“I’ll get us out of this mess”
Theresa May faced down some reportedly very upset Conservative MPs yesterday in her first face-to-face meeting with her party since last week’s election. By admitting responsibility, opening up the decision-making process in government and reaching a broader consensus on the approach to Brexit, May apparently looks to hold on to office for the foreseeable future. Whether she will do so is anybody’s guess, but it’s already becoming apparent that negotiations with the European Union will now be markedly different to how they would have been had they taken place this time last week.
Not only has the cabinet been reshuffled, but departments as well. The Brexit department’s seen a major facelift in the last few days; David Davis will still be heading it up, but the ministers serving him now have a far more diverse range of opinions, outlooks and backgrounds on the European Union. Nonetheless, they’ve got less than a week to get prepping with the discussion table being set for Monday.
Lack of clarity still hurting Sterling
For the pound, the messages are mixed. A softer Brexit and a closer relationship with Europe (which is beginning to look more and more likely) should be net positive for sterling, as shown when May announced her intentions to withdraw the UK from the Single Market and Customs Union earlier this year and the pound plummeted. But, sterling ebbed ever lower yesterday, touching the lowest levels against the US dollar since mid-April. It’s clear that the market sees last week’s election result as a significant weakening of the UK’s hand in the Brussels talks, and a wounded Conservative negotiation team could easily oversee more delays, more missing deadlines on fixed timelines and therefore a more disruptive version of Brexit.
Negative real wage growth to become the new normal
UK inflation numbers due at 0930 BST should keep real wage growth in negative territory, putting the purse strings under pressure and ensuring that very few people this year will be getting richer with average pay rises falling below price growth. Expect this discussion to be reflected in Thursday’s Bank of England minutes, where the central bank are now dealing with a labour market that, despite approaching full employment, isn’t generating wage growth anywhere close to what they’d like to see in order to raise rates from record low levels. With the government still in assembly mode and the Conservatives a long way from achieving a working majority, it’s safe to assume this issue won’t be tackled for a few months yet.
The day ahead
Finally, German ZEW survey numbers are expected to improve at 1000 BST and US producer price inflation numbers are seen moderating in May, failing to grow in May and falling to 2.3% on the year. While 2.3% is still a comfortable level of price growth, I imagine the Fed feel slightly uncomfortable hiking in a slowing inflation environment. Nonetheless, they’re expected to do so tomorrow.