Saturday 21 April 2018

Daily Market Update: Spotlight falls on the Bank of England

Richard Ramsey

Wall Street’s S&P 500 closed 1% lower yesterday with retail stocks leading the charge.

A disappointing earnings report from Macy’s Inc. renewed concerns about other retail giants such as Wal-Mart. Macy’s cut its profit forecast for 2016 and posted weaker than expected revenue figures for Q1.  At one stage shares of Macy’s were down as much as 14%. Meanwhile the US’s largest retailer, Wal-Mart, saw its share price slide as much as 4.6% yesterday. Investors are concerned that consumers are simply not spending, or at least in the bricks and mortar retailers as opposed to the internet retail giants such as Amazon. This is significant as consumer spending accounts for around two-thirds of the US economy. Analysts remain nervous ahead of tomorrow’s US retail sales figures for April. Corporate earnings results in Europe continue to disappoint too.  The Euro Stoxx index is down 0.7% already this morning which follows a similar-sized fall yesterday.

The incoming economic data points to a slowdown in UK economic growth. The latest figures for March revealed that UK manufacturing suffered its biggest year-on-year fall in output in almost three years.  UK manufacturing fell by 1.9% y/y in March. The m/m measure increased by 0.1% which was one-third of the rise expected. The wider industrial production measure also surprised to the downside with the 0.3% m/m gain below the 0.5% printed expected. UK industrial production was down 0.2% y/y. Yesterday’s poor UK manufacturing figures didn’t help sterling’s cause. EUR/GBP has moved from 78.8p at yesterday’s open to just north of 79p this morning. Cable has slipped from $1.446 to $1.443 this morning.  Meanwhile EUR/USD is broadly unchanged at $1.14. We can expect a downside surprise with the Eurozone industrial production figures due today following the weaker than expected figures from some of the individual countries earlier in the week. The market consensus has pencilled in a 0.9% y/y rise.  However, with France posting a 0.8% y/y decline and Germany reporting a rather pedestrian 0.3% y/y gain a sub-0.9% y/y print for the Eurozone looks inevitable.

The spotlight falls on the Bank of England today with a policy decision, MPC minutes, Quarterly Inflation Report and a press conference to look forward to. The MPC is expected to keep its monetary policy settings on hold. More attention will be played to the BoE’s new forecasts with the risks from a Brexit likely to feature prominently in the press conference and the associated Q&A. With the EU Referendum on the horizon, the MPC is likely to be highly non-committal at such an uncertain moment. Indeed the April MPC Minutes highlighted that “referendum effects” are likely to “make macroeconomic and financial market indicators harder to interpret” over the next few months and thus the MPC is likely to “react more cautiously to data news over this period” than would normally be the case. The market inference here is twofold; firstly, the MPC is unlikely to wish to steer markets too clearly about the direction of future policy. And second, the market is likely to be unwilling to materially adjust its assessment of the timing of policy normalisation currently discounted by the front-end of the interest-rate (swap rates) curve. Nevertheless, there is expected to be more inflationary pressures in the latest set of projections than was the case back in February. Since then, sterling on a trade weighted basis has depreciated 4%, the Crude oil price has risen by close to 50% and market interest rates are significantly lower (~10bp in the 1st year of the MPC’s projections, ~25bp in year 2 and ~30bp in year 3). As a result, upward revisions to the CPI projections are expected.

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