Alan Hill
Treasury Consultancy
Brexit, Queen’s Speech to challenge Leadership
In the U.K., the weekend press would have made dismal reading for Prime Minister Theresa May.
A challenge to her leadership is becoming more likely every day with the vote on the Queen’s Speech in which she outlines her Government’s legislative programme for the coming year set to be the catalyst.
The Conservative Party will gauge closely the mood of the House of Commons and if there is the likelihood that the Government will be defeated a vote of no confidence in their leader will follow close behind.
Brexit talks start officially today at 11am in Brussels. Both David Davies and Michel Barnier will set out the hopes and desires as attend a joint press conference at the end of the day. The “no deal better than a bad deal” bluster is set to be cast aside in favour of a more conciliatory approach. Finance Minister Philip Hammond commented over the weekend that no deal would be very bad for the U.K.
With even the Queen acknowledging the “sombre mood” in the country and new leader for the Conservative Party, a General Election and the possibility of a change in Government is becoming ever more likely.
U.K. economy at a crossroads
Liquidity has been very high in the FX market over the past few weeks. Markedly, Sterling, in particular, hasn’t suffered a flash crash despite serious upheaval both politically and economically.
BoE Governor Mark Carney reiterated his faith in the resilience of the U.K. economy on Friday following the surprise 5-3 vote against a rate hike at the MPC meeting.
Overall, the MPC are more optimistic than most observers about the prospects for the U.K. economy. Whether that is putting a brave face of a tricky situation or not, the fact remains that a hike in interest rates could have a mortal effect on economic growth which is faltering despite the boost it is getting from loose monetary policy.
Real wages are the main concern now. With inflation at 2.9% and wages growth 1.7% at the consumer, the mainstay of recent economic activity is earning less in real terms. Retail sales data for May released last week showed a marked slowdown in activity with month on month ex-fuel sales falling by 1.6% against an expectation of a small rise following April’s upwardly revised 2.2% growth.
Thin data week to be driven by politics.
With the U.K. in turmoil providing a complete contrast to the serene atmosphere in the E.U., downside momentum for the pound is likely to recommence.
In the U.S. President Trump confirmed that he is under investigation over “Russiagate”. However similar to a good poker player he is not giving away “how good his hand is”.
He certainly seems not unduly perturbed by the continued impeachment concerns but now needs to get on with getting fiscal changes and stimulus plans passed. Janet Yellen, for one, needs to see some progress if her commitment to higher rates is not to be premature.
In the E.U. Emmanuel Macron followed up his stellar performance in the Presidential Election by helping his party to a solid performance in the Parliamentary Election. His “Republique En Marche” Party and its allies gained 351 of the 577 seats contested falling short of the prediction of as high at 470 seats. Nevertheless, Macron now has a clear mandate for his centrist, pro EU policies and is the “poster boy” for the EU’s post-Brexit image.
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