Rudd-y Hell, It’s The Boris/Toff-Fibbentrop Pact

Submitted by Michael Every of Rabobank

Today’s Daily title may or may not be my own ‘Super-Caley-go-ballistic-Celtic-are-atrocious’ but it hopefully sums up part of the latest Brexit developments in what is a swirling eddy of unprecedented precedents. Cabinet member Amber Rudd has followed PM Johnson’s brother in resigning over the prospect of a looming Hard Brexit, dealing the government a further blow to its authority and majority. However, as UK political commentators make clear, for all the headlines this latest walk-out has generated it actually changes little in an underlying UK dynamic that seems to be heading to a point of praxis… and which GBP is pricing as if it were panacea.

Indeed, Rudd is just one of many threads unravelling. We also have talk of the Tories running a candidate against the current House Speaker John “Ordaaaa” Bercow, which is totally against precedent – though Bercow’s actions in favour of thwarting Brexit are widely accepted to be totally against parliamentary precedent too. Moreover, we have suggestions that while the ‘rebel alliance’ legislation forcing PM BoJo to “seek” and “agree” an extension to Article 50 will become law today (after having been rushed through the Lords in, yes, an unprecedented fashion), the government is prepared to question the legality of the law itself.

There are mutterings about “Queen’s assent v. consent”, for those who dig into constitutional law; there is a suggestion the PM might send documents to the EU alongside the mandated request for an Article 50 extension stating he has no good reason at all for wanting one, to try to shoot it down; and that the British are pledging to blockade normal working of the EU if forced to remain; and, as previously noted, it has even been floated that Johnson might opt to go to prison rather than implement the law as stated.

In short, the Tories are going to use every trick in the book to try to ensure that the 31 October deadline still holds, law or no law. Scare tactic bluff or not, the message from them is that today is the last chance for parliament to vote for a general election on the Brexit issue on an In vs. Out basis before that Halloween date with destiny – because from today parliament can be prorogued and sent home (which is legal according to two sets of judges, and has precedent, including under former Tory PM Major – who has been so active in trying to prevent the same action being repeated).

Put this all together and, from an EU perspective, what you do not have is a member state that is in any fit state to retain membership even if this is about to be requested. Indeed, in yet another Brexit irony, the Remainers who bemoan Leavers’ solipsism are themselves not noticing it is not in the UK’s power to gain an Article 50 extension, and the EU is perhaps not going to prove enthusiastic about retaining such a problematic partner. Exhibit A: the French foreign minister saying the EU can’t keep going through this every three months, and right now he doesn’t see a reason to grant an extension at all.

And so to our title’s ‘pact’. Surely–and perhaps though perhaps not today–a parliamentary dissolution and generation-defining general election looms. In which case, the Tories of Boris Johnson and his aristocratic lounge-lizard Jacob Rees-Mogg (Boris/Toff) have been publicly approached by the allegedly-highly-mendacious Brexit party of Nigel Farage (Fibbentrop) for an electoral pact to ensure a Hard Brexit victory. Of course, this potential link-up comes as little surprise to anyone looking which way the Tories are running under BoJo…and is arguably exactly why he is doing it. The polls certainly make that look a done deal from a traditional perspective. To counter that there is already talk of a tactical Remain alliance: however, what exactly do Labour, the Lib-Dems, the SNP, etc., have in common in a government apart from wanting to Remain? (And does Labour want to Remain or have another referendum and then Remain?) In short, another big and crazy and deeply political day looms in the UK.

Meanwhile, believe it or not, things of note are happening elsewhere. In particular, China has underlined just how spectacularly well it is doing on the economic front with another 50bp cut in its banks’ reserve requirement ratio (RRR) to 13.50%, which as the press report, will “free up CNY900bn” in new liquidity. First, that is less than an average month of total aggregate financing, so it’s hardly a game-changer. Second, how do you force the banks to lend to those who need it most? The answer so far as the RRR has declined 850bps is….you don’t. As such, China is also talking about bringing forward special bond issuance for local government spending from 2020 to 2019, which luckily isn’t included as part of the fiscal deficit! (“because China”). So more pump-priming. China is also widely-tipped to be cutting the RRR again going forwards, and to lower key lending rates further.

One might be excited for a moment about all that Chinese stimulus – and then one looks at the latest trade data and one sobers up. In USD terms imports slumped -5.6% y/y, which makes clear that either China is in recession OR it has decided to onshore supply chains as much as possible in exactly the way Donald Trump would like to and isn’t (and to none of the vitriol he is receiving for trying to do so). Either way–and the balance of evidence says it is the supply chains more than the demand chain–this means any Chinese stimulus is going to stay in China…that’s if it finally works this time – sorry world, you are on your own. At the same time, China’s exports were -1.0% y/y, worse than expected, and showing that there will continue to be downward pressure on CNY too, especially as even bullish White House Larry Kudlow implies there is no major trade deal likely near term, and as China suggests it might only buy “modest” amounts of US agri in exchange for action on US tariffs. Sorry world, you are going to have lots more Chinese competition ahead too.

I haven’t dived into the US payrolls data from Friday, which were somewhat weaker than expected at 130K, including 25K hiring from the census, largely because the difference between the actual and consensus outcome (-34K) is basically statistical noise regardless of the narratives one might then see spun from just one month’s numbers. Those are truly ‘Super-Caley-go-ballistic-Celtic-are-atrocious’.