Another Westminster showdown

Chris Scicluna

Buoyed by the increased prospect of an orderly Brexit (albeit one that will be economically and politically damaging over the long term), as well as some positive comments on US-China trade from President Trump to suggest that negotiations are progressing, US stocks joined those in Europe by making decent gains yesterday (the S&P500 closed up 0.7%). And most Asian markets followed suit today, with Korea’s KOSPI closing up 1.1% and China’s CSI300 up about 0.2%, on what was a quiet day for economic news from the region. US stock futures also advanced. But Japanese markets were closed for the enthronement ceremony of Emperor Naruhito.

Despite the positive tone to equity markets, following yesterday’s losses, USTs and European government bonds have opened somewhat stronger upon market opening this morning, e.g. with yields on 10Y USTs down about 1½bps so far to 1.785% and 10Y Bunds and Gilts down a similar margin to about -0.36% and 0.73% respectively. And sterling is down a touch from yesterday’s high of $1.30 ahead of this evening’s key Brexit votes in the House of Commons, which will be the day’s most notable economic event.    

So, having last night finally presented the 110-page Withdrawal Agreement Bill (WAB, the draft UK legislation that would implement the EU-UK Withdrawal Agreement reached last week), this evening (just after 7pm BST) will bring key votes in the House of Commons that could determine whether the UK leaves the EU by the end of next week, or an extension will need to be granted. For a start, MPs will hold a ‘second reading’ vote to test whether support exists in principle for the draft legislation. While defeat for PM Johnson would kill the bill, he appears now to have the numbers in Parliament required to win that vote. Success would allow the WAB to move later tonight to the committee stage, where MPs will be able to scrutinize the legislation and propose detailed amendments, including on whether the Government should negotiate a customs union during the transition period and whether the approval of the legislation should depend upon its confirmation in a second referendum. Votes in the committee stage would occur every three hours.

Most uncertain today, however, is whether the Government will win a separate vote (circa 7.15pm) on a ‘programme motion’, which seeks an extraordinarily accelerated timetable to allow the WAB to pass into law by the end of the month. In particular, according to the proposed timetable, MPs would have only until the end of Thursday to scrutinize, amend and endorse the WAB before sending it off to the House of Lords for its own round of scrutiny, amendment and voting. Given the wholly unreasonable nature of the proposed timetable for such a lengthy and profoundly important piece of legislation we have strong doubts that the Government will win this vote.

So, where might this all leave us? If, as we expect, the WAB passes its second reading this evening, the UK would certainly be on track to leave the EU whatever happened in the programme motion. But if the Government loses that second vote, at a minimum further time beyond 31 October would be required for the WAB’s ratification. And the Government has even threatened to withdraw the WAB and seek an early general election instead. Regardless of which route it chooses, we have no doubt that the EU would be willing to grant the necessary Article 50 extension and avoid a no-deal Brexit next week.

While all attention will be on the House of Commons for the aforementioned ‘second reading’ vote, today will also bring the week’s most notable UK economic data. In particular, the CBI industrial trends survey will almost certainly suggest that manufacturing activity remained weak this month with orders down following renewed Brexit-related inventory accumulation. In addition, the latest public finances figures will show that net borrowing in September continued to trend higher than its level a year earlier and on a trajectory incompatible with the Government’s fiscal mandate to reduce cyclically adjusted borrowing below 2 per cent of GDP by 2020-21.

Indeed, what earlier this year had appeared to be headroom of some £26.6bn (1.2% of GDP) against that fiscal target has already been more than used up. The cause has been a mix of poor fiscal outturns since March, changes to the accounting treatment of student loans, and the budgetary incontinence of new Chancellor Sajid Javid, who – blatantly electioneering with taxpayers’ money – pledged lashings of extra public spending in his Spending Round for 2020-21 to try to persuade voters that austerity is a thing of the past. Of course, recognising that he’s completely off track, Javid has already pledged to replace the Government’s fiscal rules with a new framework when he unveils the 2019 Budget, which is currently penciled in for 6 November.

In the bond market, the DMO will sell 2025 Gilts today. 

Euro area:
Today’s most notable economic data from the euro area will come from the ECB, as it publishes the results of its latest Bank Lending Survey. These might be watched to judge any change in attitude at the region’s banks in the wake of last month’s ECB policy package, which included several measures with direct impact on the financial sector including a 10bp cut in the deposit rate, the restart of QE, more generous conditions on the TLTRO-III liquidity operations, and – perhaps most notable – the introduction of a new tiered framework of reserve remuneration to apply from 30 October. The previous survey three months ago suggested that credit standards had tightened on business loans, the first time that had happened since 2014. In particular, increased concerns about the economic outlook and heightened risk aversion had reportedly resulted in tighter internal guidelines and loan approval criteria despite favourable funding conditions. Credit standards had also tightened for consumer credit. Nevertheless, the hard lending data suggest that loan growth accelerated in Q3, so today’s survey findings might not be quite so downbeat.

In the US, September’s existing home sales data are due along with the October Richmond Fed manufacturing survey. The September federal budget report, which is likely to leave the budget deficit for FY2019 close to $0.99trn, might also be released. In addition, the Treasury will sell 2Y Notes. 

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