Post date: 01/04/2019 08:00
The failure of British Parliament to agree on any concrete way forward for the Brexit process, and the newest rejection of May’s withdrawal agreement slammed the pound, which fell almost 2% and was the worst performing G10 currency. The Turkish lira recovered some of its recent losses as Erdogan managed to disrupt the offshore Lira market in a successful attempt to stabilize the currency just long enough for the local elections – what happens now is anyone’s guess, though the dramatic drop in the central bank FX reserves does not bode well.
Data releases for this week have started on a strong note as China PMI indices of business activity blew away expectations over the weekend. After Eurozone flash inflation on Monday, the minutes of the last ECB meeting will be released on Thursday, followed by the key March payroll report in the US out Friday afternoon. Any confirmation in the latter of the uptrend in wages could bring a sharp reversal of the rally in Treasuries that we have seen since the last Federal Reserve meeting.
The UK Parliament was unable to agree on a single course of action regarding Brexit, except in so far as rejecting for the third time May’s withdrawal agreement. The default now becomes a no-deal Brexit on April 12th, although we still regard this as an unlikely event. Our central scenario continues to be for a longer extension that will give time for the UK to develop a viable political majority around any of the options, perhaps through a general election. The immediate events is a new round of votes in Parliament over different versions of Brexit, where the goal will be to have at least one that is not soundly rejected. Expect volatility in Sterling until the extension is requested and approved.
Economic news out of the Eurozone had a better tone last week, after the bitter disappointment in industrial activity from the week prior. German retail sales came out very strong and previous moths were revised upward. However, dovish noises from ECB officials kept the Euro on the backfoot and near the bottom of its recent range against the US dollar. The flash inflation number for March is the key release of the week. With the market pricing in a 0.1% drop in the core number, we think a repeat of last month 1% would be enough to power a modest rally in the Euro from its current place at the bottom of the recent range.
The mostly second-tier data out of the US last week were on balance a bit weaker than expected, though not enough to change the macroeconomic picture in any significant way. We think that the payroll report out on Friday will regain some of its former glory as the most important data release of the month. In particular, a continuation of the upward trend in wages, combined with solid job creation, may put an end to the torrid worldwide rally in Government bonds.