Parliamentary privilege
Gains for the euro were non-existent yesterday as the initial relief of an agreement being struck between Greece and its creditors already started to unravel. Greece’s parliament alongside the parliaments of Germany, Holland, Finland, Lithuania, Latvia and Slovakia must ratify the deal soon, with the first vote in Athens set for tomorrow. Other concerns include the hit to Eurozone GDP as a result of falling uncertainty and the risk of a backlash in the near future in the Spanish elections due in December.
Needless to say that the Syriza party leader’s decision to sign an agreement backing more austerity has not gone down well internally within the party. If we see – as we expect – the centrists and right wing parties of PASOK, ND and To Potami all vote for the deal and the communists and the fascist Golden Dawn party reject the plan then that leaves around 50 Syriza MPs to vote for it. There is a lot to be said for the Syriza party – already a loose coalition of leftist parties – tearing themselves apart over this deal. I haven’t looked but I reckon you would get long odds of Tsipras remaining in power much longer with snap elections or a technocratic government the likely outcome.
Few reasons for euro strength
We must also remember that, at the end of the day, the euro is quickly becoming a funding currency for carry trades that see it sold to make higher yield investments elsewhere. The divergent split between the path of interest rates between the Fed and the ECB and the BOE and the ECB will start to widen in the coming few years, regardless of what happens in Greece. That is the key for euro weakness. I am happy with our thoughts of a weaker euro through the next 12 months.
While we wait on that Greek vote tomorrow we can turn our thoughts back to the UK economy briefly. Inflation has been a negligible problem in the developed world since the beginning of the year but will become a larger one as the year goes on.
UK inflation to remain flat for now
Inflation remains almost non-existent in most developed nations as oil price declines remain a deflationary pressure. I am looking for CPI to pick-up in Q4 as last year’s collapse in the energy complex starts to slip out of the basket. Core prices – without food and energy – have been increasing albeit slowly and wages remain the major hope for an increase here.
The UK’s jobs report – jobless claims, unemployment, wages – is due tomorrow morning and should, in tandem with a low inflation number this morning, ensure that beneficial conditions for consumers continue.
Iran, US agree deal on Iranian nukes
Oil prices are once again sinking this morning following reports that Iran and the US have reached an agreement on an Iranian nuclear program. We can expect further details of that through the morning but the knock on effect may be to further weaken US rate expectations. Lower oil growth could take as much as a per cent off US GDP in the coming year although the boost to consumers’ disposable income will counteract some of this. Oil is down around 2% this morning.
US retail sales are also due today alongside the German ZEW reading of economic sentiment. Both are expected to have fallen in the past month.
