Crunch time
A slew of important Brexit votes on Tuesday and Wednesday will be a litmus test for Theresa May’s leadership.
The Prime Minister hopes to reject 15 amendments made to the European Union (Withdrawal) Bill by the House of Lords; however, poetically, she must defeat 15 of her own party to do so. According to the FT, about 15 Conservative rebels are rumoured to be ready to side with Labour. The amendments range from enshrining EU labour and environmental rules and human rights in UK law to forcing the government’s hand over the post-Brexit trading deal. One amendment, “the meaningful vote”, would set a 30 November deadline for the government to agree and enact a Brexit deal with the EU. If that isn’t met, the government would be forced to take direction from the House of Commons and a popular vote of MPs.
In sum, the changes would curtail the government’s negotiating options and cede decision-making power to Parliament if the Cabinet cannot agree on a cohesive arrangement with the EU. So the Conservative Party has been whipping up a storm, urging rebellious MPs to get behind the leadership lest they destroy Mrs May’s government and lead to a Labour government led by Jeremy Corbyn.
As things stand, the Cabinet has been unable to agree on a way forward on much of anything. They can’t agree on the best trade arrangement, they can’t figure out how to deal with the Irish border. You could argue that uncertainty can’t get much higher: everything and nothing is on the table. And yet, if the government is defeated on the more important of these amendments – particularly the meaningful vote – expect the pound to fall. “Greater uncertainty” will be the explanation. Really, it will be investors’ increased nervousness about the bogeyman of British politics coming to power.
Don’t let all that drama distract you from the economic data coming out this week. On Tuesday we get average weekly earnings growth which is forecast to remain steady at 2.6%. UK inflation has fallen swiftly from its 3.1% high to 2.4% over the past few months, but it is expected to tick up by 10 basis points on Wednesday. Petrol prices have risen over the past month and that has been exacerbated by the sinking pound. Retail sales for May are expected to shoot higher this week because of the effect of the royal wedding. Year-on-year growth in retail sales has been plodding along at a relatively depressed pace of about 1.5% during the first four months of 2018. The nuptials should have boosted spending growth to 2.4%, according to estimates. This resurgence of spending and inflation could mean that the Bank of England could raise rates by a quarter-point as early as August.
Source: FE Analytics, data sterling total return to 8 June
Team America: World Police
After a week of European Central Bank (ECB) committee members murmuring about cuts to the quantitative easing programme, the euro has popped higher against the dollar and sterling. The ECB’s meetings just got interesting again. The committee convenes on Thursday and it will be interesting to see how they balance their desire to reduce stimulus with the recent spike in Italian (and to a smaller extent Spanish) borrowing costs.
A 25-basis-point hike from the US Federal Reserve on Wednesday is all but locked in. That would take the US benchmark rate to 1.75-2.0%; what will interest most investors will be any hint about how many more increases are likely this year. At the moment the debate rages about whether there will be four in total – two more if the June hike goes ahead – or one more. Part of the calculus will be inflation, which is expected to jump 30 basis points to 2.8% on Tuesday. Then there’s the state of US retail sales; they have been growing pretty strongly since late 2017. The next print comes out on Thursday.
US President Donald Trump has had a busy week. After bickering with the other G7 leaders for half of the Canadian summit over his protectionist trade policies, he left early for his peace talks with North Korean dictator Kim Jong-un in Singapore. Starting Tuesday, the discussions will address the pariah state’s nuclear ambitions and its recriminations about what it sees as American and South Korean hostility on the 38thParallel. That seems a bit rich from a man who fired several missiles over Japan just to show that he could. It seems unclear what Mr Trump aims to get from this meeting. To gain any concessions from North Korea, he will probably have to lift trade sanctions and extend aid to the country. That sounds awfully similar to the nuclear disarmament agreement with Iran that he just ripped up. Does Mr Trump have a foreign policy strategy or is he just out to destroy anything his predecessor touched? One thing is certain: this is a golden chance for Mr Trump to seal a peace that has eluded every American leader since Dwight Eisenhower.
Bonds
UK 10-Year yield @ 1.39%
US 10-Year yield @ 2.95%
Germany 10-Year yield @ 0.45%
Italy 10-Year yield @ 3.12%
Spain 10-Year yield @ 1.46%
Economic data and companies reporting for week commencing 11 June
Monday 11 June
UK: Balance of Trade, Industrial Production, Manufacturing Production
Tuesday 12 June
UK: Claimant Count Rate, Average Weekly Earnings, Unemployment Rate
US: CPI, NIB Small Business Optimism, Average Weekly Earnings
EU: ZEW Survey
Trading update: Bellway, Boohoo.com, Crest Nicholson Holdings, Ted Baker
Wednesday 13 June
UK: CPI, Producer Price Index, Retail Sales, RICS House Price Index
US: MBA Mortgage Applications, Producer Price Index, FOMC Rate Decision
EU: Industrial Production
Final results: Charles Stanley Group, Mulberry Group
Thursday 14 June
UK: Retail Sales
US: Continuing Claims, Import and Export Price Indices, Initial Jobless Claims, Retail Sales, Business Inventories
EU: ECB Interest Rate; GER: Consumer Price Index
Final results: AVEVA Group. Majestic Wine
Interim results: Safestore Holdings
Trading update: Brown (N) Group, PZ Cussons
Friday 15 June
US: Capacity Utilisation, Empire Manufacturing, Industrial Production, University of Michigan Confidence
EU: Balance of Trade, CPI; GER: Wholesale Price Index