Clearing Fog or More Uncertainty?
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Although markets now perceive a fall in the risk of a ‘no deal’ scenario, following last week’s Parliamentary votes, the ‘fog of Brexit’ has not completely disappeared. Combined with growing headwinds to the global economic outlook, it points to the Bank of England Monetary Policy Committee (Thu) keeping policy interest rates firmly on hold at 0.75%. Recent speeches from MPC members reaffirm that they are in wait-and-see mode. Based on the assumption that a disorderly Brexit is avoided, we expect interest rates will be raised once this year, but not until the second half.
On the politics front, the House of Commons readies up for a third meaningful vote on the EU Withdrawal Agreement by Wednesday next week (some rumours suggest it could be Tuesday), following the decision by MPs by a majority of 211 votes to delay Brexit beyond 29th March.
If the deal is rejected again, the government has said that it is likely to result in a long delay to Brexit, perhaps over a year, to provide time for parliament to chart a new course. This may persuade some MPs who previously voted against the deal (or who abstained) to support it, but it is difficult to say whether a sufficient number will do so. If the deal is passed next week, then the government has said it will seek a short Article 50 extension of three months. Any extension to Article 50, including the duration and terms, will need the unanimous approval of the EU-27 countries. This could be problematic because some EU-27 leaders have already indicated they will require some justification for a longer extension. It sets up a potentially ‘interesting’ gathering at the EU leaders’ summit next week (which PM May will attend), starting on Thursday.
The most important UK data releases next week are the Labour Market Report (Tue), CPI Inflation (Wed) and Retail Sales (Thu). Survey evidence suggests that hiring intentions have cooled, which could be reflected in official Employment three-monthly growth slowing to 120k in January, and a slight uptick to 4.1% in the Unemployment Rate. Headline earnings growth is expected to drop to 3.1%y/y for the three months to January from 3.4%y/y, but that largely reflects the bonus jump in October dropping out of the calculation. Nevertheless, regular pay growth (ex. bonuses) could also ease to 3.3%y/y from 3.4%y/y. The upward pressure on Wage Growth is expected to resume if Brexit uncertainty subsides. Annual headline CPI inflation is forecast to have stayed at 1.8% in February, while Core CPI is also expected to be unchanged, at 1.9%. The energy price cap will be raised in April, which we forecast will push headline CPI inflation back above the 2% target. Further out, the path will be determined by the tightness of the labour market and currency swings, both of which are likely to be affected by how Brexit evolves.
For UK Retail Sales, a drop to 0.8%m/m (ex. fuel) is likely, following the surprisingly strong 1.2%m/m rise in January. Real pay growth has risen over the past year, reflecting both higher nominal pay increases, and lower inflation. However, high economic uncertainty may lead to a rise in precautionary savings.
From a more global perspective, the major event next week will be the US Fed policy announcement (Wed) at the end of its two-day meeting.
On the continent, aside from the EU leaders’ summit mentioned above, key interest will be on economic updates from the ZEW investor survey (Tue) and, more importantly, from the Eurozone (including German/French) ‘flash’ PMI surveys (Fri). A further fall in the German ZEW current situation index to 8.0 in March from 15.0 is likely, but the “expectations” component is forecast to worsen for a fifth month. For the Eurozone PMI, analysts expect a slight rise to 49.5 in March from 49.3 for the Manufacturing PMI, which would be the first rise in eight months. Services PMI, however, could slightly edge down, after last month’s unexpectedly strong rise to 52.8. Overall, the PMI survey is signalling Eurozone Q1 GDP growth of around 0.2%q/q, which is consistent with the sluggish Q4 outturn.
See you next week!
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