Hard Brexit becoming more likely
The U.K.’s opposition Labour Party have called for all members of Parliament to join them in ensuring that the U.K. doesn’t leave the EU without an agreement. Their campaign will need to include both sides as the EU is placing ever more challenging hurdles in the way. Following her speech in Florence at which she offered a payment of Euro 20 billion as the U.K.’s contribution to the EU budget following Brexit, she will move on today to the fate of EU citizens remaining in the U.K. This is the second of the three issues Brussels has demanded are settled before talks move on to stage two.
In similar fashion to the Florence speech, it is unlikely her proposals will go far enough to satisfy the EU negotiators since they will fall short of allowing those EU citizens in the U.K. to be governed by EU law. This impractical and wholly unsatisfactory demand seems to be contrary to what was expected to be a clean break despite the U.K.’s trade expectations. A hard Brexit continues to loom as neither side is likely to make the concession needed for compromise.
U.K. MPC facing difficult decision
This week’s release of prices and wages data in the U.K. has left the prospect for a rate hike at November’s meeting of ye Monetary Policy Committee in a much doubt as before. The wholly expected rise in CPI to 3% has strengthened the hawks case but yesterday’s wages data will have encouraged doves.
There are three doves on the committee who will vote for rates to remain on hold and two definite hawks who have been voting for a rate hike for a few meetings. That leaves four including the Governor and Chief Economist. Carney and Haldane should vote unchanged that means no change but a 5-4 vote should be sufficient to satisfy traders who should appreciate just how delicate the decision now is.
Sterling is in a narrow range hemmed in by its own political and economic concerns but also reacting to the issues facing the dollar and common currency. Mario Draghi, having survived the German pressure for a rate hike earlier in the year was yesterday challenged by the Governor of the Banque de France to end asset purchases by the end of the year.
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Japanese election; a foregone conclusion?
Political considerations are not limited to the EU and U.K! This weekend sees a general election in Japan where the economy and what can be done to boost inflation and by definition interest rates will be a major influence on voter’s intentions. The Japanese population is aging at an alarming rate and the savings rate is collapsing as rates have been so low for so long. The BoJ has done everything it can but following the global economic crash it seems that global rates have conspired to join those of Japan as the world moves into a low interest rate environment.
Globalization has meant that no single nation can be “singled out” as the U.S. was in the 1973 “oil shock”. Interconnection means that no single nation of region can suffer alone.
The likely outcome of the Japanese election is a victory for incumbent Prime Minister Shinzo Abe. The JPY has weakened a little despite Abe’s probable 2/3rds majority. Given what has gone before in the U.S. and U.K. caution is merited but short of a major development in North Korea the JPY will remain in its current 111/113 corridor.
