Hyperbole opens limit-up
As universally expected, the House of Commons rejected the Brexit withdrawal bill by a large margin yesterday evening. Sterling's reaction was to strengthen by more than a cent over the following hour.
As MPs filed into the division lobbies the pound ticked lower. Presumably, somebody was counting them and it was clear that the government was heading for an historic defeat. However, within moments of the result being announced sterling began to head north. It could not completely recover its earlier losses but it is only an average of 0.2% lower against the other majors and it is 0.3% higher against the euro and the franc.
The headlines of this morning's newspapers ("crushed", "humiliation", "Brextinct", etc.) suggest that the vote was a disaster for the country and the prime minister does indeed face a vote of no confidence today. But she is just as likely to win it as she was to lose yesterday. Investors see little chance of a no-deal Brexit on 29 March. They foresee a postponement of Article 50, maybe even a cancellation. And they expect that the next Brexit deal put before Parliament - assuming there is one - will have to be more benign than the one rejected yesterday in order to command cross-party support.
No recession in Euroland
Mario Draghi, the president of the European Central Bank, addressed the European Parliament to mark 20 years of the euro. As well as his usual call for “political commitment" he touched on the state of the euro zone economy.
Appearing shortly after Germany reported the slowest annual growth since 2013 Sig. Draghi told MPs that Europe is not heading for a recession, "no, it's a slowdown… but it could be longer than expected". The euro strengthened briefly after his reassurance but is down by three quarters of a cent on the day against the US dollar.
There was little among Tuesday's economic statistics to excite investors. Euroland's trade surplus widened in November, US producer prices increased by 2.5% in 2018 and NZ milk prices were up by a fortnightly 4.2%, doing nothing for the Kiwi. Investors were unconcerned that the New York Fed's manufacturing index fell further, from 10.9 to 3.9, indicating slower growth.
Prices and confidence
Ahead of the vote of no confidence in Parliament, sterling will have to deal with a dozen measures of UK inflation and an appearance by Bank of England governor Mark Carney. There are a couple of inflation readings from Euroland and the Federal Reserve's Beige Book economic summary this evening.
Germany's consumer price data are already out, with both measures of inflation (CPI and HICP) unchanged at 1.7%. Italian inflation follows this morning. US data this afternoon cover house-building activity, import and export prices and international investment flows.
Of much more compelling interest will be the confidence vote in Parliament and what follows. In theory the prime minister has three days - until Friday - to wheel out her Plan B. The various factions were already jockeying for position yesterday and their calls are likely to become ever more strident as the week progresses.