Election extension?

Chris Scicluna
Emily Nicol

Overview:
After the results of last night’s votes in the House of Commons were announced – with the UK PM gaining support from MPs ‘in principle’ for his Brexit legislation, but failing to win their backing for his accelerated timetable to pass his Bill – Johnson stated that he would now ‘pause’ the process, effectively guaranteeing an Article 50 extension and raising the likelihood of a UK general election before Christmas. In response, sterling weakened immediately, dropping more than a cent against the dollar. And in Asian markets today, the pound slipped a touch further, briefly moving below $1.285 for the first time since Friday before edging a touch higher.

Those developments in the UK didn’t help risk appetite. And after the S&P500 closed down 0.4% on the day, stocks in China and Hong Kong weakened too, although in the latter the main cause appeared to be the FT report that the Chinese authorities are planning to replace Carrie Lam with an ‘interim’ Chief Executive. The Hang Seng is currently down about 1% while China’s CSI 300 fell 0.6%.

Elsewhere, however, most major Asian indices rose, e.g. Japan’s Topix closed up 0.6%, while the latest domestic economic data confirmed stronger spending in department stores ahead of this month’s consumption tax hike but revised labour earnings numbers were another damp squib (see detail below). Major sovereign bonds, meanwhile, have made gains. 10Y UST yields are currently back down below 1.75% from 1.80% ahead of the UK Parliament votes, while yields on 10Y JGBs are about 1bp lower at -0.155%. And ACGBs followed USTs higher, supported also by some weaker Aussie job vacancy data. Euro govvies have risen this morning too (yields on 10Y Bunds down about 3bps back to -0.40%), not helped by a softer French INSEE business survey. Inevitably, following yesterday’s gains, Gilts have also opened higher again, with 10Y yields about 3 ½bps lower to 0.67%.

UK:
So, the Brexit Article 50 deadline is bound to be extended beyond the end of this month. The specificities of that extension, and quite what it will be used for, is still unclear. But on balance this morning, a December general election – in line with our baseline scenario – looks most likely.

Yesterday evening in the House of Commons, UK PM Johnson won a majority, at the so-called second reading, in principle in favour of his Brexit Withdrawal Agreement Bill (or WAB), by 329 votes to 299. That might have allowed the Bill to move straight to the committee stage, where MPs would scrutinize the legislation and propose detailed amendments. But Johnson was subsequently defeated, by 322 votes to 308, on the so-called programme motion, whereby he had sought to seriously limit the scope for scrutiny and amendment by forcing the legislation through the House of Commons by tomorrow night. For fear that his Bill would now be amended significantly by MPs in the committee stage – perhaps, for example, to incorporate a demand that the Government negotiate a customs union arrangement with the EU or extend the intended transition period by two years to end-2022 – Johnson therefore stated that he would ‘pause’ the progress of his WAB.

In response, EU President Donald Tusk tweeted that he would therefore recommend to the EU27 leaders that they now accept the request in Johnson’s letter sent on Saturday for an extension. In line with the Benn Act, that letter requested an extension until 31 January. And since any alternative deadline would require endorsement in a subsequent vote in the House of Commons, we fully expect the 31 January to be agreed by the EU27 without the need for a further summit. It remains to be seen whether we receive confirmation of the EU’s offer today. But, as reported in the Times, the extension might well still leave open the door to the UK to leave the EU sooner (on the first or fifteenth of any month up until the 31 January) should the necessary legislation be adopted by then.

So, where does that leave us? It is still possible that Johnson will try again to pass a new programme motion incorporating a revised slightly longer timetable for House of Commons scrutiny of his WAB. But the chances of his Brexit proposals then being amended by MPs in a form that would be unacceptable to him would seem high. And he would still have no scope to limit the time taken by the House of Lords to consider the Bill. So, on balance, we expect Johnson to propose a general election on 5 or 12 December. And with the SNP and LibDems likely to be in favour, this time around a majority in Parliament will likely be found.

Japan:
The latest Japanese department store sales were striking, albeit not overly surprising, with the headline figures for September suggestive of a notable front-loading of spending ahead of this month’s consumption tax hike. In particular, department store sales jumped 23.1%Y/Y last month, the largest annual increase since the pre-2014 tax hike surge. And with the exception of food, sales were considerably higher across the main subsectors – e.g. clothing (19.2%Y/Y), household goods (30.7%Y/Y), cosmetics (51.2%Y/Y). But today’s figures might well have been flattered by base effects, with consumption in September 2018 have been disrupted by natural disasters, including the typhoons and the Hokkaido earthquake.

Indeed, when adjusting for seasonal effects, department store sales were effectively flat in September having jumped in August (7½%M/M). And given weakness in July these suggested that department store sales were actually down over the third quarter as a whole (0.7%Q/Q), following a near-2%Q/Q increase in Q2 and compared with a more than 8%Q/Q increase in the quarter preceding the 2014 tax hike. Of course, department store sales represent only a fraction of total consumption growth. And overall, we continue to expect household consumption to have provided a modest boost to GDP growth in Q3, ahead of the anticipated slump in demand in Q4.

While the Rugby World Cup should help to offset to some extent the retrenchment in spending in October, today’s revised labour earnings figures offered little to suggest that a boost to underlying consumption growth is likely to lie further ahead. Admittedly, headline wage growth was nudged slightly higher from the initial estimate in August, although the 0.1%Y/Y drop still marked the seventh negative reading so far this year. And the improvement principally reflected a smaller-than-previously-estimated decline in summer bonus payments (up 6.6ppts to -4.8%Y/Y). Indeed, scheduled earnings growth was revised 0.2ppt lower to just 0.1%Y/Y, with overtime earnings growth down 0.8ppt to 0.1%Y/Y. When adjusting for sample issues, scheduled wage growth was unchanged at 0.5%Y/Y, although this was below the average rate so far this year. And total earnings on this basis were merely flat compared with a year earlier.

Euro area:
In the euro area, ahead of tomorrow’s final Governing Council meeting under Draghi’s stewardship and the flash PMIs, we have a couple of sentiment surveys for October out today. This afternoon will bring the Commission’s flash consumer confidence indicator, for which last month the headline index rose 0.6pt to -6.5, the joint-highest level this year, nevertheless still well below the average seen through 2018. Having effectively oscillated around a sideways trend since February, we expect to see a slight drop in the indicator at the start of Q4.

This morning, however, we have already seen the French INSEE business sentiment survey for October, which was a touch softer than expected. In particular, this suggested that the business climate slightly weakened at the start of Q4, with the composite indicator down 1pt to 105, still however above its long-term average (100). Within the detail, there was a deterioration in manufacturing, for which the respective index fell 3pts to 99, the weakest since March 2015. In contrast, the equivalent figures were stable and above the long-average in services, construction and retail.

In the markets, Germany will sell 10Y Bunds today.

Australia:
While the most recent ABS labour market report suggested a further increase in Aussie employment in September, to leave the unemployment rate edging slightly lower to 5.2%, today’s skilled vacancy figures offered a relatively downbeat assessment for near-term jobs growth. Indeed, these reported the ninth consecutive monthly decline in vacancies in September, with the 0.7%M/M drop the steepest for four months. And with the exception of Western Australia and technicians, the weakness was broad based across the states and job classifications. So, compared with a year earlier, this left skilled vacancies down a sizeable 7.1%Y/Y, the steepest such decline since 2013, with a decline of more than 13½%Y/Y in New South Wales most striking.

US:
Following yesterday’s soft existing home sales figures (down 2.2%M/M in September, albeit from an upwardly revised reading for the prior month), today will bring more housing market data with the FHFA house price index for August due alongside the usual weekly MBA mortgage application figures. In the markets, the US Treasury will sell 2Y floating rate notes and 5Y fixed rate notes.

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