Morning comment: Brexit, German GDP & Draghi

Chris Scicluna
Emily Nicol
Mantas Vanagas

While euro area and US stocks retreated yesterday in the face of further evidence of Chinese and European economic weakness (the S&P500 and Euro Stoxx 50 both closed down about ½% on the day), Asian markets shrugged off those concerns today. Perhaps encouraged by increased hopes for Chinese stimulus as well as further dovish noises from Fed Vice Chair Clarida – who downplayed the relevance of December’s dot-plots and noted the significant amount of new information to have emerged since the last FOMC meeting – Chinese equities led the way today, with the CSI300 closing up 2.0% and the Hang Seng up 1.8%. Those gains came ahead of the release a short while ago of the December Chinese credit figures, which showed a pickup in lending growth for the second successive month and ahead of expectations to suggest that the efforts of the authorities to support activity might just be bearing fruit.

Meanwhile, despite reopening from yesterday’s national holiday down from Friday’s close and with no new top-tier domestic data to influence matters, Japan’s markets subsequently more than made up the lost ground, with the Topix closing 0.85% higher. The improved risk appetite also saw the yen depreciate about ½% against the dollar, which was otherwise broadly stable, while 10Y UST yields popped up slightly to about 2.71%. Futures markets currently point to a positive day ahead for US equities.

Looking ahead, initial German GDP figures for 2018 come this morning ahead of Draghi’s first public utterances of the year, which seem likely to pay lip-service to the recent negative data-flow while remaining relatively upbeat about the outlook not least due to improvements in the euro area labour market. The US dataflow resumes too. But the main event will be the evening votes in the House of Commons on Theresa May’s negotiated Brexit deal, with the key uncertainties being the size of her inevitable defeat and quite what she and her political opponents will decide to do next.

So, all eyes in the UK will be on the Brexit ‘meaningful vote’ this evening. The parliamentary debate will conclude with a speech from Theresa May before MPs vote from about 7pm UK time, first on various amendments selected by the Speaker (of which arguably the most notable – which sought to reject both May’s negotiated deal and a no-deal Brexit – was withdrawn this morning so as not to provide distraction from the main event) and then on May’s deal itself.

It is still highly uncertain what May’s strategy will be once the inevitable defeat has been confirmed. She will certainly be expected to give an early indication of her planned next steps, perhaps as soon as this evening or, if not, before Prime Ministers’ Questions in the House of Commons tomorrow lunchtime (even though a vote last week gave her until next Monday to submit a statement to Parliament). Much will depend on the size of her defeat, which could indicate whether or not it is worth her seeking to resume talks with the EU to try to gain further concessions in the hopes of achieving a majority in favour at a future date.

In the event of a very heavy loss (above 100 votes), however, such further negotiations might be considered pointless, and May would be bound to face immediate calls to resign. The responses of the various Parliamentary factions (e.g. the Hard Brexiters and those in favour of a second referendum) process could also come swiftly after the result is announced as they seek to wrest control of the Brexit. And, of course, Labour leader Jeremy Corbyn could also immediately demand to hold a Parliamentary vote of no confidence in the Prime Minister, which could be conducted as soon as tomorrow.

Whatever happens, however, there would seem to be very little chance of Parliament endorsing a Brexit deal and adopting all of the necessary legislation in time for the UK to leave the EU by end-March. As such, we continue to expect Brexit to be delayed beyond end-March, perhaps through to the autumn. So, we also expect a ‘no deal’ Brexit to be avoided. And we continue to attach roughly equal probabilities to the likelihoods of eventual (i) endorsement of a variant of May’s deal, perhaps revised to open the door to a wider range of possible future arrangements, including the so-called Norway-plus arrangement or (ii) revocation of the Article 50 notice, with a second referendum or general election possible before then too.

Euro area:
In the euro area, today will bring Mario Draghi’s first public utterances of the year when he addresses the European Parliament in Strasbourg. That will give him an opportunity to discuss the continued loss of momentum in the euro area economy – illustrated by yesterday’s dire IP figures which showed a drop of 1.7%M/M, the most since early 2016 – which strongly suggests that the ECB’s economic forecasts remain overoptimistic and that the Governing Council will struggle to raise rates this year.

Data-wise, today brings a preliminary full-year German GDP growth figure for 2018 along with an estimate of the government budget surplus – consistent with our forecast of a modest rebound of 0.2%Q/Q in Q4, we expect the figures to show full-year GDP growth of 1.5% down from 2.2% in 2017. November’s euro area goods trade data are also due and likely to indicate that net trade remained a drag on growth towards the end of last year. Meanwhile, we have already seen the release of final French and Spanish inflation numbers for December, which aligned with the flash estimates to show declines of 0.3ppt and 0.5ppt respectively to 1.9%Y/Y and 1.2%Y/Y due principally to lower energy inflation.

In the US, the week’s economic data-flow gets underway with the Empire Manufacturing survey for January and December PPI figures. 

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