The UK has been given a longer extension than it requested. On the surface, that would suggest calmer times ahead for Sterling, right? Wrong!
That's because those 6 months have the potential to hold legislative changes which potentially carry more drama. They host a guaranteed local council elections in which the Tories expect annihilation. They carry risks of unknown magnitude to the the Tories in the European Parliamentary Elections in which analyst expect the UK to participate. There is also, in those next 6 months, the chance of a general election and/or a Referendum and the omens don't look good for whatever will be left of the Conservative Party. And what's more; in the run up to all these events will be releases of opinion polls; inflation figures; monetary policy announcements and growth figures which will sway Sterling in one wild direction and then another. All this data will be particularly pertinent due to analyst concerns about the increased risk of recession in the next 12 months.
Furthermore, analysts believe that an extra six months Article 50 extension is unlikely to give much headroom to businesses to kickstart investment, nor the BoE to alter policy. Unsurprisingly therefore, markets have (as of now) shown little response to the news. The week ahead offers few opportunities for BoE speakers to discuss how they view the development. Otherwise, with regards to broader themes for financial markets, worries persist around the strength of global growth and its effect on monetary policy. The IMF, earlier this week, cut its estimates for world GDP growth, reflecting slowdowns in China and the Eurozone, and elevated trade tensions. On that front, though US/China negotiations continue to yield positive soundbites, President Trump’s remarks on unfair European trade practices have generated some fresh concern. Trade data for both countries next week could trigger further comments.
In the UK, we are anticipating that average earnings (Tue) will show a pick-up in the headline rate of income growth in the 3 months to Feb to 3.6%y/y while regular pay rises by 3.4%. This would reflect the tightness that we continue to see in the labour market amid ongoing delayed corporate investment spending. Reinforcing this, we expect another solid rise in employment in the three months to February of 175k, but anticipate a tick up in the unemployment rate (to 4.0%). As with the US numbers earlier this week, we forecast UK CPI (Wed) to tick higher, to 2.0% on the ‘headline’ measure, while ‘core’ rate remains at 1.9%. The recent rise in the oil price has helped elevate the ‘headline’. In the months ahead, the rise in energy price caps (due this month) will lend further support to this. Confidence numbers suggest that UK consumers are becoming increasingly wary about the uncertain political situation, and may be putting off larger purchases. However, retail sales data in the first two months of 2019 suggest they continue to spend, likely reflecting the aforementioned real wage rises. While the BRC report earlier this week showed a fall in retail sales for March (y/y), this doesn’t always closely track official data. We look for a solid 0.4%m/m outturn in the ‘exfuel’ reading. The data may be affected by the timing of Easter, which was far earlier last year. Also of interest, may be the ONS’s release of new, faster indicators of UK economic activity for February and March.
In the Eurozone, immediately post the ECB meeting, there will perhaps be less focus on the final CPI readings for the bloc, but manufacturing data will remain under close scrutiny. CPI (Wed) is expected to show that both ‘headline’ and ‘core’ readings remain well below the ECB’s 2% target. As a net-exporter, fears of a global slowdown will continue to be critical for the Eurozone economy. Trade balance numbers for February (Wed) will provide a clue as to how much this uncertainty has fed into the real economy. Furthermore, manufacturing and services PMI surveys (Thu) will show sentiment trends across the different sectors. Manufacturing, in the Eurozone’s largest economies has trended downwards since the start of last year (graph 2), while the aggregate measure has been negative for the last two readings. Our expectation is for the latest measure to be slightly up on its Feb reading at 48.5. Meanwhile, the services reading has probably come off slightly, dipping to 53.0.
US data will be relatively light next week, with industrial production (Mon) and retail sales (Thu) the main releases. Our expectations are for a 0.2%m/m growth in the former, reflecting strength in utilities and extraction. While we see retail sales growing 0.8%m/m, supported by auto sales and high-street spending. Following the release of the FOMC’s minutes for their March meeting, Fed speakers will share their latest thinking, particularly in the context of a perception of political encroachment. This week, saw the Fed’s arch-doves Bullard and Kashkari both speak in defence of the Fed’s record, in the wake of President Trump’s recent calls for rate cuts and his announcement of two controversial names for the Fed Board. The week ahead sees voters Evans, Rosengren, Bullard all speaking. Boston Fed President Rosengren, though at the more hawkish end of the spectrum, has recently noted the potential for a weaker international economy to negatively affect the US, citing this as sufficient rationale to pause. This explanation for recent dovishness has been voiced by other speakers including Chairman Powell, Vice Chair Clarida and Chicago Fed President Evans.
Given policymakers’ focus on global growth, without doubt the official release of China’s Q1 GDP growth (Wed) will be watched with interest. It is forecast to be marginally weaker than prior, though with positive sounds from the IMF, and the stronger than expected trade data we saw this week, it could surprise on the upside. However, the longer-term picture remains uncertain, with the outcome of the US/China talks still in doubt.
See you next week!
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