Market movers today
Markets will continue to digest yesterday’s defeat of Theresa May’s Brexit deal (see more below), while attention will also turn to whether May’s government can survive the ‘no confidence’ vote called for today at 20:00 CET and what Plan B she will present to the Commons by Monday.
On the data front, UK inflation figures for December will probably show another decline in headline inflation from 2.3% in November on the back of lower energy prices. With inflation slowly heading back towards the target, we do not expect the Bank of England to be in a hurry to deliver its next hike, especially amid the ongoing Brexit uncertainty. We recently changed our call for the next BoE hike from May to November this year.
Selected market news
As widely expected, PM Theresa May’s Brexit deal failed in the House of Commons . The defeat, however, was bigger than expected, 432 against versus 202 in favour. In Brexit Monitor: The waiting game – Brexit edition, 15 January, we argue some outcomes are still more likely than others despite us being in uncharted territory. The likelihood of an extension of Article 50 has probably increased, so that is also something we are set to monitor (officially, May still sticks to the plan of leaving the EU on 29 March). A majority in the House of Commons has clearly indicated it is against a ‘no deal’ Brexit, which would only happen by accident, as it is the default option (15% probability). We continue to believe the probabilities of a soft Norway-style Brexit and snap election are low (10% and 5%, respectively). The two most likely outcomes are either May’s deal (or something very similar) passing at a later stage as pressure builds on the politicians or a second EU referendum (40% and 30%, respectively) but British politics need to settle before we find out which way the UK will go.
Yesterday, we got more dovish signals from the Fed. While it was not a surprise that the Fed’s Kaplan said the Fed could wait and see for ‘ a quarter or two’, it was more noteworthy that the Fed’s George, normally considered a hawk, said that the Fed should continue ‘ with caution’ and that it might be a good idea to ‘ pause Fed rate normalisation’. She also said the impact of the balance sheet policy was ‘ unclear” Overall, a very dovish message supporting that the Fed is on hold for now and likely until the June meeting. The comments, together with expectations of tax cuts from China, probably supported risk sentiment and S&P ended 1.1% higher yesterday.
ECB President Mario Draghi was also dovish yesterday, saying ‘ there is no room for complacency’ as ‘recent economic developments have been weaker than expected’ and ‘ uncertainties remain prominent” He believes ‘ significant amount of monetary policy is still needed to support the further build-up of domestic price pressures’. In particular, we take note of the ‘no room for complacency’ comment, which opens up for a dovish message after the next ECB meeting on Thursday 24 January.
