Who Will Be Left Holding Baby Brexit?

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The electoral wipe-out suffered by both the Tories (1,334 seats lost) and Labour (63 seats lost) while both parties are in talks of how to proceed with Brexit suggests that a blame game is inevitable at some point. The spoils have been won by Remain supporting parties: the LibDems and the Greens. So who will be left holding Baby Brexit and his over-flowing nappy? Only time will tell!

The coming week’s events calendar is much lighter than the week just gone. In the UK, Brexit will inevitably remain a key focus. Cross-party talks on the potential way forward may now be coming to a head. Reports suggest that a final summit between senior ministers and their Labour counterparts is likely to be held next week. This was initially expected for Tuesday or Wednesday but a report today suggested it may be shifted toward the end of the week. A cross-party deal would boost expectations that the EU Withdrawal Agreement bill could now successfully pass through the House of Commons. However, media sources suggest that while both sides are making positive noises, it remains unclear whether they are really close to a compromise. In the event that the talks fail it seems that the government’s next recourse will be to put different options to Parliament in the hope of identifying a workable solution.

This week’s Bank of England policy announcement reiterated its twofold message that it will sit on the sideline for now due to Brexit uncertainty but will eventually raise interest rates by more than markets currently expect. Ahead of that there had been some speculation in markets that at least one BoE policymaker would vote for an immediate rate hike. However, this never seemed that likely to us. Indeed ongoing Brexit uncertainties and the dovish shift in the rhetoric of central banks around the world has caused us to move out our forecast for the timing of the next BoE hike to early next year. Nevertheless, the Bank’s acknowledgments that economic growth was likely to be significantly above sustainable potential by the end of its forecast period and that

inflation was likely to be above target by then (and trending up) was almost certainly intended to reinforce the message that rates will eventually surprise on the upside. Scheduled comments from a number of BoE policymakers in the coming week will be watched for any indications as to the possible timing of the next hike. The first estimate of Q1 GDP (Fri) is expected to show much stronger growth than Q4 2018’s relatively lacklustre 0.2%q/q. After larger-than-expected rises in monthly GDP in January and February we look for a quarterly rise of 0.5% in line with the BoE’s updated forecast. The detail of the report is likely to show that stockpiling, as companies prepared for a ‘no deal’ Brexit, was a key contributor to that upswing, while consumer spending is also likely to have been strong. In contrast, business investment growth will probably have been lacklustre at best and rapid import growth may ensure that net exports have made a negative contribution. It is otherwise a relatively quiet week for UK data. The British Retail Consortium’s survey (Wed) will provide indications of whether retail spending has continued to rise in Q2, after an unexpectedly strong Q1. Meanwhile, the Halifax (Tue) and RICs (Thu) indices will give updates on house prices.

This week’s Federal Reserve update re-affirmed its previous policy guidance that it will be ‘patient’ before considering any further policy changes. That points to the likelihood of US interest rates now remaining unchanged for several months. That was a disappointment to markets that were hoping for a signal that rates might be cut before year-end. In reaction, the market’s probability on a reduction by December has dropped below 50% (from >65% pre-meeting) prompting a rise in Treasury yields and the US dollar. Nevertheless there continues to be hope in the market that below target inflation will force the Fed to ease, so Friday’s April CPI data will be watched closely. However, the data is unlikely to support the case for lower rates as we expect annual ‘headline’ inflation to rise to 2.1% from 1.9% in March. That will be partly on the back of higher energy prices but also reflect a small move up in the ‘core’ rate. There are a number of Fed speakers whose comments will be perused for any dissent from the consensus.

As we expected Eurozone Q1 GDP growth picked up to 0.4% from 0.2%. That was partly fuelled by a February rebound in industrial production, so the coming week’s March data for industrial output in the four largest Eurozone economies will provide indications of whether that was continuing into quarter end. However, the slump in German factory orders in February and ongoing weakness in the Eurozone manufacturing PMIs are both signs that the sector is not out of trouble yet. Following the latest round of US-China trade negotiations, a Chinese media source reported that talks have “hit an impasse”, casting doubt on the likelihood of a near-term deal. A further round of talks is expected next week in Washington. Meanwhile, April trade data for China will provide the latest indications of whether its economic growth outlook is improving.

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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