Friday 19 January 2018

Daily Market Update: Central Banks take centre stage


Jason Rehill

Central banks take centre stage today as the Bank of England, ECB and FOMC are set to release meeting minutes today.

Additionally in the UK, the Bank of England MPC meeting minutes come alongside the October rate decision, where the bank rate is likely to be left unchanged at 0.50%. The minutes from the ECB and FOMC are from the September policy meetings where interest rates were also left unchanged. Before looking at the day ahead in more detail I will quickly recap the main economic releases yesterday. Industrial production numbers were in focus in the UK, Germany and Spain. Industrial production in Germany grew 2.3% year-on-year in August, but missed market expectations of 3.3%. Industrial output in Spain rose just 2.7% year-on-year and again missed market expectations of 4.7%. The slowing industrial data out of Germany and Spain yesterday paints a gloomy outlook for economic growth in Europe especially given Tuesday’s slightly weaker European PMI’s. The headline UK Industrial production number released yesterday showed a larger than expected rebound in activity in August which was boosted by gas extraction and transport equipment.

Other data of note yesterday included the UK shop price data that showed a further slowdown inn September to -1.9% year-on-year. The index has been in contractionary territory since mid-2013, highlighting what has been a disappointing contribution of retail prices to overall inflation. Also overnight in the UK, the RICS house price index fell to 44 in September from 53 in August, back to the same level it was in July, as British house prices rose more slowly in September.

For the day ahead the initial focus will be on the Bank of England official bank rate decision at midday, where the expectation is for the MPC to leave policy settings on hold in October. In terms of the dynamics around the vote, a repeat of the September’s 8-1 vote on bank rate is also expected, with Ian McCafferty once again likely to be the sole dissenter opting for a 0.25% rise. Given the recent intensification of downside risks to global growth (weak US payrolls, Atlanta Fed’s “now-cast” Q3 GDP estimate running at just 1.1%, softening PMI’s in Asia) the MPC’s assessment of the economic environment may well take a more cautious tone; particularly given that UK data is evidently losing momentum. UK Services PMI for instance fell sharply in September, recording the lowest outturn since April 2013. Though, any bigger shift in policy tone is more likely to come in the Quarterly Inflation Report next month, with only marginal changes expected in today’s Minutes.

As for the ECB, the September meeting saw no changes to its policy rate or QE program, nonetheless President Draghi made it clear in the subsequent press conference that downside risks to the outlook for growth and inflation have increased in light of weakness in China and other emerging market economies. Given Mr. Draghi’s extremely dovish press conference tone it is very likely that this may be reflected in the minutes of the September meeting. Market participants will also scan the minutes looking for any reference to discussions around increased bond purchases i.e. QE2.

After the European close we will receive the minutes of the September FOMC meeting however the importance of the minutes has likely been diminished by the soft September jobs report, as the discussion among the Committee may now be seen as “old news.” At the very least, the risks with respect to the market’s reaction may be skewed. That is, even if policymakers seemed very close to hiking in September,or if the desire to raise rates later this year was clear, market participants will be inclined to dismiss the hawkish tone because the discussion occurred before the Fed had the disappointing September jobs data in hand. Conversely, if the Committee seemed hesitant to hike in September – even before seeing the weakness in payrolls – market participants’ expectations for no Fed action this year would be strongly reinforced.

While the September jobs data may have been a game changer for the Fed, market participants will nonetheless look to the minutes for more clarity over what is driving the Fed’s decision making process. In particular, the degree of concern that policymakers had over international conditions and the factors that may have undermined the Committee’s confidence over the inflation outlook (making them hesitant to hike in September) will be closely scrutinised. In addition, the extent to which the strong dollar entered into the Fed’s thinking will be closely watched, as this may provide insight into the Fed’s decision making process going forward.

Finally the Irish NTMA will today auction €1bn of the 2.4% May 2030 bond. This is the last of the scheduled bond supply from Ireland this year, the completion of which will see the 2015 funding target of €13bn being achieved. As highlighted by the NTMA, Ireland has been funding approximately 12 months in advance of cash outflow requirements, indicating a strong funding positon to start 2016.

Sponsored by: Ulster Bank

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