Pound traders look through CPI miss with Brexit front and centre

The latest inflation figures from the UK have shown a smaller than expected reading with the Consumer Price Index (CPI) for October rising by 2.4% in Y/Y terms. The core reading, which is more widely viewed, increased by 1.9% as expected and while the headline reading remains above the Bank of England’s (BoE) inflation target, this measure isn’t, and overall it appears that price pressures aren’t in danger of accelerating too high anytime soon.

After peaking late last year both the CPI and core reading are drifting back lower as the passthrough effects of the post-referendum fall in the pound come out of the data. Source: XTB Macrobond   

The latest employment and inflation figures could well be seen to suggest that in more “normal” times a rate hike from the BoE would be in the offing. However, given the ongoing Brexit uncertainty this remains distinctly unlikely and the Bank will likely appreciate the latest inflation figures, as while they remain above target they don’t pose a particularly pressing concern given their recent trajectory.  

Agreement reached on Brexit draft treaty

What appears to be a major breakthrough in Brexit negotiations could well prove to be a false dawn as PM May’s draft Brexit treaty has been met with widespread criticism. The document proposes a solution to a hard border in Ireland by introducing a UK-wide customs backstop plan which would keep Britain in a customs union with the EU until a more permanent solution is agreed. The wording here is key, with the devil very much in the detail, as skeptics fear that rather than providing a temporary solution it could well be seen as a minimum basis going forward. Given that it is unlikely a “better” deal would be reached after first agreeing to this it is true that it may well end up becoming the default position.

The pound reacted positively when this news broke but any over exuberrance has been kept in check by the several hurdles that still need to be jumped before it can be finalised. The first of these is a cabinet meeting this afternoon where PM May will attempt to unite her divided cabinet behind this proposition. Given the initial reaction it seems implausible that this will achieve the requisite backing not just of the cabinet but ultimately in parliament, but it could well have at least a fighting chance. Theresa May will likely frame the discussion as this proposal vs a hard Brexit and if she can persuade enough MPs that this is the what decision actually is, then against all the odds it may well be accepted.

Do the numbers add up?

While it may be a little premature to assume that the cabinet will back the PM on this - especially after the resignations following her Chequers proposal in the Summer - it does appear on balance that they will support May. The bigger challenge by far lies in the House of Commons where she will need 320 votes to get the deal passed and to put it mildly, this looks a stretch at present.

It looks a stretch for PM May to get the requisite support for this deal to pass it through parliament with votes needed from several unlikely source. Source: Bloomberg

There’s 235 seats comprising the Tory payroll vote and party loyalists which can be fairly safely assumed to vote in favour but this still leave a further 85 votes needed. Looking across the benches there may will be some support from the opposition despite Labour leader Jeremy Corbyn already indicating that he would instruct MPs to vote against the deal. In a best case scenario this may represent around 25 more votes but this still leaves a further 60 votes needed. The DUP have already opposed the deal and their 10 seats are unlikely to support the current arrangement.   

Ultimately it will likely come down two groups who can loosely be defined at Tory europhiles and Brexiteers that together command 77 votes. For the former they would no doubt prefer a 2nd referendum but may well fall in line if they fear that the alternative is a no-deal. As far as the Brexiteers are concerned it’s a case of the opposite dynamics at work, with steadfast MPs unlikely to shift but there could be some support from those that fear voting this down would end up with growing support for a 2nd referendum.