Market Insights

Back to the Backstop

Listen here for a 2 minute clip from our Irish Border expert on why talk of the Backstop is more likely to be in preparation for No Deal than a Deal:

 

Optimism over a Brexit Deal is rising because:

  1. Boris and the DUP are talking about an “all-Ireland” approach
    • Breathless anticipation that if they would deviate from the UK, then that could mean they would accept the backstop
  2. Boris is thought to be so wounded
    • Amber Rudd lambasted him for failing to look like he even wanted a Deal
    • He can stick to his pledge not to send that Extension Letter if he gets a Deal passed
    • The Scottish Court ruling that his advice to the Queen to prorogue was unlawful
  3. The EU spot an opportunity
    • Here’s a quick solution Boris – pick up Theresa May’s Deal and her original Northern-Ireland-only Backstop!

We believe this is misplaced, largely due to a misunderstanding over why Boris is focused on agricultural and food checks. Listen to the clip above to find out more!

No Deal comes closer

  1. Boris goes for the jugular to squeeze the Remainer rebels.
    • new Queen’s Speech on October 14th means the 22 sitting days until Brexit Deadline Day now becomes just 5 before the EU Council Summit on 17th October
  2. This will force the anti-No Deal crew to reveal their hand.
    • Which Conservatives would face career suicide to open the door to a Corbyn government?
    • Which Labour MPs would defy their divisive leader to ensure Brexit is delivered?
    • And which method will they try to stop what cannot be stopped?
  3. Next week Team Boris will then have the information to ensure the final 10 sitting days after the Queen’s Speech will give them the mandate to deliver Brexit, deal or no Deal.
  4. The market will also then become clear on just how difficult it will be to ‘prevent’ No Deal.
    • Our analysis shows neither a Corbyn-led nor Alternative-anti-No-Dealer can command confidence of the house.
    • Our assessment of parliamentary procedure shows there is only one path to an extension.
  5. Subscribe now to find out these details, or email us to request a conference call or meeting.

No Deal can’t be stopped

  1. Only the Prime Minister can extend or revoke Article 50
  2. Only the PM can decide the date of the next General Election
  3. Only the Government can dictate the Business of the House

1+2+3 = Boris can ensure the UK leaves the EU on 31st October, Deal or No Deal. 

Public opinion could affect his decision. But:

  • 410 of 650 constituencies voted to leave
  • The extension has cost both the Conservatives and Labour almost half their support, as the EU Elections demonstrated

Political pressure could affect his decision. But:

  • Anti-No-Dealers have no alternative leader nor Brexit plan
  • Even 55% of Labour MPs don’t back Corbyn (see our analysis)

No Deal can’t be stopped. Our analysts picked this up last Septemberagain after the recent Benn/Burt Amendment, and in our note from 2nd July, “Diary To An Election“:

BM on PM

Today the BlondeMoney CEO Helen Thomas was the guest of Evan Davis on BBC Radio Four's PM programme. They discussed the reasons behind the fall in Sterling and the risks of a No Deal Brexit.

Click here to listen:

Or click here and listen from 28 minutes 40 seconds onwards . . .

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The Fed’s made-up Minutes

Well, if you were left in any doubt that the Fed wanted to deliver an asset boom to ensure a Trump 2020 victory, tonight’s Minutes should eradicate that. We have never seen anything like it.

The first half of the Minutes describe the strength of the US economy:

‘labor market conditions remained strong’
‘GDP… rising at a moderate rate’
‘household spending growth picked up’
‘survey-based measures of inflation expectations were little changed’
‘Michigan consumer sentiment… still at upbeat level’

Sure, forecasts for inflation and GDP were trimmed slightly: ‘The projection for U.S. economic activity prepared by the staff for the June FOMC meeting was revised down somewhat on balance.’

But what’s this? What’s the market doing you say?
‘The spread between 10-year and 3-month Treasury yields fell to the bottom decile of its distribution since 1971’

And what’s happened recently?
‘Participants judged that uncertainties and downside risks surrounding the economic outlook had increased significantly over recent weeks.’

OMG! And why is that? Is it because of some stuff you heard some guy say somewhere anecdotally?
contacts reported that softer export sales, weaker economic activity abroad, and elevated levels of uncertainty regarding the global outlook were weighing on business sentiment …. Several participants noted comments from business contacts reporting that their base case now assumed that uncertainties about the global outlook would remain prominent over the medium term and would continue to act as a drag on investment. Several participants also noted reports from some business contacts in the manufacturing sector suggesting that they were putting capital expenditures or hiring plans on hold and were reevaluating their global supply chains in light of trade uncertainties.’

And you know that data in the first half of the Minutes? Maybe it’s not telling the whole story, particularly on inflation right? Bad stuff could happen, couldn’t it? 
Some participants also noted that recent readings on some survey measures of consumers’ inflation expectations had declined or stood at historically low levels. Many participants further noted that longer-term inflation expectations could be somewhat below levels consistent with the Committee’s 2 percent inflation objective, or that the continued weakness in inflation could prompt expectations to slip further’

What kind of bad stuff could happen? Debt ceiling issues, or heavily indebted firms getting into trouble, or, um…. you know. Things.

And then we come to the crux of it:
While overall financial conditions remained supportive of growth, those conditions appeared to be premised importantly on expectations that the Federal Reserve would ease policy in the near term to help offset the drag on economic growth stemming from uncertainties about the global outlook and other downside risks.’

That’s right guys! We have to cut because we are expected to cut!

They then throw around some reasons for cutting:

  • ‘risk management’
  • ‘continued shortfall in inflation’ could weigh on inflation expectations
  • ‘lower natural rate of unemployment’ could mean inflation never gets going (the Clarida argument)

There we are then. Almost total capture of the Federal Reserve by greedy financial markets and a greedy President. There are a few holdouts to this madness however:
A few participants expressed the view that with the economy still in a favorable position in terms of the dual mandate, an easing of policy in an attempt to increase inflation a few tenths of a percentage point risked overheating the labor markets and fueling financial imbalances’.

Good of them to get their reservations on record, but there is only a few of them, and they’ll likely quit the Fed in the years ahead anyway before this all blows up in their face.

Powell has his rate cut excuses ready. Just look at what he said in his testimony:
‘Economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the U.S. economy. Moreover, a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling, and Brexit.’

The word ‘Brexit’ comes up just once in the Minutes. When was the last time the Fed cared about what was going on in the rest of the world? It’s the most important central bank in the world, isn’t it?

So now we know. They will be using the 3month-10year yield curve to signal recession risk. That you have to cut now or suffer the consequences later. They’ll argue stuff could weigh on inflation. They’ll point to trade tensions, geopolitics, Brexit, whatever. It doesn’t matter. They’re cutting.