May’s brinkmanship tactics were to narrow the choice between her much-despised Withdrawal Agreement and something worse. Sometimes that worse thing is leaving without an agreement, May herself has given fodder to the no-deal camp by arguing that no deal is worse than a bad deal. Apparently, some MPs agree.
While we have been critical of May’s leadership, or lack thereof, the real underlying problem is that the UK itself is split on the issue and so is Parliament. Many issues could have been avoided, or at least minimized if more thought was given before Article 50 was triggered. Yes, the non-binding referendum was treated as it were binding by the two main parties. But what leaving the EU, which is the destination of more than 40% of the UK’s exports, meant and when it should begin, was not in the referendum. That is what the political leaders needed to work out, and they have failed.
The UK’s exit is likely to take longer and be softer than what May and the Tory government advocated. An extension of at least a year, which gives space to monetary policy, will likely be seen as favorable for sterling. I suggest sterling may still see $1.35-$1.36.
Amanda extended the conversation to the other part of the EU, the eurozone. Brexit is a source of uncertainty identified by the ECB. For the EC the political importance may very well outstrip the economic significance. Only about 10% of EMU exports to the UK. More important for the euro’s exchange rate has been the dovishness of the ECB (slashed growth forecast for this year to 1.1% from 1.7% and maintained risks were still on the downside, and the sobering flash PMI.
Even if we go with the rule of thumb, which is not a technical definition nor is it the one that is used to define US recessions, and use two consecutive quarters of negative growth, maybe our imagination is not so good, but it is still difficult to forecast them The first quarter has been often the weakest since the Great Financial Crisis, though we can’t say we fully understand why, and this time the government was shut, and there were some bitterly cold days that deterred economic activity. The economy appears to have ground to a halt…almost.
The high-frequency economic data has turned mixed, which is what is expected as the economy emerges from a soft patch. The 10-year note yield has dropped around 80 bp since in the last six months. As some of Powell’s crosscurrents get resolved, and the labor market and earnings growth remain solid, is a recovery toward trend growth (~2%) in Q2 such a stretch?
The euro has spent most of the past five months between $1.13 and $1.15. When the range broke another cent or so could be added to each side. With the still historically wide interest rate premium the US pays over Germany to borrow, and our constructive view of the US economy (yes, despite the shape of the yield curve), the meaningful break of the range may come to the downside, with the $1.10 being our suggested targeted.