UK Politics: May’s likely survival further reduces the risk of a no-deal Brexit – Prime Minister Theresa May is highly likely to survive the confidence vote that has been scheduled for this evening (result will be announced at 22:00 CET). The vote is an internal Conservative Party vote, and she needs the support of only a simple majority of her MPs to avoid a leadership contest. A number of influential potential opponents have already come out publicly in support of the Prime Minister (including Brexit-supporting Cabinet members such as Sajid Javid and Michael Gove), while Reuters reports that 185 of 317 eligible MPs have come out in public support of the Prime Minister. Indeed, the triggering of the confidence vote appears to have backfired on the parliamentarians who called for it – with a wave of criticism coming from inside the Party. Clearing this hurdle could even leave her in a stronger position, as Party rules are that such a vote cannot be called for another year if she survives it.
With the likelihood of a new Conservative Party leader declining, so does the chance of a No-deal Brexit, in our view. Had a new, more doggedly pro-Brexit leader become Prime Minister, a vote on a deal with the EU could have been delayed indefinitely – perhaps right up until the Article 50 deadline – which could have led to an ‘accidental’ No-deal Brexit. While already an unlikely scenario, this latest development makes it even less so. All told, while political uncertainty has risen in the UK, we continue to think the chances of a second referendum (and a potential Remain) scenario have increased, while the chance of a No-deal Brexit has fallen (see also No-deal Brexit still looks unlikely, 11 December 2018).
US Macro: Benign core inflation paves the way for a fall in the Fed ‘dots’ – US CPI inflation printed in line with expectations, with headline inflation flat on the month (on the pass-through from lower oil prices), and core inflation rising 0.2% mom. For the core measure, a pickup in shelter inflation and a continued rebound in used cars was offset by weakness in transportation services and apparel. Core services inflation (ex-shelter, medical, and transportation) held broadly steady, rising just 0.1% mom, and consistent with our view that inflationary pressure should remain benign in the US, despite the modest acceleration in wage growth we are seeing. While the risk of a trade tariff-induced boost to core inflation remains, recent positive rhetoric on trade talks with China has lowered that risk, and in any case we would expect the Fed to look through such a temporary supply-side driven rise in inflation. At the same time, there are signs of a renewed drag from one of the key drivers of 2017’s core inflation undershoot – namely the collapse in mobile phone tariffs – with wireless telephone services registering the biggest decline since March 2017 at -2.2% mom. The continued benign inflationary backdrop is likely to embolden Fed doves at next week’s FOMC meeting, and we expect this to be reflected in a move lower in the ‘dots’ rate hike projections for 2019-20.