Monday 24 July 2017

Daily Market Update: BoE minutes slightly dovish; latest stellar Irish GDP figures see economy on track for best year of growth since 2000

Simon Barry

Yesterday’s Bank of England decision resulted in the expected no change outcome on UK monetary policy in December.

The outcome of the policy vote at the meeting, also released yesterday via the meeting minutes, was also in line with market expectations in showing an 8‐1 vote for unchanged interest rates. Ian McCafferty was again the sole dissenter in voting for a 25bps hike in rates. The minutes noted a lack of much new news on the international growth front relative to the Bank’s November projections, but did highlight some “material news” in relation to costs: “the price of oil had fallen markedly again, increasing the likelihood that headline inflation rates would remain subdued, and nominal wage growth had levelled off”.

These observations – particularly those on the levelling off of wage growth ‐ lend a slightly dovish tone to the minutes, and suggest that the centre ground within the Committee is far from in a hurry to begin the process of interest rate normalisation. We still think it’s likely that if the UK expansion stays on track, official rates will rise next year. However, any such move looks more likely to come around mid‐year or later, with a hike before May looking increasingly unlikely at this point given the modest nature of price and cost pressures.

More imminently, there was little in yesterday’s US newsflow to trigger a revision to expectations that the process of rate normalisation will kick off in the US next week. The weekly jobless claims were a touch weaker than expected in ticking up to 282k from 269k previously, but claims can be noisy viewed on a week‐to‐week basis and in any case very much remain at extremely low levels historically. The latest figures on import prices confirm that international price pressures faced by the US economy remain weak, though yesterday’s November figures were a little less weak than had been expected (headline import prices were down 9.4% y/y, with ex‐petroleum prices down 3.4%y/y).

The absence of much market‐moving news sees currency markets little changed over the past 24 hours. If anything, the euro has given back some of its gains from earlier in the weak and opens a touch weaker at $1.0965 and 72.3p against the dollar and sterling respectively.

At home, yesterday saw the release of the latest set of Irish quarterly national accounts covering the third quarter of this year. The headline GDP figures reveal a continuation of stellar growth in the output of the economy. Real GDP rose by a further 1.4%q/q in Q3 – the seventh consecutive quarterly rise – to leave the annual rate of growth at 7%, up from 6.8% in Q2. Growth in also at 7% for the year‐to‐date so far in 2015, meaning that growth is on track for its best year since 2000. Notwithstanding some quirks and caveats linked to multi‐national activity, this was another highly impressive set of growth figures. While some cooling in momentum next year is near‐ inevitable (early indications of this are being hinted at by the more timely PMI surveys), full‐year real GDP growth is now likely to be 6.5‐7.0% this year. Please see our analysis at the link below for more details. http://www.ulsterbankcapitalmarkets.com/Handlers/docstream.ashx?doc_id=3006

Turning to the day ahead, retail sales figures are published in the US. Headline sales are expected to increase 0.3% m/m in November following 0.1% in October, whereas core (ex. auto & gas) sales are expected to grow 0.4% m/m after 0.3% in October. Private consumption is the main driver of growth in the US economy, so analysts will closely track the signals that emerge from this important indicator of consumer activity. In our view, a backdrop of robust employment gains and solid wage growth points to some potential upside risk to the consensus forecast. Should sales outperform expectations, this could potentially further underpin market expectations for an interest hike at next week’s Federal Reserve meeting.

In turn, a stronger number may impart some upward pressure on US market interest rates, supporting a mild strengthening in the dollar as we approach this week’s close. In other consumer related news, the preliminary University of Michigan consumer sentiment survey is released for December and expectations are for the index to increase from 91.3 to 92.0. The medium term inflations expectations component will also be reported after printing at 2.6% in November.

In the UK, the Bank of England also announces the November results of their 12 month ahead inflation expectations survey which published at 2.0% in October.

The credit rating agency Fitch announces their grading on the state of the sovereign debt of the European Stability Mechanism (an institution founded to provide lending assistance to Eurozone countries experiencing or threatened by financing difficulties). Investors could show some interest in this assessment of the risks faced by one of the major creditors to the Euro Area’s more debt laden economies and more generally, the risks faced by these economies themselves.

Finally, Bank of England MPC member Martin Weale gives a speech in London.

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