Week in Focus; week commencing 11 March 2019
As crunch time approaches for PM May and her Brexit plan, this week once again was another ‘stalemate’ with both the UK and EU still seemingly far apart in their demands which culminated in AG Cox and Brexit Secretary Barclay scrapping their visit to Brussels on Friday. To recap the week’s (lack of) proceedings, AG Cox reportedly proposed an independent arbitration system to rule on when the backstop could be terminated. If the arbiter deemed that the UK acted in good faith in attempting to secure a trade deal with the EU, the UK would enter into a ‘mini-backstop’ which would solely focus on border infrastructure. However. This was rebuffed by EU Chief Negotiator Barnier on the basis that it went against the Withdrawal Agreement and EU law, and thus, would never have been accepted by EU member states. Barnier attempted to offer further legal assurances to Cox on the backstop, however, the UK AG stated that it would not be enough to justify altering his legal opinion on the matter. With a failure to make progress this week, press reports suggest that UK PM May is to make further pleas to the EU in order to obtain legally binding assurances. PM May is to meet with European Commission President Juncker on Monday ahead of her Parliamentary showdown. However, as this stage, it’s difficult to envisage any progress being made. As such, all eyes are on this week’s Parliamentary proceedings with May’s deal to once again be voted on Tuesday March 12th. If the deal is rejected, Wednesday March 13th will see a vote on the House’s view on a no deal Brexit and if that is rejected, a vote will follow on 14th March on an extension of Article 50; an option which will likely receive Parliamentary backing. Nordea apply a 54% chance to a Brexit delay, in which case, they see GBP/USD at 1.32, 37% chance of May’s deal being passed by the end of March which would see GBP/USD rise to 1.37, whilst the 9% chance of a no deal would see GBP/USD plummet to 1.2300. If the UK is to opt for a delay this week, the issue will be for how long? The EU are widely expected to accept an extension to the end-date but most likely with the view of a short-technical extension in order to get a deal passed and not interfere with European elections in May (Parliamentarians to take their seats in July). However, a longer extension cannot be ruled out, with reports a few weeks ago suggesting that an extension could be stretch out until December 2020; something that could be politically fatal for UK PM May given the outrage it’d cause within the Brexiteer faction of her party.
In what could be a relatively chaotic day in Westminster, Brexit (for once), won’t be the only game in town on March 13th with UK Chancellor Hammond set to deliver his Spring Statement. That said, Brexit will likely play a key role in the Chancellor’s thinking with it being only two weeks until the UK leaves the EU (theoretically). As such, Hammond will need to ensure enough safeguards to protect the UK from the potential fallout of a ‘no deal’ Brexit. However, ahead of March 13th, it has been noted that the release will not be a fiscal event, therefore any potential policy changes are expected to be relatively limited. Instead, a bulk of the release will centre around the latest macro projections. Ahead of which, HSBC look for 2019 GDP to be lowered to 1.2% from 1.6%, 2020 and 2021 both cut to 1.4% from 1.5%. On the inflation front, HSBC look for 2019 CPI to be lowered to 1.8% from 2.0%, 2020 and 2021 maintained at 2.0% and 2.1% respectively. For the borrowing figures, HSBC look for last October’s 2018-19 PSNB forecast to be lowered to GBP 23.5bln from GBP 25.5bln, 2019-20 raised to GBP 33.5bln from GBP 31.8bln, 2020-2021 lifted to GBP 28.5bln from GBP 26.7bln and 2021-22 raised to GBP 24.6bln from GBP 23.8bln. As mentioned, this is not a full-scale fiscal event, but, given some of the political pressure on the Chancellor ahead of the UK’s departure from the EU to unveil some policy initiatives to gain some political capital. One potential measure that has been a topic of discussion has been May’s planned GBP 1.6bln ‘giveaway’ to ‘left behind regions of the UK’. Although this is widely perceived as political blackmail in order to get Labour MPs to support her deal, the plan could aww increased spending on transport infrastructure. Elsewhere, retail and auto names could received a lift from a potential funding measures to help support their respective sectors, but, details are light at this stage. In terms of Gilt issuance, HSBC look for 2019-20 Gilt supply of GBP 119.8bln vs. 2018-19 GBP 97.5bln with a GBP 5bln pick-up in the stock of T-Bills.
The BOJ is likely to stand pat on policy (Friday), keeping rates at -10bps and the 10yr JGB yield target at 0% (with the band at +/- 20bps). Asset purchase guidelines are also seen unchanged. Goldman Sachs expects the Bank to centre its discussions around the weak tone of the January data (particularly exports and production data), which has given rise to talk that the Japanese economy is flirting with recession; there may be glimmers of hope, given capex data at the end of the week rose strongly (in the GDP report). "We expect the economy to avoid a recession as the dip in January was due chiefly to the timing of the Lunar New Year holidays in the greater China region and also expect some rebound in activity data in February and March," GS says, "However, the BOJ will likely need to lower its production and export assessment, in our view, while it is likely to maintain its overall economic assessment." The bank caveats that though, arguing that if activity data do continue to come in weak, the BOJ will need to mull further easing measures, in line with comments from the BOJ's Gov Kuroda in Feb, when he told Asahi that the BOJ would consider additional easing if momentum towards its inflation target was derailed due to an economic slowdown, a sentiment echoed by board member Kataoka too; that said, these are unlikely to be discussed at its March policy meeting, however.
US RETAIL SALE AND CPI
US headline retail sales (Monday) are expected to rise 0.1% MM in Jan, with the control group seen up 0.2%, and the ex-autos measure seen up 0.5%. After a weak December, the January data may face some distortions, particularly since the December print was at odds with other gauges of the retail sector, RBC says, and the bank suggests that there could be significant revisions to the prior data, as a result. Focussing on the January data, the bank believes that income trends have begun the year on a solid footing which could underpin the data, and it posits that soft autos activity is unlikely to constrain the data too much.
Analysts expect February inflation data (Tuesday) will print 0.2% MM for both the headline and core measure. "On the heels of three consecutive monthly declines, gasoline prices finally carved out a bottom and rebounded about 3% in February," RBC writes, "this gain outpaces the seasonal norm and, accordingly, we have energy CPI rising 1.5% on the month." Accordingly, the bank believes there may be some upside to the consensus view, pencilling in a 0.3% reading, which would take the annual rate of CPI to 1.6%. Additionally, RBC says that there is nothing in the underlying detail that suggests core prices will deviate much from the recent 0.2% monthly advances, which it says would drag on the YY rate slightly, to 2.1% from 2.2%.