If Love Is A Losing Game, Politics Is A Waiting Game - So We Wait

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With only a few days to go before the UK general election, opinion polls still point to the likelihood of a Conservative majority. An exit poll will be available as soon as the polls close at 10pm on Thursday. This has generally been more reliable than pre-election polls in the past. For example, in June 2017 it correctly predicted that the Conservatives would win the largest number of seats but be short of an overall majority. For this reason, we would rather wait than draw anlayses, create assumptions and draw conclusions from data whose accompanying text often reads like party political broadcasts.

The first few constituency results should be available before midnight but most will announce in the early hours of Friday, with a substantial number between 4am and 6am. Unless it is very close, the result should be known by the time European markets open. A number of factors cast doubt on the potential reliability of opinion poll predictions suggesting that the result may still be uncertain. A record number of late registrations to vote point to the possibility of a high turnout. If those new voters are disproportionately skewed towards the young that may boost the Labour vote by more than is currently expected. Meanwhile, some analysts argue that a December poll could discourage some older voters, who tend to disproportionately vote Conservative, from turning out. Finally, forecasts based on opinion polls tend to typically assume a uniform swing across the country an assumption that may be even more dubious than usual this time particularly if Brexit views have a decisive impact on voting intentions. Sterling has risen sharply this week, touching its highest level since 2017 against the euro. Many market commentators attribute that to a growing conviction that the Conservatives will win a majority that will allow passage of the Brexit deal. A Conservative win is widely seen as likely to lead to at least some modest further sterling appreciation, although some think any upside will be limited as markets start to focus on the next round of trade negotiations with the EU. The next most likely outcome is thought to be a hung parliament. In that case, the composition of the next government may take some time to work out and the initial uncertainty may hurt sterling. However, any downside may be limited by the expectation that any incoming government will wish to avoid a ‘no deal’ Brexit. Next week’s UK data releases are likely to receive only limited attention. Monthly GDP for October is expected to post a rise of 0.1% but that follows two consecutive falls so the underlying pace of growth is at best very modest. Moreover, November PMIs point to a fall in activity.

Internationally, the ongoing trade tensions between the US and China remain a key focus for markets. Conflicting indications on the likelihood of a near-term deal have buffeted markets this week. A key date is 15th December when the US is scheduled to hike tariffs on a range of imports from China. Markets will be looking for an agreement by then or for a postponement of the hikes. Both the US and Eurozone central banks will hold their last policy meetings of 2019 next week. Neither is expected to change policy.

The US Fed, when it cut interest rates by 25bp for the third successive policy meeting in October, signalled that it was likely to now pause and study their impact. Subsequent comments from Fed officials signal general agreement with that strategy despite calls from President Trump for further cuts. Fed rate setters will also update their interest rate projections, which seem likely to point to rates staying unchanged through the whole of next year with modest increases projected for 2021 and 2022. That is still somewhat at odds with market expectations that expect rates to be on hold for now but still sees at least one more cut as likely next year. Recent US data has continued to be mixed. Consumer spending remains a key support to grow and November retail sales are forecast to show another rise. Anecdotal reports of sales on Black Friday and beyond indicate that these have beaten expectations but it is unclear just how much of that will be captured by the official November reading. Annual CPI inflation (Wed) is expected to have picked up modestly in November but not to an extent that would concern the Fed.

The ECB meeting will be the first with new President Lagarde at the helm. Her initial comments have shown support for her predecessor’s policy actions but she has also emphasised that fiscal policy needs to lead any further attempts to stimulate growth. The ECB is likely to take a similar position to the Fed for now and say it is on hold while it watches developments. There have been some tentative signs in survey data that this year’s slump in manufacturing activity is bottoming out. However, the much weaker-than-expected October reading for German industrial production showed that the sector may not yet be out of the woods, while surveys also suggest that services activity may be slowing. Nevertheless, even if more stimulus action is required there seems to be a growing feeling both within the ECB and outside that conventional monetary policy tools and even some alternatives such as asset purchases may have hit their limits with interest rates already negative. The possibility that a further move into negative territory may be counterproductive is now leading many economists to forecast that the ECB will refrain from any more cuts unless the economic outlook worsens significantly. Indeed, a survey of economists this week suggests that the most likely outturn now is that ECB rates will stay on hold for the next two years. The ECB has promised a review of monetary policy early next year and it will likely discuss a number of other unconventional policy tools. However, there are no signs at present that it will consider the more radical measures proposed from outside.

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