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by Charalambos Pissouros

Weekly Outlook: Mar 11 – Mar 15: UK Parliament Votes on Brexit, BoJ Decides on Monetary Policy

This week, all lights are likely to turn back to Brexit and the on the votes PM May promised to UK lawmakers. On Tuesday, MPs are likely to vote on an updated Brexit bill, the rejection of which will open the door to a Wednesday vote on whether lawmakers would like to leave the EU with or without a deal. If the Parliament rejects the option of a disorderly withdrawal, a third vote over extending the process will be held the following day. Apart from the Brexit vote, we also have a BoJ policy decision, but no major changes are expected.

On Monday, the calendar appears relatively light once again, with the only top-tier indicator on the agenda being the US retail sales for January. Expectations are for headline sales to have risen fractionally, 0.1% mom, after tumbling 1.2% in December. Core sales are also expected to have rebounded, to +0.4% mom from -1.8%. However, bearing in mind that both the University of Michigan and the Conference Board consumer confidence indices for the month declined, we view the risks surrounding the retail sales forecasts as tilted to the downside, perhaps for another slide, but maybe at a slower pace than in December.

On Tuesday, the spotlight is likely to turn to UK politics and the series of Brexit votes PM Theresa May promised to Parliament. Specifically, the Prime Minister told lawmakers that they will have a new deal on the table by March 12th, and if it is not approved, another vote will take place the on March 13th. The second vote will be on whether Britain should leave the EU with or without a deal. If Parliament rejects the option of a disorderly withdrawal, a third vote over extending the process will be held the following day.

Taking into account that recent headlines suggest little progress in talks with Brussels, we see the chances for any updated deal to pass through Parliament on Tuesday as very low, while the desire of most MPs to avoid a chaotic exit on March 29th could result in voting in favor of delaying the divorce date. Although such an outcome could be a relief for GBP-traders, we don’t expect the pound to skyrocket. After all, the currency already rallied in the second half of February due to hopes that a no-deal Brexit on March 29th can be eventually averted. Thus, we believe that a potential extension is mostly priced in and appears as the most likely outcome, at least for the markets. For the pound to surge, the approval of May’s alternative plan on Tuesday may be needed, which, as we already noted, we see as a low-probability case.

Thus, if indeed lawmakers reject May’s plan but decide to request an extension, all eyes will quickly turn to the EU’s response as consent from all 27 member-states is needed before a delay takes flesh. But even it does, we stick to our guns that the chances of a no-deal Brexit may not totally disappear. PM May said that an extension should be a one-off and as short as possible, suggesting that it could be up until the end of June. So, if MPs continue to reject any deal offered by the Prime Minister during the extended period, the remaining alternatives may be a no-deal Brexit, a second referendum, or revoking Article 50. With May dismissing the latter two, we prefer not to get overconfident that the worst is behind us.

As for Tuesday’s economic releases, Sweden’s inflation data for February are due out. No forecast is currently available for neither the headline CPI nor the CPIF rates. That said, we will once again focus on the core CPIF metric, which excludes energy. Since the previous Riksbank gathering, January inflation numbers disappointed, with the core CPIF rate ticking back down to +1.4% yoy from +1.5% in December. However, GDP data showed that the economy expanded twice as fast as was anticipated, while Riksbank’s Deputy Governor Cecilia Skingsley noted that the plan remains for higher interest rates later this year, even with inflation below the 2% objective.

So, having all that in mind, we believe that a rebound in the core CPIF rate may increase speculation for a Riksbank hike in 2019, but another slide may raise concerns on that front. Yes, Skingsely said that a hike could come even if inflation is below 2%, but an underlying rate of +1.3%, or lower, will be far from warranting such a move in our view. In any case, the Bank’s upcoming gathering is scheduled for the 25th of April, and up until then, we also have the March inflation data. Thus, we prefer to wait for that data set before we start examining what signals we may get from the world’s oldest central bank.

From the UK, we have industrial and manufacturing production for January, as well as the monthly GDP for January. Both the industrial and manufacturing production rates are expected to have rebounded, to +0.1% mom and +0.2% mom from -0.5% and -0.7% respectively. This would drive the yoy IP rate lower, to -1.3% yoy from -0.9%, but the manufacturing yoy rate is anticipated to have ticked up to -2.0% from -2.1%. That said, bearing in mind that the manufacturing PMI for the month slid to 52.6 from 54.2, we view the risks surrounding the manufacturing production rate as tilted to the downside. With regards to the monthly GDP, no forecast is currently available for the monthly rate, but the 3-month rolling quarterly one is anticipated to have declined to +0.2% from +0.4%. The UK trade balance is also due to be released and the forecast is for the nation’s deficit to have widened fractionally.

In the US, consumer prices for February are coming out. The headline CPI is expected to have remained unchanged at +1.6% yoy, while the core rate is forecast to have ticked down to +2.1% yoy from +2.2%. That said, even if the core rate ticks down, bearing in mind that the yoy change of WTI continued to improve during the month, although staying in negative territory, we see the risks surrounding the headline CPI as tilted somewhat to the upside.

A small rise in the headline rate and a core print still near the Fed’s symmetric target of 2% may allow market participants to reduce their Fed cut bets, and perhaps revive some with regards to a hike. According to the Fed funds futures, investors are nearly 84% confident that the Committee will refrain from pushing the hiking button this year, while the probability for a rate cut has increased to 16%. The chance for a hike is at 0%.

On Wednesday, as we already noted, conditional upon May’s new proposal being rejected on Tuesday, the UK Parliament will hold a vote on whether they wish to leave the EU with or without a deal. But apart from the vote, we also have the “Spring Statement”, which the Chancellor of the Exchequer Philip Hammond will present to lawmakers. In the midst of all this uncertainty surrounding the UK’s departure from the EU, the Chancellor is unlikely to proceed with any major fiscal measures, and perhaps stick to commenting on the new forecasts form the Office of Budget Responsibility. He could also reiterate plans for larger spending post Brexit if there is an orderly withdrawal. In any case, we expect the Statement to pass largely unnoticed, as the center of attention will most likely be the series of votes with regards to what happens next with Brexit.

As for Wednesday’s data, we have Eurozone’s industrial production and the US durable goods orders, both for January. Eurozone’s industrial production is forecast to have rebounded 1.0% mom after sliding 0.9%, which would drive the yoy rate higher, but keep it into negative territory (-2.1% from -4.2%). As for the US durable goods orders, expectations are for a 0.5% mom slide after a 1.2% increase in January. The US PPIs for February are also on the agenda. The headline rate is expected to have ticked down to +1.9% yoy from +2.0%, while the core rate is forecast to have remained unchanged at +2.6% yoy. Bearing in mind that we will already have the CPIs for the month the day before, we don’t expect market participants to pay much attention to the PPIs.

On Thursday, if May’s Brexit plan is rejected and UK MPs choose to exit the EU with a deal, all eyes will be on the extension vote (See Tuesday).

As for the releases, during the Asian morning, China’s industrial production, retail sales and fixed asset investment, all for January are coming out. Industrial production and retail sales are expected to have slowed to +5.5% yoy and +8.1% yoy, from +5.7% and +8.2% respectively, while the fixed asset investment rate is anticipated to have ticked up to +6.0% from 5.9%.  Later, during the European session, Germany’s final inflation numbers for February are coming out, but as it is usually the case, they are expected to confirm the preliminary prints.

On Friday, during the Asian day, the Bank of Japan concludes its two-day monetary policy meeting. At their first meeting for 2019, Japanese policymakers kept their ultra-loose policy unchanged, reiterating that they intend to maintain the current extreme low levels in interest rates for an extended period of time. What’s more, in their quarterly report, they trimmed further their inflation projections for the whole forecast horizon. The Bank now expects its core CPI to hit +1.4% yoy in the fiscal year 2020/21, down from +1.5% previously, and well below its inflation objective of 2%. 

Latest inflation data showed that headline consumer prices slowed to +0.2% yoy in January from +0.3% in December, while the core National CPI rate ticked up to +0.8% yoy from +0.7%.  The Bank’s own core inflation rate stood at +0.5% yoy. Thus, with all inflation metrics running well below the BoJ’s 2% objective, we stick to our guns that policymakers are unlikely to alter their ultra-loose policy anytime soon.

Later in the day, Eurozone’s final CPIs for February are anticipated to confirm the preliminary forecasts of +1.5% yoy for the headline rate and +1.0% yoy for the core one, while the US industrial production is expected to have rebounded +0.4% mom in February after sliding 0.6% in January. The US JOLTs Job Openings for January and the preliminary UoM Consumer Sentiment index for March are also scheduled to be released.

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