Thursday 14 December 2017

Daily Market Update: BoE warns of Brexit-induced recession

Prospect of a Brexit from Europe has been a big factor
Prospect of a Brexit from Europe has been a big factor

Simon Barry

The Bank of England was centre-stage yesterday as far as the financial markets were concerned.

As expected, the MPC left monetary policy settings unaltered in May (Bank Rate at 0.5%, QE asset purchase stock at £375bn). The May MPC Minutes revealed another unanimous policy vote on Bank Rate (the fourth successive unanimous vote), in line with consensus.  There had been some market and media speculation about a dissenting dovish vote(s) but this did not come to pass. The main interest yesterday was in the BoE press conference which offered more observations on the UK referendum on EU membership. As expected, the mood music around the economic implications of a ‘Leave’ outcome was distinctly cautious, with warnings about stagflation (lower growth – possible recession – higher unemployment, higher inflation). The BoE made some other revisions to its economic forecasts and indicative projections. Most notably, GDP growth forecasts were trimmed: by 0.2pp to 2.0% in 2016, by 0.1pp to 2.3% in 2017 and by 0.2pp to 2.3% in 2018.

As expected, Eurozone industrial production surprised to the downside in March, as we flagged in yesterday’s commentary. The annual rate of growth slipped from an upwardly revised 1.0% y/y in February to 0.2% in March. This compared with the market consensus of 0.9%.  There has been better news this morning, however, with German GDP for Q1 exceeding analysts’ expectations.  The Eurozone’s largest economy grew at its fastest pace in two years in Q1 as domestic spending offset weakness in global trade.  German GDP rose by 0.7% q/q beating the 0.6% print pencilled in by analysts.  Given the recent slump in German industrial production in March, however, this Q1 figure is likely to represent a high point. This morning we get the Q1 economic growth figures for the Eurozone as a whole with a growth rate of 0.6% q/q predicted.

The US has a busy day of economic data releases and will attract the most attention from financial markets. Following the disappointing Q1 earnings results for some of the US retailing giants (e.g. Macy’s) earlier in the week, markets will be focussed on April’s retail sales figures. Analysts are expecting the underlying retail sales measure (excludes car and gasoline sales) to accelerate from a lacklustre 0.1% m/m in March to 0.3% m/m for April. Outside of retail sales we have producer price inflation and the University of Michigan consumer sentiment survey for May.

Finally, the San Francisco Fed President John Williams delivers a speech this evening. This follows a number of Fed speakers over the last 24 hours who have been signalling the need for higher US interest rates. Boston Fed President Eric Rosengren (voter) said that financial markets have odds of further rate hikes priced too low, adding that if second quarter data continue to point to stronger economic growth, labor market improvement and rising inflation, it would be "appropriate" to "continue the gradual normalization of monetary policy." Meanwhile Kansas City Fed President Esther George (voter) reasserted her call for higher rates, saying current levels are “too low for today’s economic conditions” and that she supports gradual rise toward “a more normal level.”  Economists polled in a recent Reuters survey expect the Fed to wait until September before raising rates again.  Less than one-third of the 90 economists polled expect the Fed to raise rates at its next meeting next month.

On the currency markets EUR/USD has moved lower over the last 24 hours from $1.142 to $1.134.  Cable is down slightly from $1.444 to $1.441 over the same period. Meanwhile EUR/GBP is currently changing hands at 78.7p which compares with 79.1p at yesterday’s open.  

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