A High Stakes Games Of Who Blinks First

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The past week has seen an escalation of high stakes "who blinks first" games in the talks between Labour and the Conservatives; in the Prime Minister's efforts to bring her Withdrawal Bill back to Parliament; and in internal quarrels with her own party.

Cross-party talks between the Conservatives and Labour have now been going on for about six weeks. A Government spokesperson described them this week as “constructive and detailed”. However, less upbeat comments from the Labour side noted that that the Government would need to move on its red lines to achieve a deal. An analogy from the Shadow Chancellor John McDonnell paints an even more bleaker picture: "It's like trying to enter into a contract with a company that's going into administration and the people who are going to take over are not willing to fulfill that contract."

Meanwhile, PM May has again rejected calls from within her party to quit over her handling of Brexit. The Conservative backbench ‘1922 Committee’ reaffirmed for now its decision not to change its rules for electing the party leader. That should mean no near-term challenge to the PM’s leadership. However, reports suggest that she will nevertheless talk again to the committee in the coming week. Media sources also suggest that the PM confirmed to Graham Brady, the head of the committee, that she planned to bring her EU Withdrawal deal back to the House of Commons for another vote before the European Parliament elections on 23rd March. However, no such vote is in the schedule of parliamentary business for the coming week, which just leaves three working days of the following week prior to the European election date. After that, parliament will be in recess for two weeks, which may further delay progress on Brexit.

The coming week’s data calendar is very light and so there will be little to distract markets from trade tensions or Brexit developments. In the UK, the only release of note is Tuesday’s labour market report for the three months to February. Recent reports, which have shown a tight labour market and a gradual upward move in wage growth, have encouraged the Bank of England to indicate the likelihood of future interest rate rises in excess of market expectations. However, next week’s report is forecast to be mixed. We see strong employment growth and the probability the unemployment rate will hold at 3.9% (an 44-year low). But on this occasion we expect wage growth to slow modestly. Such a deceleration is likely to be temporary as we think that the trend is upward, but it may still be seen as a sign that the BoE need be in no hurry to move on rates. Of most interest in the US will be April retail sales (Wed). The consumer sector started the year slowly but picked up sharply in March. We expect another solid rise in April driven by strong ‘core’ sales offsetting a slowdown in spending in automobiles. Overall, the fundamentals for consumer spending remains very supportive, with strong employment growth, and wages rising more quickly than inflation. Also of interest will be April industrial production (Wed) and housing starts (Thu). The second reading for Q1 Eurozone GDP (Wed) is expected to be unchanged from the initial estimate at 0.4%. Meanwhile, the first out-turn for German GDP (also Wed) is likely to reinforce the message that economic growth in the region picked up in early 2019. We look for a gain of 0.4% after no rise in Q4. This week’s stronger-than-expected March estimate for industrial production will have helped boost hopes that the rebound will continue into the spring. However, as there are still concerns that the upturn will prove temporary, surveys for May in the coming weeks (starting with Tuesday’s ZEW report) will provide indications of whether such pessimism is justified. As a survey of financial analysts, the ZEW may be a less reliable gauge than some of the other indicators that will follow but its expectations reading can be useful. Analysts expect a sixth successive monthly rise.

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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