We are pessimistic about today's Brexit talks. There is no chance that they will lead to a deal along the lines proposed by Prime Minister May. The E.U. has shown no signs of backing off of its position (which it would have to do to agree to such a deal) and doing so is not in its economic interests because, unlike the U.K., it has to worry about establishing precedent for other negotiations over leaving the E.U. Given the political constraints facing May, the most likely outcome is that there is little tangible profess in Brussels. Betting markets have the odds of a hard Brexit in April 2019 around 45%, they will likely rise above 50% soon.

If, however, there is some type of deal to delay the U.K.'s exit, we think  that this would probably lead to either a soft-Brexit or a second referendum. The odds of a second referendum have been stable around 30% for several months.

We are also waiting for the release of the September FOMC minutes this afternoon. We do not think that Chairman Powell's recent comment that interest rates are far from neutral represents a change in the FOMC's thinking. The minutes will probably confirm this. We are also curious to learn more about whether rising trade barriers will push the FOMC toward a faster (due to inflationary pressures) or slower pace (due to slower growth) of rate hikes. We suspect the former.

-Paul Shea

Chief Strategic Economist

Miller Tabak

Reggie Middleton here, taking the contrarian view to Mr. Shea's report for the day. It's possible he may not taking all scenarios of rate action into consideration, re: FOMC action. We can have slower growth AND higher inflation. Although it is definitely not the likely or probable scenario in the very near term, it's not as if we haven't had to deal with the "s" word before (ask Paul Volcker, one of the "grownup" Fed chairs). Ruling something out in its entirety is seldom ever wise. Consider massive financial engineering on the part of central bankers with the potential for repercussions on the trade and fiscal policy front (regardless of your politics, you must see where Trump is taking material risk), combined with natural snapback from ZIRP and NIRP, particularly in Asia and the EU; makes stagflation a non-zero possibility.
Re: BREXIT, nearly every pundit is failing to recognize the risks to the EU side of BREXIT. Not only will contagion run through other potential referendum states if the UK get's away with anything that even remotely benefits them, but the EU doesn't have nearly the bargaining chips that they need to guaranteedly prevent such an occurrence. 
Let's put the UK's bargaining chips into perspective...
  • UK is the 2nd largest economy in the EU
  • US is, by far, the largest financial market in the EU
  • UK has the most powerful standing military in all of continental Europe (save possibly/arguably Russia), the EU and the EZ
  • London represents the premier market for listing and trading european securities
  • Over 75 percent of eurobond deals are originated and executed by dealers based in London
  • More than a third of the world’s swap transactions emanate from the Cit of London
  • Over a quarter of foreign exchange transactions, take place through banks based in London.  
The UK is not an Ireland, Greece or Portugal, and the triumvirate of power cannot casually push them the way have the smaller nation-states. A betting man (or woman) would place odds on the unforeseen damage cracking the EU before and greater than it cracks the UK - particularly if contagion takes hold. One great problem in the UK is over-inflated real estate prices, which are already taking a hit from an anecdotal glance. This is going to hurt, because I'm suspicious of the British banks having fully cleared the NPAs and NPLs from the last banking crisis of their books. The British taxpayers and the BOE are just recently selling of their last involuntarily forage into bank and insurance company equity ownership; yet here we go again. 
I know... I know... It's different this time! :-) 

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