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by Charalambos Pissouros

Weekly Outlook: Jan 14 – Jan 18: Brexit Vote in Parliament; Japan, UK, Canada Inflation Data

Following last week’s Parliamentary debate over PM May’s Brexit plan, as well as Friday’s reports that Britain will seek to delay Brexit, this week, GBP-traders are likely to lock their gaze on Tuesday’s vote in Parliament. That said, with the plan set to be rejected, the question on everyone’s mind may be: What happens next? We also get data from several G10 nations, including Japan, UK, and Canada.

On Monday, during the European morning, we get Sweden’s inflation data for December. Expectations are for both the CPI and CPIF rates to have held steady at +2.0% yoy and 2.1% yoy respectively. That said, once again, we will pay more attention to the core CPIF metric, which excludes energy. At its latest policy meeting, the Riksbank decided to raise rates to -0.25% from -0.50%, the first increase since 2011, while in the accompanying statement, officials noted that the next increase is likely to come during the second half of 2019. The core CPIF rate currently stands at +1.4% yoy after ticking down from October’s +1.5%. Even though a rebound is unlikely to raise bets for another hike at the Bank’s upcoming gathering, which is scheduled for the 13th of February, it could spark some hopes that the policymakers may bring somewhat forth the timing of when they expect to hike again, especially if the rebound in the core CPIF rate is accompanied by decent headline rate. On the other hand, another slide could generate concerns that the Bank may wait a bit longer before lifting interest rates to zero.

From the Eurozone, we the bloc’s industrial production for November, and expectations are for a 1.5% mom decline, after a 0.2% mom rise in October.

On Tuesday, the highlight is likely to be the vote of the UK Parliament over the Brexit deal agreed by PM Theresa May and the EU. With May still facing opposition from all sides within the Parliament, her plan is set to be rejected. Unless of course the Prime Minister secures last-minute concessions from the EU and then manages to convince MPs to support her deal, a conditional probability we see as very low, given the EU’s stance that the current deal is not negotiable.

Thus, the big question in everyone’s mind may be: What happens next? Last week, the Parliament voted that the government should come up with an alternative plan within three working days if the existing deal is rejected. But, what if it doesn’t? In order to avoid a disorderly Brexit, the Parliament may seek to delay Brexit or revert Brexit altogether. With the government denying any headlines regarding the former front, and clearly saying that it won’t revoke its notice, the options left may be a second referendum or a no-confidence vote that could lead to general elections.

Brexit decision opinion poll

Having said that though, hardliners within the Parliament are unlikely to risk staying within the EU, especially with polls now suggesting that the Britons who believe that the UK was wrong to leave the EU are more than those who believe that the decision was right. After all, hardliners reject the existing plan because it keeps the UK closely tied to the EU. Thus, as the clock ticks towards the 29th of March, the official exit day, they may prefer to accept May’s accord in a second round of voting, if May is defeated by a tight margin on Tuesday.

As for Tuesday’s economic releases, during the European day, we get Eurozone’s trade balance for November, and Germany’s annual GDP. The Euro area trade surplus is forecast to have declined slightly, while the annual German GDP is expected to have slowed to +1.5% from +2.2%.

Later, in the US, we have PPIs for December. Expectations are for the headline rate to have held steady at +2.5% yoy, while the core one is forecast to have risen to +2.9% yoy from 2.7%. We usually monitor producers’ prices as a gauge of where consumer prices may come in. But given that we already got the CPIs for December on Friday, we won’t pay the same attention as we used to on the PPIs, and we believe that they may pass unnoticed by the market as well. The New York Empire State manufacturing index for January is also due out and is forecast to have risen to 11.25 from 10.90.

On Wednesday, the final German CPI for December is set to be released, and is expected to confirm its preliminary estimate, namely that inflation in Eurozone’s growth engine has slowed to +1.7% yoy from +2.3% in November.

We get inflation data for December from the UK as well. The headline CPI is forecast to have slowed further, to +2.2% yoy from +2.3%, while the core rate is expected to have remained unchanged at +1.8% yoy. The case for a declining headline rate, conditional upon an unchanged core print, is supported by the fact that the yoy change of Brent oil slid further into the negative territory during the month.

UK CPIs inflation vs yearly change in Brent oil

With headline inflation returning to the BoE’s target faster than previously thought and the core rate staying below that objective, investors may price further out their hike expectations, especially with all this uncertainty surrounding the Brexit landscape. According to the forward curve of the UK OIS (overnight index swaps), a rate hike is now fully priced in for October 2020. However, we stick to our guns that pre-Brexit inflation numbers are likely to continue attracting less attention than usual, especially this data set, which comes the day just after Parliament’s vote over Brexit. At its latest meeting, the Bank maintained its position that interest rates could move in either direction post-Brexit, even in case of a no-deal outcome, something we agree with. Yes, a no-deal Brexit could hurt economic growth, but a potential slide in the pound could lift inflation up again. The Bank would have to assess the trade off and judge whether bringing inflation back to target is a priority compared to supporting economic activity, in which case it could increase rates. If the opposite is true, it may decide to cut.

From the US, we get retail sales for December. Expectations are for headline sales to have risen +0.2% mom, the same pace as in November, while core sales are forecast to have slowed to +0.1% mom from +0.2%. The CB consumer confidence index declined for the second consecutive month in December, but the UoM consumer sentiment gauge rose. Thus, having that in mind, it’s hard to say to which direction the risks of the retail sales forecasts are tilted.

On Thursday, Asian time, Australia’s new home sales and home loans, both for November, are coming out. No forecast is available for home sales, while loans are expected to have declined 1.5% mom after rising 2.2% in October.

Later in the day, we get Eurozone’s final inflation data for December, as well as the US housing starts and building permits for the month. The Philly Fed manufacturing index for January is also coming out. As usual, the final Euro-area inflation prints are expected to confirm their preliminary estimates, while in the US, both housing starts and building permits are expected to have declined. The Philly Fed index is anticipated to have risen to 10.0 from 9.1.

Finally, on Friday, during the Asian morning, we have Japan’s National CPIs for December. No forecast is available for the headline print, but the core rate is expected to have ticked down to +0.8% yoy from +0.9%. Both the more-forward-looking Tokyo CPIs for the month slowed, with the headline rate tumbling to +0.3% yoy from +0.8%, something which suggests that the headline National rate may fall notably as well. Further slowdown in Japan’s National inflation metrics could add more credence to our longstanding view that BoJ policymakers have still a long way to go before considering a meaningful step towards normalization, especially with the Bank’s own core CPI measure sitting at +0.5% yoy. The nation’s final industrial production print for November is also scheduled to be released.

Japan CPIs inflation

During the European day, we get the UK retail sales for December. Both headline and core sales are expected to have slid 0.8% mom and 0.5% mom, from +1.4% mom and +1.2% mom respectively. This may drive the headline yoy rate slightly lower, but it could leave the core yearly rate unchanged.  The case for a slide in the headline yoy rate is supported by the BRC retail sales monitor for the month, which slid further into the negative territory, to -0.7% yoy from -0.5%.

From Canada, we have inflation data for December. Expectations are for the headline rate to have ticked up to +1.8% yoy from +1.7% yoy, while no forecast is currently available for the core rate. A rebound in the CPIs could be encouraging news for BoC officials who still see the case for more rate hikes over time. Even if inflation edged somewhat lower, that would be in line with the Bank’s view and thus, we don’t expect it to alter BoC officials’ plans. We believe that a notable tumble, especially in the core rate, is needed for market participants to start worrying again that the Bank will stop its hiking process.

Canada CPIs inflation

In the US, industrial and manufacturing production for December are due to be released, as well as the preliminary UoM consumer sentiment index for January. Industrial production is expected to have slowed to +0.2% mom from +0.6%, while manufacturing production is forecast to have risen 0.3% mom after stagnating in November. That said, bearing in mind the tumble in the ISM manufacturing PMI for the month, we remain skeptical over the manufacturing production forecast. With regards to the preliminary UoM consumer sentiment index, it is expected to have declined to 96.9 from 98.3 in December.

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