wait with bated breath for directional news on a deal.

Tuesday

  • German unemployment
  • EZ CPI (Inflation)
  • US ISM Manufacturing
  • Fed Chair Powell Testifies

Last week, Germany extended its lockdown measures until December 20th, so the market will be keen to see if the unemployment numbers prior to this decision provide them the scope to not damage the economy further.

This figure is also released ahead of the bloc’s figure on Wednesday. November ‘flash’ CPI is due out on the same day, which is expected to show another annual decline in prices. The ISM Manufacturing Purchasing Manager’s Index (PMI) for will provide some context on how economic growth is performing in the service sector. These has been some concern recently as COVID cases increase. Fed Chair Powell and Treasury Secretary Mnuchin will testify to Congress about the effectiveness of policies designed to offset the economic impact of COVID-19. Rhetoric here will be closely monitor for clues on future policy.

Wednesday

  • EZ unemployment
  • US ADP Unemployment
  • US Beige book

Following on from Germany’s unemployment numbers, we have the Eurozone’s figures today which are expected to show that October’s unemployment rate ticked up to 8.4% from 8.3%. The US ADP employment figures will provide some context of how the headline labour figures could look on Friday.

The market rarely reacts to this due to the inconsistency with the headline figure on Friday; however it does provide some foreshadowing. After the European markets close, the US Beige Book is set for release. This comes out 8 times per year, 2 weeks before each Federal Open Market Committee (FOMC) meeting. This provides anecdotal evidence supplied by the 12 Federal Reserve banks regarding local economic conditions in their district.

Thursday

  • US Jobless claims
  • ISM Service PMI

Ahead of tomorrow key labour report and following on from the ADP employment report we have the weekly jobless claims. It should be noted that initial jobless claims have picked up sharply in the past two weeks, possibly signalling a stalling in the jobs recovery. In addition, ISM PMI Services will provide some context on how economic growth is performing in the service sector. These has been some concern recently as COVID cases increase.

Friday

  • UK Construction PMI
  • US Non Farm Payrolls

The UK’s construction sector will be monitored for signs of growth despite COVID restrictions. The sector is expected to continue to grow. The headline figure for the day ahead will be the labour data from the US. The November labour market report will provide more comprehensive information. The unemployment rate is expect to decline by 0.1% whilst the headline figure expected to expected to slide to 500k from 638K.

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