Good morning,
Fed hints that 2nd half of 2017 likely to be quieter than the first
Sterling is on the back foot heading into the long weekend following a YouGov poll showing that the Conservative lead, that had sat at 20 points on the day that the election was called, has fallen down to 5 points. The last poll done by YouGov was before the Manchester attack and saw the Tories leading by 9.
It is more than unwise to hang prognostications off one poll and other updates of the post-Manchester attack political landscape will emerge over the course of the weekend.
A confused pound
The move to push sterling lower is an interesting one. The move in sterling following the announcement of a general election was broadly positive and centred, we think erroneously, on the belief that a larger mandate for Theresa May increases the chances of a ‘softer Brexit’. The Labour party, under Jeremy Corbyn, voted with the Conservatives to trigger Article 50 and start the clock on Brexit and noted in their manifesto that they would end the free movement of people that is integral to membership of the single market. It therefore stands to reason that the fall in sterling is not about Brexit per se, but more about the increased odds of a hung parliament or a slimmer than previous Tory majority.
The usual health warnings apply of course; this is only one poll and the fact that we vote on a first past the post system and not popularly means there is not a direct translation into representation within a newly formed parliament. It will likely mean an increase in campaigning and a few more nerves on the night of the vote which is less than a fortnight away now.
Our webinar on the election, its impact on Brexit, the pound and therefore your business and international sales is next Wednesday afternoon. You can sign up here to watch it live or a recording will be made available afterwards.
Stagnation more than recession
Yesterday’s negative revision to UK GDP won’t have helped matters and was a little unexpected but the weakness seen in consumption fundamentals were not. The biggest shock came in a 1.6% fall in exports on the quarter which stands completely apart from the survey data from industry PMIs and torpedoes the belief that there is a direct link between a weaker currency and a swell in exports.
Yesterday was the first time in a while that I was asked whether the UK was heading for a recession given the moves in UK data. Whilst we cannot rule out a dip in output below 0% in the coming quarters we think that there is more the case that the UK is heading towards a period of stagflation – a stagnant economy that has to deal with increasing inflation. That is more chronic than a short term recession but, and in terms of the pound, is unlikely to drive the Bank of England to do anything more than sit on its hands when talking about rate rises.
Elsewhere
In other news, Donald Trump is winning friends during his European tour allegedly scolding Germany at a meeting and saying that he would put an end to the country’s car exports to the US. The 2nd reading of US GDP for the first quarter is due at 13.30 and while we are looking for a negative revision (down to around 0.7% on the year) the impact on the USD will likely be marginal before the long weekend.
Have a great day and a better bank holiday weekend.
We will be back on Tuesday.