Delay Is Better Than Disaster
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So the Brexit "cliff-edge" date of 29th March has now been delayed. The EU has given the UK a bit more breathing space (to allow its internal domestic politics to play out) and reach an agreement on Brexit.
The deadline has been pushed back to at least 12th April, as the result of a new timeline proposed at the EU leaders’ summit. Nevertheless the eventual outcome remains extremely uncertain.
After reaching its highest level of the year last week against both the Euro and the US dollar, the pound subsequently slumped as markets reassessed the risk of a ‘no deal’ Brexit. However, the latest announcement has led to an overnight rally. Further volatility is expected in the coming week. Near-term economic news will inevitably be overshadowed by political developments.
The past week’s UK economic data showed further employment growth and an unexpected rise in Retail Sales in February. Annual headline CPI Inflation also picked up modestly last month, but at 1.9%, is still below target. None of these releases had much impact on markets and that seems likely to be the case again this week, particularly given the rather sparse data calendar. The second reading for Q4 GDP growth is forecast to be unchanged from the initial estimate of 0.2%. Potentially of more interest will be March’s updates for GfK Consumer Confidence and the Lloyds Business Barometer on Friday.
Wednesday’s policy announcement from the US Fed was more dovish than expected. It was no surprise that interest rates were left unchanged for the second successive meeting. Moreover, the accompanying press statement was unchanged from last time aside from some downbeat comments about recent economic developments.
However, the rate-setting committee downgraded its consensus interest rate forecast (the ‘dot plot’) to show no rate hikes in 2019. This reinforced its previous message that it would be ‘patient’ before considering any further interest moves, effectively signalling that the pause would last for at least several months. The move has reinforced market expectations that interest rates have peaked and that a cut is the more likely next change. The Fed also confirmed that its balance sheet reduction programme will stop after September and sales will be tapered beforehand. The likelihood that the Fed is now on the sideline for several months means that upcoming US economic data may attract only limited market attention. Of most interest in the coming week will be January personal spending (Fri), which will be watched for signs of whether the consumer will continue to drive US economic growth. Meanwhile, February new home sales (Fri) may provide indications of whether activity is perking up in an area that seems to have been negatively affected by higher interest rates.
The Wuro slipped sharply after weaker-than-expected Eurozone ‘flash’ PMIs for March. The negative surprise was primarily due to a big drop in manufacturing activity. The data was another indication that Eurozone economic growth, after disappointing in late 2018, remains subdued in the first few months of this year. PMI data for Q1 as a whole point to modest GDP growth of 0.1-0.2%q/q, basically the same as the second half of 2018. German manufacturing activity in particular continues to surprise on the downside. Monday’s German IFO survey for March will provide further indications of trends in that sector.
See you next week.
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