This week, apart from the transient diversions of the monetary policy meeting minutes from both the Federal Open Market Committee (Wednesday) and the European Central Bank (Thursday), it is all about the UK.
After this morning’s inflation data (which showed both headline and core inflation unchanged at 2.6% and 2.4% respectively), we have the release of retail sales data for July and the June employment report. Perhaps more importantly for sterling and sentiment towards the UK, however, is the steady release of government papers outlining what Tory politician David Davis described this morning as the “new deep and special partnership the UK wants to build with the EU” and setting out the “key issues for the government’s approach to that partnership”.
As parliament returns from summer recess this week, the government is under no illusion that clarity, direction and a united, cohesive approach to the proceedings is desperately needed. Davis, who is the secretary of state for exiting the EU, sets out the strategic intentions of the UK in this morning’s City AM
(ahead of a series of “future partnership papers”), where it is clear that his jottings are intended for many distinct audiences and issues.
The article begins by stressing the desire for a new “deep and special partnership”, and to draw on the expertise of external parties — addressing criticism of isolationism and the involvement/inclusion of UK businesses. Davis also addresses (i) the freest and most frictionless possible trade, (ii) the development of policy to build a stronger, more prosperous, more outward looking UK than ever before, with (iii) no return to the borders of the past between Ireland and Northern Ireland. Not to mention greater clarity over the government’s desire for a transition period during which the UK would be part of a “temporary customs union”.
Davis went on to say, in a subsequent interview, that “constructive ambiguity” is vital for negotiations. We partly agree with this sentiment — it is after all a negotiation (and a very significant one). However, due to the significance of this negotiation, it is critical (at least from this point forward) that constructive ambiguity does not stray (back?) towards disruptive uncertainty, or even worse.
“Paying good wages is not in opposition to good productivity” — James Sinegal
Last week, we discussed our increasingly confident view
that the UK (and the US) are likely closer to wage inflation and therefore a major pivot point for price pressure, expectations, interest rate structure and monetary policy. We maintain that view. Indeed, if the uncertainty surrounding the Brexit negotiating position is clarified (even very modestly) by the government papers to be released this week, the implications are potentially very significant.
In that regard, the June UK employment data will be keenly watched, not just for continued erosion of labour market slack, but increasingly for tentative signs of a recovery in long-elusive wage pressure. To paraphrase the economist Rudi Dornbusch, we are of the opinion that wage inflation likely, “takes a much longer time coming than you think, and then it happens much faster than you would have thought”.