Saturday 1 October 2016

Daily Market Update: Bank of England take centre stage

Shane O'Hanlon

Published 04/08/2016 | 12:58

Chris Radburn/PA Wire
Chris Radburn/PA Wire

Yesterday's Markit purchasing managers index showed activity in the UK's all important service sector experienced its sharpest fall in seven years (47.4 in July down from 52.3 in June).

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Meanwhile the all-sector index chalked up the steepest month-on-month decline on record pointing toward an economy estimated to shrink by 0.4% in the three months to September. In a similar vein the National Institute of Economic and Social Research (NIESR) said it expected the UK economy to contract by 0.2% between June and September and saw a 50% chance of a recession by the end of 2017. By way of a response the Bank of England's Monetary Policy Committee (MPC) is widely expected to look past the likely pickup in inflation and reduce its benchmark rate from the current 0.5% to a new low of at least 0.25%. In addition many market participants expect the BOE to provide other non-standard stimulus measures in an attempt to increase the flow of credit through the UK's post Brexit economy. However, there remains a risk that the central bank may refrain from adding to their QE programme and Funding for Lending Scheme (FLS) until official data becomes available. Recent comments from Dame Kate Barker have prompted many to question the economic benefit of a rate cut. Either way all eyes and ears will undoubtedly be on Governor Mark Carney as he addresses the press conference at 12.30pm.   

Elsewhere, data released yesterday, showed euro zone retail sales were flat in June compared with the previous month and 1.6% higher on a yearly basis versus the 1.7% expected. It should be noted however that the halt in retail sales growth in June came on the back of the year's highest monthly rise of 0.4% in May. Markit’s final composite PMI for the euro zone suggests the region has thus far shrugged off Britain's decision to leave the European Union as business activity expanded faster than expected (53.2 in July ahead of an expected 52.9 and June's 53.1).

In the US, yesterday afternoon's ADP National Employment Report showed that private employers added 179,000 jobs in July ahead of the 170k forecast. In an equally positive manner June's reading was revised up from +172k to +176k both of which augur well ahead of Friday's eagerly anticipated non-farm payrolls. Before then we have initial jobless claims, Challenger job cuts, durable goods data and the thoughts of the Fed's Kaplan to reflect upon.    

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