The latest news from the UK
Is that they have sought a delay
Til midsummer’s eve
When, they now believe,
They’ll duly have something to say
But Europe seems not quite so keen
To grant that stay when they convene
It should be a year
Unless it’s quite clear
The UK is fleeing the scene
Despite the fact it is payroll day here in the US, there are still two stories that continue to garner the bulk of the attention, Brexit and trade with China. In the former, this morning PM May sent a letter to the EU requesting a delay until June 30, which seems to ignore all the points that have been made about a delay up until now. With European elections due May 23, the EU wants the UK out by then, or in for a much longer time, as the idea that the UK will vote in EU elections then leave a month later is anathema. But May seems to believe that now that she is in discussions with opposition leader Jeremy Corbyn, a solution will soon be found and the Parliament will pass her much reviled deal with tweaks to the political codicil about the future. The other idea is a one-year delay that will give the UK time to hold another referendum and get it right this time determine if it is still the people’s will to follow through with Brexit given what is now generally believed about the economic consequences. The PM is due to present a plan of some sort on Wednesday to an emergency meeting of the EU, after which time the EU will vote on whether to grant a delay, and how long it will be. More uncertainty has left markets in the same place they have been for the past several months, stuck between the terror of a hard Brexit and the euphoria of no Brexit. It should be no surprise the pound is little changed today at 1.3065. Until it becomes clear as to the outcome, it is hard to see a reason for the pound to move more than 1% in either direction.
Regarding the trade story, what I read as mixed messages from the White House and Beijing has naturally been construed positively by the market. Both sides claim that progress is being made, but the key sticking points remain IP integrity, timing on the removal of tariffs by the US, and the ability of unilateral retaliation by the US in the event that China doesn’t live up to the terms of the deal. The latest thought is it will take another four to six weeks to come to terms on a deal. We shall see. The one thing we have learned is that the equity markets continue to see this as crucial to future economic growth, and rally on every piece of ‘good’ news. It seems to me that at some point, a successful deal will be fully priced in, which means that we are clearly setting up a ‘buy the rumor, sell the news’ type of dynamic going forward. In other words, look for a positive announcement to result in a short pop higher in equity prices, and then a lot of profit taking and a pretty good decline. The thing is, since we have no real idea on the timing, nor where the market will be when things are announced, it doesn’t help much right now in asset allocation.
As a side note, I did read a commentary that made an interesting point about these negotiations. If you consider communism’s tenets, a key one is that there is no such thing as private property. So, the idea that China will agree to the protection of private property when it contradicts the Chinese fundamental ruling dicta may be a bit of a stretch. Maybe they will, but that could be quite a hurdle to overcome there. Food for thought.
Now, on to payrolls. Here are the latest consensus forecasts:
|Average Hourly Earnings||0.3% (3.4% Y/Y)|
|Average Weekly Hours||34.5|
A little worryingly, the ADP number on Wednesday was weaker than expected, but the month-by-month relationship between the two is not as close as you might think. Based on what we have heard from Fed speakers just yesterday (Harker, Mester and Williams), the FOMC believes that their current stance of waiting and watching continues to be appropriate. They are looking for a data trend that either informs coming weakness or coming strength and will respond accordingly. To a wo(man), however, these three all believe that the economy will have a solid performance this year, with GDP at or slightly above 2.0%, and that it is very premature to consider rate cuts, despite what the market is pricing.
Meanwhile, the data story from elsewhere continues to drift in a negative direction with Industrial Production falling throughout Europe, UK House Prices declining and UK productivity turning negative. In fact, the Italian government is revising its forecast for GDP growth in 2019 to be 0.1% all year and all eyes are on the IMF’s updated projections due next week, which are touted to fall even further.
In the end, the big picture remains largely unchanged. Uncertainty over Brexit and trade continue to weigh on business decisions and growth data continues to suffer. The one truism is that central bankers are watching this and the only difference in views is regarding how quickly they may need to ease policy further, except for the Fed, which remains convinced that the status quo is proper policy. As I continuously point out, this dichotomy remains in the dollar’s favor, and until it changes, my views will remain that the dollar should benefit going forward.