Authored by Michael Every via Rabobank,

Which came first, chicken or egg?

This age-old question may have been talked about as much as Brexit. And Brexit, too, is now facing a similar catch-22 situation. On Monday, speaker Bercow blocked another meaningful vote on May's deal, as it wasn't substantially different than the one that was voted down last week. As a result PM May had to ask the EU for an delay of Brexit yesterday without having tabled her deal for a vote again. Europe responded that it is willing to grant some form of extension, provided that there are guarantees that a (short) extension would result in an orderly Brexit; i.e. guarantees that her deal would pass this time, after being voted down twice now. Basically, the EU wants to see the Withdrawal Agreement being approved by the House of Commons before it commits itself. So the EU needs the UK to give guarantees (a positive vote in the House) before it will approve any extension, and the PM May needs a substantial change to what has been agreed before she can bring anything back to the House for a vote. Like the chicken and the egg discussion, this sounds a bit like a stalemate.

In the case of the chicken and the egg, evolution provides an answer. However, for Brexit there is now just one week left for things to evolve. And so the game of chicken continues…

PM May appealed to the nation, pleading:

“You’re tired of [...] MPs talking about nothing else but Brexit when you have real concerns about our children’s schools, our National Health Service, knife crime.”

And she's probably right. People are getting tired. However, in Europe, similar feelings of Brexit-fatigue are showing. Macron has probably been the most vocal about this. The French president is worried that a delay will cause the European Union to remain too preoccupied with Brexit-negotiations whereas he much rather sees the EU make some real progress on reforms and other policies on his agenda. The Prime Minister will have to convince Macron and his peers today that an extension will help get results. However, by putting the blame on the MPs in her speech last night, she may have just lost the backing of some key potential supporters of her deal if a new vote makes it to the floor of the House in the coming few days.

So while she might get the EU to (reluctantly) agree to an extension, any such offer will probably be conditional on PM May getting her deal approved back at home before 29 March. That raises two questions: 1) will Bercow consider EU pre-committal to an extension as making the deal substantially different, and 2) if he does allow the deal to return to the House for a vote, how many MPs will be prepared to make a U-turn and back her deal after her finger-pointing speech yesterday?

The Fed did make an about-turn, and a sharper one than expected. While analysts, including our US strategist had anticipated that the FOMC would lower their expectations, the new dot plot shows that they’re no longer planning to hike in 2019, although they do think that one hike in 2020 is still warranted. The December dot plot still showed two hikes in 2019 and one in 2020. So the Fed now has a lot of patience, and as my colleague Philip Marey adds: a lot of wishful thinking. If they are still thinking about a hike in 2020, this means that they believe that the current spell of weak data will be followed by a reacceleration of the US economy. In contrast, we think that it is more likely that the economy will slide into a recession next year. So while the Fed is still thinking of hiking in 2020, we think that the Fed’s extended pause is in reality the end of the hiking cycle.

While the Fed believes it may still be able to pull off another rate hike, the FOMC did conclude that the reduction of their balance sheet has gone far enough for now. The Fed will start to taper its balance sheet normalization in May 2019 by reducing the threshold above which Treasury redemptions are reinvested to USD 15bn/month from USD 30bn/month. At the end of September 2019 the cap on Treasuries will be reduced to zero. This means that all proceeds will be reinvested. Additionally, beginning in October 2019, the Fed will start to partially shift reinvestment of agency MBS and debt to the Treasury market. So from September 2019 the Fed’s balance sheet will no longer shrink, and over the long run the composition will move more towards Treasury securities.

Explaining the dovish shift in the FOMC’s plans, Chair Powell turned to the slowing Chinese and European economies as one of the factors. Meanwhile, the European Central Bank has also pointed fingers at the slowing external economy – i.e. China and the US. And so on...

Powell blames Europe and China for slowdown.

Europe blames China and US for slowdown

China blames Europe and US for slowdown — zerohedge (@zerohedge) March 20, 2019

In fact, it appears that almost every central bank is now pointing at the economy of its neighbours. Now that’s chicken and egg for you!