Friday morning was dominated by another Brexit headline, with the Pound promptly pushing lower. This time a senior opposition Labour Party official was quoted as saying that Labour was set to vote against Prime Minister Theresa May’s Brexit deal and predicted that the PM would be forced from office before Christmas. Eurosceptic factions within the ruling Conservative Party mean that the PM may have to rely on Labour votes for the withdrawal agreement to be ratified by both Houses of Parliament before the 21st January 2019 deadline. Friday’s headlines increased the risk that internal politics could scupper an orderly soft Brexit.
However, if the withdrawal motion is rejected by Parliament, the Government’s statement response on how it would proceed would be presented to Parliament ‘in neutral terms’, meaning it is not amendable. Parliament would have to either accept or reject. As this involves losing control over the direction of the withdrawal agreement, it seems more plausible that Parliament would show their dissatisfaction by amending the motion, instead of rejecting it. While this would complicate an agreement, it would still be a path towards an orderly soft Brexit, our base case.
The Friday afternoon session was dominated by dollar strength as US 10 Year Treasury yields approached 3%. The market digested a raft of economic data. First up was the US August Advanced Retail Sales. Disappointment in the August print was offset by an upgrade to July retail sales. The August reading was skewed by price changes. Clothing sales were down in line with a decline in clothing prices while gasoline sales were higher in line with higher prices. US Industrial Production beat market expectations for August with output revised higher for July. Next to be released was the University of Michigan September Consumer Sentiment index, which rose to a 14-year high. Importantly, the breakdown of the report showed that consumer inflation expectations are well anchored, out to 10 years ahead. This reinforced market expectations that the Federal Reserve will continue hiking interest rates, supporting the moves higher in Treasury yields and the dollar.
Today marks a quiet start to the week ahead. The main release during the European morning will be the Eurozone’s Final Consumer Price Index (CPI). The measure of price growth is now above the European Central Bank’s target; however, it’s what is under the hood that counts. Underlying price pressures remain characteristically subdued, with still slow wage growth. If the recent weakening in activity continues it risks slowing what price momentum the Eurozone has. The US Empire Manufacturing Index will be released in the afternoon. Although the index registered a multi-month high in August, a drop in new orders and shorter delivery times suggest that high will be short-lived. The Prices Received sub-index will be watched to see if manufacturers are still struggling to pass on higher input prices to consumers, especially after last week’s inflation print misses.