The week started so well for the Prime Minister. Tory rebels failed to muster the necessary 48 votes to force the no confidence vote. The withdrawal agreement had proven unacceptable to all parties. The saving grace ... the no-deal option appeared to be even worse. Staying in the EU was becoming a more favoured option.
Theresa May had made it clear she would exhaust all options, herself included. The performance on Radio 5 live evidence of the long haul. Mrs May has the "emotional engagement of an answering machine", claimed Patrick Kidd in the Times today.
Press 1, if you want a facilitated customs arrangement; Press 2, if you want to avoid a hard border down the Irish Sea; Press 3 for tariffs; 4 for another vote; Your call is important to us, just keep those questions coming!
"Is your deal better than the one we have already, staying within the European Union?" asked Michael from Kent. Was this Heseltine? Who knows ... "Don't be absurd" the PM wanted to reply but held the line. "It will be a different world but a good one, I genuinely believe there is bright future for this country". Taking back control, a truly global Britain, seeking a rightful place in the world, on the edge of Europe, that sort of thing.
The EU plans to meet this week-end. Angela Merkel is planning to veto the session unless France and Spain get into line. "Fish and Gibs" on the menu. The French reluctant to let go of the fishing quotas, the Spanish requiring additional assurances on the future of Gibraltar.
It all seemed so clear last week-end, an ambitious free trade agreement the outcome at the end of the withdrawal agreement. We get to keep the fish, save some money, expats get to stay in the sunshine. Then came the fudge ...
"Britain and the EU "envisage having a trading relationship on goods that is as close as possible with a view to facilitating the ease of legitimate trade." Plus ...
The French just won't let go of the fish. the EU boats will continue to seek access to British fisheries. Both parties have agreed to use "best endeavours" to conclude and ratify a fisheries agreement no later than July 2020. It's a fix and a fudge, agreeing not to disagree, the basis of agreement once again.
For the DUP, the deal is worse than Jeremy Corbyn in power. For Dominic Raab, the deal is worse than staying in the EU. For all parties, Brexit is like the battery advert, Theresa May the Duracell bunny.
Last one standing, in the end we may all say ... "Look whatever you agree in the end is fine with me ... especially if that means "status quo ante referendum". Yep get them to vote on that ... status quo ante referendum ... we have exhausted all other options ...
Where next for oil prices ...
Oil prices Brent Crude closed below $60 dollars this week-end. WTI closed at $50 dollars. Demand is slowing, stocks are rising, the Saudis continue to pump oil above quota for now. President Trump thanks Saudi Arabia for pushing prices lower in a tweet. "Thank you Saudi Arabia but let's go lower".
Energy bills in the Trump Hotel Group the main beneficiary. Not so the shale oil producers of America, with an average cost of production at around $50 dollars. US output will be slashed. The nodding donkeys will be put to sleep and soon.
We expect a 20% drop in the oil rig count if prices stay at current levels. The correlation between the count and prices is high, 0.9775 with a 16 week lag. The US and Russia are just as much the price governors as OPEC. Lower prices will mean job losses in oil and coal! The good news ...
It seems unrealistic for prices to remain at current levels on fundamentals. With so much troubled oil on the waters at any given time, futures trading may yet push prices lower. We have seen this in the recent past and could do see it again in this short cycle.
Back in the UK, there was a slight setback for the Chancellor this week. Borrowing in October came in some £1.6 billion higher than prior year. Receipts were up by just 1.2%, spending in the month was up by almost 8%. Austerity is over, the pay caps have been released. Borrowing for the year to date was £26.7 billion down by £11.2 billion prior year. For the year as a whole we expect borrowing to be around £28 billion. Total government debt was £1.8 trillion around 84% of GDP. Over on the U.S.A. ...
Let's be honest ...
President Trump was in great form for Thanksgiving this week. Recovery from the mid term election set back was evident. “I made a tremendous difference in this country,” he said. “This country is so much stronger now than it was when I took office and you wouldn’t believe it and when you see it, we’ve gotten so much stronger, people don’t even believe it.”
Leaders around the world say to me when we meet, "You have made such a tremendous difference, your country is so much stronger now than it was when you took office apparently. We don't believe it."
In many ways they are right to have their doubts. Despite strong GDP growth this year, the stock market gains have been eradicated as markets fret about tariffs and trade wars. Fears for growth in 2019 materialize as Trump policies generate domestic inflation and hit job prospects.
The President no longer claims credit for the strength of the stock markets, blaming Fed Chair Jerome Powell for the rapid rise in rates. This week he attacked Steven Mnuchin, the Treasury Secretary who made the Powell appointment in the first place. Mnuchin, Mattis and John Kelly may be on the way out.
The President pardoned "Peas" the Thanksgiving Turkey this week. It is a tradition bordering on farce with an element of tragedy. The average life span of a turkey with a Presidential Pardon is less than two years. Over fed and over weight, life on the farm is not rich in longevity. Two years at best. 'That's better than the average life span of a senior official in the White House!
That's all for this week, have a great week-end, Don't Miss Our Monday Morning Update, we will expand further on market moves ... and assess the fortunes of our "Empires of the Cloud" tech fund ...
"We are leaving the EU on the 29th March" claimed the Prime Minister this week.132 days to go, we have a deal. It's a good deal, the best that could be secured. We actually get to keep the fish and to leave the Common Agricultural Policy. It gets even better.
We "take back control, with an end to unfettered immigration". We will stay within the customs union until December 2020. The lure of a generous free trade deal to follow. Citizens rights will be protected in mutual territories. Planes will fly, fish will swim. Champagne and Prosecco will flow for many Christmases to come. It's a great deal ...
It's a soft Brexit, hard Brexit avoided. The CBI applauded the deal. Take the offer now! Who would have thought the EU would offer the concession, cherry picking free movement of goods, without free movement of labour. OK, there are a few complications. We will pay €40 billion euros to settle outstanding obligations. The European Court of Justice will monitor MPs expenses. We will be allowed to leave the customs union but only with the agreement of our European partners.
Four hundred and eighty five pages of complicated cross reference devoid of executive summary. Something for everyone not to like and so it proved. For Dominic Raab, the Brexit Secretary it was all too much. The shock of discovering Britain was dependent on sea ports for the movement of goods had been a huge setback last week. So much dependent on the Calais - Dover route particularly, who would have thought? Yes Proximity trade models rule. The Brexit Secretary resigned from Cabinet, the shock of it all.
For Esther McVey it was also five hundred pages too far. The Works and Pensions Secretary explained in her resignation letter, "The deal you put before the Cabinet yesterday does not honour the result of the referendum. You have said that we must regain control of our money, our borders and our laws and develop our own independent trade policy." That isn't happpening. I am back off to Tatton.
Come on Esther, two out of three isn't bad. Business doesn't really want an "independent trade policy" anyway. What a load of nonsense. They are quite happy with the status quo thanks.
More resignations, the Cabinet wobbling. What would happen to the Brexiteers in Cabinet, particularly what of Michael Gove? The drama was unfolding but ERG was about to strike …
My right honourable friend ...
A vote of no confidence in the Prime Minister appeared as an option once the deal was published. Forty eight is the magic number of Tory MPs needed to secure a vote of no confidence. The ERG (European Research Group) was to lead the charge.
Jacob Rees-Mogg at the vanguard spoke in the house. "What my right honourable friend says and what my right honourable friend does, no longer match." "Should I not write to my honourable friend the member for Altrincham and Sale West".
The latter of course a reference to Sir Graham Brady, Chairman of the Conservative back bench committee. The writing, a letter of no confidence which duly followed. The temperature was rising the number of letters submitted did not. MPs were in constituency on Friday and will be over the week-end. They will test the appetite for a challenge to the Prime Minister and the prospect for a leadership election.
Forty eight the number to force a vote, then 158 the number to force the Prime Minister out of office. Then what? The ERG charges forward without any idea of strategy to follow. Boris Johnson, David Davis, Michael Gove, Esther McVey, Amber Rudd ... the list is not inconsiderable for options to rule the party. Really?
It is a tragedy of course. The Prime Minister is trying to secure the best deal for the "British People" and for business. There is no self interest, no idealogical prejudice. The negotiator has returned from the ring with a solution to the deal. Three hours explaining the deal in the house, then a battering from colleagues of every hue for the remainder of the day. The reward, an evening of baked beans on toast and a large whisky to end the day. Yes husband Phillip poured the drinks, made the toast and did the washing up. A gent!
The Choices Before US ...
All eyes were on Michael Gove as Raab and McVey left government on Thursday morning. To lose Gove at that stage would have been a cruel blow to the Prime Minister at a particularly vulnerable moment.
The DEFRA Secretary was offered the job of Brexit Secretary. He declined but agreed to stay in cabinet, as one of "Five Brexiteers" pushing for am improvement in the final deal. Andrea Leadsom, Chris Grayling, Penny Mordant and Liam Fox remain in government for now. Cabinet ranks amplified by the return of
close ally Amber Rudd and arch remainer Stephen Hammond. Stephen Barclay becomes the new Brexit Secretary.
So what happens next? Boris Johnson has been strangely silent to date. Better to wait post week-end to see which way the winds blow for Boris, always the man of pragmatic principal.
Monday we will learn if the challenge to the Prime Minister is to be made, let's hope not. The EU are set to approve the agreement on the 25th November, there may be a few tweaks wither side before the deal is done.
Either way we are set to leave the EU (after a fashion) at the end of March next year. To leave without an agreement would be a disaster, to remain within the EU is now an impossible dream. The deal on the table is a good deal for the UK and for business. It is not perfect, there is something for everyone to dislike. On the other hand there is something for everyone to welcome, hard Brexit avoided, most of all ...
That's all for this week, have a great week-end, Don't Miss Our Monday Morning Update, we will expand further on market moves ...
Brexit is turning out to be a lot more complicated than anyone thought. Listening to Dominic Raab, the Brexit Secretary, it's easy to understand why.
"I had not quite understood that everything that comes to Britain has to cross the sea" explained the Brexit secretary this week.
"It's a function of the way the UK is a peculiar, geographic entity"
he explained. Lessons from history: RIchard II, Act 2 scene 1 ...
"This royal throne of Kings, this earth of majesty, this other Eden, this demi paradise, this fortress of nature, this blessed plot, this realm, this peculiar geographic entity." Yes the Brexit Secretary has realised Great Britain (not the UK) is an Island ... a sceptred Isle in fact.
"“I hadn’t quite understood the full extent of this", he said on Wednesday ... "but we are particularly reliant on the Dover-Calais crossing. You know that bit where England is closest to France." Well now we know. The White cliffs of Dover offer a Brexit reality shock and a lorry park extending to the M25.
To be fair, Government can be difficult, often offering a steep learning curve. Karen Bradley Northern Ireland Secretary had explained, “I didn’t know that Nationalists and Unionists wouldn’t vote for each other." Well who would have thought? Someone should have explained the complexity of office before taking the job, you have to think, culture and sport may have offered a better option.
David Davies had promised the easiest deal in history. Jo Johnson now suggests "the easiest deal in history is leading to the biggest gaffe since Suez and the greatest crisis since the Second World War."
Yes Jo Johnson, transport secretary, resigned from Government this week. Brothers Johnson are united in abandoning Downing Street. It's a bit like that moment in the disaster movie. All the birds fly in one direction, the animals run from the jungle, something horrible and implausible is about to appear from the shrubbery but you are not sure exactly what that is.
It turns out to be The Prime Minister's Brexit deal. It is 99% agreed ... with husband Phillip at least. A few details still require ironing out. Taking back control appears to refer to Brussels and not to Westminster. We will stay within the customs union until we don't, then there will be a backstop.
Some matters are purely technical, how to you paint a border on the Irish Sea? How do you stop fish swimming across the Channel? A deal is close. It should all be over by Christmas, but which Christmas? The deadline is looming, business cannot afford to wait.
This week, CME Group. said it’s moving its $240 billion-a-day short-term financing market to Amsterdam from London. German ball bearings maker Schaeffler announced the closing of two of its three British plants. Surgical appliances manufacturer Steris said it plans to move its corporate base to Ireland from the U.K.
Panasonic is moving to Amsterdam ...
Brexit is complicated, now they tell us ...
UK Growth up by 1.5% in third quarter ...
Good news for the Chancellor this week. The economy grew by 1.5% year on year in the third quarter following growth of 1.2% and 1.2% in the first and second quarters.
Manufacturing was up by just 1%. Construction output was up by 2%. Service sector expansion was up 1.7% with hot spots in financial services, distribution and leisure. For the year as a whole we expect growth of 1.4%.
In 2019, the EU has suggested growth will be just 1.2%. The OBR forecasts average around 1.5%. The Bank of England has forecast growth of 1.8%. The giveaway budget suggests growth could well be 2% or higher assuming a satisfactory basis for Brexit is achieved. Jobs growth continues as earnings increase, the outlook remains positive for the UK despite the short term nerves.
House prices increased by just 1.6% in October according to Nationwide and 1.5% according to Halifax. Housing market transactions remain relatively low. There were 1.2 million transactions in the 12 months to September 2018,
Car sales fell by 3% in the month and 7% in the year to date according to the SMMT. For the year as a whole, diesel sales were down by 30%, petrol sales were up by 7%. In 2018, registrations are expected to fall by just over 6% to a level of 2.4 million. The short term position remains mixed.
The IMF continues to warn of the damage to world trade of tariffs and the threat of a China - US trade war. We expect trade volumes to slow to less than 4% this year following growth of 4.6% in 2017.
This week the Fed voted to keep rates on hold. Markets expect a rate rise in December with more to follow in 2019. Rising dollar rates will place pressure on emerging markets, exacerbating the challenge of serving debt and accelerating capital outflows.
Grumpy Trump arrives in Europe ...
As expected, the GOP lost control of the house, the Republican hold on the Senate was extended. It was a setback for the President but ...
Trump announced a great victory, fired Jeff Sessions and excluded Jim D'Acosta from the White House Press Corps.
The President talked of working with the Democrats on a bi-partisan basis, assuming there will be no pursuit of impeachment nor difficult "investigations" of course.
A Federal judge blocked construction of the Keystone XL oil pipeline. A disgrace said Trump. A recount was called in Florida, another disgrace said the President. A grumpy Trump traveled to Europe opening up a rift with President Macron on arrival with more to follow no doubt.
It's going to get tough for the President. A siege mentality will grip the White House. Pressure will increase as the President's tariffs disrupt expansion in the USA and the Democrats flex their muscles. Much to follow ... but ...
That's all for this week, have a great week-end, Don't Miss Our Monday Morning Update, we will expand further on market moves ...
Budget Day on Monday! The Prime Minister had announced an end to Austerity. The Chancellor talked of austerity coming to an end. "Not so much the end, nor the beginning of the end but the end of the beginning of the end."
Actually, it wasn't really about austerity at all. It was all about Brexit. A softening up of the back benches; a preparation for the difficult discussions ahead.
It was the beginning of profligacy of huge dimension. Blood on the spreadsheets for spreadsheet Phil. The rabbits out of the box, genies out of the bottle, leaks laid out on the despatch box. It was huge fun. £84 billion for the NHS, £15 billion for personal allowances, £5 billion for Universal Credit, £4 billion for house building, £1 billion for business rates.
Money for the High Street, Money for infrastructure, Money for Brexit, Money for potholes, Money for investment, Money for defence, yes there was even Money for public toilets. "Rate relief for those providing relief", that's a Hammond joke. A review of police budgets and money for schools, £400 million for "those little extras" like books and teachers.
Money for the regions, for the Northern Powerhouse, the Midlands Engine and Cornish Pasties. Money for the Nations, for Scotland, Wales and Northern Ireland including the DUP of course. Money everywhere. Funded by Digital Services Tax on the FAANGS like Facebook, Apple, Amazon, Netflix, Google and Satan.
Money everywhere funded by increased borrowing. In the current year, borrowing is expected to fall to less than £26 billion. That's down by £14 billion from prior year and £11 billion lower than the PBR had projected in March this year. It does make you wonder why so much attention is based on the OBR numbers at all! The forecasts aren't that great. The OBR expects GDP growth to average around 1.4% over the forecast period.
Borrowing is expected to average £20 billion in each and every year. A fiscal stimulus equivalent to equal to 1% of GDP. Based on current trends and without the spending spree, the government could have balanced the books within three years. Now the plan is to spend over £100 billion to settle nerves ahead of the Brexit move. The Chancellor explained he has a further £15 billion if needs be if things get tough. He may have to spend some of that on the Fixed Odds Betting Terminal Taper, a delay, probably not a gamble worth taking in the end …
Inflation Report ... worried about Brexit ...
Inflation report this week, the Bank is more upbeat about the economy than the OBR. Growth is expected to average 1.75% over the forecast horizon. Earnings are expected to rise above 3%. Job prospects remain buoyant, inflation is expected to remain over target but will return to the 2% level by the end of the timescale. Interest rates will rise gradually and a limited extent. Base rates are expected to rise to 1.5% at most within a three year horizon.
It's all pretty much the same stuff as usual but the Bank is concerned about Brexit. The forecasts are postulated on a mid term scenario. The range includes a smooth Brexit with continued access to the single market within the customs union. The most extreme scenario, would be a hard Brexit. No access to the single market, outside of the customs union, trading within the WTO framework. The Chequers deal, is scored about 6 plus. Canada Plus (a return to the colonies by The Governor), would mean, a job well done in Threadneedle Street, rate rise avoided during term in office.
The Inflation Report had been produced without access to or knowledge of the Autumn Budget. A profligate Chancellor boosting spending by 1% of GDP in each and every year over the next five years had not been included in any calculations. A fiscal relaxation of such dimension would lead to a higher growth forecast to over 2% in each year. An economy already experiencing supply side constraints would be subject to greater inflationary pressure than in the current outcome.
The Bank will assess the impact of the latest budget measures in the model forecasts. Expectations must surely include a revision of forward guidance on interest rates. Ten year gilt yields moved to 1.5% this week. We would expect a further rise to 2.5% within six months. Assuming a smooth Brexit, interest rates will increase much more rapidly than market expectations currently. 1.5% will be the projected level for base rates within twelve months, with a further 1% rise on the cards in 2020.
Buckle up. We are leaving Planet Zirp and will move into orbit with our North American cousins sooner than expected. Strangely, the Governor has suggested interest rates could rise in the event of a no deal scenario with the EU. What's that all about?
The Bank fears a supply side shock post Brexit, supply interruptions as a result of border disruption. More significantly a relocation of capacity out of the UK, within the customs union could occur in certain sectors. Excess demand over supply would lead to an acceleration of inflationary pressures exacerbated by softer currency. The reaction function for monetary policy would lead to a faster hike in base rates than currently expected. It wouldn't make sense, set against a scenario of rising unemployment, higher inflation and a real income squeeze.
In the case of a hard Brexit, an expansionary fiscal policy already outlined would be met by a more passive approach for monetary policy. With little or no capacity for rate cuts, interest rates would still be expected to rise gradually and to a limited extent. The Chancellor has indicated he still has some £15 billion of provisions which could be made in the event of a significant slowdown. The economy would slow, inflation would rise and the debt burden would increase ... but no need to worry, Dominic Raab is on the case …
Eye on the prize ...
Mid terms week. Trump has admitted the GOP may lose control of the House. "Well I can't be everywhere" he explained modestly.
Probably just as well. The President has forgotten the basic mantra, it's the economy stupid". Growth of 3% this year, a strong jobs market, real earnings rising, medium term problems for the economy obscured, Democrats should be out of the frame when it comes to voting.
Project Fear should have been based on the risk to recovery and jobs if Trump loses control of the House. Instead the President focused on the threat of an invasion on the Southern border of huddled masses yearning to breathe free.
"Give me your tired, your poor, Your huddled masses yearning to breathe free, The wretched refuse of your teeming shore. Send these, the homeless, tempest-tossed to me, I lift my lamp beside the golden door!"
No lamps by the Golden Door. Trump is lining up the National Guard and the Marine Corps by the Great Wall with a "Shoot to Kill" Policy if as much as a stone is lifted in anger. Separation of mother and child the back stop policy. Just as well the masses will arrive after the mid terms, the photo ops would not have been flattering.
The army projects less than 20% of the current caravan will make it to the Southern Border. With 15,000 troops in wait, that's ten soldiers for every would be arrival. No need to lock up your daughters of the South.
Trump has been surprised by the constraints of the office. He has had to learn how to deal with Congress, congressional leaders and the constitutional constraints on the executive branch. If Democrats take the House, he will be further shackled. Let's hope that will include tariffs. There are serious concerns in the Republican Party, the White House is not fully attuned to this. Surely Fox news would have provided a briefing.
The good news this week. Trump will sort out the deal with China at the G-20 meeting in Argentina. Tariffs are hurting in Trump's homeland. Unintended consequences include relocation of domestic manufactures outside of the USA. A deal with President XI is on the cards. Trump has an eye on the real prize. A Trump Tower in Beijing, Shaghai and Pyongyang ...
That's all for this week, have a great week-end, Don't Miss Our Monday Morning Update this week, we will expand further on market moves ...
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy.
|The Saturday Economist|
The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.