May survives her first test
When Theresa May saw the result of the exit poll at 10.00 pm on the evening of June 8th she has admitted to “shedding a little tear”. It is likely that come the autumn, Labour Leader Jeremy Corbyn is expecting her to “cry me a river!”
The summer recess of parliament, which begins next week, cannot come quick enough for Mrs May. She will have survived, propped up by the most unlikely of allies but can expect to face further difficulties through the rest of the summer as Brexit negotiations continue and the economy falters.
Boris Johnson's “go whistle” comment has hardly endeared him to Michel Barnier the EU’s chief negotiator who can “only hear a clock ticking”. Remember Boris, “he who laughs last!”
The government published its Repeal Bill yesterday. This is the legislation that makes the EU laws into British laws and repeals the 1972 Act that led to the UK’s entry into the “Common Market” (if only it could have stopped there!). The opposition parties have vowed to make its passing in its current form impossible. Already Labour has voiced concerns over workers’ rights and that all changes will be subject to parliamentary scrutiny.
Yellen facing data test
Fed Chair Janet Yellen asserts that future rate hikes will be “data dependent” and that current benign inflation was “partly the result of a few unusual reductions” in certain parts of the consumer price index. Well, it will be interesting how she reacts to today’s inflation data where the headline is expected to fall to 1.7% to 1.9% in May.
Retail sales numbers are also released today and although a bounce from May’s fall is likely a 0.1% rise is hardly likely to set FOMC pulses racing
The dollar index has been in the doldrums this week trading between 96.45 and 96.00. Its constituent parts have however had a mixed week. The euro has corrected a little following its failure to breach 1.1500. Sterling continues to be buffeted by headwinds. The Canadian dollar has had a spectacular week since the BoC followed through on its advance guidance and hiked rates.
The yen has appreciated after Yellen's testimony. Interest rate differentials have always been a major driver of the USD/JPY rate but that has changed since the SNB wrecked the “old carry trade”. It could, however, make a comeback. The BoJ meets next week and a rate hike is as far from their consideration as ever.
UK MPC voting a little clearer
Ian McCafferty, one of two MPC hawks who voted for a hike at the last MPC meeting, switched tack yesterday and possibly admitting defeat over a hike on August 3rd by calling for the end of the BoE’s quantitative easing programme.
Last year he also presented his hawkish credentials but since he couldn’t gain sufficient support to bring about a change went back to following the governor's lead. A hawk in sheep’s clothing it you will.
Next week’s inflation data may garner him a little support. The mantra that a weak pound is bringing above trend inflation is wearing a little thin. Year-on-year numbers should start to fall as the pounds collapse happened thirteen months ago. The market can accept the MPC’s concern over headwinds facing the economy in the shape of Brexit and political uncertainty but their haste in cutting rates has been proven to be a wrong decision and should be reversed.
Sterling has bounced against the common currency as commercial buyers view it as cheap above 0.8900. Nothing has fundamentally changed for the pound and the “long-march” towards parity is still the long-term prognosis.