Sunday 22 October 2017

Daily Market Update: No 'Super Thursday' for the Pound

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Jason Rehill

The November Inflation Report was harder to interpret than its recent predecessors, principally as a result of a sharp fall in short-term market interest rates, where the first 25bp Bank Rate hike is not fully priced until early 2017.

Clearly, such expectations are too dovish in the view of the MPC. The alternative CPI (inflation) forecast on the ‘constant rates’ assumption provides a better indication: inflation was lowered by 0.20% at the three-year horizon so, implicitly, there is judged to be less underlying price pressure than at the time of the August Report. The dovish Inflation report was reinforced by the 8-1 vote on Bank Rate at the November meeting. This combination was enough to send the Pound tumbling with GBPEUR trading at 1.4200 (EURGBP 0.7042) before the release down to 1.3970 (EURGBP 0.7158) at the time of writing this morning. There was a similar trend against the USD, with GBPUSD trading 1.5402 yesterday morning versus 1.5193 this morning. The market clearly took yesterday’s Bank of England (BoE) update as dovish.

It is worth noting though the BoE’s guidance is conditional, the outlook is distinctly unclear and there is little by way of precision. External events, most obviously the growing possibility of a US fed funds rate hike in December 2015 – could trigger a more ‘hawkish’ outlook. Interestingly BOE Governor Mark Carney said in an interview late yesterday with Bloomberg, that the UK should be prepared for a rate hike in 2016. Mr. Carney said "would I rather have the majority of the British people thinking that rates are likely to go up in the next year, which is the case today? Yes I would, because that is reasonably prudent behaviour, given the progress this economy is making.”

Elsewhere in the numbers yesterday Euro zone retail sales disappointed in September, falling 0.1% month on month versus +0.2% expected. On an annual basis, sales rose from 2.2% to 2.9% versus 3.0% expected. US Initial jobless claims for the week ending October 31st were +276k versus +260k expected. Q3 Preliminary Productivity was 1.6% versus -0.3% expected and Atlanta Fed President Lockhart said in remarks in Switzerland that while lift-off “remains a close call,” he expects the case to begin raising rates “will continue to firm up” and that it “will soon be appropriate”; he later said he’s “ready to take a leap of faith on inflation”. Whilst Vice Chair Fischer, NY President Dudley, Governor Tarullo, and Philly Fed President Harker did not address policy in their speeches yesterday.

For the day ahead, given, within their October FOMC statement, the Fed signalled that a rate hike is on the table for December. The October employment report will play a key role in shaping near-term market expectations for a hike ahead of year-end. Many market participants expect the October employment report to look solid in nearly all respects. Specifically, the Bloomberg market consensus is for payrolls to have advanced by 185,000 and for the unemployment rate to have slipped from 5.1% to 5.0%. The expectation is also for hourly earnings to have increased by 0.2% and for the workweek to have rebounded. If we were to get a number above these forecasts, speculation over a Fed rate rise in December could increase.

Over the first six months of 2015, monthly payroll changes averaged 213,000. Over the April-to-June period, monthly payroll growth averaged 242,000. However, over August and September, the monthly pace of job growth slowed to an average of just 139,000. This deceleration is at odds with other gauges of labour market conditions, which have not signalled any meaningful deterioration. To the contrary, initial jobless claims have trended down, falling to their lowest level since 1973. The employment barometer of the ISM non-manufacturing survey averaged 58.0 in Q3 versus 54.9 in both Q1 and Q2. Even in the ISM manufacturing survey, where the adverse impact of a stronger dollar and weaker global growth is most clearly evident, the employment component averaged 51.5, little changed from the average 51.8 reading recorded in both Q1 and Q2. One possible explanation for the surprisingly weak job rises of late (and one we have discussed previously) is that firms simply cannot find enough workers to hire (i.e. a lack of supply, not a lack of demand). Anecdotal evidence has long highlighted this possibility.

Also of note for today German, Spanish and U.K. industrial production figures are all due this morning along with multiple European Central Bank policy makers set to speak: Peter Praet at 8:45 am, Klaas Knot at 9 am, Yves Mersch at 10 am and Ardo Hansson at 11 am.

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