Theresa May calls snap election in bid to strengthen hand in Brexit talks

Theresa May dramatically seized the initiative on Brexit on Tuesday by calling a snap general election on June 8, as she sought a direct mandate for her plan to deliver a smooth British exit from the EU.

The pound rose on expectations that the prime minister would win a much increased Commons majority, allowing her to sideline implacable Eurosceptics in her Conservative party and ensure a phased Brexit concluding with a UK-EU free-trade deal.

Polls predict a heavy defeat for the opposition Labour party, which has been in disarray under the leadership of leftwinger Jeremy Corbyn.

Mrs May had only last month ruled out an early election, saying it would be “self-serving” and would create uncertainty, but on Tuesday morning she stunned Tory colleagues by announcing in Downing Street that she had changed her mind. The House of Commons will vote on Wednesday to trigger an election that had not been due until 2020.

Mrs May said she had “only recently and reluctantly” concluded that a poll was desirable, and blamed opposition parties and the House of Lords for weakening her negotiating position with the EU.

“Division in Westminster will risk our ability to make a success of Brexit. The decision facing the country will be all about leadership.”

Privately Mrs May told colleagues she feared that a general election in 2020 would significantly complicate Brexit, with other EU leaders using the impending poll to put her “over a barrel” in final negotiations due to conclude in 2019.

By holding an election now, Mrs May will not have to face electors again until June 2022, allowing her to negotiate a transition deal after Brexit takes effect, during which time Britain might have to apply EU rules including free movement.

Amber Rudd, home secretary, told the BBC’s Newsnight that Mrs May could use an increased majority as an opportunity “to arrive at potential compromises within the EU”.

The pound climbed as much as 2.7 per cent to a five-month high of $1.2905 on Tuesday, as investors bet the prime minister would use the vote deliver a softer Brexit.

“Not only does this neutralise Labour and the SNP, but it means she can negotiate a Brexit deal along the lines of what she wishes for, rather than having to appease the hardliners in her own party,” said David Owen, chief European financial economist at Jefferies.

The strength of the pound unnerved UK stock markets, which have been energised by sterling’s slide since the Brexit vote as global companies with earnings in dollars benefit. The FTSE 100 was 2.2 per cent weaker at 7,169 in late-afternoon trading.

Mrs May is expected to win parliamentary support for a snap election, overriding the five-year Fixed-terms Parliaments Act, which requires a two-thirds majority in the House of Commons to back a general election motion.

Mr Corbyn said on Tuesday that his party would support a vote, even though Electoral Calculus, a prediction website, forecast that his party would be left with just 170 seats, down from 229 at present.

“Labour will be offering the country an effective alternative to a government that has failed to rebuild the economy, delivered falling living standards and damaging cuts to our schools and NHS,” said Mr Corbyn in a statement.

According to the FT poll tracker, the Conservatives have an 18-point lead over Labour with bookmakers offering odds as low as 1/10 on a Tory victory. Electoral Calculus predicts a Tory majority 130, compared with 17 now.

Mrs May was cheered by Tory MPs as she addressed them on Tuesday evening, but privately some fear they could be exposed to a strong challenge from the Liberal Democrats, who are promising a second referendum on any final Brexit deal.

Mrs May told the Queen of her plans for an early election on Monday evening and explained her decision to Donald Tusk, European Council president, on Tuesday. Mr Tusk joked that, as with a good thriller, “First an earthquake, then the tension rises.”

Holding an election gives Mrs May her first opportunity to win a direct mandate to be prime minister. She took power last July without a public vote, after David Cameron resigned and her remaining rival in the Conservative leadership contest pulled out of the race.

The Tories’ existing majority would have made it hard for the government to push through its Repeal Bill, which transfers EU legislation into the statute book, without significant amendments. William Hague, the former Conservative leader, was among those to have called for an early poll in an attempt to win a larger majority.

A general election will allow Mrs May to scrap the 2015 Tory manifesto and campaign on her own policies, including the opening of new grammar schools which have been opposed by Tory moderates. Key policies from the Cameron era, including a commitment to spend 0.7 per cent of gross national product on international development, might also be changed.

The SNP, which has called for a second independence referendum by mid-2019, could use the election to win a new mandate for such a vote. An election comes as Northern Ireland remains in political turmoil, following the failure of the main unionists and nationalist parties to come to a power-sharing deal.

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Federal Reserve Chairwoman Janet Yellen indicates era of extremely stimulative monetary policy is coming to an end

Federal Reserve Chairwoman Janet Yellen indicated Monday that the era of extremely stimulative monetary policy was coming to an end.

In a public discussion at the University of Michigan, Ms. Yellen said the Fed was moving away from its efforts to revive a recession-scarred economy and focusing instead on maintaining the gains of the past few years. That will change the central bank’s policy-making stance, she said, noting that Fed officials plan to continue gradually raising interest rates unless the economy begins to deteriorate.

“Where before we had our foot pressed down on the gas pedal trying to give the economy all the oomph we possibly could, now [we’re] allowing the economy to kind of coast and remain on an even keel,” she said. “To give it some gas, but not so much that we’re pressing down hard on the accelerator.”

That means the Fed’s benchmark short-term interest rate will continue to move up to its long-term average, she said.

Fed officials raised rates in March for only the third time since the financial crisis, to a range between 0.75% and 1%. But they have penciled in two more rate increases this year, followed by three in 2018. They are also considering reducing the Fed’s $4.5 trillion portfolio of cash and securities, acquired during three rounds of asset purchases aimed at lowering long-term borrowing costs after the recession.

Ms. Yellen said the Fed is “doing pretty well” in meeting its congressionally mandated goals of low and stable inflation and a full-strength labor market.

In February, inflation rose 2.1% over the previous year after running below the Fed’s 2% target for almost five years. Meanwhile, the unemployment rate fell to 4.5% in March—below what the Fed considers a sustainable long-term average.

Overall, Mr. Yellen said the economy had been growing “at a moderate pace.”

Fed officials expect it will take until 2019 for interest rates to rise to their long-term sustainable level. But even then, the bank’s benchmark federal-funds rate will only end up around 3%, lower than in the past because of long-term changes to the U.S. economy.

That lower long-term interest rate has led some economists and policy makers to consider letting inflation rise above the 2% target to give officials more room to raise rates higher during good economic times and drop them during periods of recessions. San Francisco Fed President John Williams has proposed studying raising the inflation target.

Ms. Yellen suggested Monday that she preferred to hold the goal at 2%, largely because that is the level that markets and consumers expect.

“Evidence suggests that the population roughly expects inflation in the vicinity of 2%,” she said. “We’re focused on making sure that inflation expectations and actual inflation stay very well anchored.”

Weak yen brightens Japanese manufacturers’ outlook

  • Japanese industry is growing steadily more confident as a weak yen and a stronger global economy offer new hope of escaping deflation.

    The Bank of Japan’s Tankan index for large manufacturers, the country’s most closely watched measure of business conditions, rose from +8 to +10 in March — its highest for 18 months.

  • The figure suggests big companies are starting to believe the yen’s fall is durable and will lead to rising exports, prices and investment in Japan.
  • But confidence remains lower than levels recorded during the early days of Abenomics in 2013, highlighting the long road still ahead for Japan to escape from more than two decades of on-and-off deflation.
  • Business confidence has improved in Japan since the election of Donald Trump as US president last November, triggering a fall in the yen from close to ¥100 against the dollar to a new range of ¥110-¥115.
  • The Tankan is a quarterly survey, similar to ISM polls of purchasing managers in the US. It samples more than 10,000 companies with a response rate of nearly 100 per cent. Compilers subtract the percentage of respondents reporting bad business conditions from those reporting good to give indices ranging from -100 to +100.
  • Japan’s unreliable statistics on consumption and output, which are prone to large revisions, mean the BoJ relies heavily on the Tankan to track the business cycle.
  • Sentiment rose most strongly in Japan’s core export industries. The index for general machinery rose by 11 points to +25, for production machinery by seven points to +17, and for motor vehicles by eight points to +18. That was partially offset by drops in commodity sectors, notably a 16-point fall for the petroleum industry to +6, reflecting a fresh slide in the global oil price. Sentiment in the services sector rose by 2 points to a reading of +20. There was an 8 point rise to +17 for hotels and restaurants, possibly hinting at a pick-up in consumer spending, but a 13-point drop to +31 for communications, as the government puts pressure on mobile phone companies over tariffs. The index for all companies rose by 3 points to +10.
  • With the unemployment rate down to 2.8 per cent, companies reported increasingly severe labour shortages, especially for smaller employers in the service sector. The index for companies reporting they have adequate staff dropped by 4 points to -25.
  • The BoJ hopes that an increasingly tight labour market will lead to upward pressure on wage, feeding through to consumer prices. That in turn would help inflation escape from its current levels close to zero.

Eurozone price pressures ease during March

  • Price pressures in the eurozone slipped back sharply in March, easing some of the pressure on European Central Bank president Mario Draghi to start tightening monetary policy for the single currency area.

    Eurostat, the European Commission’s statistics bureau, said on Friday that annual inflation had fallen to 1.5 per cent this month, down from 2 per cent in February.

  • The sharper-than-expected decline follows a spike in oil and food prices earlier this year.
  • Core inflation, which excludes the changes in oil and food prices, fell to 0.7 per cent — the lowest reading since April 2016.
  • However, that core figure is likely to rise in the coming months as one-off seasonal effects fall out of the index.
  • The re-emergence of price pressures — coupled with better news on the region’s economy — had led to calls from several heads of national central banks for Mr Draghi to adopt a more optimistic tone and talk up the region’s recovery.
  • When the ECB governing council last met in early March, inflation was above the bank’s target of below but close to 2 per cent for the first time in four years, while growth has been higher than expected.
  • The council made only minor adjustments to its views on its monetary policies and the economic outlook, however, concerned that markets could overinterpret a shift in tone as a signal that the ECB would soon begin a discussion on tapering its bond-buying programme.
  • The ECB will from April buy €60bn of mostly government bonds each month under a policy dubbed quantitative easing. It plans to do so at least until the end of this year.
  • While that plan is expected to remain in place, the bank could begin discussions later this year to taper, or slow, the pace of its bond buying in 2018.
  • Mr Draghi has said the council wants to see “underlying” price pressures re-emerge and inflation to rise steadily over a number of months before abandoning QE.
  • Hawks on the governing council are now expected to rein in their calls for the ECB to move more quickly towards the monetary stimulus exit.
  • The most vocal of Mr Draghi’s critics were in Germany, where inflation fell from 2.2 per cent in February to a harmonised rate of 1.5 per cent this month.
  •  Most analysts had not expected inflation to drop so sharply this month. While the main reason for the drop was lower energy prices, last year’s early Easter also affected the data.

Yen Hits Four-Month High as Skepticism Grows Over Trump Policies

  • The Japanese yen rose to its highest level in four months against the dollar on Wednesday in Asia, prompted by greater skepticism among investors about whether President Donald Trump will be able to stimulate the U.S. economy.
  • The potential for trade friction following a weekend meeting among the Group of 20 industrialized and developing nations also clouded the global economic outlook and boosted the appeal of the yen, a safe-haven asset in times of economic uncertainty. At the request of the U.S., finance ministers in the G-20 dropped a longstanding clause criticizing protectionism.
  • The yen rose against the U.S. dollar in the hours immediately after Mr. Trump’s election victory, then fell sharply on expectations for an economic-stimulus policy in the Trump administration.
  • The president has promised to introduce tax cuts and spur $1 trillion in spending on U.S. infrastructure construction, but he hasn’t outlined a detailed plan.
  • Expectations for the changes began to weaken after Mr. Trump struggled to round up support for a health-care bill headed for a vote this week in the Republican-led House.
  • Japanese Finance Minister Taro Aso on Wednesday said Tokyo should maintain close communication with the U.S. and continue its efforts to keep the yen stable. “Excessive sharp movements, up or down, could have a considerable impact on the economy,” Mr. Aso said in Parliament. He brushed aside speculation Washington might pressure Tokyo to guide the yen higher.
  • Until recently, the widening interest-rate gap between the U.S. and Japan was supporting the dollar. The Federal Reserve has been raising rates while Japan’s central bank has been keeping the yield on 10-year government bonds close to zero. However, when the Fed raised its benchmark rate last week, its projections for further tightening disappointed some investors who had bet on a faster tightening pace. That led to drops in Treasury yields and some dollar selling.

Trump worries send yen soaring to 4-month high

  • The Japanese yen hit a four-month high against the greenback on Wednesday, complicating the export-oriented country’s efforts to weaken the currency.

    Jitters over President Donald Trump’s ability to push through pro-business policies triggered a sharp stock sell-off on Tuesday and sent investors scrambling for haven assets.

  • The flight for safety continued on Wednesday, sending the yen 0.9 per cent higher to 110.76 per dollar.
  • That’s its strongest level since November 18, extending the currency’s gains so far this year to over 5 per cent.
  • The dollar’s retreat comes amid mounting nervousness over a key vote in Congress on Thursday over Mr Trump’s plans to dismantle Obamacare.
  • Signs that the president might not be able to rally the support needed to pass the bill have raised questions over whether he would be able to deliver on the expected tax cuts, stimulus spending and deregulation that have powered stock markets to record high after high this year.
  • The dollar has been also been pressured by unexpectedly dovish comments last week from the Federal Reserve over the pace of future interest rate hikes.

RBNZ holds rates steady

  • The Reserve Bank of New Zealand kept interest rates steady at a record low 1.75 per cent, as expected.
  • Graeme Wheeler, the central bank’s governor, said that while the New Zealand dollar had weakened by 4 per cent since February, partly thanks to softer dairy prices, “further depreciation is needed to achieve more balanced growth.”
  • So far this year, the New Zealand dollar is up 1.4 per cent against the greenback.
  • Markets are pricing in a roughly 38 per cent chance the RBNZ will raise interest rates to 2 per cent by the end of this year, and the chances of one 25 basis point rise in 2018 is almost entirely baked in, according to market pricing tracked by Bloomberg.