By Seema Shah, Strategist, Principal Global Fixed Income
In the weeks before and after the Brexit vote, economists and European Union (EU) sceptics alike warned about the imminent catastrophe to the UK in the event of a Leave vote.
Many people could be forgiven for thinking it was all just scaremongering. After all, contrary to the Britain Stronger in Europe campaign's concerns about the future of English football if Britain left the EU, Manchester United (UK) still managed to sign the world's most arguably in-demand midfield talent, Paul Pogba (French), from Italy's (EU member) Juventus. The latest economic data doesn't look too bad either. UK CPI inflation is a touch stronger than expected, the labour market report showed the July claimant count data were very robust, and total retail sales actually strengthened in July. The UK FTSE100 is above pre-Brexit levels, while bond yields are significantly lower.
Don't be lulled into a false sense of security, it's still early days.
While the "hard" economic data may show little sign of slowing, surveys - which tend to be leading indicators - paint a very different picture. For example, the purchasing managers' indices (PMI) for manufacturing, services, and construction fell between June and July to their lowest values since the 2009 global financial crisis. While they have remained above recessionary levels, there is significant scope for further downward moves. Put simply, it seems that the likely downturn in real activity just hasn't yet shown up in the "hard" data due to reporting lags.
Financial markets have been strongly supported by the Bank of England's decision in August to cut policy rates by 25 basis points, boost its quantitative easing scheme, and introduce their new Term Funding Scheme, which is designed to provide cheap financing to lenders. A likely extension to the European Central Bank's quantitative easing programme is also contributing to the feel-good factor. But the impact of any further, and arguably necessary, monetary easing is likely to be limited from here.
But perhaps the key reason why things seem so positive is that Article 50 is yet to be triggered and, moreover, it's the summer recess in Europe! With European political leaders enjoying their few weeks of sunny respite, developments (and certainly media comments) about the Brexit process have been far and few between - a case of out of sight, out of mind.
"Brexit means Brexit."
Those long summer nights will soon draw to a close and negotiations will recommence. The coming weeks should see a pick-up in Brexit-related news flow: Parliament in the UK is due to reconvene on 5 September; an informal summit of EU leaders on the post-Brexit future of the EU will be held on 16 September and will, importantly, exclude the UK; and, the UK Conservative party conference takes place 2-5 October and is likely to be fertile ground for Brexit-related vision making.
The first step is of course to trigger Article 50 and at the moment, all bets are on the first half of next year. Once formal notification has been submitted, the process for negotiating the UK's exit from the EU will commence. The UK's future relationship with the EU will be unfathomably complex, thus discussions will be fraught with disagreements, likely involving considerable "horse-trading," and will be drawn out - Phillip Hammond, the UK's newly appointed Chancellor of Exchequer, has recently said that Brexit could take up to six years. And we know how much markets like uncertainty.
Enjoy the sun while it lasts.