Said Corbyn, the clear antidote
To Brexit is hold a new vote
Meanwhile the EU
Said they would push through
Delay, while they secretly gloat
For traders the news was elating
With Sterling bulls now advocating
The lows have been seen
Will see the pound appreciating
The pound has topped 1.3220 (+1.0%) this morning as a result of two key stories: first Labour leader Jeremy Corbyn has agreed to back a second referendum. This increases the odds that one might be held, assuming there is a delay in the current process which dovetails nicely with the other story, that PM May is mooted to be about to announce a delay in the process. The EU has already essentially agreed that they will allow a delay with the question, as I discussed yesterday, really about the length of time to be agreed.
The two sides of this debate are either a short, three-month, delay, whereby PM May believes she can get the current deal approved or a long, twenty-one-month delay, which would allow enough time for a second referendum where the current belief is that the outcome will be different. Regarding the second referendum, while the press posits it is a slam-dunk the vote would be to remain, the latest polls show remain currently leads 53-47, hardly a landslide, and arguably well within the margin of error. If memory serves, that was the expectation leading up to the first vote! At any rate, I would contend the FX market is pricing in a very high probability of the UK ultimately remaining in the EU. What that says to me is that the upside for the pound is limited. Certainly, in that event, an initial boost is likely, but after that, I would argue a slow decline is the probable path.
As to the trade story, yesterday’s ecstasy seems to have abated somewhat as investors have not yet seen or heard anything new to encourage further expectations. The result has been that equity markets have slipped a bit, and now everybody is waiting for the next announcement or tweet to boost sentiment again. My gut tells me the market is far too sanguine about a successful conclusion to this process, but I am one voice in a million. However, for today, this doesn’t appear to be having a significant impact.
And finally, the third in our trio of key stories, the Fed, will get new impetus today when Chairman Powell sits down in front of the Senate Banking Committee this morning at about 9:45 to offer his semi-annual testimony on the state of the economy. Based on all we have heard lately, the Fed’s current stance appears to be that the economy remains solid, with some very positive aspects, notably the employment situation, and some softer concerns (housing and autos) with confusion over the consumption numbers after the latest Retail Sales data. There is clearly a camp in the Fed that believes further rate hikes are appropriate later this year, and a camp that would prefer to wait until inflation data is already running above target. It would be surprising if the opening comments were committal in either direction, but I expect that a number of Senators will try to dig into that very issue. However, given just how much we have heard from various Fed speakers over the past several weeks, it seems highly unlikely that we will learn much that is truly new.
One thing to watch for is any hint that there is a change in the stance on the balance sheet. As it stands right now, expectations are for a continued running down of assets for a little while longer this year before halting. However, and this is probably more a concern for tomorrow’s House testimony than today’s in the Senate, questions about MMT and the ability of the Fed to simply print funds and buy Treasuries without end may well cause a market reaction. Any indication that the Fed is considering anything of this nature would be truly groundbreaking and have some immediate market impacts, notably, significant dollar weakness, and likely immediate strength in both equities and bonds. Please understand I am not expecting anything like this but given the number of adherents that have gravitated to this concept, I do expect questions. Fortunately, thus far, there has not been any indication the Fed is considering anything like this.
On the data front today we see December Housing Starts (exp 1.25M) and Building Permits (1.29M) as well as the Case-Shiller House Price Index (4.5%) and finally, the only current data of note, February Consumer Confidence (124.7). Much of the data this week is out of date due to the government shutdown last month. But in the end, the morning will be driven by PM May and her Parliamentary speech, and the rest of the session will be devoted to the Fed and Chairman Powell. The dollar has been modestly offered for the past week, trading to the low end of its trading range, but we will need something new to force a breakout. As of now, it is not clear what that will be, so I anticipate another session of modest movement, perhaps this time edging toward strength in the greenback.