More Time, Please!
The British Prime Minister has reached out to the Leader of the Opposition, Jeremy Corbyn for cross-party talks. The aim is ‘to break the logjam’. In the adversarial style of Westminster politics, such a move probably represents a last-ditch attempt to find a solution. Sterling initially held firm on the news but dipped towards the week's close, as it appeared that no tangible progress was being made. However, it’s not certain at the time of writing whether negotiations between the party leaders will bear fruit. Even if there is no agreement between PM May and Corbyn, she has promised that MPs will be able to vote on various options on the future EU relationship – and that the government would abide by the result (as long as the opposition does too). Those options are yet to be specified, but could include a resurrection of Mrs May’s current proposals as well as ‘softer’ Brexit options. The timing of such a vote and how options might be whittled down is currently uncertain. The settlement could pivot towards closer a future EU relationship (a ‘softer’ Brexit), but would still have to include the Withdrawal Agreement (the divorce) already agreed with the EU. With more domestic negotiating time needed, PM May will attend the emergency EU summit on Wednesday in Brussels where a further extension to the Brexit date is expected to be granted, although it would require the unanimous approval of the other EU-27 countries. Without that, the UK would leave the EU with ‘no deal’ on 12th April. In a letter today to European Council President Donald Tusk (who represents the EU-27 leaders), PM May asked for an extension to 30th June, but her preference is still to leave the bloc on 22nd May (if it can be done) to avoid taking part in European elections (23rd -26th May). A longer delay is possible, for instance, if there is a demand from parliament to hold a confirmatory (second) referendum. Media reports suggest that Mr Tusk could propose a 12-month flexible extension (‘flextension’) to the Brexit date, which would contain a break clause enabling an earlier departure. That may help to prevent the potential need for a series of short extensions. It’s clear, though, that the PM hopes for a delay to the Brexit date that is ‘as short as possible’.
The official February GDP (Wed) numbers bear watching. Following the surprisingly strong start in January when GDP increased by 0.5%m/m, analysts expect a flat reading for February which would keep the three-month growth rate at 0.2%. Releases for Manufacturing, Construction and Services activity will also be released at the same time. The potential implications for Q1 GDP growth and beyond are rather nuanced. Even if there is no growth in February and March (and assuming no revisions to January), the strong start to the year means that Q1 GDP would still be around 0.3%q/q, stronger than Q4 and in line with the Bank of England’s current estimate. But that monthly trajectory, if maintained, would lead to a softer outturn in Q2, consistent with more downbeat signals from current business surveys.
With the focus on UK events, it’s easy to overlook the importance of global economic developments. Chart 1 shows that global equities have rallied by more than 10% since the start of the year. That has coincided with significant declines in bond yields, as the US Federal Reserve and other major central banks swivel towards a more dovish policy stance. The US and China appear to be moving closer to a trade agreement, which is also supporting risk sentiment. There has been some tentative evidence this week that global economic activity may be stabilising. China’s official manufacturing PMI rebounded strongly to 50.5 in March from 49.2, while the US manufacturing ISM rose to 55.3. Further, US nonfarm payrolls increased by nearly 200k after last month’s 33k rise, although wage growth eased unexpectedly. Overall this week, global bond yields have started to recover in tandem with equities. US and UK 10-year bond yields, for instance rose above 2.5% and 1.1%, respectively.
US data focus will be on the March CPI (Wed). We look for headline CPI to rise to 1.8%y/y from 1.5%y/y, but core inflation is forecast to stay at 2.1%. As chart 2 shows, underlying inflation remains at historically benign levels. The minutes of the March FOMC meeting (Wed) will reaffirm that interest rates will be kept on hold for now. Other notable US releases include durable goods orders (Mon), PPI (Thu) and the University of Michigan consumer sentiment survey (Fri).
Eurozone data headlines remain downbeat. For instance, the manufacturing PMI was revised down to 47.5, with the German index at only 44.1. Domestic activity indicators, however, have held up better, and there are no clear indications yet that the Eurozone economy as a whole is entering recession. The ECB policy meeting (Wed) takes place, with officials mindful of downside risks stemming mainly from external demand, but also puzzling over the weakness of domestic inflation pressures despite the pickup in wage growth. We don’t expect any significant further detail at this week’s ECB meeting. In March, the ECB downgraded its growth forecasts, pushed out its signal for the earliest first rate hike to 2020 and announced new TLTROs (long-term loans to banks). Instead, ECB President Draghi is likely to be quizzed on recent remarks he made on “mitigating the side effects” of negative interest rates. That has led to speculation of a tiering of interest rates for banks’ excess reserves held at the ECB, but it could also be a reference to the new TLTRO programme, although further details of which will probably have to wait until June.
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