EU Warns UK of Economic Downturn over Brexit, Fed Plans for Further Rate Hikes, more…


Earlier this week Guy Verhofstadt (chief negotiator of Brexit for the European Union) cautioned that ‘cat-fighting’ within the Conservative Party risks jeopardising the future economic health of the UK:

The economic damage wrought by a hard exit or a collapse in talks would be bad for all of us, but I have little doubt the UK economy will be hit hardest.

The UK Government still has choices, but time is running out.

A day later Foreign Secretary Boris Johnson stood up in the House of Commons and said that, ‘there is no plan for no deal‘ on Brexit, and that financial demands from the EU in regards to the ‘divorce bill‘ are ‘extortionate‘. Johnson added:

It is manifestly in the interests of both sides of the Channel to get a great free trade deal and a new deep and special partnership between us and the European Union, and that is what we are going to achieve.

The narrative developing here is of a Tory government incredulous to the idea of leaving the EU without a newly negotiated trade deal in place. Theresa May fired the first salvo many months ago by stating that ‘no deal is better than a bad deal‘. For its part, the EU has now begun to issue open warnings about economic decline should the Conservatives fail with Brexit negotiations. They are communicating that the UK does not have a clear understanding of what type of Brexit the country seeks, and emphasising with greater intensity the danger of talks ‘collapsing‘.

As I wrote about this week – (‘Conservative Brexit’ – The Reason the Tories are Still in Office) – I believe the Brexit process will remain under the purview of the Tories throughout negotiations. The identity of Brexit as belonging to the ideologies of ‘populism’ and ‘nationalism’ equate to the perception of it being predominantly a ‘right wing’ phenomenen. Despite this being an egregious lie, the sight of the Tories pursuing a ‘hard Brexit‘ reinforces the image that they alone own the negotiations. It stands to reason that they will also be held up as responsible for the ramifications of a resulting economic downturn.

Reuters: Fed’s Yellen says rate and portfolio plans on track, cautions on inflation

  • The U.S. economy is healthy enough for the Fed to move forward with plans to raise rates and begin winding down its massive bond portfolio, though low inflation and a low neutral rate may leave the central bank with diminished leeway, Fed Chair Janet Yellen said on Wednesday.
  • Yellen depicted an economy that, while growing slowly, continued to add jobs, benefited from steady household consumption and a recent jump in business investment, and was now being supported as well by stronger economic conditions abroad.
  • Yellen told members of the House Committee on Financial Services that the economy remains strong enough for the Fed to continue its plans to gradually tighten policy

Higher interest rates send mortgage applications tanking, down 7.4%

  • Mortgage rates just saw their biggest jump since the presidential election, and that took a heavy toll on demand for home loans.
  • Total mortgage application volume fell 7.4 percent last week from the previous week, according to the Mortgage Bankers Association’s seasonally adjusted report. Volume was 36 percent lower than a year ago.
  • Higher rates have the biggest effect on refinance applications, which fell 13 percent last week to the lowest level since January. Refinances have fallen 58 percent from a year ago.

Dimon Says QE Unwind May Be More Disruptive Than You Think

  • JPMorgan Chase & Co. Chairman Jamie Dimon said the unwinding of central bank bond-buying programs is an unprecedented challenge that may be more disruptive than people think.
  • “We’ve never have had QE like this before, we’ve never had unwinding like this before,” Dimon said at a conference in Paris Tuesday. “Obviously that should say something to you about the risk that might mean, because we’ve never lived with it before.”
  • Cumulatively, the Fed, the European Central Bank and the Bank of Japan bulked up their balance sheets to almost $14 trillion. The unwind of such a large amount of assets has the potential to influence a slew of markets, from stocks and bonds to currencies and even real estate.
  • “All the main buyers of sovereign debt over the last 10 years — financial institutions, central banks, foreign exchange managers — will become net sellers now”, he said.

Interactive Investor: US Consumer Credit Jumps More Than Expected In May

  • The Fed said consumer credit jumped by $18.4 billion in May after climbing by an upwardly revised $12.9 billion in April.
  • Non-revolving credit such as student loans and car loans rose by USD11.1 billion in May after climbing by USD11.7 billion in April.
  • Revolving credit, which largely reflects credit card debt, increased by USD7.3 billion after inching up by USD1.2 billion in the previous month.
  • The Fed said consumer credit increased by an annual rate of 5.8% in April, as revolving and non-revolving credit surged up by 8.7% and 4.7%, respectively.

Bloomberg: Deutsche Sees Trouble Ahead for the World’s ‘Frothy’ Stock Markets

  • Price-to-earnings ratios increased steadily after the global financial crisis as waves of monetary stimulus pulled down the yields on safe assets, spurring investors into riskier options. That dynamic may be on the verge of reversing with a turnaround in policy now underway in developed nations other than Japan, Mikihiro Matsuoka, chief economist of the Japanese unit of Deutsche Bank AG, wrote in a note dated July 10.
  • The first sign of the 2008 crisis was a suspension of redemptions at a hedge fund. This time around, signs of a problem may include a deterioration in the quality of securitized U.S. auto loan products, and/or the deterioration of the financing of emerging market countries following U.S. interest rate rises, he said.
  • And, like the way that the first round of Federal Reserve quantitative easing was the most powerful, “likewise, the first round of the withdrawal of monetary accommodation could well deliver a bigger negative effect on the financial market and the real economy than the ensuing second and third shots of monetary-policy turnaround,” he wrote.

New York Times: Federal Reserve Sees U.S. Economic Growth as Steady but Slow

  • The Federal Reserve’s view of the American economy, which it updated Friday in a semiannual report to Congress is out: steady growth still impeded by a range of problems.
  • “Apparent high risk appetite in asset markets has not led to increased borrowing in the nonfinancial sector,” the report said.
  • In a similar vein, the Fed said banks reported a broad decline in loan demand during the first quarter of 2017, “even as lending standards on such loans were reported to be basically unchanged.”
  • Stanley Fischer, the Fed’s vice chairman, said Thursday that uncertainty about federal fiscal policy may be weighing on the economy once again. Businesses reported a burst of optimism after President Trump’s election, in part because of hope that the new administration would enact fiscal policies like tax cuts. But that optimism is flagging.

Bloomberg: ECB’s Villeroy Sees Autumn as the Season to Adapt Stimulus

  • The European Central Bank is likely to decide on the next change in its stimulus settings in the fall, when it will continue the process of tweaking its measures to reflect the euro area’s upturn, according to Governing Council member Francois Villeroy de Galhau.
  • “What we have to do, and what we started to do, is to adapt the intensity of this accommodative monetary policy to the progress toward our inflation target and toward economic recovery,” Villeroy de Galhau said in a Bloomberg Television interview on Saturday. “In the future, and this will be our decision next fall, we will go on adapting the intensity of this monetary policy.”

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