Good morning,

Brexit and the ‘R’ Word

It seems that the Bank of England sees a fair few reasons to be slightly negative on the UK economy at the moment but none more so than the possibility of a Brexit. Carney would have preferred to have not uttered the word ‘recession’ in his post-decision press conference but did not hold back on the risks to the UK economy once asked by the assembled journalists.

Of course, the likelihood of the UK falling into a recession is well within the Bank of England’s purview and it also strikes me as strange that it is any way controversial that the Governor of the Bank of England should weigh in on this. Would it not be worse had he and the MPC stated that they are completely ignoring the issue.

Once again it will be interesting to see what effect Carney’s pronouncements have had on voting intentions. I would be surprised if this damaged the Leave vote; my thoughts lying in the belief that those looking to exit the EU are unlikely to have their mind changed by one speech from the Bank of England Governor. Instead, I am looking to see the level of ‘undecideds’ fall and an increase in those voting to stay.

In 6 weeks we’ll know exactly whether any of this has made the blindest bit of difference.

Longer term issues for sterling

Away from the referendum, the forecasts of lower growth and solid inflation were not a surprise courtesy of the weakness in retail, construction and manufacturing but also headwinds from a slowing China and a doleful Eurozone. Inflation can easily be buoyed by a weaker pound, although it remains strong on a historical basis, higher wages and base effects from the oil price.

Futures markets were pricing in a 40% chance of a BOE cut by the end of the year before this meeting. It now sits at 32.8% and while most of this is Referendum risk, we think it remains too high and remain of the belief that rates will rise in Q1 of next year contingent on a strong bounce back in growth following the EU vote and upside inflation surprises.

Yen gains on equity weakness

Overnight in Asia, the yen has regained some of its poise following a week on the back foot. Lower equity markets and commodity prices saw haven currencies in demand with AUD lower on iron ore price declines. As we have said often of late, these markets are messy and choppy and money is very happy to sit on the side lines until a clearer trend emerges.

Germany strong as we wait on the US consumer

German data this morning has seen GDP rise by 0.7% in Q1, earning them the title of fastest growing economy in the G10. Domestic demand, particularly in consumer and construction sectors, were the main drivers of the outperformance and offset weakness in export markets and manufactured geared externally. More recent data has shown a slowing in Q2 so the Liebfraumilch should stay in the fridge for now.

This week’s last major news item is US retail sales at 13.30 with markets looking for a hefty rebound from March’s 0.3% fall.

Chinese data due over the weekend includes fresh news on new loans in China as well as the retail sales and industrial production. If loan growth remains strong then you have to think that the risk of the bubble bursting is only going to heighten into next week’s G-7 meeting.

Have a great day and a better weekend.

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