Brexit: Careful what you wish for

Brexit: Careful what you wish for

Brexit got a six-month breather; US growth stayed on the path, while Italy downgraded its own forecast; China's exports recovered, but imports fell; shale oil got another large sponsor.


“The course of action will be entirely in the UK's hands…please do not waste this time.”
EU President Donald Tusk on the extension of the deadline for Brexit until October

Brexit: Careful what you wish for

The EU’s extension of the deadline for a negotiated Brexit that Prime Minister Theresa May brought back from Brussels last Wednesday added six months by shifting the already-revised date of May 22 to October 31. During that time, the European Union (EU) indicated it will be willing to ratify the deal already negotiated by May that has been repeatedly rejected by Parliament, or give the UK an opportunity to "reconsider the whole Brexit strategy".

The UK's next moves are as yet unclear. The multiple public failures of Prime Minister May's first comprehensive plan, plus the realization that a "no-deal" Brexit would have brought short-term economic chaos in its wake, make the prospect of extending the painful process by half a year a mixed blessing.

U.S. growth: On the path

This week's economic reports confirmed earlier data that growth was still robust, even if not quite full speed. core inflation for consumers in March came in at a solid 2.0%. However, the job openings report for February (the most recent available) showed openings at 7.087 million -- significantly down than January's upwardly-revised 7.625 million and notably below consensus expectations.

Minutes of the FOMC's March 20 meeting, showed the committee describing price pressure as "muted", but also made clear that committee members were grappling with the same equivocation about the path of growth as financial markets – but their remarks also seemed less committed to a rate cut in 2019 than do Fed Funds futures prices.

Italy: Stop digging

Italy's ongoing dispute with the European Commission about its forecasts for the country's budget shortfall hit another snag. Growth for the full year 2019 is now forecast at 0.1%, vs. a previous forecast of 1.0%. If so, that downward revision would drive its budget deficit up to between 2.3% and 2.4% of GDP – notably above the level of 2.04% agreed with the European Commission in negotiations last year.

The short-term remedy will be to use a contingency fund of €2 billion ($2.2 billion), intended as a backstop for just this occasion, to ensure its deficit target is met. The structural problems behind the shortfall are another matter entirely.

China: Exports up, imports (still) down

March saw China's exports rebound, exceeding estimates with a 14.2% increase year-over-year in dollar terms.  Imports, on the other hand, continued their decline, falling -7.6% year-over-year in March, well below the expected figure. Some observers attributed the continuing fall in imports to U.S. tariffs, still in force even as China and the U.S. continue their detailed negotiations over a trade agreement.

Oil: Shale

The announcement of Chevron's purchase of Anadarko Petroleum, a company prominent in the Permian Basin, is the market's most recent indication that shale is a key component of the global oil markets. The deal gives Chevron a major boost in crude-oil and natural gas production, bringing the combined entity's daily output for 2018 to 3.396 million barrels equivalent, approaching that of top producers (Exxon's 3.833 million barrels and Shell's 3.666 million barrels). The deal underscores the value generated by the year's strong prices for crude oil, now standing at $71.49 (Brent) and $64.07 (West Texas Intermediate)1 per barrel, and the profitability of the industry overall when the price of oil is strong.

 


1 Source: Bloomberg, as of April 12, 2019, 1:00 PM ET

All prices Source: Bloomberg, as of April 12, 2019, unless specified otherwise.


Definitions:

Brent and West Texas Intermediate (WTI), are major trading classifications of crude oil that serves as a major benchmark price for purchases of oil worldwide. 

The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System (Fed), which is responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

 

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