- As expected, UK Prime Minister May survived the no confidence vote yesterday 325-306
- Press reports suggest that the EU will consider an extension of the Article 50 deadline well into H2
- Federal prosecutors in Seattle will pursue a criminal case against China’s Huawei
- The economic costs of the shutdown are mounting
- During the North American session, the US reports January Philly Fed index and weekly jobless claims
- Bank Indonesia kept rates steady at 6.0%, as expected; SARB is widely expected to keep rates steady at 6.75%
The dollar is mostly firmer against the majors as markets await fresh drivers after the no confidence vote in UK parliament. Yen and euro are outperforming, while Kiwi and Nokkie are underperforming. EM currencies are mostly weaker. INR and HUF are outperforming, while PHP and TRY are underperforming. MSCI Asia Pacific was up 0.1%, with the Nikkei falling 0.2%. MSCI EM is down 0.1% so far today, with the Shanghai Composite falling 0.4%. Euro Stoxx 600 is down 0.2% near midday, while US equity futures are pointing to a lower open. The US 10-year yield is down 1 bp at 2.72%. Commodity prices are mixed, with Brent oil down 1%, copper down 0.3%, and gold up 0.1%.
As expected, UK Prime Minister May survived the no confidence vote yesterday 325-306. She got the vote of everyone in her party. Even then, she would have lost by 1 vote without the support of the 10 DUP MPs. Clearly, it was in the interest of no one in the government to vote against her, as fresh elections would most likely punish them the most.
What now? May has invited all party leaders to talk with her about a Brexit plan but Labour is reportedly boycotting the talks. We think the base case is that the UK and EU agree to extend the Article 50 deadline beyond March in the hopes of eventually reaching another deal.
Indeed, press reports suggest that the EU will consider an extension of the Article 50 deadline well into H2. Some thought that an extension beyond July was unlikely, as this would go well beyond the convening of the newly elected European Parliament. One EU official said September was a possible new deadline. Sterling has stabilized but unable to build on Tuesday’s gains.
Press reports the federal prosecutors in Seattle will pursue a criminal case against China’s Huawei for alleged theft of trade secrets from its US partner companies. The investigation is in an advanced stage, and reports suggest an indictment could come soon. This comes on top of the recent charges against company CEO Meng and will throw another spanner in the upcoming US-China trade talks.
Eurozone reported final December CPI of 1.6% y/y. This is the lowest since April. Clearly, the Q3 slowdown in the eurozone was not temporary and staff forecasts still need to be adjusted downwards. Next ECB meeting is January 24, and it will be hard for it to maintain its balanced risk assessment given data and comments that have come out since its last meeting December 13. However, this month is probably too soon to make any changes to its official forward guidance.
The euro remains heavy. After posting an outside down day Tuesday, the single currency has continued to weaken. It has recovered back near $1.14 but a break below $1.1350 is needed to set up a test of the November 12 low near $1.1215.
The Fed’s Beige Book was released yesterday. The tone has gotten a bit more tentative, which makes sense given the more “patient” and “flexible” approach that the Fed has set out for 2019. Quarles speaks today. Note that Bloomberg’s WIRP shows zero chance of a hike either this month or in March.
The economic costs of the shutdown are mounting. This week, the head of Trump’s Council of Economic Advisors Kevin Hassett estimated that the shutdown reduces quarterly GDP growth by 0.13 percentage points for every week that it lasts. This is greater than initial CEA estimates of 0.1 percentage points for every two weeks that is lasts.
During the North American session, the US reports January Philly Fed index and weekly jobless claims. Add housing starts and building permits to the pile of postponed US economic data. Key data is being delayed, which means that policymakers and markets are basically flying blind.
Bank Indonesia kept rates steady at 6.0%, as expected. CPI rose 3.1% y/y in December, below the 3.5% target but still within the 2.5-4.5% target range. If the rupiah remains relatively firm, then BI is likely to remain on hold for the time being, but much will depend on global factors. The bank said that its policy rate has almost reached its peak, adding that the Fed outlook was one of the factors behind today’s decision.
The South African Reserve Bank is widely expected to keep rates steady at 6.75%. The economy is very weak and so we don’t think there is much appetite to hike this year if they can avoid it. However, the market may eventually force its hand by putting more pressure on the rand. The next meetings after today are March 28 and May 23, and much will depend on how the rand is trading then.