What to expect this week (October 28 – November 3)

Highlights

> The Fed’s meeting with a press conference and a press release on Wednesday. Two questions: are disagreements between FOMC members remain as high as in September ? Will the Fed cut its target rate ? The dots graph suggests a third cut this year.

Christine Lagarde will replace Mario Draghi as president of the ECB next Friday. The balance between politics and economics will be different than in the current mandate. The main task for Christine Lagarde will be to maintain the cohesion of the ECB members at a moment where the monetary policy is already very accommodative and the impact of a change will be questioned and lower than in the past.

On the Brexit side, a vote is expected today on the possibility of general elections on December the 12th  Boris Johnson will probably not have the qualified majority for it.
The EU, in a draft, has proposed an extension of the Brexit until the end of next January.

> GDP figures will be released this week in the US and in France (30) and in the Euro Area, Italy and Spain (31). Expectations are on lower figures than in the second quarter. This would be consistent with the business surveys seen during this third quarter.

> ISM index for the manufacturing sector (November 1) will be key to anticipate the business cycle profile in the US. The index was below the 50 threshold in August and September.

> The Chinese official PMI index (31) and the Markit index for the manufacturing sector (1st )

> The Markit indices for the manufacturing sector will be released on November the 1sr except on Continental Europe.

The US employment report next Friday. The momentum is lower than in the first part of the year even with a very low unemployment rate

Inflation flash estimates will be released in Europe this week. (Euro Area 31). As the oil price is on average lower than in September (53.7 € in October vs 56.7€ in September )  and has to be compared with a high level in October 2018 (70.3€). The energy contribution will be strongly negative and the inflation rate will be probably below the 0.8% seen in September.

The document is available here
NextWeek-October28-November3-2019

nwoct28

Brexit after the deal

The Brexit deal takes all its flavor by looking at the situation in Northern Ireland. It will be in the United Kingdom and the single market. The UK will therefore have a border with one of its provinces and Northern Ireland will be in a customs union with the EU. Let’s not doubt that UK products or products going through the UK will not find it very difficult to end up in the single market.

Once again the British get what they want and have an exorbitant power over the European law. The Europeans accept this situation with a smile. Since 1973, discussions and negotiations between the EU and the the UK are usually in favor of the UK. With this deal this also the case. What a scandal. How, under these conditions, can we, one day, imagine a political Europe that does not disintegrate when the pressure is rising?

The deal must now go before the British Parliament. The Conservatives do not have the majority, as this balance of strength of Parliament shows.

What to expect this week (14 October – 20 October 2019)

Highlights

> Next Tuesday, the IMF will release its new forecasts. Comments are bearish, the global economic outlook will weaker than last spring or last July forecasts. In July, the world output growth was expected to be 3.2 % in 2019 and 3.5% in 2020. For the US, numbers were 2,6 and 1.9, for the Euro Area 1.3 and 1.6% and for China 6.2 and 6%.

> The other political event will be the European Summit on Brexit. It will take place on October 17 and 18.  Two questions: will there be a new agreement between the UK and the European Union and will this agreement, if it exists, be voted by the Parliament in London ? If it is not the case, BoJo will have to ask for a delay. The Parliament want to postpone the Brexit until January the 30th , 2020.
> The most important element this week on monetary policy will be the Fed’s Beige Book. Fed’s members are considering a new drop of the US central bank’s interest rate in December (according to the dots’ graph). It will depend on the economic outlook. The Beige Book will give information on this point for a foreseeable future. We will look specifically at elements associated with the international trade.

> Industrial production indices for September in the US (17) and in China (18). August figures were lower in August and negative in the US. We can’t expect a reversal. In the Euro Area the industrial production index for August will be released (14). Could be quite strong after German, Italian and Spanish numbers.

> The inflation rate will be confirmed at 0.9% in the Euro area for September (16). The major question on inflation will be for China as pig price has recently pushed up the inflation rate. It will be released on October 15.
> Chinese foreign trade for the month of September (14). The dynamics of exports is still the key point of this statistic in order to perceive the impact of US tariff measures.

> Retail sales in the US (16), China (18) and the UK (17). These numbers have been rather strong in recent months notably in the US.  We expect robust data in the US but weaker in the UK according to the BRC survey. In China the mild rebound seen recently should hold in September.

> Real estate data will be released in the US notably the Housing Starts figure. The data was stronger than expected in August. Will it last confirming the reversal of the real estate market ?

The detailed document is here
NextWeek-October14-October20-2019

Referendum is the ultimate weapon for the UK

The UK House of Commons does not want Brexit, and on three occasions, it voted down the deal that Theresa May’s government negotiated with the European Union, which would have eased the country out of the bloc gently. However, MPs do not want a hasty no-deal exit either, and have also rejected Boris Johnson’s plans for leaving the European Union on October 31 do or die. 

However, MPs feel that there is not enough time left now before this date to come to a fresh exit agreement, different from Theresa May’s deal. So the deadline for leaving the European Union could now be pushed back to January 30, 2020, which according to Parliament, would be a better date for the UK to exit the EU with the agreement of the remaining 27.

It is worth raising several points on this issue:
1 – What has happened since the initial March 29 exit date to put MPs in this hasty situation less than two months from the new deadline? 
The quest for political balance right throughout the lengthy process to appoint a new prime minister ground all new initiatives to a halt and dwindled the chances of considering new options. The two months between Theresa May’s resignation on May 24 and BoJo’s appointment on July 24 were wasted time and took up a huge chunk of the extension granted by the EU.
2 – An extension beyond October 31 is only possible if the EU agrees. EU countrieswill be meeting on October 17 and 18 to discuss Brexit. Dissenters have already made their views known, with the French president, Spain and some others already expressing their frustration at the extension to October 31. As recently as September 5, Amélie de Montchalin, French Secretary of State for European affairs, again referred to a likely no-deal Brexit on October 31, soEurope could well take the wind out of British MPs’ sails. 
3 – At the European summit on April 10, the different countries did not seem to be united on the issue of the extension. So it would be preferable for the next summit in October to be able to set aside this issue, as the various member countries need to show a united front on October 17 and 18.
4 – It may be in Europe’s best interests to swiftly cut ties. The Brexit issue is at the forefront of everyone’s minds, it creates uncertainty and delays the potential economic impacts that could be felt depending on the final exit scenario. Europe needs to get this matter cleared up quickly. 
5 – The British economy is also hampered by this situation. The country’s growth is now much lower than the pace across the other G7 countries and corporate investment is 11% lower than it could have been without a referendum, so the price is high. 
6 – Boris Johnson has lost and his coup has failed. Parliament will not support him and in an ultimate humiliation, he cannot call an early election for October 15 just ahead of the crucial end-October deadline either (he will ask Parliament to call an election during the next sitting on Monday 9, but he will not win a two-thirds majority if the election date is too soon). From a London perspective, there can be no Brexit on October 31, whatever happens. 
BoJo no longer has a parliamentary majority after Phillip Lee’s defection and the 21 Conservative rebels had the whip withdrawn, so the whole system is now in deadlock.

It looks like there is no possible outcome for this political chaos. BoJo’s resignation may look like a potential solution, but there is the question of his successor and the time required to appoint him or her, so this would be a risky move given the state of the party and its shaky situation in the House of Commons. 
The whole situation needs a fresh start and this will probably involve a general election at a date beyond October 15 (the next general election in the UK must take place by May 5, 2022). 
However there is a risk that no party will win a majority: thiswill call to mind the latest election that Theresa May called on June 8, 2017, when she only managed to scrape together a majority with the support of a small group of MPs from the Northern Irish Democratic Unionist Party.
Achieving a clear majority looks like mission impossible in light of the sea change in British right-wing politics after recent events – both within the Conservative party and as a result of competition from Nigel Farage – as well as the rising influence of the Lib Dems, and wariness of Labour leader Corbyn, who wants to nationalize at any cost. The swift election that Johnson wanted would have forced each candidate to clearly state their remain or leave position. This would admittedly make the whole situation much easier for any new prime minister, but this majority would be Brexit-based and would only last a short time. Any elections taking place well after the October 31 date would raise different questions, although this would not make it any easier to establish a clear majority and choose a prime minister. The fundamental questions raised during the June 2016 referendum will not just fade away into the political background.
Against this backdrop and with no decisive majority to make a clear decision, it is in Europe’s interests to put paid to any further extension. In other words, political chaos would not be resolved by a general election, but rather a hard Brexit scenario would then be on the cards.

To eliminate all doubt, and in light of the government’s and MPs’ inability to come to an agreement that no-one wants anyway, a fresh referendum is needed. This time no-one can say they were unaware after the first vote on June 23, 2016. At the time, the UK voted 51.89% to leave the European Union. Now it is up to them to confirm their decision …or not. They must now take their future into their own hands, because the government and Parliament have failed to do so. 

Posted in French: 5 September 2019

BoJo and the general elections

This is a spectacular moment. BoJo has lost tonight and the final decision will be taken tomorrow as the Parliament will vote  for the possibility for it to take the lead in the negotiation in order to avoid a no deal Brexit. 
Then BoJo will convene general elections. 
Then we may have what everybody asks since the first referendum: a confirmation of the Brexit or not. 
That’s may be the best move to clarify the political situation as the vote at the general election will again be remain vs brexit. No one will no longer be able to say “we didn’t know”. 
The result is still random even if polls bend on Johnson’s side. 
The general elections results will definitely give the answer. Will the UK remain in the EU or will they exit. An exit vote would probably mean a no deal brexit. 
Therefore the pound will improve in coming hours but will follow polls’ results after BoJo convenes general elections. A poll in favor of Brexit will probably weaken the pound and conversely a stronger pound when polls are in favor of the remain side. The equity market will follow the same momentum. The point is that everyone will know that these elections will definitely close the referendum file. The huge uncertainty will be on the side the coin will fall. We can expect huge uncertainty and volatility if polls have the same volatility than before the referendum. Because investors know that this is the second chance. 
 This can be a source of a kind of sudden stop on the economic activity as no one will take strong bets on the future. 

British procrastination – a postponement will not guarantee an agreement

Theresa May is in Berlin and Paris to request a new deadline. It’s a safe bet that she will get some time. The date discussed is December 31, 2019. It is a little less than what Donald Tusk was talking about, who was ready to go up to a year.

As no one knows the possible consequences of a lack of agreement, no leader will take the risk of being the one who could trigger the possible apocalypse.

Business leaders are making arrangements to manage the possibility of a Brexit but none wants a disruption that would have a negative impact on their business.

This procrastination has a cost. This is true for the English who, if they had not stored heavily, would have been in a recession for the last two quarters. This is the case of the European Union too. Any meeting with employees, clients, bankers or industrialists gives pride of place to the concerns about Brexit. Let’s not doubt that this uncertainty affects behavior and also penalizes the growth of the EU. We are thus in a war of attrition, looking for who will exit first. This may be the worst solution because costs will accumulate on both sides of the Channel.

Because, let us be clear, an additional period does not mean an agreement on the British side on the scheduled date. British are in the EU for an extended period.