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Tuesday, 17 October 2017

Never mind the price; feel the quality!

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Suddenly the end of the world as we know it has been put back in the cupboard and the sea of red has turned green again. Not that US indices had been in quite the mess which their European counterparts had found themselves in. In fact the Dow had its third day in a row of gains and the S&P has put on a four day run, closing 2,257.59, just 23 pts or 1% below its all-time high of August 7.

Not surprising really with the second print on US Q2 GDP - still an estimate - being released and being revised upwards from 2.7% to 3.0%. The implicit price deflator remains at 1%. Three percent is pretty punchy in anybody’s book and confirms that the American economy is in rude health. The ADP Employment Change number also comfortably beat forecasts at +237,000 versus the expected +185,000. That number bodes well for Friday’s payroll report for August.

Today marks the last day of what has been a confused and volatile month of August and although tomorrow, apart from being the beginning of meteorological autumn, rings in the last third of the year. Well, mathematically it might be the last third but realistically it is more like the beginning of the last quarter. By the time September has wound itself up and December has wound itself down, there are at best three months of grown up trading ahead of us culminating on December 13 with the probable 0.25pt tightening by the Federal Reserve.

This morning’s release of China’s August Manufacturing PMI, ahead of forecast at 51.7 and Non-manufacturing PMI at 53.4, marginally lower than in July but still strong, also convey the impression that the Polyannas should, for the moment at least, get back in their box.

Risk asset bulls are already calling the beginning of something of a Santa rally and are predicting strong gains between now and year end. The breakdown of the GDP release makes interesting reading but the real winner is to be found in the strong increase in corporate cash flow. Quarterly profits were down marginally but the cash position points towards a bit more flexibility on the capital investment and on the hiring front.

The July figures had unemployment at a very tight 4.3% and although that is slated to remain unchanged we must be coming close to the point where labour cost inflation begins to kick in. And that is what the FOMC will be looking at if it wants to stay ahead of the curve. Price inflation, for those who might have forgotten it, is about as lagging a lagging indicator as can be found and staring at CPI is about as useful as waiting to board a train of which one can only see the red tail light.

A detailed sifting of the data – if you have an hour or so to spare away from facile headlines, feel free – gives the impression that the positive stats are not just a flash in the pan and that the momentum should be carried through into Q3. Another figure to look forward to is the trade balance which will be reported on September 6. The emergence of shale gas and the ever decreasing extraction cost attached to it has turned the oil price into a game of 3D chess which in turn has rendered the trade figure one level more opaque, but we should not take our eye off that particular ball, not least of all as it is one of the Donald’s favourite hobby horses.

Older readers might remember Jeux sans Frontieres, the pan-European TV game show. Not surprisingly, while the “sans frontieres” or in German the “ohne Grenzen” element pointed to one great big European family get together, the BBC missed the point by calling it “It’s a Knockout”. It was transmitted and enjoyed by millions live across the continent; the UK recorded it and put it on at some other time. Anyhow, it was played by teams of about 30 from communities in a string of different Eurovision member countries and was made up of a bunch challenges which usually ended up with the candidates either in a pond or slip-sliding around on surfaces coated in liquid soap. I’m not sure what brought it to mind but maybe it was my piece yesterday which took a look at the dog’s breakfast which are the Brexit negotiations.

I caught part of an interview with Guy Verhofstadt, the EU’s chief Brexit negotiator; I think it was on CNBC but I can’t be sure. In it he was asked why he, Michel Barnier and the Muppet in Chief persist in criticising the UK and its team of negotiators in public. We don’t, he replied, we just try to make their position more realistic…or something to that effect. There is no question that some of the sniping would be better done in private but that is what happens when one places responsibility for one of the greatest upheavals in the European economic edifice in the hands of politicians.

Verhofstadt, no disrespect meant, was elected to the Belgian parliament at the age of 25 in 1978 and rose to become PM from 1999 to 2008. What qualifications he brings with him to justify sitting on the boards of publicly listed companies escapes me. But one thing is clear; there are two elements to Brexit, a political one and an economic one. It is human nature that people will deal with the bits of a problem which they understand first. The politicians understand the political element but are hugely out of their depth when it comes to the implications for business. Hence these are being left aside to look after themselves.

This applies to both sides. It might be nice to know that we’re all going to be kitted out with nice new blue passports but what about the really important things? The fact that Article 50 envisaged no more than a two-year unwind period proves that those who wrote it didn’t have a clue what they were promulgating. A transition, a long transition, will be necessary and the faster the two sides agree on that and get on with thrashing out a viable road map, the better. Standing around crowing “The UK doesn’t know what it wants” while at the same time repeating “You’re not going to get what you want” is no way to run a railroad.

Two years was never going to be enough and the first and most important task of the negotiating teams has to be to nail down a more realistic timetable. It was said of the late Yasser Arafat that he never missed an opportunity to miss an opportunity. To me it looks as though the Brexit teams are trying to set new standards on that front.

On April 18 sterling was at €1.1970. On Monday it printed the €1.07 big figure. The euro lost some ground yesterday against both the pound and the dollar but if the former remains within its trend channel it will be at or around parity by the end of the year. Readers might recall that in the opening comment of the year I suggested that anybody who has no need to own sterling would do best not to do so. As we stand, my three key calls for 2017 which were to remain long of risk, that the Fed would tighten three times and that sterling was toast look to be on track….and I have, as yet, no reason to back away from any of them.

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