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The UK economy is heading towards contraction

London Wrap – Markets gain ahead of Fed, big Brexit week.

Posted Monday, March 18, 2019 by
Neil Wilson • 3 min read

After a solid run last week, the main bourses in Europe were largely higher on Monday as markets turn their attention to the Federal Reserve meeting this week. The S&P 500 broke clear of the 2817 level last week, closing at 2822, suggesting further gains as the Fed rolls over and lets the markets tickle its tummy.

The FTSE 100 has opened up and broken out above the immediate resistance on the 200-day line around 7245. Having also broken the 7259 February peak, we need a close above these levels to cement the bullish case. Next up is the 23.6% retracement from the all-time highs at 7336.

The DAX is also up, clearing 11700 and approaching its 200-day line at 11789. Another couple of positive sessions could tip it over – we await to see whether the news that Deutsche Bank and Commerzbank are officially exploring a merger will help bolster sentiment.

Fed set for pause

Whilst it’s almost a given the Fed will leave rates on hold, there could be some grist for the forex mill in terms of interest rate forward guidance, its quantitative tightening process, and fresh economic projections.

Markets are counting on the Fed to remain accommodative and for the FOMC to announce an end to the process of unwinding its balance sheet this year. Now may the time for the Fed to say that it will halt QT this year.

Market expectations have rotated to see a cut more likely this year than another hike, but this may be too complacent.  Whilst economic data has clearly softened of late, the key figures remain robust and the Fed may be minded to hike again, in spite of Jay Powell’s comments.

The key message from the January minutes was this: “Several other participants indicated that, if the economy evolved as they expected, they would view it as appropriate to raise the target range for the federal funds rate later this year.” So, some FOMC members still want to hike, but there is not enough consensus for further hikes this year.  We await to see whether the median projected fed funds rates retreats again from the 2.9% in Dec – even if it does not there does not seem to be enough policymakers for a hike. A shift in the economic data to the upside through the summer may be change this equation.


The coming days may at last prove decisive with Theresa May likely to try and push her much-maligned bill for a third time – MV3. It all hinges on the DUP and whether the PM can persuade them to come around to the deal – that would almost certainly get the ERG on board and this bill could yet pass. GBPUSD remains heavily range-bound around 1.3280 at the moment but positive Brexit news would of course be bullish. Philip Hammond has said the government will only seek to bring a MV3 if there is already the support of the DUP and by implication the ERG. Therefore a decision to call the vote could spark a significant rally in sterling, though of course gains may be capped until the actual vote.

 Other events this week

The Bank of England decision on Thursday should be a non-event. The Bank made big changes to its projections last month and there has – yet – not been anything concrete on Brexit to make it shift its guidance on inflation and growth.

UK inflation figures are due on Wednesday. Having undershot in January at 1.8%, there is likely to be a period of some below-target prints (as the BoE has guided us to expect) at least until the Ofgem energy price cap is lifted.

Finally, Eurozone flash PMIs due on Friday will be of note for the EUR. Manufacturing has slipped into contraction territory but services are holding up. With the ECB and Mario Draghi at last sounding the alarm bells over the EZ economy, an upside surprise in the PMIs would be positive for the euro. But euro bulls should not get their hopes up too much.




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