May Comes Out Swinging

I got us into this mess and I will get us out

Prime Minister Theresa attempted her best Margaret Thatcher impression yesterday evening to rally support for the continued occupation of 10 Downing Street.

It is unlikely she was able to summon up the same level of fear that the “Iron Lady” did in backbench MP’s but she will have gone some way to convincing them that she can form a government.

In the world of political intrigue, every compliment is questioned, every vote of confidence subject to a recount and the hand that pats you on the back could just as easily contain a dagger! Mrs May remains under pressure but having survived the “first weekend” her position becomes a little less untenable. The tradition that general elections are held on Thursdays has meant that the weekend newspapers tend to be prompted to “break” stories of gossip and intrigue.

It was no different this week with rumours of a potential “coup” from Foreign Secretary Boris Johnson. So far this has come to nothing and Johnson has been solid in his support for the PM.

Sterling bearing up well as crisis unfolds

The pound has fared rather better than most would have anticipated given its performance following shocks in the recent past.

It rallied by a little more than 4% following the announcement of the election and has not, so far, “given back” the entirety of that move.

Sterling had been suffering a little prior to the election from a fear that a strong majority for the government would lead to a “Hard Brexit” and the “no deal is a good deal” refrain becoming a bargaining tool.

Despite the turmoil caused by hung parliament, an economic benefit could be construed from a government forced to accept a slightly “softer” Brexit. The four freedoms: goods, capital, labour and services, are now set to be offered as an all or nothing package by Michel Barnier. A tweak here or there and an acceptable compromise could be reached.

Free movement of labour is likely to be limited to those EU nationals already residing in the UK. Capital and services are likely to provide some weakening of the position of the City of London although that is a decision that will be “market driven”. Goods will provide a sticking point since it is the “Jewel in the Crown” of the EU and won’t be handed to a non-member easily. Just ask the Swiss!

Inflation and interest rates bring the market back to reality

Today sees the release of inflation data for the U.K. May's month on month data is likely to be unchanged as seasonal pressures ease leading to an unchanged YoY read.

Producer prices, the cost of good at the factory gate will have eased considerably as the effect of the fall in sterling following the Brexit referendum becomes far less significant. A fall from 16.6% or around 13.5% is possible.

MPC and FOMC meetings take place this week with different influences and pressures likely to provide vastly differing paths for interest rates. A hike is still the core expectation for the FOMC, whereas Mark Carney is likely to continue to canvas for a steady as she goes policy.

Janet Yellen risks losing at least part of her credibility by stating that the FOMC will be most influenced by economic data then hiking rates despite a poor employment report. Inflation is neither particularly important nor a major influence on FOMC decision making. This is just as well as the most recent report pointed to a benign outlook.