UK Politics: A deal, but not done deal – The UK and the EU reached a preliminary agreement on the UK’s exit from the EU on Tuesday, and Prime Minister Theresa May got Cabinet approval for it last night. The next step is for the deal to be debated in Parliament, and for the EU side to approve it in a summit later in November. The UK Parliament would vote on the deal in December.
The parliamentary arithmetic remains challenging for the deal, with the opposition confirming that it would vote against it this morning (Labour leader Jeremy Corbyn called it a ‘botched’ deal that ‘breaches the government’s own red lines’), and the government holding only a slim majority. So far, leading pro-Brexit ministers Michael Gove and Sajid Javid are said to support the deal, according to Bloomberg News. Regarding the Northern Irish DUP – which props up Prime Minister May’s government – public commentary indicates that they will oppose the deal, although Sky News reports that the government is ‘bullish’ that the DUP would eventually accept it when they see the details of the deal. There are also a number of Conservative Party MPs who have stated they would vote against the deal, but it is possible opposition rebels could vote with the government to offset that. All told, we think parliament will pass the deal to avoid a chaotic No-deal outcome. However, this is with a low conviction level. If parliament opposes the deal and the government collapses, a new government could be returned to push through an agreement, whether Conservative or Labour. However, there continues to be a material risk of a No-deal Brexit. Please see our UK Watch, The macro impact of Brexit scenarios for more. (Bill Diviney & Nick Kounis)
China Macro: First signs of support kicking in – Recent data point to a further gradual weakening of momentum, but there are signs that policy easing is starting to kick in. In line with our expectations, investment growth picked up to 5.8% yoy ytd in October (September: 5.4%). That mainly reflects the recovery of stated-led investment on the back of fiscal easing policies. Over the past months, Beijing ordered local governments to issue more special purpose bonds to finance local infrastructure projects, while the banking supervisor cut risk weights for local government bonds. Industrial production edged up marginally, to 5.9% yoy (September: 5.8%). By contrast, retail sales slowed to 8.6% yoy (September: 9.2%), the slowest pace in five months. That likely reflects some statistical factors, such as the timing of the mid-autumn festival holidays and possibly some households holding back spending in the run-up to ‘Singles Day’ on 11 November. All in all, Bloomberg’s monthly GDP estimate continued its gradual decline, falling to 6.6% yoy in October. That’s the lowest level since May 2015, but still somewhat above the latest official growth number (Q3: 6.5% yoy). Meanwhile, despite the easing measures taken, lending data for October were remarkably soft. Due to seasonal factors (national holiday week), new lending always weakens in October, but this year the drop was sharper than expected. Part of the weakness in lending reflects the ongoing crackdown on shadow banking. Moreover, local government bond issuance stagnated as annual quota are being reached. We expect the PBoC to continue taking measures to prop up lending, including further cuts of bank RRRs. For more background see our Short Insight China: First signs of support kicking in published yesterday. (Arjen van Dijkhuizen)