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Brexit Risks Rise in the UK

14 May 2018PoliticsEurope
Brexit Risks Rise in the UK- Market Insights by Citibank UK

Brexit risks rise in the UK

  • In the UK, Brexit negotiations seem to be hitting a rocky road with press reports of conflicts in PM May's cabinet. The Times writes that Theresa May has divided her warring cabinet into two rival camps to fight out their differences on Brexit. Her top team is split over how Britain should manage its customs arrangements with the EU after it leaves the bloc. Foreign secretary Boris Johnson has called her favored customs partnership model "crazy" and he and other Brexiteers favor an alternative plan called "max-fac". But this is opposed by Chancellor Philip Hammond and others who say it would damage the economy and break Britain's promise to avoid a hard border with Ireland.
  • The Financial Times also adds that the PM's allies now believe there is unlikely to be a breakthrough over customs arrangements and the Irish border at next Tuesday's meeting of the inner Brexit committee, even though she wants the issues settled before next month's EU summit. Meanwhile senior Tories admit they did not dare bring back two key Brexit bills to the House of Commons — on trade and customs — until the autumn, because of fears May could be defeated.
  • Meanwhile, Citi Analysts see the chances of a Bank of England (BoE) 25bp rate hike this year now dependent on recovering UK economic momentum, rising wage growth, stabilizing inflation, political stability and progress on the Brexit front. Risks around a 25bp rate hike in August now look finely balanced while looking beyond, downside risks remain high and with the Brexit process entering its decisive phase in autumn, rate hike probability dwindles after August.

Watch for ECB speak this week

  • This week in the Eurozone, Germany releases its Q1 GDP growth. Citi Analysts expect 0.2%QQ (consensus: 0.4%) due to adverse weather and calendar effects, but expect growth to rebound in Q2. Following three months of decline, Citi expects Eurozone industrial production to reverse the trend and grow by 0.8% (consensus: 0.7%). European Central Bank (ECB) speakers include President Draghi, Vice President Constâncio, Chief Economist Praet and Executive Board Members Lautenschläger and Coeuré.

Commodity Bloc: Pushing back the first RBA, RBNZ hike, NAFTA deal expected soon – AUD, NZD underperformance to continue versus CAD

  • Citi Analysts now see the timing of the Reserve Bank of Australia's (RBA's) first rate rise slightly later than their long-standing Q4 '18 forecast to Q1'2019. Australian data this week includes Q1 Wage Price Index (f/c 0.5%, last 0.6%), April employment change (f/c 21k, last 4.9k) and unemployment rate (f/c 5.6%, last 5.5%).
  • In New Zealand, the new Bank of New Zealand (RBNZ) Governor presents a slightly more dovish qualitative forward guidance when he fronts the media for Friday's press conference. However, the numerical OCR projections still show a slow and steady hiking cycle beginning in late 2019. Citi analysts still view the first OCR hike in Q1'19 with the risk that this occurs in Q2 from ongoing soft adaptive inflation expectations.
  • In Canada, creeping North American Free Trade Agreement (NAFTA) optimism as Foreign Minister Freeland says the 3 sides have made meaningful progress and she is optimistic NAFTA will clinch a new deal as "we are definitely getting closer to the final objective." Citi analysts expect that a NAFTA agreement in principle could be announced in the coming days, as US House Speaker Paul Ryan sets May 17 as the deadline.
  • Meanwhile, Canada's April jobs report disappoints on headline with net change in employment declining -1.1k vs +20k expected (though the miss is entirely due to part time employment declining) but wages growth strong as average hourly wages rise 3.6% from a year earlier at the fastest pace of growth since 2012 and average hourly wages for permanent workers – more closely watched as a gauge of underlying pressures – are up 3.3%, also matching the highest since 2012.

Asia EM: China's industrial production may pick up

  • Citi analysts expect growth in China's April industrial production to pick up to 6.4%YY (consensus: 6.4%) from 6%, fixed asset investment and retail sales to remain relatively stable at 7.5%YY YTD (consensus: 7.4%) and 10.1%YY (consensus: 10%), respectively.

Stay tuned for more updates on Market Insights by Citibank.

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