The UK moves centre stage today … or at least it does in the UK.
Chancellor of the Exchequer Philip Hammond will “rise” at 12:30pm local time and deliver what was once called the annual budget speech. It was timed just ahead of the end of the old and the beginning of the new tax year so that any changes to the fiscal framework could be implemented on April 4. This is no longer true, having been joined some years ago by the Autumn Statement and now, under Hammond, the March budget presentation will come to an end and the whole shooting match will be moved to autumn. Since he only moved to the Treasury after the change of prime minister after the Brexit vote, this budget speech will be his first and last.
The big theme will surely be the way in which the UK economy has outperformed even the most optimistic of forecasts, Brexit or no Brexit. Whether this is the result of the country’s consumers sailing into the hurricane with all the hatches open and oblivious to the risks ahead or whether the economy is of itself stronger than all the Pollyannas would have it is not easy to assess. If in doubt, assume a bit of both.
One way or the other, fiscal revenues are well ahead of expectations and Hammond has let it be known that he will hang onto as much of the extra income as possible to build up a war chest. Talk is of £60bn, which could be used to smooth over some of the rockier stretches of the road ahead, if, as and when they present themselves. In the prosaic words of the less highbrow end of the media this morning, “don’t expect any giveaways”.
With large parts of the content of the budget already leaked, all that remains is for us to see what projections the Office for Budget Responsibility has on the economy for the coming year or two – with Brexit ahead it truly is a case of standing in a dark tunnel without a lantern looking for a black cat…which isn’t there - and betting on what the rabbit will look like when the chancellor pulls it out of the hat. I still think that some of the more stringent tax changes that his predecessor, George Osborne, imposed on buy-to-let properties could be loosened though not reversed.
Brexit will loom large. Fact is that, nearly nine months after the referendum, we know little more about the whats and hows than we did back then. I must admit that I would have been rather surprised if we had; knowing the outcome of a set of negotiations before they have actually begun would smack of secret back-room deals. As Theresa “Kitten Heel” May has made clear, this is not the way she wishes to go forward.
Today the House of Lords, the unelected chamber that the progressives are always so keen to see abolished, will be their toast as it stands up for the right of parliament to scrutinise and vote upon the final Brexit agreement. I’m not going to suggest that divorces where the parties agree everything over a cup of coffee, the shake hands, kiss each other goodbye and sail off into the sunset don’t happen but, and I can sing a song on this, they are very, very rare. May is quite right when she observes that it’s hard to walk a tightrope with one hand tied behind your back but nobody ever said it would be easy and parliament, in a democracy, is here to make sure of just that.
Brexit was always going to be a bit of a dog’s breakfast and so it is proving to be. What the House of Lords has done, though, is to open the door to the EU side to press towards a deal bad enough that it fails to command a majority in the Commons … and then what? I remain a soft Brexiteer and still believe that the final settlement will be a lot more accommodative than current rhetoric has it but, again with the experience of divorce, there will be lot of screaming along the way, nobody will be completely happy with the outcome and nobody, other than the lawyers, will get rich.
Deutschland
Meanwhile German finance minister Wolfgang Schäuble has been assuring us that he is certain that the French electorate will do the right thing. Of course we all know what he means but he might have found a more subtle way of expressing it. Mind you, subtlety and Wolfie rarely appear in the same space. He took issue with Donald Trump’s statement that Germany is the chief manipulator in the global economy. It might not suit the Donald’s world view but Germany has no need to manipulate currencies: if you make better mouse traps than your neighbour, people will beat a path to your door.
Ten year ago I spent a summer in the US and was highly impressed that the GM Yukon SUV I borrowed. It had, as standard, digital radio reception but that did not compensate for the fact that every piece of trim you touched immediately fell off. While the US is obsessed with quantum leaps, Germany runs on incremental improvement. Thus, the Bund market is becoming ever more the safe haven of choice and much has been written about the widening of spreads between French and German bonds.
Having spent most of the past few years in the 20bp-40bp range, the irresistible rise of Marine Le Pen and the fear of a Front Nationale presidency whipped it out to 80bp. In the past week a more realistic assessment of the probable outcome is prevailing again although at 63bp, the old relationship between the two markets is still a good way away. Part of this can be explained by the release of foreign bond holdings by Japanese institutions, where there is a clear trend out of US Treasuries and into Bunds. They have a point and it has nothing to do with the probable tightening of monetary policy by the FOMC next week. It is that the ECB is still significantly more active in the long end of the Bund market than the Fed is in its own curve. Forget the fundamentals and invest where you think the monetary manipulators will be most accommodative … and at the moment that has to be in the eurozone.
China
China surprised overnight with something we hadn’t really expected, and that was a trade deficit for February, not an insignificant one either. At Rmb60.4bn it was a huge miss against the consensus forecast of a surplus of Rmb172.5bn. Chinese New Year always prompts a few fireworks – pun entirely intended – but outliers like this one tend to find themselves washed out ‘ere long. That said, debt levels in China remain high and the authorities, though evidently worried, don’t seem to know what to do about them. More to the point, the liberalisation of the currency has prompted Chinese companies to borrow abroad – there were reports last week about the record levels of corporate issuance in the international markets – and I am led to wonder whether this might not possibly be the next CDO crisis in the making. Fact is that I knew where the CDOs were parked but I have very little clue who holds the rising tide of Chinese corporate debt. It might be worth looking for the tyre tracks in the sand…
Meanwhile, keep an eye on today’s release of US wholesale inventories if you can’t hold your breath until payrolls on Friday … or can you?