Brexit watch: And they're off...

Brexit watch: And they're off...

Theresa May's government gave notice under Article 50, as Scotland and others ponder the consequences; a tailwind for U.S. earnings; U.S. inflation follows the Fed's script

“There is no reason to pretend that this is a happy day, neither in Brussels nor in London. We already miss you.”
European Council president Donald Tusk, on the UK's departure from the EU

Brexit watch: And they're off True to her word, March 29 saw Prime Minister Theresa May issue the UK government's notice to the European Union (EU) that "Britain is leaving the European Union," a decision "…from which there can be no turning back." The delivery of notice begins a two-year negotiation period, by the end of which the details of the departure are meant to be settled.

Among the unintended consequences known so far is Scotland's move to hold a second referendum on the subject of its continued membership in the United Kingdom. The previous vote, on 24 September 2014, saw a turnout of over 84% of the eligible electorate; the result was 55.3% against independence vs 44.7% in favor. But Brexit wasn't on the agenda at the time; a departure from the EU wasn't viewed as a likely result. How that issue will unfold, along with matters of trade, immigration and security, is unknowable for now, despite the growing number of predictions on offer so far.

U.S. growth: Solid earnings ahead? The most recent annual GDP growth figures for 4Q seem to suggest that corporate earnings could be on the upswing for the upcoming reporting season. Why the fuss over the third (and final) estimate of growth for the quarter?

First, the final figure was revised upward, from 1.9% to 2.1%, beating expectations. Second, and more important, was a key reason for the revision: better-than-estimated consumer spending, revised to 3.5% from 3%. Perhaps most significant: corporate profits rose for the second quarter running – the first two-quarter rise in over nine quarters – that's 2¼ years. Year-on-year, that brings profit growth to a solid 9.3% for the full year from the previous year-on-year figure of 2.1%. That's a solid reversal from the year-on-year contraction that ran from 2Q2015 to 2Q2016. The coming few weeks will tell how successful corporations have been at converting this growth into earnings and dividends. But at least they have something to work with.

U.S. inflation: On target The Fed's self-declared favorite measure of inflation, the year-on-year Personal Consumption Expenditure (PCE) deflator, hit 2.1% for February, the first time it rose above the Fed's 2% inflation objective since March 2012. That's good news for fans of the Fed's forecasts, which are looking pretty accurate at the moment. As are the Fed's own estimates that the number of rate hikes for the remainder of the year will be two or more. If the fed funds futures market is to be believed, the next hike won't come before the June 14 FOMC announcement and press conference.

Unfortunately, other forecasts were also accurate, including February's consumer spending, which rose 0.1% after January's 0.2% rise. Taking inflation into account, personal spending fell -0.1% in February after a -0.3% fall in January. Optimists accounted for the shortfall by citing the mild winter weather in much of the country, which reduced spending on utilities and winter clothing.


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