Morning comment: Brexit shifts & euro surveys, ahead of Powell testimony

Chris Scicluna
Mantas Vanagas

As yesterday progressed, US stocks gave up most of their initial gains, with the S&P500 eventually closing up just 0.1%, while USTs also ended the day little changed from this time yesterday with 10Y yields around 2.66%. Given that lack of momentum in the US, as well as a dearth of significant macroeconomic data from the region, Asian equities today perhaps inevitably went into reverse while government bond yields also moved a touch lower. Having gained almost 6% on Monday, China’s CSI300 at first struggled for direction before eventually slipping back (down now more than 1%). Japan’s Topix also fell, albeit closing down just 0.2%, as the yen promptly reversed an initial depreciation through ¥111.1/$, which briefly represented its weakest level since December. 

Elsewhere, sterling appreciated to reach its strongest level against the euro for a month (€1.158) on suggestions that Theresa May will today concede her readiness to extend the Article 50 deadline beyond 29 March if necessary to avoid a no-deal Brexit, and after yesterday evening saw the main opposition Labour Party commit to support a second referendum on any deal negotiated by the Prime Minister (see below). Meanwhile, this morning’s dataflow from the euro area has been broadly positive, with consumer confidence readings from the euro area’s largest member states suggesting stability in Germany and greater optimism in France. Later today, the data focus in the US will be the housing market while Fed Chair Powell will give his semi-annual monetary-policy testimony to Congress.

Today should see a significant step taken towards the avoidance of a no-deal Brexit on 29 March. In particular, this morning will see PM Theresa May brief her Cabinet before making yet another statement to Parliament on her Brexit plans later in the day. All the indications are that she’ll concede that MPs should be given the opportunity to decide whether to prevent the UK leaving the EU on 29 March without a deal. The move will respond to the risks of rebellion within her Party and Cabinet, with a majority of MPs having seemingly been ready to vote tomorrow in favour of the Letwin-Cooper 'amendment' giving Parliament control of the timetable for an extension of the Article 50 deadline should May’s deal not be approved by MPs by 13 March. May’s plan appears to be broadly in line with an alternative amendment tabled by Tory backbenchers Percy and Hart, whereby if MPs reject the PM’s deal in the meaningful vote on 12 March then they would be granted a further vote on whether to press ahead with a no-deal Brexit on March 29 or move for ‘a short extension’ to the Article 50 deadline (the Percy-Hart amendment proposes to push Brexit Day back to 23 May, the start of the European Parliament elections).

Of course, yesterday evening’s concession by Labour leader Corbyn to support a second referendum on any deal negotiated by the Prime Minister was similarly motivated by the risks of a more severe rebellion within his party’s ranks following last week’s resignation of membership by nine of its MPs. Nevertheless, dozens of Labour MPs seem unlikely to back his proposal when it comes to a vote on 12 March, and there will probably be insufficient Tory MPs to make up the numbers to get a second referendum. Much might depend on the specific wording of Corbyn’s ‘amendment’, with inevitable ambiguity remaining about quite what he has in mind.

Moving to the UK data flow, ahead of BoE banking data due on Friday, we will get an early preview of how lending evolved in January when the industry body UK Finance announces its figures from the major retail banks. We think that mortgage lending flows remained little changed at the start of the year, as activity in the housing market remained highly subdued. But stronger activity in the retail sector likely provided some support to consumer credit growth.

Euro area:
This morning’s consumer confidence survey results suggest that there has been no further significant loss of momentum in the euro area economy in the first quarter of 2019, at least as far as household spending is concerned. German consumer confidence remains little changed, according to the GfK survey, with the headline index moving sideways in the latest month at 10.8, the highest level since Q2 last year. Supported by very favourable conditions in the labour market, income expectations remained robust, with consumers maintaining their most positive assessment in 1½ years. However, expectations for the general economic situation deteriorated again, marking a fifth consecutive decline to the lowest level in three years. The survey once again highlighted that external factors are largely to blame for economic concerns. Indeed, according to GfK, German consumers appear to worry that a rise in global protectionism against the backdrop of the US- China trade dispute might harm German exporters, while a possibility of a disastrous Brexit scenario also represents a significant downside risk. With that in mind, the survey indicator for propensity to buy eased back towards the bottom of its recent range to leave its average this quarter unchanged from that in Q4. So, overall, the survey looks to be consistent with a similar rate of growth in German household consumption in Q1 to the 0.2%Q/Q rate seen in Q4.

Meanwhile, in France, the similar consumer survey from INSEE painted a more positive picture. Following a sharp deterioration at the end of last year, when the Gilets Jaunes protesters flooded the streets of Paris and other cities and towns, consumer sentiment rose sharply for the second consecutive month in February, this time by 3pts to 95, a level last seen in October before the protests gathered steam. Indicators of optimism regarding personal finances picked up, and those reflecting consumers’ assessments of the economy improved more significantly – likely at least in part reflecting government announcements of additional fiscal giveaways in response to the protests. In addition, the survey’s unemployment-fears index plummeted 20pts, one of the biggest drops on the series, to a level well below its long-term average. This is despite President Macron’s pledge to press ahead with his agenda to reform the labour market and increase its flexibility. Overall, the survey signalled that French households are regaining confidence and, like in Germany, we expect household consumption to provide a positive, albeit not particularly large, contribution to GDP growth in the current quarter.

All eyes later on will be on Fed Chair Powell, as he finally gets to give his delayed semi-annual testimony on monetary policy to Congress, with today’s session to be conducted in front of the Senate Banking Panel. Whether this adds to the markets’ stock of knowledge on the Fed’s policy reaction function might, however, seem doubtful. The FOMC is seemingly split on what might be required to justify a further rate hike this year, but the last set of Committee minutes having indicated that security redemptions would likely end ‘at some point over the latter half of this year’. Nevertheless, while he has been relatively consistent in his message this year, Powell’s record on communication over past quarters was somewhat erratic, so today might yet throw up a surprise for the markets. Data-wise, meanwhile, the focus will be on the housing sector, where momentum has been lost in the face of past rate hikes. Housing starts and permits data and the S&P CoreLogic Case Shiller house price index, all for December, are due today.

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