Market Insights

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.

Diary to an Election

As we await Boris Johnson’s likely move into 10 Downing Street, some Conservative MPs have suggested they would force a General Election by voting down their own Government in a no confidence vote, all in an attempt to avoid a No-Deal scenario. Although the former mayor of London has promised to try and negotiate a deal with Brussels, Mr Johnson has confirmed that he would abide by the 31 October deadline ‘’do or die’’, keeping the possibility of a No Deal Brexit firmly on the table.

This stance has understandably panicked those who want to avoid falling over the cliff edge into No Deal by default. They feel their ultimate weapon to stop Boris on this course of action would be the threat of bringing down his government.

The introduction of the Fixed-term Parliaments Act (FTPA) in 2011 removed the sitting Prime Minister’s ability to call an election at a time of their choosing – it is now up to Parliament. Absent the option of repealing the act entirely by a simple majority, there are two ways in which an early election may be triggered: at least two-thirds of the Commons votes in favour (as happened under Theresa May in 2017) or by the passage of a motion that “This House has no confidence in Her Majesty’s Government”. If this motion were carried, a 14 day period would follow in which confidence in the government could be re-established, either in a newly formed alternative government or in the incumbent government; if that fails, a General Election is called.

The current Conservative government has a working Commons majority of just four, including the backing of the Democratic Unionists. This could soon be reduced still further by the by-election that has just been announced for Brecon and Radnorshire on 1st August. This was largely a Liberal Democrat seat until 2015, and they’re expected to regain it for two reasons: 1) the by-election was triggered by a recall petition over the incumbent Conservative MP due to an expenses scandal and 2) that same MP is standing once again as the Conservative candidate. That’s before we even look at the resurgence of the Liberal Democrats in the national polls.

The threat of bringing down the government is therefore becoming more credible, requiring only two Conservative MPs to defy the party whip in a No Confidence vote.

But the timetable is against the anti-No-Dealers. An election would need to be triggered well before the 31 October deadline, in order to give enough time for the 14-day period under the FTPA, as well as the compulsory 25 working-day campaigning period. A vote would therefore need to be held as soon as MPs return from their summer recess, at least before 10th September 2019. After that date the Conference season recess also kicks in (specific dates TBC).

Instead, MPs could pass motions similar to the Cooper Bill, wrestling control of parliamentary time to mandate the Prime Minister to extend article 50 again. They could pass No Confidence motions with alternative phrasing, or with an explicit demand to ‘rule out no deal’, in an attempt to exert pressure on the PM. They could even pass a censure motion to hold Johnson’s pay to ransom.

Unfortunately, as Johnson-backer Dominic Raab has pointed out, these motions to stop a no deal Brexit would have ‘’zero legal effect’’. Only revoking Article 50 would remove the No Deal risk entirely. Even then that could be up for challenge from the European Court of Justice, whose recent ruling over revocation is that it must be “unequivocal and unconditional”.

If the No Confidence vote is passed, then surely that would force a change of direction?

Not if the Prime Minister doesn’t want it to. Under the rulings of the Fixed Term Parliament Act, he has two weapons up his sleeve constitutionally speaking:

  • It is only Her Majesty’s Government that can command confidence; therefore if Jeremy Corbyn wanted to form a new government, he would need to have been appointed Prime Minister by the Queen before testing the House in a fresh motion of confidence. If that doesn’t happen, and why would an incumbent PM give their opposite number the chance, then a caretaker government is put in place. (Callaghan continued as PM in a caretaker administration when the last vote of no confidence was lost by a government in 1979)
  • Dissolution of the government need not immediately follow the 14-day period and section 2(7) of the act allows the Prime Minister to recommend a suitable polling day to the Queen. With the Brexit clock ticking, Prime Minister Johnson could simply schedule an election for after the 31st October deadline.

Either of those courses of action would take a tremendous amount of chutzpah in the face of what would be a determinedly driven opposition. But the truth is that the opposition only have political pressure up their sleeves. This can work in their favour, but also against them. If they failed yet again to pass a Deal, then created chaos to force an election, it is not entirely clear they would be rewarded favourably by the electorate – nor that the voters would vote to Revoke rather than go for No Deal in an election that would effectively become a re-run of the Referendum.

Indeed, a ballsy Prime Minister might bypass the No Confidence vote altogether, calling for a dissolution of Parliament by the super-majority vote of two-thirds of the House, and daring the opposition to stop him.

We think the risk of an election in September/October is rising. It could benefit those trying to stop Brexit altogether, those trying to take power at any cost, and those trying to benefit from splintering the left wing vote as much as those trying to exploit the fragmentation of the right.

– Written by Catherine Fellows (Analyst) and Matthew Grant (Intern)

KO for Gove

  • And so it is Boris Johnson v Jeremy Hunt that will go to the Conservative membership ballot
    • Leaver v Remainer
    • Chaotic Personal Life v Family Man
    • Lifelong politico v Businessman
    • Shambolic v Smooth
    • Hated by Liverpool v Hated by Doctors
    • Classicist from Oxford University v PPEist from Oxford University
    • ex-Foreign Sec v Foreign Sec
    • Public schoolboy v Public Schoolboy
  • But it is really the first difference that will matter the most to the Conservative Party membership, and it is this which makes Team Boris so confident that he will win. The last Remainer Prime Minister didn’t work out too well…
  • Looks like Javid’s voters went to Johnson but then Johnson votes went tactically to Hunt (as 5 Javid MPs had publicly declared for Boris but he only picked up 3 votes).
  • Revenge for the Gove stabbing in 2016 has been served. With balance back in the Brexiteer force, expect Gove to work closely with Boris once (if?) he becomes PM

….And finally, thank you to the BlondeMoney team of analysts who worked very hard to make some strong predictions in an extremely volatile political environment. If you’d like to know more about their analysis or work with our database, please let us know.

The Weigh In

  • By 5pm today we will have the full list of candidates to be the UK’s next Prime Minister
  • Under the new rules, each candidate requires 8 MP supporters
  • Round 1 of voting by MPs will then take place this Thursday, 13 June, 10am-12noon. Result expected 1pm.
  • Here is the BlondeMoney forecast based on our MP-by-MP analysis:
  • And here is this support versus each candidate’s BM Brexit Rating (which runs from -15 for the most pro-Remain MP in the House of Commons, to +15 for the most pro-Leave)

We therefore conclude: 

  • Boris Johnson should immediately hit triple figures and burst into the lead. Johnson received a huge boost in the form of ERG leader Steve Baker’s endorsement, exemplifying that the Brexiteer wing of the party is on board.
  • Jeremy Hunt has emerged as the moderate alternative and is currently favourite to join Boris on the ballot. In receiving a surprise endorsement from Liam Fox, Hunt has shown the first signs of the broad appeal that will be necessary if he is to go all the way. The support of Amber Rudd has also boosted his credentials.
  • As illustrated by our Brexit rating chart, the bulk of support currently lies on the extremes of the party. But could a compromise candidate emerge?
    • Sajid Javid – Sitting almost perfectly between Johnson and Hunt, he could pick up votes from MPs hoping to keep the party united after a divisive leadership race.
    • Michael Gove – in recent media interviews, Gove has tried to soften his image as a hard Brexiteer and move himself towards the centre ground that Javid currently occupies. This has been somewhat successful as he has picked up endorsements from both Remainers like Nicky Morgan and more pro-Brexit MPs such as Richard Bacon.
  • If our predictions are correct, the field could shrink by nearly half after just one round of voting. If a unity candidate is to emerge, they will require a large proportion of support from the first eliminations in order to mount a serious challenge on Hunt and Johnson at the front of the pack. It is their supporters who will decide who wins the overall contest.
  • The real question here is whether middle-of-the-road Conservatives will look to Johnson or Hunt once their first preferences have left the race.
    • If polling continues to indicate that Johnson is popular among the membership, then they will rally to his side in the hope of currying favour once the contest is over.
    • If moderate MPs continue to make noises about resignation in the event of a Johnson victory, or of bringing down the government over the risk of No Deal, then Hunt will gain support as the man to keep the party together moving forward.
  • Whoever wins, note that the leading Brexiteer candidates are now promising potentially undeliverable tax cuts along with reopening the Withdrawal Agreement. Boris says he will withhold the £39bn divorce bill until the right deal is done. Meanwhile on the parliamentary time available until the new October 31st deadline, today would be equivalent to January 15th, when the first Meaningful Vote was held. Tick tock goes the Brexit clock, counting down to No Deal….

++ If you would like to see our full scenario analysis for who will become the next UK PM please email us if you haven’t already done so ++