The Federal Reserve is preparing to hike rates at its December meeting, although it is leaving an escape route open. The latter is tied more to electoral risks (heightened in the past few weeks) than to economic data……
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Intesa Sanpaolo – Research Department For professional investors and advisers only
In the United Kingdom, the High Court has imposed on the government to obtain Parliamentary mandate before activating procedures to exit the European Union. Unless the Supreme Court upturns the ruling, this could result in a longer negotiation process.
As expected, the FOMC meeting left interest rates unchanged and signalled a likely hike soon. The two dissenting participants were in favour of an immediate hike. The statement only introduced a few changes compared to the September text, aimed at indicating that the case in favour of a hike had further strengthened since the previous meeting. The interpretation of the outcome of the meeting is rather Byzantine, as it must focus on the addition of two verbs and of a single indefinite adjective to the previous statement. The fact is that since September the macroeconomic picture has kept meeting the conditions the Committee seemed to be waiting for to hike rates. The real reason for staying put in November is a concern over potential post-election shocks, but this cannot be written in the statement. In actual fact, the risk tied to the US presidential elections of 8 November has heightened in the past week, as the advantage of the Democrat candidate has progressively shrunk in voting intention polls. The markets, which considered Clinton’s victory as almost certain, are now pricing in an uncertain outcome again. However, they are not pricing in a victory of Republican candidate Trump, but simply a no longer negligible probability of such an outcome. Therefore, should Trump actually win, a further adjustment phase would have to follow, which could complicate the Federal Reserve’s job in December. Also, a Clinton victory could be challenged, and there is also the risk of an institutional crisis, given the FBI investigations currently under way.
In addition to the uncertainties weighing on the presidential elections in the US, the process leading up to the United Kingdom’s exit of the European Union has also become more complicated: the High Court has imposed on the government to obtain a Parliamentary mandate to proceed with negotiations. The government would have preferred avoiding this, and intends to appeal to the Supreme Court to do so. The Supreme Court could examine the case at the beginning of December. Given the weakness of the government’s technical arguments, the High Court ruling seems unlikely to be upturned. In our view, however, the need to garner the approval of Parliament will not call into question the UK’s exit from the EU, which at this point does not reversible. Should Parliament play to buy time, the government could decide to act on favourable voting intention polls and call early elections, winning a more solid and favourable majority. However, even without boycotting the process, Parliament could impose constraints and conditions, which is the real risk the government wanted to avoid. Specifically, Parliament could impose on the government to clarify the goals of the process (limiting immigration? Reducing costs?), to take into account the opinions of those who opposed Brexit, and to subject the final agreement to the vote of electors (although there would be little choice at that point, as invoking Art. 50 would seem to activate an irreversible process). If Parliament does its job, therefore, this will not be a mere formality. Furthermore, the Parliamentary debate could also lead to a postponement of the formal application to exit the Union compared to the date announced by the British government (March 2017).
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