RANsquawk Week in Focus; week commencing 4 February 2019
Last week was another momentous one in Westminster after the passage of the Brady and Spelman amendments and rejection of 5 other amendments which included a potential delay to Article 50. The Brady amendment caught a bulk of the focus for markets as its passage now means that UK PM May has to return to Brussels in order to negotiate an alternative solution to the contentious backstop proposal. Negotiations will likely gather more momentum in the coming weeks ahead of the scheduled Feb 14th Meaningful vote, however, last week provided little in the way of optimism with the EU continuing to stand firm against British demands. As far as Brussels is concerned, the Withdrawal Agreement is not to be renegotiated and thus nor is the backstop, particularly given the lack of clarity from the UK on what any alternative arrangement could be. Despite the optimism in Westminster on Tuesday evening, the UK remains unable to provide any solution to the issue that has plagued the passage of PM May’s deal in the HoC with the potential use of technological or regulatory mechanisms unable to appease EU members. Ideally, the UK would like to secure a time limit on the potential backstop, however, this is viewed as a proposal which would essentially defeat the point of having a backstop in the first place and thus is currently deemed as somewhat of a non-starter. At the time of writing, the EU’s negotiators have stated they could offer some assurances to the UK and have downplayed the likelihood of ever implementing the backstop, however, this would not provide the legal assurances that many in Westminster require. In a call last week, EC President Juncker stated that the only was the EU would materially revisit the backstop would be for PM May to shift her red lines in favour of a permanent customs union; something which would potentially politically devastating for UK PM May to concede. As such, with a distinct lack of visibility on what a potential solution could look like for either side and as March 29th approaches, Goldman Sachs have stated that the prospect of a ‘no deal’ has subsequently increased. With the EU’s door still essentially closed to PM May, her efforts have begun to turn towards reaching across the aisle to Labour lawmakers with reports last week suggesting the Mrs May has begun offering opposition MPs increased funding for deprived areas and better domestic employment rights. However, the fact remains that the Meaningful Vote was lost by a margin of 230 including 118 of her own party and thus it is increasingly difficult to see what, at this stage, could help avoid a no deal Brexit for the UK, particularly given lawmakers last week rejecting a potential extension to Article 50.
Sixty-seven of the 68 analysts surveyed by Reuters expect the Bank of England to stand pat on rates at 0.75% with the consensus looking for a 9-0 vote split in doing so. Despite a domestic unemployment rate of 4.0% and UK average weekly earnings at a cycle high, policymakers hands continue to be tied by the UK’s withdrawal from the EU. Since the December meeting, MPC members have been provided with little in the way of clarity on Brexit with UK lawmakers refusing to approve UK PM May’s deal with the Article 50 deadline fast approaching. Despite wanting to pre-empt any negative fallout from a disorderly Brexit, MPC members will likely wish to avoid accusations of ‘jumping the gun’ given the criticism faced following the 2016 rate-cut that followed the Brexit referendum. Subsequently, Lloyds expects the MPC to reiterate its assumption “that forecasts are based on the average of a range of outcomes for the UK’s future trading relationship with the EU”. Aside from Brexit, in terms of recent economic developments for the UK, the latest 3M/3M GDP print of 0.3% in November continued to highlight the Q4 slowdown from the 0.6% levels seen in Q3, with analysts at Morgan Stanley expecting further declines when the December figures are released. On the inflation front, headline CPI printed at 2.1% in December vs. 2.3% seen in November amid declines in petrol prices and thus moved closer to the BoE’s 2% inflation goal. In terms of survey data, services PMI remains above 50.0 but with some underlying weakness in the components, whilst the manufacturing sector continues to remain underpinned by stockpiling ahead of Brexit. With regards to the QIR, Lloyds looks for the MPC’s estimate of 2019 and 2020 growth of 1.7% to be little changed, citing the strength of the UK consumer which should be enough to ward of other headwinds. In terms of inflation forecasts, Morgan Stanley believes “the risks to the MPC's inflation forecasts are skewed towards a downward revision in the near term from oil, pushing inflation below target for a period, and towards an upward revision in the medium term from domestic cost pressures”. Recent rhetoric from the Bank has been particularly light other than Carney restating the MPC’s guidance that future rate hikes are to be ‘limited and gradual’ with his colleagues Broadbent and Haldane unable to add anything too noteworthy during speeches in January; a likely by-product of the ongoing uncertainty created by Brexit.
The Reserve Bank of Australia is widely expected to keep its Cash Rate at the all-time low of 1.50%, with 39 of 40 economists polled by Reuters predicting stable policy at the 5th February meeting, with one economist looking for rates to be cut. Minutes from the last meeting noted that the board agreed that the next move in rates is more likely to be a hike than a cut, though there was no strong case for a near-term policy change. Since then, domestic Q3 GDP slowed to 0.3% from 0.9% in Q2, and December inflation printed at 1.8%, undershooting the RBA’s 2-3% CPI target. Furthermore a decline in house prices is also likely to weigh on consumer spending. Subsequently, some analysts are looking for the RBA to reduce its GDP growth forecasts next week, while retaining a positive medium-term outlook, while reiterating that “the next move will likely be up but is still some way off”. RBC highlights that a GDP downgrade, coupled with Governor Lowe’s statement will present “ample opportunities to confirm if there has been a shift to a neutral stance in line with the global trend. Increased uncertainty suggests this is likely”. The dismal domestic readings, alongside China’s economic slowdown, a dovish FOMC, and the “Big Four” Aussie banks hiking variable mortgage rates has in turn eliminated market expectations of any tightening this year by the RBA, with OIS now pricing in a 30.7% chance of a 25bps RBA rate cut by November 2019 and markets hinting at an 80% chance of a cut to 1.25% by H2 2020. Analysts at Barclays also rolled back expectations for a hike next year, the bank previously expected two hikes in H1 2020. More pessimistically, Capital Economics analysts’ forecast the RBA will trim rates by 25bps by the end of this year, with an additional cut of the same magnitude to follow in H1 2020.
CANADA LABOUR MARKET REPORT
Analysts at RBC forecast 5k jobs will have been added to the Canadian economy in January, following the 9.3k of additions in December. RBC also sees the unemployment rate rising by 0.1ppts to 5.7%. Focus will be on the wages components of the data; in December, the measure fell to 1.5% YY; the BOC's measure of wage growth, the wage-common measure, fell through the course of 2018, standing at 2.3% at the end of Q3, largely on oil price factors. "Recent BoC communication has noted a lack of 'job churn' or turnover in the data, as well as high involuntary part-time employment and structural factors as contributing to slower wage growth than the 5.6% unemployment rate would suggest," RBC observes.
The market expects Banxico will leave rates at 8.25% at its policy meeting next week. The central bank will also likely maintain its cautious talk with inflation sticky. Investors will also be paying attention to the tone of the central bank, after new President AMLO appointed two new members to the Board who will join the February meeting. Barclays' analysts think the tone of the board could be less hawkish due to these appointments. “However, we do not see room for rate cuts in coming months, and the board is likely to reiterate that structural risks to inflation persist,” Barclays writes, “Risks for the meeting are tilted to the upside for short-end yields, given the relatively benign pricing (32bp cuts by year-end) and our expectation of Banxico’s keeping its vigilance.” Additionally, Barclays argues that “Banxico may signal its willingness to be patient amid a more dovish Fed, a more stable currency and a growth outlook that could start to show signs of slack," adding that “nonetheless, policy risks from the medium-term fiscal outlook are probably to be the most relevant for the majority of the board members.”