Today’s daily post is going to a true daily, covering a wide range of market and political economy news.
Forcing government to rule out no deal
And I want to start with Brexit because I think this is one of the most pressing issues in the political economy in the last decade.
In terms of the House of Commons, what I see happening is a coalition of forces joining, from the opposition parties led by Labour and joined by rebel Conservative MPs. Their collective aim is two-fold: to make the government more accountable to Parliament on Brexit and to prevent the UK from leaving the EU without a signed agreement.
Tuesday’s vote against the government’s finance bill in the Commons was the first sign that this coalition had formed to prevent a no-deal Brexit. Yesterday’s vote to force the government to table a plan b within 72 hours of a defeat of May’s negotiated exit agreement was the second. The view that seems to be taking shape in parliament is that MPs will have to explicitly reject a no-deal outcome well ahead of the March 29 deadline, so that the government has no choice but to ask for an exit timeline extension or to revoke Article 50 and start again.
In that vein, I found the following in the Times of London useful regarding where Labour is on the issue:
Labour is a party of Remainers led by Brexiteers. More than two thirds of the party’s voters wanted to stay in the European Union, the majority of trade unions backed a Remain vote and 86 per cent of Labour activists want a second referendum. But Jeremy Corbyn himself is a Eurosceptic of long vintage who backed Remain in 2016 for two reasons: the first was that he feared a Leave victory would trigger the end of his leadership, and the second was that the left-wing economist and former finance minister of Greece Yanis Varoufakis convinced him that Brexit would lead to the break-up of the EU and a worse deal for the nations of the EU periphery. Corbyn’s belief that the United Kingdom itself was better off out never wavered.
As I have said in the past, many elements of Corbyn’s agenda would be blocked by the EU because they fly in the face of the EU’s neo-liberal rules orthodoxy. This is why Corbyn believes the UK is better off outside the EU. But, he is leading a party that is overwhelmingly in support of staying in the EU. If we see a delay of the timeline or a revocation of Article 50, this juxtaposition will come to a head.
The US data is good while UK data is not
I have been talking up the upcoming US holiday season retail data releases. As we await their release, cast a look at what’s happening across the pond in the UK.
John Lewis may axe its staff bonus this year in the wake of the worst Christmas for retailers since the depths of the financial crisis.
The employee-owned John Lewis Partnership which also owns Waitrose said its board would “need to consider carefully … whether payment of a bonus is prudent in the light of business and economic prospects at that time”.
Its chairman, Sir Charlie Mayfield, warned that partnership profits will be substantially lower this year despite higher sales at Christmas, due to heavy discounting by rivals and weak consumer demand.
John Lewis slashed its staff bonus last year to just 6% of salary which was the lowest level of payout since the 1950s. The bonus was first paid in 1920 and is handed to all staff, from shelf stackers to senior management. The last time John Lewis suspended the payment was during the economic downturn of 1953.
And this is before Brexit. In the event of a no-deal Brexit, expect things to be considerably worse.
I should point out, though, that Leave voters are not as bothered by this. A recent Twitter thread by YouGov, pulling from a Times of London poll, says “Leave voters are less likely to see the negative economic impacts of the BoE’s worst case Brexit scenarios as “bad””.
In the US, jobless claims data show you that last week’s uptick was a blip as I speculated it was. This morning’s email from the Department of Labor read:
In the week ending January 5, the advance figure for seasonally adjusted initial claims was 216,000, a decrease of 17,000 from the previous week’s revised level. The previous week’s level was revised up by 2,000 from 231,000 to 233,000. The 4-week moving average was 221,750, an increase of 2,500 from the previous week’s revised average. The previous week’s average was revised up by 500 from 218,750 to 219,250
The small increase in average initial claims is nothing to worry about at this point. On the employment side, things are looking good.
Shutdown meets market and freezes IPOs
The problem: the US federal government shutdown is now in its 20th day. And there’s no sign of an imminent deal. Economists estimate the negative impact at $1.2 billion a week. And this comes via workers without paychecks cutting spending and government contractors not doing business as the two biggest factors.
One headache that is not been calculated into scenarios is the freeze on the IPO market. Remember that both Lyft and Uber executives are looking for IPO exits this year. The Wall Street Journal explains that this may be a problem:
The government shutdown is threatening to spoil what was poised to be a banner year for IPOs.
The partial closure of the Securities and Exchange Commission is forcing companies that were seeking to list shares in January to push back their plans, according to bankers and lawyers. They include biotechnology firms Gossamer Bio Inc., Alector Inc. and Blackstone Group LP’s Alight Solutions LLC.
It now looks likely that no major company will tap the U.S. IPO market this month. Since 1995, there have been just three years that had a new-issue drought in January, according to Dealogic data. That happened as a result of choppy markets in 2003, 2009 and 2016, which went on to be some of the weakest years for initial public offerings on record, the data show.
The longer the shutdown goes on, the more damage it will do. I see Trump caving eventually. If he doesn’t, he will take huge knocks for his economic stewardship. And while the Congressional Democrats will also get some of the blame, it is Trump who has most to lose here, since the economy is his best issue.
Big market issue: Oil is in a new bull market
Yesterday, I talked about the 10% gain in the S&P500 since Christmas Eve. Oil is also doing well. It’s officially in another bull market now. Oil had an eight-day gain through Wednesday. That is the longest uptrend since mid-2017. And the proximate reasons for this are two-fold: the Fed’s pause bringing about optimism regarding the US and the prospect of a US-China deal to end their trade dispute. Plus OPEC began production cuts.
The overhang is US-based shale supply. And that’s not going anywhere soon. So, to the degree these two factors for optimism fade, expect oil to be under renewed pressure. For now, it looks like we are not going to see major oil capital expenditure cuts in the US.
I mentioned the Fed as a reason for optimism. Here’s the context via Binjamin Appelbaum at the New York Times:
A pair of influential Federal Reserve officials said Wednesday that the central bank should pause to assess economic conditions before considering additional interest rate increases, reinforcing the message delivered last week by the Fed chairman, Jerome H. Powell.
The Fed on Wednesday also published an account of its most recent meeting, in December, which showed that most Fed officials had already reached a similar conclusion at that time.
Taken together, the speeches and the meeting minutes signal that the Fed will not raise its benchmark interest rate at its January meeting and that it is unlikely to do so at the following meeting, in mid-March.
But most Fed officials still expect that economic growth will be strong enough to justify rate increases later in the year.
So, the new baseline view is a pause until at least April, maybe June. And afterwards, only then would we see a rise. The market is actually pricing in no hikes this year, followed by easing late this year or early 2020. For now, this is bullish for risk assets but bearish for the US dollar and Treasuries. Let’s see what happens when the next batches of economic data come out in the next few weeks.
That’s it for today. Cheers.