May and sterling reluctant to move as the 1922 circles
May 23, 2019
It looks as if the confirmatory vote confirmed one thing for British politics; that Theresa May is unlikely to see out the week. In the afternoon of yesterday’s session, sterling stood still as political headlines came thick and fast with speculation rife that May would announce her retirement that evening amid significant pressure from senior party officials. Cabinet ministers one-by-one voiced their distaste for the confirmatory vote and thus the Withdrawal Act bill before the backbench 1922 committee was forced to intervene. Very brief meetings, around 2 minutes long, between the 1922 committee and Chief Whip Julian Smith led to a meeting being arranged on Friday. In the said meeting, PM May will sit in front of Sir Graham Brady’s committee, where party rules are likely to be altered to see a vote of no confidence forthcoming if May refuses to step down. For the pound, it remains a question of how clean the break is, but if last night is anything to go by then May won’t leave without a fight. In the medium-term, rhetoric from Eurosceptic replacements will drive sterling as traders attempt to gauge a highly uncertain Brexit outcome.
The single currency once again edged closer to the cliff of a 23 month low against USD this morning after Flash Eurozone Purchasing Manager Indices disappointed on the Services as well as on the Manufacturing front. The Services PMI came in at 52.5 (53.0 expected, 52.8 prior), a four month low that contradicts the narrative of green sprouts forming in the Eurozone economy. The softness in the services sector is particularly worrisome as there are high hopes this leg of the economy would get the whole system running again. The Manufacturing leg continues to look feeble just like in previous months with a PMI score of 47.7 (below the 47.9 prior and 48.2 expected). These figures suggest the 0.4% growth rate in Q1 was more of a one-off spike, while a subdued 0.2% appears to be on the cards again for Q2 and Q3. The good news is that GDP growth already defied the predictions of softness PMIs pointed at the start of 2019, a feat which could, of course, be repeated again. For now, however, macroeconomic risks once again appear to be pointing downwards for the Eurozone.
The dollar edged higher yesterday and remained firm overnight, despite last night’s run-of-the-mill meeting minutes from the Federal Open Market Committee offering little hawkishness. Patience remained the main message in the minutes, consistent with the official communications released from the meeting itself. Some participants seemed concerned about falling inflation expectations, although the consensus seemed to be that the recent fall in inflation itself would be transitory. Bloomberg reports this morning that a worsening trade war is becoming increasingly likely according to the assessment of major investment banks including Nomura, Goldman Sachs, and JPMorgan Chase, who were previously confident of an eventual resolution in the dispute. Looking at the current headlines it’s difficult to disagree. There has been no sign of softening from either side and the US’s recent moves against Huawei appear to have made the dispute a matter of national pride according to Chinese state media. The implications for USD remain murky: last year’s slowing of global growth saw the greenback appreciate, but the US economy is on shakier ground today, and the inflation shock from tariffs will make it difficult for the Fed to deliver on the cuts that appear to be widely anticipated by fixed income markets.
The loonie has traded in a 0.6% range open-to-close over the course of May. Yesterday’s Retail Sales release undershot expectations by 0.1% with the headline release coming in at 1.1%. Sales excluding automobiles have been under the microscope given tariffs on Steel and Aluminium but showed a significant upward surprise in March to 1.7%. Retail sales edged up 0.1% in Q1 following Q4’s 0.5% decline. The positive reading confirms the Bank of Canada’s optimism of a growth rebound. USDCAD continues to rise, however, as oil prices nosedive following yesterday’s Department of Energy inventory release. US crude inventories swelled to the highest level since July 2017.