Vive la Revolution
2017 is a critical year for European politics not to mention the triggering of Article 50 and Trump.
It was only a few weeks ago that today’s Bank of England meeting was billed as a big event, with almost all of the market expecting a rate increase.
|12:00||UK Bank of England policy announcement|
|12:30||UK Mark Carney press conference|
|13:30||US Inflation data|
It was only a few weeks ago that today’s Bank of England meeting was billed as a big event, with almost all of the market expecting a rate increase. As many of us know, recent UK data has weakened and Mark Carney cooled talk of an imminent rate rise leaving the market’s current perceived likelihood of an increase at only 13%. The MPC announces its results at noon and this is a significant meeting for two reasons. First, the Quarterly Inflation Report (IR) is also due, in which the committee will outline its latest inflation and other economic forecasts. This is also published at midday and Governor Mark Carney’s press conference follows half an hour later. Second, a sudden weakening of UK data means that ahead of the IR, the Bank of England’s views on the outlook are less clear than usual.
Two weeks ago, a second hike in the interest rate cycle seemed virtually nailed on. Minutes to March’s MPC meeting were on the hawkish side of expectations. Two members (Ian McCafferty and Michael Saunders) backed a 25bp hike, from 0.5% to 0.75%, while the minutes referred to ‘an ongoing tightening’ being appropriate. Since GDP figures a fortnight ago showed that the economy grew by a mere 0.1% in Q1, general doubts about a May hike began to set in. Indeed last week we shifted our own forecast to ‘on hold’ at 0.5% from an increase to 0.75%. Additionally the disappointing rebound in April’s services PMI, to 52.8 after March’s near three point drop to 51.7, opens up more doubts over how much of the weakness in Q1 was due to the snow. At this juncture, the MPC does not have to take a heroic view over whether the economy’s current sluggishness is temporary or something more malign. Indeed at 2.5%, CPI inflation has fallen faster than the BoE’s forecasts so far this year and this will give the committee a degree of cover in planning a postponement of a hike to later this year.
The balance of the vote on rates will give markets an indication of the degree to which the committee as a whole may be reappraising economic prospects. Here we note Mark Carney’s warning last month from Washington, when he spoke about ‘mixed’ data, but also remarking that there were likely to be differences in view among members. Indeed we doubt that dissent has evaporated completely, and our suspicion is that the vote will mirror that in March i.e. that it will be 7-2. We judge that Dr Carney will stress the uncertainties connected with recent soft data and that the path of rates will be dependent on how the economic numbers evolve. But at this point, our baseline case is that next week will mark a three month postponement to rate increases, with the next 25bp hike occurring in August. We are also pencilling in two 25bp moves over 2019, taking the Bank rate to 1.25% by the end of next year. This of course is based on our premise that GDP growth returns to levels prior to the start of the year and that the Brexit process is not too dysfunctional. If not, interest rates will rise only very slowly over the next 18 months, if at all.
In terms of yesterday’s events, we saw the Reserve Bank of New Zealand keep rates unchanged with them saying that it won't be moving them "for some time to come". The NZD fell to the lowest level in five months as a result. Elsewhere, CAD surged as oil prices rose on the prospect of a drop in Iranian exports. Brent crude, the international benchmark, was up 0.7% to $77.76 a barrel. NOK, NZD and AUD also benefitted from this.
Outside of the main event of the Bank of England today, we get UK industrial and manufacturing output data at 09:30 and US CPI data at 13:30. The main measure for the US inflation data is CPI ex food & energy which the market is expecting to come in at 2.2 % year-on-year.
As the football season draws to a close there are still many clubs still battling to avoid relegation/ gain promotion and many who have just been relegated / secured promotion. With regards to the latter… enter Neil Warnock; his Championship side, Cardiff City, secured promotion to the Premiership at the weekend. Yes, Cardiff City, the team that were battling relegation when Warnock arrived after a string of manager changes is now back in the Premiership! His appointment as Cardiff City manager, now looks an inspired one. Although in hindsight, was it? If you are serious about achieving something, in Cardiff’s City’s case, securing promotion… then why not hire a specialist? Warnock clearly is a specialist of getting football teams promoted. Cardiff City’s success is now his eighth promotion, a record in English football, an unbelievable achievement. When it comes to specialism, having a specialist bank like Investec help in specialist areas like foreign exchange risk management, clearly makes a lot of sense! Fortunately for most of you readers, you understand this as you benefit from our expertise and guidance! With it being Super Thursday today, and a 7-2 MPC split expected, there certainly is room for some volatility around midday, please give us a call on 0800 055 6339 to get the specialists’ view on how the day might unfold!
Happy Monday all! US treasury yields were a big highlight of last week.
There has yet to be a final agreement between 5 Star and the League over a coalition government in Italy.
Italian markets remained under pressure yesterday afternoon, with the 10yr yield spread widening 18bp on the day to 148bp, whilst the FTSE MIB was down 2¼ %.
Yesterday saw the headline data release from the UK. Labour market data - the data points of interest for March were much as expected.
Markets were relatively muted yesterday and the violent clashes in Israel largely dominated the news. Israeli troops shot dead dozens of Palestinian protesters on the Gaza border when the high-profile opening of the U.S. embassy to Israel in Jerusalem, by the Trump administration raised tensions to boiling point after weeks of demonstrations.