16 Motions, 8 Votes, 0 Consensus

March 29, 2019

 

A quick Google search of the phrase "waste of time" brings up the following result from vocabulary.com: the devotion of time to a useless activity. Few could argue that the political events of the past week have been an exercise in productive use of time. Indeed, some would argue that the inherent contradictions in the promises of the Leave Campaign (pro-Brexit) were always bound to lead to this point but we digress.

 

Indicative Parliamentary votes earlier this week did not result in any consensus view for a way forward, with all eight options tabled rejected by MPs. These eight options had already been whittled down from a list of sixteen. MP's voted against a no deal; staying in the EU; and everything in between!
 

That being said, the two that received the most votes in favour were a confirmatory (second) referendum and a customs union option. On Monday, a second round of indicative votes is scheduled to take place to whittle down the options. The aim is to see if any of the options (likely a subset of the eight options in the first round) can muster majority support. Logically, the second referendum and customs union options should be part of the mix, but the decision will be with the Speaker. It’s not clear at the time of writing whether the same voting system as the first round (MPs putting a cross next to ‘yes’ or ‘no’ for each option) will apply or whether a different method, such as an alternative vote system, will be used. The process may be elongated across the week. More broadly, the key challenge for the government is that the majority of Conservative MPs voted against both the second referendum and customs union options, but in favour of a ‘no deal’. Press speculation of a general election has increased, while close attention will be on the Prime Minister after she stated this week that she would step down once Brexit has been delivered.

 

While next week’s attention remains on Brexit, there will likely be some attention on the Markit PMI reports for March, which are among a range of surveys closely watched by Bank of England policymakers. This week saw the GfK consumer confidence index stay at -13 in March, with personal finances holding up rather better than economic confidence.

 

Last month’s forward-looking components in the manufacturing PMI pointed to the risk of a further moderation in activity. We look for a third monthly decline in the manufacturing PMI (Mon) to 51.0 from 52.0. As for the services PMI (Wed), we expect a pullback to the 50.0 growth/contraction level after last month’s surprisingly strong rise to 51.3. Overall, the PMI survey is signalling close to flat economic growth in Q1, but that probably underestimates actual activity which began the year on a firmer footing according to official January GDP figures – see chart 1. The BoE, for example, currently forecasts Q1 GDP growth of 0.3%q/q.

 

The most important economic data from a global perspective is the US labour market report (Fri), although even its importance may have been lowered by the Fed’s signal of no likely further interest rate rises this year. Nevertheless, financial markets have started pricing in rate cuts this year, leading one Fed official (Bullard) to describe that as ‘premature’. Last month’s very weak nonfarm payrolls number of 20k was most probably an outlier, while the three-month average was still not far off 200k. For March, we have pencilled in a rise of 195k. The unofficial ADP employment report (Wed) and the ISM surveys (Mon/Wed) could provide tentative hints on risks to the central forecast – see chart 2. We also see no change in the unemployment rate at 3.8% and steady annual wage growth of 3.4%. Other US notable data releases include retail sales (Mon), where we forecast a rise of 0.4% for the ‘control group’.

 

 

The principal economic focus for the Eurozone will be the ‘flash’ estimate of March CPI inflation (Mon) and the ECB minutes of its March meeting (Thu). The past week has seen German 10-year bund yields fall further into negative territory, reaching a low of -0.09%, partly in tandem with declines in US Treasury yields and partly as markets push out their expectations of the first ECB 10bps rate rise to 2021. We expect Eurozone headline CPI inflation to be unchanged at 1.5%, with higher energy prices offset by lower ‘core’ inflation. In fact, we predict core CPI (excluding food and energy) to fall to 0.9% from 1.0%. Some of that fall will be due to the volatile ‘package holidays’ component, but the broader picture is that there remains little sign so far of core inflation moving significantly higher. The ECB minutes will be scoured for further detail on discussions at the 7 March meeting. That was when the forward guidance on the earliest interest rate rise was pushed out to early 2020. The ECB also announced a new TLTRO-III programme, starting in September, to provide additional liquidity for banks. There has been much focus this week on a speech from ECB President Draghi. He talked about “mitigating the side effects” of negative interest rates, leading to speculation that the ECB is looking into the possibility of tiering interest rates, i.e. applying less negative or zero rates on banks’ excess reserves held at the ECB (banks are currently ‘paid’ the deposit rate of -0.4%). Amid signs that economic activity has slowed, the concern is that such costs for banks may impede lending to the wider economy.

 

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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