Daily Comment (January 24, 2017)

by Bill O’Grady, Kaisa Stucke, and Thomas Wash

[Posted: 9:30 AM EST] The big news overnight came from the U.K. where the Supreme Court ruled that Parliament must move on Brexit before an Article 50 declaration can be made.  Although this decision is being portrayed as a setback for PM May, it isn’t exactly a huge shock.  A number of legal experts warned that the referendum alone would not be enough to pass constitutional muster and the court confirmed this opinion.  Interestingly enough, Scotland and Northern Ireland MPs won’t participate in this vote as decided by the court.

It doesn’t appear that the results of the referendum will be reversed by Parliament.  MPs have made it clear that they will support the outcome of the referendum.  However, taking the decision to Parliament will, to some extent, remove some of May’s power over the process of Brexit.  Those wanting a “hard Brexit,” especially favoring strict immigration restrictions, may be frustrated.  A number of MPs have indicated that they want to offer amendments to any bills granting May the power to declare Article 50.  Most of the proposed amendments would soften immigration restrictions and press for fewer trade restrictions with the EU.  In other words, the amendments will push for a “soft Brexit.”

It is suspected that May will quickly offer a short bill for Parliamentary approval.  However, it will be difficult for her to limit amendments.  The more amendments that are considered, the greater the likelihood is that the Article 50 declaration will be delayed.  It is also more probable that she will lose control of the process and be forced into a softer Brexit stance.  May has proven to be a leader that controls the process; if the Parliamentary vote forces her to lose control of how Article 50 is executed, political turmoil will likely rise.  This fear probably explains why the GBP is weaker this morning.  In general, the softer Brexit proves to be, the more bullish it is for the GBP.  Thus, news of the Supreme Court’s decision is arguably bullish for the currency but the political tensions it could raise lifts uncertainty and is consequently being taken as bearish, at least for now.

As we noted yesterday, the president formally killed TPP yesterday by pulling the U.S. out of the treaty.  Although there is much media wailing about this action, in reality, TPP was dead a long time ago.  Secretary Clinton had promised not to enact it if she won the presidency; essentially, neither candidate supported TPP or its European twin, TTIP.  Although all the evidence suggests that Trump is going to be more protectionist than previous presidents, one really can’t hang TPP on him.  After all, if President Obama had really thought it had a chance, he could have rammed it through the lame duck session of Congress.  Given the backlash against globalization, there was little chance it would have passed through the legislature anyway.

Bloomberg, citing BOJ sources, suggests that the Japanese central bank is committed to maintaining a zero percent 10-year JGB even as inflation rises.  There has been speculation that the BOJ would set a higher target for the long-dated sovereign in Japan as inflation rose.  Essentially, the BOJ has given up control of its balance sheet.  It is reasonable to assume that the higher inflation rises, the more the 10-year yield would rise in an unfettered market.  Capping the yield, in theory, will require more buying as inflation rises.  Expanding the balance sheet is a quiet method of keeping downward pressure on the Japanese currency.

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