“The EU Summit in Brussels…..”

The EU Summit in Brussels

European leaders have met this week in Brussels.  Brexit is not the biggest talking point to be discussed as focus will be turned to other topics and challenges such as the situation in Spain, the relations with Turkey and the Iran Nuclear deal, French Trade Brake, North Korea and Migration Money, Russian Gas Pipeline and the future of the EU.   The first day of the EU Summit saw European leaders pushing the UK to offer more in Brexit negotiations.

Elections in the EU

• Germany

It was three weeks ago that Merkel’s CDU won the federal ballot while her party,  the Germany Christian Democratic Union, posted its worst election result in Lower Saxony since 1959 and lost in the state to the Social Democrats.   This  weakens German Chancellor Angela Merkel’s bargaining position as she enters talks this week to form a national government.  According to preliminary results published by public broadcaster ARD, the SPD which currently governs the state with the Green party secured 36.9 percent of the vote compared to 33.6 percent for the CDU.  This is a marked reversal for the Social Democrats to become the largest party for the first time in 19 years which suffered its worst result since World War II in the 24th September national vote.  On Wednesday Merkel will start coalition talks on a national level with the pro-business Free Democratic Party and the Greens.

• Austria

Austria’s two big parties the People’s party and the Social Democrats have governed together for 44 years out of the 72 years since World War II.  Austrian’s voters paved the way for the nationalist Freedom party to enter government for the first time since 2005 heralding a shift to the political right.  The projections after Sunday’s election put the populists within reach of second place behind the People’s Party of Foreign Minister Sebastian Kurz who is 31 years old who claimed victory.  His strategy to put Austrians first gave him an advantage in the election as Europe struggles on issues of migration.   Now he has a mandate to form a coalition replacing Social Democrat Christian Kern as chancellor.  He will also be the world’s youngest government leader.

• Spain

President Carles Puigdemont Catalonia’s President defended his region claim to independence as the Spanish government signalled it will move ahead with the process of suspending self-rule this week.  Puigdemont in a letter to Spanish Prime Minister Mariano Rajoy said that he will focus on dialogue in the next two months and has called for an immediate face to face meeting insisting the referendum held on 1st October gives his government a mandate to found a new republic.  He further said that, “More than two million Catalans gave the regional parliament a democratic mandate to declare independence.”  In reply to Puigdemont’s letter, Rajoy said that Puigdemont is sowing discord among Catalans and gave him until Thursday at 10 a.m., to back down. On Thursday , the Catalan President  Puigdemont refused to drop his claim to independence for the region in a letter delivered just before the deadline imposed by Madrid.  Prime Minister Mariano Rajoy’s government said it will move ahead with suspending the powers of the regional administration.

Brexit

There is lack of consensus within the British government making it hard and frustrating for the European Union officials to know what the UK wants.  Although ministers in the British government have played down internal divisions, the EU is seeing little progress at the summit meeting, which is happening this week.

Data from the UK

Figures published on Wednesday show that the UK jobless rate held at a 42 year low in the three months through August, as Britain enjoyed near-record employment.   BOE Governor Mark Carney made it clear that erosion of slack in the economy is the primary concern.  He also stated that a rate increase would probably be needed in the coming months.  The wage growth was little changed at just over 2 percent.  The jobless rate stood at 4.3 percent in the latest period, remaining below the BOE 4.5 percent equilibrium rate and below which inflationary pressures start to build.  The number of people looking for work fell 52,000 to 1.44 million which is the lowest since 2005.  Employment rose 94,000 from May to 32.1 million. At 75.1 percent, the employment rate is just below the 75.3 percent which was recorded between May and July.  Economists detect some signs of weakness in the data as the rise in employment was half that seen in the period through July.  Furthermore much of the increase in employment was coming from self-employment which tends to be lower paid and less secure than salaried work.  Long term unemployment and the number of part-time workers unable to find a full-time job have increased.  One cannot not mention the pressure on living standards that continues with regular pay growth falling in real terms for a sixth month in August.    Retail sales in the UK dropped 0.8 percent in September leaving growth in the third quarter at its weakest in four years.

US – “Inflation the biggest surprise in the Economy”

Janet Yellen the Federal Reserve Chair  at  the Group of Thirty Annual International Banking Seminar in Washington said that the Federal Reserve expects to continue raising interest rates gradually as solid growth, a healthy global economy and a strong labour market are expected to lift prices.  She recognises that inflation has remained surprisingly low. During the meeting she said,”the biggest surprise in the US economy this year has been inflation.” In August, inflation, after stripping out volatile food and fuel, came in at 1.3 percent which is far below the Fed’s target rate.  Data through the end of the year will be unreliable clouded by seasonal adjustment issues and price fluctuations in view of the hurricanes that hit the US South late this summer.  Employment has surpassed officals expectations with the US jobless rate has fallen to 4.2 percent which is the lowest since 2001. Americans are also coming back into the workforce and wages have been slow to accelerate but show early signs of movement.   If the strong growth and labour market push inflation higher, then there will be support for the Fed to increase the interest-rate in 2017 which move is being seen by investors to take place in December.  Last month Fed officials agreed on beginning to unwind their balance sheet and Yellen reiterated on Sunday that they do not intend to use that process as an active monetary policy tool.  Yellen’s term is due to expire in February and she is among the candidates President Donald Trump is considering to be his pick in leading the central bank.

US  –  Obamacare

Two weeks before Americans start signing up for the 2018 coverage, senators in both political parties have reached a bipartisan deal to stabilize Obamacare.  The two year deal would allow subsidies to health insurers to start flowing again, potentially lowering insurance premiums for those in the program next year.  Trump’s administration said last week that it was cutting off payments and Trump called the agreement a short-term solution.  The deal still has to go through houses of Congress and be signed by Trump.  If it becomes law it would end a chaotic situation for insurers after the Whitehouse last week  moved to dismantle parts of the Affordable Care Act.  Trump has criticised Obamacare and has pushed for full repeal of the law.  He said that he encouraged the effort but wanted to ultimately see states given blocks of money to be able to set up their own programs.  Trump added, “I continue to believe Congress must find a solution to the Obamacare mess instead of providing bailouts to insurance companies.”

US – Fiscal Plan

On Wednesday the tax debate kicked off in the Senate with Republicans winning some key votes against the Democratic proposals  that sought to draw a line against tax breaks for the wealthy.  A provision to prevent cuts to Medicaid and reduce any tax breaks the wealthy might receive, was defeated by  51-47 vote.  Furthermore, a second amendment to bar tax cuts for the top 1 percent of earners was also shot down by a vote 52-46.  The sharp divisions came as part of the congressional process to approve a budget resolution.  This was a critical step to allow the GOP to pass a tax bill with just 50 Senate votes.  Republicans who control 52 seats in the chamber have a slim margin for error as they try to seize the last chance of Trump to secure a legislative achievement this year.

China

In his three hour speech at the Communist Party  gathering in Beijing the President of China Xi Jinping warned of  severe challenges while he laid out a vision to  transform China into a leading global power by 2050 touching on several topics such as foreign policy, environmental concerns and the continuing push towards anti-corruption.  With regards to the markets he said that the country will continue to open up to foreign businesses and seek to ensure that interest rates and exchange rates become more market based.  According to Xi, “China is still in an important period of strategic opportunity for development.  The prospects are very high but the challenges are very severe”.  His speech signaled that the President will priortise to extend the influence of the Communist party in China over the next few years.  Although economic growth has been on the upside in recent quarters, factors like inefficient state owned enterprises and ballooning corporate debt pose threats to the stability.  Last month the S&P Global Ratings cut China’s sovereign rating for the first time since 1999.  He is seeking to boost China’s global influence with infrastructure spending and avoid conflicts with President Donald Trump over North Korea.

Nuclear Warnings

Threats have come about from North Korea as the US and South Korea begin naval drills off both east and west coasts of the peninsula.  Officials in Seoul are preparing for another possible missile launch this week by the Pyongyang regime.  North Korea warned that a nuclear war may “break out at any moment”.    North Korea’s deputy ambassador to the United Nations, Kim In Ryong said on Monday that his nation had become a “full-fledged nuclear power which possesses the delivery means of various ranges” and warned that “the entire US mainland is within our firing range”.

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