Brief Macro: UK Politics: Intransigence Meets Incompetence and more

In this briefing:

1. UK Politics: Intransigence Meets Incompetence
2. India: Weaker Growth, Benign Inflation Implies Continued Monetary Easing
3. Raw Materials and Retail Pricing
4. Trade During Lunar New Year
5. Why China’s Stimulus Will Disappoint

1. UK Politics: Intransigence Meets Incompetence

• The government has lost its second attempt to secure support for its Brexit deal by 149 votes, versus 230 first time. A Wednesday vote is set to reject no deal before one on Thursday leads the government to request an Article 50 extension.
• A third meaningful vote may arise as the cost of EU conditions is compared. An expensive extension to the summer is likely, though that may not thaw relations. An unlikely general election wouldn’t help, but a new Conservative PM might.
• Intransigent positions among an arguably incompetent current crop of political actors have significantly raised the risk of no deal. I now see the relative probabilities of a deal, no deal, and no Brexit at 45:35:20, versus 55:25:10.

2. India: Weaker Growth, Benign Inflation Implies Continued Monetary Easing

The weak January industrial production data and benign inflation data for February reinforce the belief that the economy has hit a soft patch. With the government in election mode, public spending is likely to slowdown. Monetary policy is thus likely to turn accommodative to support growth given that inflation is likely to remain well inside the MPC’s target of 4%. Indeed odds are increasing for continuation of monetary easing beyond April, especially if the forecast is for a normal monsoon.

3. Raw Materials and Retail Pricing

What the pricing data seems to imply is that consumer prices remain relatively steady but trending slightly downward, likely from weakness in household consumption that mirrors the broader economic trends. Corporate and producer sector data is driven by weakness in commodities and raw materials that seem hard pressed to accelerate in 2019 given the high base effect from 2018. 

4. Trade During Lunar New Year

An underlying issue regarding February data is just how pressurized it is. Between cross armed speculations about trade talk negotiations and the biggest Chinese holiday, it should come as no surprises that February data is underwhelming. Chinese markets are still grappling with a way forward in the trade talk quagmire, but February numbers are in many ways seasonal, due to the holiday snapshot it encompasses.

5. Why China’s Stimulus Will Disappoint

By Lawrence Brainard, Chief Emerging Market Economist at TS Lombard

• In a Chinese version of QE the PBoC is flooding markets with liquidity
• Commercial banks will be slow to use it to boost lending to SMEs