Brexit - 12 April next key date
Several March votes in the House of Commons have set the direction for Brexit. The possibility of the UK crashing out of the EU on WTO-terms was voted down and is no longer on the table (at least from the UK parliament's side), which is important for markets and the outlook for economic growth. However, Theresa May's deal was also voted down and it still does not seem likely that May will gain a majority for her deal in the short term. Finally, a vote on asking the EU for an extension of Article 50 was passed in the House. The EU has subsequently given a very short unconditional extension to 12 April, with a possible extension to 22 May conditional on the House passing a withdrawal agreement. To us it seems most likely that we will eventually get a long extension of a minimum of nine months. Under this scenario we think it is most likely that some version of May's deal will pass (45% probability in our view) or that we get a second EU referendum (30%).
No hikes from Fed in 2019
The Fed kept the target range at 2.25-2.50% at the March meeting as expected, but surprised by no longer signalling any rate hikes in 2019, down from a signalled two hikes in December. The Fed now thinks the US domestic economy has slowed down, with slower private consumption and investment growth. From previous hiking cycles, we have not experienced the Fed pausing for a long time and then resuming hiking and hence we no longer expect the Fed to hike again in this cycle. While we think the Fed is done hiking, we believe it is too soon for it to start cutting rates. The US economy is still in good shape in our view.
Signs of Chinese slowdown bottoming out
Q1 data have so far shown that Chinese growth has been weak. This picture was strengthened with the surprise jump in the unemployment figures from 4.9% to 5.3% in February, a very large change that could possibly be slightly distorted by Chinese New Year. Moving forward, we look for stimulus measures to support the economy as 2019 unfolds. The National People's Congress meeting brought some new changes: revising the target growth rate slightly, reducing VAT and preparing to approve a new Foreign Investment Law which is aimed at increasing the attractiveness of operating in China to foreign businesses. The US/China trade war seems to be making progress, but could face several hurdles during the final stretch. Although the tech war is set to continue, we doubt that Trump would dare to reignite the trade war in the middle of an election campaign.
Oil market shakes off Trump comments
Oil prices have moved higher since February and are currently at $68/bbl. The Q1 macroeconomic key figures have been rather weak, but the more dovish tone from the Fed and increased likelihood of a trade deal between the US and China have been key drivers for the move higher and will be important for underpinning demand over the medium term. The oil price took a hit with Trump lashing out to OPEC with complaints about an over-high oil price on Twitter. Moving forward, April remains an important month with waivers on the Iran sanctions set to expire. The US announced that it would draw 5mb from its strategic petroleum reserves in May, creating some downside risk in this month. Short-term, we see some sources of downside risk and higher volatility, but the fundamentals remain positive for the oil price and we stick to our USD80/bbl forecast for Q4.
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