Image via © European Union 2016 – European Parliament. Heated debate on Brexit and its consequences
The British pound found support following two days of turmoil with the currency seen stabilizing following the Brexit lows, despite the UK’s credit rating taking a hit. In the US, the final revised GDP numbers showed the US economy expanded at a pace of 1.10%
Today’s Economic events
- German import prices m/m 0.90% vs. 0.60%
- CBI Realized Sales 4 vs. 9
- EU economic summit
- US final GDP q/q (Q1) 1.10% vs. 1.0%
- US final GDP price index q/q 0.40% vs. 0.60%
- US S&P/CS HPI
- US CB consumer confidence
- Richmond manufacturing index
EU leaders press for the UK to invoke Article 50
The EU summit began today, and European leaders insisted on a quick resolution on the Brexit issue. The EU Commission president Jean-Claude Junker urged the UK to clarify its position on Brexit as soon as possible “so we can get on with it” he said. The EU commission president also took a dig at the UKIP MEP leader, Nigel Farage, asking “Why are you here?”
German Chancellor Angela Merkel explicitly ruled out any negotiations with the UK until Article 50 was invoked saying “No negotiations until the UK submits article 50 notification. Whoever decides to leave EU family cannot keep privileges without keeping obligations. Exiting from EU must have tangible consequences.” Ms. Merkel’s statement was in stark contrast to her comments over the weekend, where she urged not to rush into negotiations with the UK.
Ex-Prime Minister David Cameron is expected to meet with his EU counterparts later today, but so far there are no indications that article 50 will be invoked, especially with the leadership void in the UK following the resignation of Mr. Cameron.
The British pound was showing signs of steadying by European trading session pulling back moderately after to a 31-year low yesterday. The markets at larger were seen trading on an optimistic note with the USDJPY also seeing some recovery. Still, analysts are not convinced on the recovery. “Even though the market is this morning dominated by risk-on and even Sterling has been able to appreciate a little, in the absence of new information this is likely to be temporary,” Commerzbank analysts said earlier today, while ING analysts recommend fading any rallies. “Look to fade any relief rally as the risks are skewed towards animosity at today’s summit. Markets will be looking for clarity on whether the EU will try and force the U.K. to invoke Article 50 as soon as possible.”
UK Credit Ratings downgraded by S&P Global and Fitch Ratings
Following up on its previous statements on the Brexit falling, Standard&Poors Global Ratings cut UK’s sovereign ratings from a coveted, investment grade AAA rating to AA following the departure from the EU. S&P said, “This outcome is a seminal event, and will lead to a less predictable, stable, and effective policy framework.”
The action came after Friday, Standard&Poors reiterated that it could undertake a multiple downgrades in the wake of the Brexit aftermath. Standard&Poors put UK’s outlook at negative inferring that further credit rating downgrade cannot be ruled out. Following the S&P’s ratings downgrade, Fitch Ratings also lowered UK’s credit rating from AA to AA+.
In a statement, Fitch Ratings said: “Uncertainty following the referendum outcome will induce an abrupt slowdown in short-term GDP growth, as businesses defer investment and consider changes to the legal and regulatory environment.”
The ratings downgrade for the UK was widely expected as the economy hitherto enjoyed its status as the financial hub with investors seen flocking to the City as it offered a single window access to the European markets. Moritz Kraemer, S&P’s global sovereign chief ratings officer, told Bloomberg, “What we’ve observed now in the context of this referendum and the Brexit vote is such that we do no longer think that the institutional strength of the U.K. is what we had been used to before. This is a major event that has just occurred.”
US Q1 GDP growth revised higher to 1.10%
The first quarter GDP growth in the US was revised higher to 1.10%, from the second revision of 0.80%. This was higher than analyst estimates of 1.0%. The final revision to the GDP shows that the US economy expanded more than previously thought but the pace of growth remained subdued. Contributing to the upward revision, US goods and services exports expanded more than what was previously thought to be during the period while companies also spent more on software and R&D. Business investments, however, remained weak, compared to the previous quarter and falling at the fastest pace since the third quarter of 2009. US consumer spending was also weaker in the first quarter, slowing down at the fastest pace in two years.
Consumer spending was revised lower to show an expansion of 1.50% which was weak and lower than previous estimates of 1.90%. Exports were the bright spot, rising 0.30% in the third revision, compared to a 2.0% decline in the second reading. Net exports added positively to the US economy.
Growth in the US during the first quarter was constrained by a stronger exchange rate and sluggish global demand.