October 2016 Treasury Review

31 October 2016


Uncertain, unclear, unpredictable; just a few words used to describe Britain’s post-Brexit economic outlook with the month of October continuing this trend. The collapse in Sterling was the key talking point for the month as unexpected events increased its volatility in currency markets. Theresa May’s announcement on the final day of the Conservative Party Conference, that Article 50 would be “triggered no later than the end of March,” caused the currency to fall by 1%. Philip Hammond added fuel to this fall by insinuating a “Hard Brexit” with departure from the Single Market being the desired route of action for Britain, followed by the potential to pursue a Customs Union once Brexit is complete. These announcements caused material levels of volatility in markets through the start of the month, even though official negotiations have yet to commence.

Sterling drop

This initial tumble in Sterling was followed by the most detrimental event for the month; the ‘Flash Crash’ in the currency, where its value fell by 6% in 2 minutes, causing investors to worry that it could fall further. The crash was put partly down to a ‘fat-finger trade’ or faulty automatic trading algorithms. However, the factor to cause concern was that the currency never rebounded back to its original, pre-crash level. The currency is currently 16% less than it was pre-Brexit. One advantage of the depreciation is that it will help boost exports in the economy as the price of goods and services is relatively cheaper to those abroad. Nevertheless, greater inflationary pressure is another by-product of the currency depreciation.

The Purchasing Managers Index (PMI) figures were the first pieces of key data to be released for the month, providing investors with further insight into the economy’s performance post-Brexit. On the whole figures were positive, with manufacturing activity rising to 55.4 from 53.4 in August, its fastest rate since June 2014. Likewise, the Construction PMI registered a rise, to 52.3 from 49.2 in August, beating the forecasted value of 49.0. The Services PMI also remained upbeat, despite it contracting slightly to 52.6 from 52.9 in August, even though the abnormally high August figure is believed to be a reaction to the unusually low July figure of 47.4. These figures broadly supported the case of not having an interest rate cut in November. All sectors of the economy saw activity readings in excess of 50, the level that separates “expansion” from “contraction”.



Inflation figures for September were too early to reveal the effect which the 16% fall in Sterling had on the economy. Consumer-level inflation (CPI) for the year rose to 1.0%, its sharpest increase since November 2014, beating expectations of 0.9%. Furthermore, wholesale prices also increased, to 2.2% year-on-year. It was stated that the sharp increase was simply due to a rise in both clothing and fuel prices through the month. However, the Sterling impact will feed through, but typically lags by a number of months, so further upside movement is widely anticipated in the future.  Elsewhere, figures showed that despite the labour market showing signs of it enduring the Brexit shock, growth in the labour market slowed. The claimant count rose by 700 to 776,400 in September with the unemployment rate remaining at 4.9%, despite an increase in the number of unemployed in the economy to 1.656 million in the three months to August.



Retail, GDP, Employment

Despite unexpected warm weather and higher prices for new clothing dampening demand towards the end of the third quarter, UK retail sales recorded its strongest quarter since late 2014. In the three months to September sales grew by 1.8% despite a disappointing 0.0% change on the month. On the year, sales were down from Augusts’ figure of 6.6% as data for September came in at 4.1%, lower than the forecasted 4.8%. Many economists fear that the knock-on effect from rising inflation in the form of rising prices, will heavily affect consumer demand in the economy as a result of the sharp decline in Sterling since the EU referendum; a factor which caused the consumer confidence GfK index to fall to -3 in October from -1 in September.

Public finances also added to Britain’s list of problems as it showed a larger than forecasted deficit for September of £10.6bn, 14.5% higher than the deficit in the same month last year. Corporation tax receipts unexpectedly experienced its first fall since September 2009, with experts struggling to understand the reasoning behind the drop given other, more robust data releases for the economy.  Therefore, the chances of Britain reaching its budget target for the year have all but disappeared after this release. However, current target levels are expected to be torn up at Chancellor Philip Hammond’s first Autumn Statement in November. The more robust performance of the economy through the quarter was clearly reflected in the first estimate of Q3 Gross Domestic Product (GDP) coming in above the forecasted figure at 0.5% on the quarter, with annual growth at 2.3%.

Across the pond US employment growth unexpectedly continued to slow for September as the unemployment rate rose to 5.0% from 4.9% in the previous month. Despite non-farm payrolls rising by 156,000, it was still down from the revised figure of 167,000 for August. On the other hand, Q3 GDP figures were upbeat for the quarter as it increased at 2.9% on an annualised basis, exceeding the 1.4% recorded in Q2. This strong rate was largely due to a 2.1% increase in consumer spending for the quarter, as well as a 10% rise in soybean exports.

Data for the Eurozone showed that growth in the third quarter remained steady, as expected. According to Eurostat, GDP in the third quarter rose by 0.3% on the quarter and 1.6% on the year. Elsewhere, a “Flash” estimate for CPI showed that it rose 0.5% year-on-year in October from 0.4% in September. The combination of tepid growth and still scant levels of inflation lead many economists to forecast that the European Central Bank will extend its loose monetary policy, potentially at its December meeting.

Britain’s future is a subject which no-one can confidently predict, which leads to turbulence in financial markets. What can be said is that the economic events set to be held in November have the potential to cause further fluctuations in financial markets. The Bank of England Quarterly Inflation Report and the Chancellor’s Autumn Statement will provide an insight as to what the experts expect to happen in the UK over the coming months. Further afield, the spotlight will be on the US Presidential Election on the 8th of November and what ramifications this may have going forwards.


House price growth continued to slow in September as the previous surge in values damped demand in the market, according to Halifax. On the month, values increased by 0.1% leaving the annual figure at 5.8%. This was down from 6.9% in August and the lowest figure since August 2013. Towards the close of the month, Nationwide shared a similar view as it reported that the housing market recorded its slowest annual price growth since January in October at 4.6%, down from September’s figure of 5.3%. These figures combined lent some support to Theresa May’s statement that government intervention is needed to repair the ‘dysfunctional’ housing market.


Sterling opened the month at $1.299 against the US Dollar and closed at $1.221. Against the Euro, Sterling opened at €1.156 and closed at €1.114.


Interest Rate Forecast

Capita Asset Services (CAS) did not alter their forecasts this month. Capital Economics altered their forecasts this month as a result of the recent volatility in the financial markets. It is mutually anticipated that another rate cut will occur in the last quarter of this year with CAS forecasting a potential hike occurring in the second quarter of 2018.


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