Morning Commentary: When the Economy Doesn’t Matter

Foreign Exchange - Morning Commentary
When the Economy Doesn’t Matter
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Overnight, the UK printed a significantly stronger-than-expected CPI report.  This inflation beat came one day after the UK also printed a stronger-than-expected employment report.  However, overnight the GBP barely moved with the pound sitting around 0.1% higher than where it was when we closed last night. 
What this does is illustrate the reality that the GBP has become a currency for which economic data is practically overshadowed and is driven by Brexit news.  To this end, the possibility of a no-deal Brexit took a tick lower as Commons speaker Bercow stated he would do everything possible to stop PM Johnson from circumventing Parliament to force a no-deal exit.  Under PM May, Parliament was able to take control of the Brexit conversation by adding amendments to PM May’s withdrawal agreement during the meaningful vote process.  If PM Johnson wanted to deliver a no-deal exit, there would be no need to hold a vote on a withdrawal agreement, making it unclear how Parliament would be able to control the narrative. 
Adding another twist to the Brexit story has been a Conservative politician’s accidental (or perhaps not accidental) publication of a draft email about his “GE2019” team.  This has added to the growing speculation that a general election could be the next step in the UK’s Brexit drama, however the timing is unclear. 
The case for elections is fairly clear.  PM Johnson only has a 1 seat majority so he doesn’t have the votes needed to pass controversial legislation.  By calling an election, it is possible for the Conservatives to achieve a more significant majority.  For what it’s worth, the Conservatives reportedly see Johnson’s celebrity as an electoral asset and over the first three weeks of being PM, Johnson has announced spending pledges at a rate of 2 billion pounds a week.  However, the PMs can no longer call elections.  Early elections can only be called by two-thirds of MPs or if the government loses a confidence vote. 
Ultimately, the takeaway seems to be that leading up to Brexit, market measures for event risks (early elections, no deal sentiment etc.) warrant watching as these measures are likely to have a greater impact, than economic news, on the GBP. 
  • Trump delayed some of the 10% tariffs until December 15.  Most of the items for which tariffs will be delayed on are consumer goods, implying concern over rising prices ahead of the holiday season.  As it stands, the scheduled September face-to-face meeting between the two sides remains on track.     
  • Overnight, the yield curve between the US 2-year and 10-year Treasuries inverted for the first time since 2007.  Additionally, 30-year yields have dropped to record lows. 
  • German Q2 GDP contracted by 0.1% QoQ, which met consensus.  The drag from foreign trade developments was a key drag on the economy.  Euro area Q2 GDP grew 0.2% QoQ, matching expectations. 
  • In Italy, the vote of no confidence now looks to be scheduled for August 20. 
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