- Prime Minister May expected to survive today’s no confidence vote but is far from a Brexit solution
- Fed’s Beige Book will provide some much-needed economic information
- Chinese tax cut announcement boosts Chinese stocks
- Weekly EIA report
Prime Minister May expected to survive today’s no confidence vote but is far from a Brexit solution — Prime Minister May is expected to win today’s no-confidence vote in Parliament that was called after the epic defeat for her Brexit plan on Tuesday. Ms. May’s Conservative Party does not have a majority of seats in Parliament but can count on help in today’s no-confidence vote from the Northern Ireland’s DUP party.
On the other hand, if Ms. May’s government does not survive today’s no-confidence vote, then the UK will have to hold a new general election. The UK would then likely request a delay of six months or more in the Article 50 Brexit deadline of March 29 to give time for the election and Brexit planning by the new government.
Ms. May’s Brexit separation agreement was defeated by the massive margin of 230 votes (432 against vs 202 for), making it the biggest defeat ever in the long history of the House of Commons.
Prime Minister May responded to her epic defeat by saying that she will not resign and will instead open talks with opposition parties and keep working towards a Brexit solution. That raises the outside possibility of a deal with some members of the Labour Party for a softer Brexit. Ms. May in any case is required to come back to Parliament with a Plan B within the next three days.
Ms. May on Tuesday said she will not request a delay in the March 29 Brexit date. Ms. May needs the Brexit deadline for the time being to keep the pressure on the various factions to agree on some kind of deal.
The EU responded to yesterday’s Brexit defeat by reiterating that it will not reopen negotiations to change the deal that has already been negotiated with Ms. May, even though the EU may have no choice but to revisit some key issues if they want to avoid a no-deal. The EU on Tuesday sought to keep the pressure on UK politicians by saying that it will step up planning for a no-deal Brexit on March 29. Yet, FT reports that there are virtually no EU diplomats that believe that March 29 will be Britain’s departure day even if there is a no-deal Brexit since time will be needed for preparations.
GBPUSD fell sharply right after the news of the Brexit plan defeat but then quickly regained its losses and closed the day little changed. The heavy defeat of Ms. May’s Brexit plan meant that there is still a chance for a no-deal Brexit on March 29, but it also meant that the odds may have risen for a softer Brexit or for the EU to ease its Irish backstop demands. March FTSE futures on Tuesday closed the day up +0.77%, shaking off the Brexit vote and closing higher on support from the global rally in stocks on the Chinese news of more tax cuts.
Fed’s Beige Book will provide some much-needed economic information — The Fed today will release its Beige Book survey of the U.S. economy. The report will be useful in providing the market with some additional economic data considering that the Dec retail sales report, which would have normally been released today, will be postponed due to the government shutdown. The consensus for the Dec retail sales report was for a weak report of +0.1% m/m and unchanged ex-autos following the tepid Nov report of +0.2% and +0.2% ex-autos.
The Fed’s last Beige Book report on December 5 said that the economies of the twelve regional Fed districts expanded at a “modest or moderate pace” from mid-October through late November. St. Louis and Kansas City noted just slight growth while Dallas and Philadelphia reported slowdowns versus the previous period. The report found that consumer spending held steady, but that tariffs continued to be a concern for manufacturers. The report said that businesses in most Districts remained positive but that “optimism has waned in some Districts as contacts cited increased uncertainty from impacts of tariffs, rising interest rates, and labor market constraints.”
Chinese tax cut announcement boosts Chinese stocks — The Shanghai Composite index on Tuesday rallied by +1.36% and neared last Wednesday’s 3-week high. Chinese stocks were boosted by the government’s announcement that tax cuts on a “larger scale” are in the pipeline.
The markets are pleased with the Chinese government’s recent targeted approach to stimulating the economy with tax cuts as well as cuts in the bank required reserve ratio. The Chinese government is being more strategic about stimulating the economy this time around, staying away from the massive monetary stimulus and infrastructure programs that were launched after the 2008/09 global financial crisis and that helped cause the current massive level of Chinese debt.
China’s combined corporate and household debt is currently at a record high of 220% of GDP, far above the 125% level seen in 2008 before the Chinese government’s post-crisis stimulus measures. The government in 2016/17 focused on a deleveraging campaign to try to cut debt and risk levels. However, the government was forced to put its deleveraging campaign on hold later in 2018 while it battled the damage from US/Chinese trade tensions and tariffs.
Weekly EIA report — The consensus for today’s weekly EIA report is for a -2.5 million bbl decline in U.S. crude oil inventories, a +2.6 billion bbl rise in gasoline inventories, a +1.4 million bbl rise in distillate inventories, and a -0.7 point drop in the U.S. refinery utilization rate. The API reported yesterday that U.S. crude oil inventories fell by -560,000 bbl. U.S. crude oil inventories are 8.3% above the 5-year seasonal average, while gasoline is 6.5% above average and distillates are 3.0% below average. U.S. oil production last week remained at the recent record high of 11.7 million bpd.