Forget the hikes, forget the cuts
‘Super Thursday’ is back like some bloated policy nightmare that seemed to be a good idea at the time but has since lost its lustre. The Bank of England will release its latest policy decision, the minutes of the meeting and present the Quarterly Inflation Report at noon today and there is a considerable amount of news to get through.
As we wrote on Monday, market expectations of future Bank of England policy are all over the shop at the moment. Thoughts of when the first hike will finally come have been pushed out into the middle of next year with some measures suggesting that an interest rate cut is more likely than a hike; a full 3 basis points – a cut of 0.03% – are currently priced in.
This is bonkers and comes alongside a significant decline in expectations around the next move from the Federal Reserve; a rate hike is not priced in now through the rest of the year following poor news from the service sector yesterday.
What to expect?
I’d be very surprised if the minutes of today’s meeting showed that Ian McCafferty – the sole Monetary Policy Committee member voting for interest rate hikes at the moment – to have changed his tune. As we said last month, we think that he would need to see a further deterioration in output for the lone hawk to come back to the pack.
Yesterday’s services PMI number from the UK is a case in point. The readout registered an increase to 55.6 from 55.5 previously – growth carrying on as it was the month before to all intents and purposes, but survey respondents seemed quick to limit their optimism on future growth, however. UK businesses have a laundry list of concerns moving through 2016 from fiscal tightening, the impact of the National Living Wage and the EU referendum here to the impact of Fed rate rises and Chinese economic malaise on global confidence.
Such concerns may limit subsequent increases in job growth within the sector although we have been expecting a slowing of the improvement in labour market dynamics as the overall unemployment rate has got closer to the 5.0% level.
Updated forecasts that will form part of the Quarterly Inflation Report will likely show weak but rising inflation pressures, while growth is set to be revised slightly lower. Despite the increasing inflation outlook there is little reason to suggest any form of policy action before the EU referendum. There is also little reason to suggest that the recent weakness in sterling will be seen as enough by the authorities.
Pound pounds higher
The strength of sterling yesterday, especially against the USD, was welcome. Sterling has gained against the USD in seven of the past 10 trading sessions. Previous to that the cross had only risen on three days in 2016.
Dollar was hit hard yesterday by a potent mix of slackening interest rate expectations and rather poor jobs numbers. The services industry makes up close to 90% of the US economy and employment growth within that sector fell to its lowest level since April 2014. Oil price falls and declines in capital expenditure and investment mean manufacturing isn’t going to add too many jobs in the short term so traders are looking at tomorrow’s payrolls report with newfound trepidation. A reading that shows the US managed to add 175,000 jobs or fewer and we can easily see the USD rumbling lower into the weekend.
Elsewhere, Mario Draghi speaks this morning and while he may repeat lines about possibly revisiting monetary policy stimulus in March this is now expected so would have a limited impact on the euro.