Saturday 25 January 2020

Daily Market Update: BoE minutes highlight that Brexit risks are featuring more prominently in UK policy deliberations


Simon Barry

Yesterday’s minutes of the Bank of England’s April monetary policy meeting highlight that Brexit risk is now featuring much more prominently in policy-maker deliberations.

In fact, a document word count shows that the word ‘referendum’ appeared fourteen times in the April minutes, double the seven references in the March equivalent. The BoE noted that there was little evidence as yet that referendum uncertainty had much affected job creation. However, the minutes highlighted a range of other areas of the UK economy where there are signs that such uncertainty is now beginning to manifest itself, including future hiring intentions, business spending plans, credit demand, capital markets fundraising activity, with a particularly significant impact cited in relation to commercial real estate transactions which had fallen by around 40% in Q1.

The MPC noted that “referendum effects were likely to make macroeconomic and financial indicators harder to interpret over the next few months”, and “as a result the Committee was likely to react more cautiously to data news over this period than would normally be the case”. That is, given referendum noise, the MPC isn’t going to be coming to any fast or hard judgements about how the UK outlook might be changing in the next few months – a very reasonably position to take in the circumstances. However, the Committee did note that “a vote to leave could have significant implications for asset prices, in particular the exchange rate”. We agree: the exchange rate is likely to remain the most intense pressure point if Brexit risks escalate further. So while selling pressure on the pound has eased over the last week or so (taking Eur/Stg from around 81.2p at one point last week to 79.5p this morning), we continue to see the risks around sterling’s outlook as skewed to the downside in the run-in to the vote.

In the US, CPI inflation was a touch weaker than expected yesterday. The headline figure was slightly below expectations at +0.1% m/m in March, bringing the annual rate down from 1.0% to 0.9%. The key news point however, was in the core index (ex. food & energy) which was also weaker than expected at +0.1% m/m, resulting in the y/y rate slipping from 2.3% to 2.2%. This provides some support to Fed Chair Yellen’s take that the strong rise at the start of the year may have been transitory, but we remain of the view that the jury is still very much out on this stance and we suspect that core inflation is likely to remain in an upward trend over the course of the coming year. Elsewhere in the US, the initial jobless claims were a significant surprise, posting at 253k, their best level since 1973. While an element of caution must be applied to a single week’s reading, the US Department of Labor have reported that there are no data quirks or distortions flattering the result. Furthermore, the four week moving average also showed encouraging improvement and sits at levels consistent with a labour market that continues to register ongoing improvement.

In other news, last night’s economic news from China was better than expected. The Q1 GDP figures were – surprise, surprise - in line with the guidance from the authorities. They showed Chinese growth decelerated - but only slightly - from 6.8% y/y in Q4 to 6.7% in the March quarter. This was the weakest growth reading since the financial crisis, though it was in line with analyst expectations. Other data points were actually ahead of forecasts, with industrial production, retail sales and fixed asset investment and money supple all showing accelerating growth in March. Not many market analysts truly believe in the accuracy or reliability of the Chinese GDP figures and the credibility of their national accounting framework was dealt another blow last night with the failure to release an estimate of q/q growth as it has done since 2011. According to a Chinese statistics official, the calculation requires “exploration and creativity” given some complications around seasonal adjustment. Few analysts would disagree that Chinese GDP figures do indeed benefit from considerable creative input! But more broadly, the totality of recent news from China does suggest that the economy is stabilising and at the margin showing signs of improvement, helped by recent additional monetary and fiscal stimulus. That indicates that downside risks to the global outlook from China have eased in the short-term, which is a welcome development that in turn is helpful for global financial market sentiment. However, the large-scale restructuring and rebalancing of the Chinese economy continues to represent a source of downside risk over the medium to longer term.

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