Weekend Summary & The Week Ahead
March 21, 2016
David Cameron will be managing some political fallout this week, after Ian Duncan Smith resigned. The column inches on the subject are plentiful and are likely to keep coming this week, as David Cameron and George Osborne work frantically to calm the political storm and also to patch up a £4.4bn hole in the budget, now that the cuts to the 'Personal Independence Payments' have been shelved.
The Brexit debate got another statistic to chew over at the weekend, with the CBI saying that the UK could lose 950,000 jobs by 2020. They've got to that number through GDP, saying that it could be up to 5% lower in the years after leaving the Union, which would have a significant impact on living standards.
The market looks like it's already doing a pretty good job of pricing in risk aversion over the Brexit, but an interesting point made by Bloomberg this morning says it could be easier to manage from next Wednesday. From then we'll be exactly three months from the vote on the 23rd June, which means that the event risk will be included in the three month Sterling volatility index. This index, which is constructed by measuring price swings in options, will be the financial markets main reference point over which way the vote is going.
In Europe, Jens Weidmann, head of the German central bank and also ECB executive board member, has been pretty damning about his colleagues' decision to add more QE and their comments last week that 'helicopter money' was an interesting concept. Mr Weidmann believes that there is no risk of deflation anymore and that ballooning money supply through QE “does not replace necessary reforms in countries and does not resolve growth problems in Europe”
Mr Weidmann isn't alone in his criticism; The OECD's chief economist also has concerns that countries are now 'overloaded' on monetary policy, saying “The ECB has done a lot, but the effective way to enhance economic activity in the euro area is a three-legged stool; fiscal, monetary and structural. What Draghi has done is make the monetary leg of the stool even longer, so we're not there yet with the recipe we need in order to get Europe back on track”.
An interesting point of view from Fed member Bullard is that the ultra-low monetary policy across the G7 may in fact be the cause of inflation being pinned to the floor. It runs against the conventional wisdom that the more open the money supply the greater the upward price pressure, but he fears that we could be building a system with low nominal interest rates and low inflation that can last for a very long time.
Overnight we've seen a fairly mixed session to get the week started. The dollar is starting to claw back the losses that it suffered following the Fed's more dovish than expected announcements. The knee-jerk short covering that took place on Thursday and Friday seems to be reversing and Goldman Sachs have said that they keep their strong dollar calls in place for the rest of the year, despite the reduction in the amount of possible rate rises.
This week is a short one, as the long Easter weekend will see most trading floors emptying out on Thursday afternoon for the long weekend. Before we get there though, there's plenty of economic data, including UK inflation and retail sales, US manufacturing and oil inventories. As such, we'd expect plenty of movement in the run up to Easter.
Have a great week.