Brexit Takes Fresh Toll on Sterling, Dollar Broadly Firmer

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  • UK Prime Minister May got the parliamentary approval the courts ruled was necessary to formally trigger Article 50
  • The main economic news today comes from China
  • US economic data features PPI ahead of tomorrow’s CPI and retail sales; the FOMC’s two-day meeting gets under way today
  • India and Poland report February CPI; Mexico reports January IP

The dollar is mostly firmer against the majors. The Swedish krona and the Loonie are outperforming, while sterling and Nokkie are underperforming. EM currencies are mostly softer. INR and THB are outperforming, while KRW and RUB are underperforming. MSCI Asia Pacific was down 0.1%, with the Nikkei falling 0.1%. MSCI EM is up 0.4%, with China shares flat. Euro Stoxx 600 is down 0.2% near midday, while S&P futures are pointing to a higher open. The 10-year UST yield is down 1 bp at 2.62%. Commodity prices are mixed, with WTI oil up 0.3%, copper flat, and gold down 0.1%.

UK Prime Minister May got the parliamentary approval the courts ruled was necessary to formally trigger Article 50.   It is not clear what UK she will lead out of the EU. Scotland is beginning the legal proceedings to hold another referendum on independence. There is some talk that Northern Ireland, which voted to remain, might be allowed to rejoin the Republic of Ireland.

It is also not clear precisely when May will formally invoke Article 50. Some expect Parliament to be told tomorrow during the Prime Minister question time in the House of Commons. Others suspect May might wait until later this month for the EU Summit to celebrate its 60th anniversary, to formally begin the two-year amputation negotiations. In any event, there is little uncertainty that Article 50 will be invoked before the end of the month.

Sterling has taken it on the chin. Its two-day rally, the first since February 20-21, has ended with an exclamation point. Sterling has been sold through the shelf it had carved out last week in the $1.2135 area to record its lowest level in nearly two months. It found support in the European morning ahead of $1.2100. We have been targeting the trend line off last October’s flash crash low and the mid-January low. It is found today near $1.2055.

For its part, the euro is trading firmly against sterling, but it has been unable to rise above the two-day cap near GBP0.8785. The intraday technicals warn that if the euro is going to go through the GBP0.8800, it needs a running start, which means lower levels first. A pullback toward GBP0.8730 should not be surprising.

Against the dollar, the euro has shed a little more of its recent upticks. There is potential toward $1.0595-$1.0620. Initial resistance is now pegged in the $1.06660 area. Meanwhile, the US10-year yields holding around 2.60%, the dollar is again probing the JPY115.00 level. In the past two months, despite several pushes, the greenback has only been able to close above this cap once since January 11. Immediate support is pegged near JPY114.80.

The German ZEW investor survey showed improvement over February, but not as much as the median survey response expected. The assessment of the current situation rose to 77.3 from 76.4 (median Bloomberg guesstimate was 78.0). Expectations rose to 12.8 from 10.4 (median was 13.0). There was little market reaction.

The main economic news today comes from China. The general thrust of the data is constructive and suggests that the world’s second-largest economy is off to a firm start in 2017. Due to the Lunar New Year distortions, China reports January-February data combined. Industrial output rose 6.3% year-over-year. This was a little better sequentially and slightly above expectations. Fixed investment rose 8.9%, which is also an improvement from the last report and above expectations.

To the extent there was the disappointment, it came from retail sales. The 9.5% increase is the first sub-10% reading since 2003. The incredible year-over-year growth in retail sales has been slowing gradually for several years. Recall the 12-month average year-over-year rate peaked in 2008 near 21.4%. It is now at 10.2%.

News of the BJP’s overwhelming victory in Uttar Pradesh (312 seats out of 403, up from 47 seats five years ago) lifted Indian assets. The Nifty 50 Index reached new record highs, while the rupee rallied to about 0.65% to reach an 11-month high. Excluding Japan, the MSCI Asia Pacific Index rose 0.25%, its third successive gain and the sixth of the past seven sessions. Japan’s stocks edged lower, snapping a three-day advance.

India reports February CPI, which is expected to rise 3.60% y/y vs. 3.17% in January. Earlier, February WPI came in higher than expected, rising 6.55% y/y vs. 5.25% in January. The economy appears to be recovering nicely from the shock November demonetization, while price pressures are clearly picking up. As such, we think the RBI was right to signal the end of the easing cycle at its February meeting.

European shares are mostly heavier, with the Dow Jones Stoxx 600 off 0.25% in late morning turnover. It remains within yesterday’s ranges. Most sectors are lower but consumer staples, health care, and utilities. With the weakness of sterling lending support, the FTSE 100 is holding onto minor gains.

UK lawmakers were scathing in their criticism of BOE Deputy Governor Hogg. At the heart of the issue was a failure to disclose that her brother works for a UK bank. Hogg was put in charge of markets and banking at the start of March.

The North American session may be hobbled by the winter storm in the Northeast. The economic data features PPI ahead of tomorrow’s CPI and retail sales. The FOMC’s two-day meeting gets under way today. Nearly everyone expects a 25 bp hike in the Fed funds target range tomorrow (to 0.7%-1.0%). The key point of interest is the forward guidance and the prospects for another hike at the end of Q2.

The CBO scoring of the Republican health care plan was released late yesterday. This will be much discussed today. On the one hand, the CBO is not infallible, and its earlier forecasts of the Affordable Care Act (“Obamacare”) were not particularly accurate regarding participation. On the other hand, it projects that 14 mln more will be uninsured next year (rising to 24 mln by 2026). The CBO reckons it will reduce the deficit by $337 bln over ten years ($935 bln from lower savings, with a $599 bln offset from lower taxes).

Poland reports February CPI, which is expected to rise 2.1% y/y vs. 1.8% in January. January trade and current account data will be reported Thursday. February industrial (2.7% y/y expected) and construction (flat y/y expected) output, PPI (4.6% y/y expected), and real retail sales (6.4% y/y expected) will be reported Friday. In light of rising inflation and a robust economy, we are surprised the central bank is sticking with its pledge to keep rates steady in 2017.

Mexico reports January IP, which is expected to be flat y/y vs. -0.6% in December. The economy remains sluggish, but rising inflation is keeping the central bank in hawkish mode. The next policy meeting is March 30. It’s a tough call. The bank would probably like to keep the tightening cycle on hold, but Fed rate hikes and potential global fallout may prevent this. Much will depend on external developments.