Market movers today
The data release calendar is rather thin again today. Markets will follow political discussions in the UK and the EU countries on an Article 50 extension (see more below).
In Germany, the ZEW index is released, where we look for further signs of stabilisation in business expectations, in spite of the falling trend currently.
Riksbank Governor Skingsley will speak on Monetary Policy at a seminar in Stockholm, 14.00 CET. Market focus is likely to be on SEK comments
Selected market news
Yesterday, the market focus was yet again on Brexit. After a relatively quiet day in terms of other market-moving events, Speaker John Bercow ‘stole the show’ as he made it clear that he will (at least in principle) not allow for a third vote unless there are “substantial changes” to the current deal.
Therefore, it seems unlikely that there will be a third vote in the House of Commons on May’s Brexit deal before the EU summit starts on Thursday (21 March). The big question now is whether the EU27 leaders will grant an extension when they meet on Thursday (the decision has to be unanimous but the EU council tends to work by consensus). While we previously thought a short extension was likely, we have changed our minds and now expect a long extension (60% likely versus 30% probability of a short extension). We would be more concerned if the EU leaders were not able to reach a consensus around an extension (10% probability). This clearly increases the chance of a no deal Brexit but from a legal perspective, the extension can be granted right up until the deadline.
A long extension may increase the pressure on the Brexiteers to such a degree that they end up backing the deal. Some are speculating, despite Bercow’s reservations, that May may try bring the deal forward for a vote next week, if her strategy works. A long extension would mean that the high uncertainty is prolonged for a longer period, which would continue to have damaging effects on the economy.
Overall, it seems like we will get a long extension or May’s deal will pass soon. We still think May’s deal passing is the most likely final outcome and that a second EU referendum (after a long extension) is the second most likely final outcome. See Brexit Monitor: 60% probability of a long Brexit extension, 19 March.
In the US, former NY Fed president Dudley called for caution as the Fed is waiting for further data, although he still expects a hike later this year. Inflation holds the key here. We published our Fed preview yesterday, where we outlined our expectations for the Fed to stay on hold while lowering the ‘dot’ signal for 2019 to one hike (from two). We would not be surprised if the Fed signals “one and done”. Our base case with two hikes this year will be under pressure if the Fed confirms it has changed its reaction function by looking more at inflation expectations. We expect the Fed to announce it will end a shrinking of the balance sheet in Q4 19. The impact on fixed income markets should be limited even if the Fed completely removes all hikes from the dots.
