Caution: Brexit Reality Cometh

July 13, 2018

 

In the UK next week will be a critical week for politics as well as the broader economic outlook. In the upcoming Zimbabwean election, we're entering the final 2 weeks of the race.

 

The customs and trade bills proposed in yesterday's White Paper face votes within parliament (provisionally Mon & Tue). Their performance here will be important in setting the path for future negotiations. The customs bill vote is expected to see most discord, with Tory hard-liners attaching several amendments to be discussed. The reception of these amendments by the government may determine whether there is a future push for a ‘vote of confidence’ in the PM (would require 48 MPs to request it). Markets will be watching closely.

 

Of equal  importance (yet strangely not reported as widely by many elements of the British press) will be further colour regarding the EU’s reception of the proposals. Clearly the arrangement is not their ideal outcome (they would prefer the UK remain in the Customs Union), but if they push for further concessions it risks raising tension both within their ranks as well as in the UK parliament.

 

The question on many people’s minds will be how the Bank of England may respond should political impasse prevail. Governor Carney (speaking Tue) has made it clear that they will seek to look through to the underlying economic data.

 

In this respect, we are firmly of the view that next week’s UK data remains very important. The official readings start with May’s labour market data (Tue), where we see average wages remaining stable around 2.7% and 2.5% (exc. and inc. of bonuses respectively). These are robust figures, which alongside our expectation for the unemployment (at 4.2%) paint a picture of supply-side tightness; supportive of further rate hikes. Inflation figures (Wed) will add to this story across the pipeline.

 

Our forecast for headline and core CPI (2.9% and 2.4%) sit significantly above consensus due to the timing of energy price increases, and expectations for furniture, clothing and footwear price rises. Such an out-turn will be highly conducive to the argument for an August hike (currently 83% priced). On the face of them, our expectations of June’s ex-fuel retail sales (Thu) stand in contrast to this positive story (-0.9% m/m, 2.6% y/y). However, in context of stand-out results in April and May, the trend story remains positive.

 

See you next week!
 

 

To discuss how the above may affect you, please contact your Currency Dealer at Heritage Pay on +44 (0) 203 858 7274.

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