Week in Focus – Week Commencing 11th June 2018
- Monday: Nothing major of note
- Tuesday: Brexit votes in the House of Commons, UK Labour Market, US CPI, US-North Korea Summit
- Wednesday: UK CPI, FOMC Rate Decision
- Thursday: Australian Labour Market, ECB Rate Decision
- Friday: EZ CPI (Final), BoJ Rate Decision
On Tuesday, UK Parliament is holding a mammoth session of debate and votes on the Lords amendments to the Brexit Withdrawal Bill. The session is expected to last 12 hours after the government was defeated 15 times in the House of Lords on issues ranging from environmental protection standards to the Customs Union, Irish Border and the end date for Brexit. After losing seats in the 2017 General Election, UK PM May’s working majority in parliament stands at just 13 seats, including the support of the 10 DUP MPs that have agreed to back the government on key issues. Nevertheless, there are still enough Tory rebels who want to stay in the Customs Unions (Ken Clarke etc) that could make some votes touch and go. Theresa May has continued to suggest that the government will respect the “will of the people”, i.e. the 52% of the electorate that voted for the UK to leave the EU in the 2016 plebiscite. The Tory Chief Whip, Julian Smith, has requested all MPs vote on the amendments “in a way that reflects both the referendum result and the Conservative Party manifesto we all stood on last year”. The opposition Labour Party appear equally as split. The Huffington Post reported that a number of shadow ministers in the Labour Party are considering joining a large group of rebels that back the Lords amendment to keep the UK in the European Economic Area (EEA), aka the Norway model, giving the UK access to EU trade. This number of rebels could cause a defeat for the government, given that there are a number of Tory rebels who would also vote for the EEA option. Even so, this is still not confirmed and it’s unclear whether the opposition would vote against the Bill given they have a number of pro-Brexit MPs and a number of their key seats voted to leave the European Union in 2016. The next stage is still unclear but if Theresa May gets the Bill through in a way she wants, then it is expected the Bill will go back to the House of Lords by the end of the week.
US President Trump is set to meet North Korean Supreme Leader Kim in Singapore on Tuesday, in a summit that is likely going to be high on photo opportunities but low on content. The ultimate aim of the discussions for Trump is for North Korea to denuclearise but the likelihood of a firm agreement and treaty signed on Tuesday is slim to none. Barclays say the best-case scenario for the talks is that negotiators outline a multi-year process for the complete, verifiable, and irreversible dismantlement of the North Korean nuclear program; halt testing of ballistic missiles; and lay out potential enforcement mechanisms.
The overwhelming expectation is that the FOMC will lift its Fed Funds Rate target corridor by 25bps on Thursday, for the second time in 2018, to 1.75%-2.00%; money markets are pricing in the hike with a certainty over 90%, and as such, the market may not take its cue from the rate decision itself, but more from the FOMC's view of future hikes. Currently, it pencilled in a total of three rate rises in 2018, three hikes in 2019, and two hikes in 2020, meaning rates will peak between 3.25-3.50%. Although the market has begun to align pricing with the Fed's forecasts in the near-term under the Powell chairmanship, Fed Funds Futures currently sees the terminal rate at between 2.50%-2.75%, just short of the Fed's view of the long-term rate (between 2.75%-3.00%). Analysts will be keeping an eye on whether the Fed raises the Interest on Excess Reserves, as hinted at in the FOMC's recent meeting minutes. The statement may see some tweaks, with the central bank likely to review its language around 'accommodative policy'. In the press conference, Fed chair Powell may be quizzed about the neutral rate, a subject that has featured heavily in recent Fedspeak; specifically, what level does the FOMC see the neutral rate, and how far is it prepared to overshoot it in this hiking cycle is the key area of debate.
It's been a busy week for the ECB ahead of their June 14th meeting with Tuesday's source reports triggering expectations for some form of announcement/discussion by the ECB regarding exiting its QE programme, with a formal announcement possibly following at the July meeting. The reports were then followed up by a slew of hawkish ECB speak, with the likes of Weidmann, Hansson and Knot voicing their views for unwinding stimulus. However, perhaps the most noteworthy interjection came from ECB's Praet. BAML highlights Praet giving "a generally positive assessment of the 3 criteria he had laid out to assess 'progress' (convergence, confidence, resilience)," adding that "this is very significant coming from a board member who has always sat decisively on the dovish end of the spectrum." Thursday’s meeting will also be accompanied by updated economic projections; ING suggests that "the fact remains that the weaker euro and the surge in oil prices in recent months should lead to an upward revision of the ECB staff projections for inflation." On the growth front, Morgan Stanley looks for the new forecasts "to show a moderate downward revision to GDP growth," citing oil as a key factor.
Aside from the Brexit debate in the Commons, focus for the UK will likely also be placed on the deluge of domestic data with production (Mon), jobs (Tue), inflation (Wed) and retail sales (Thurs) figures all due for release. Starting off with inflation, headline Y/Y CPI is expected to tick higher to 2.5% from 2.4% with core expected to remains at 2.1%. Ahead of the release, RBC note “we see energy prices exerting the greater influence (than the fading currency effect) given the scale of the movement in prices last month”. On the labour front, wages will remain the key focus of the report with both headline and ex-bonus metrics set to remain at their current levels of 2.6% and 2.9% respectively; ING suggest that “with average earnings growth likely to remain within touching distance of 3% next week, there is increased evidence that firms are having to lift pay more rapidly to cope with staff shortages”. For the retail sector, M/M metrics are set to fall from their priors with Y/Y reading due to show upticks. Oxford Economics highlight “the BRC reported that total spending rose 4.1% y/y in May, the fastest rate of growth since January 2014. But recent increases in the price of oil and the pass-through to petrol prices represents a headwind which may have held back sales growth.”
The Bank of Japan’s policy meeting on Friday will cap the triple-header of central bank meetings, though when framed in this way, may prove to be the dampest squib of the lot. It’s policy rate is seen being maintained at -10bps, and the 10-year yield target will be maintained at 0.00%. There seems to be a ‘financial stability’ focus going into the meeting after the recent meeting minutes showed four members of the Board expressing concerns about the impact of prolonged loose monetary policy in financial stability conditions. “This is understandable. Banks’ net interest margins have fallen sharply in recent years and the capital ratios of regional banks have reached fresh lows,” Capital Economics writes. “However, it isn’t clear whether tighter monetary policy would make much of a difference. The Bank itself believes that the decline in profitability reflects an oversupply of financial institutions.” CapEco argues that policymakers cannot ignore their price stability mandate, especially given that inflation remains off target; additionally, the next sales tax hike is slated for October 2019, which clouds the outlook somewhat. CapEco therefore believes that the central bank will leave policy unchanged for the foreseeable future.