- UK inflation cools but will rate hike pressures?
- Economic and monetary policy uncertainties could drive volatility;
- US PMI data crucial after uninspiring H1.
As we enter the business end of the week, focus has turned away from earnings season and onto some of the other major economic events that could shake things up in the markets.
While there are still a large number of companies reporting second quarter earnings on Thursday – 43 from the S&P 500 – attention is shifting towards tomorrow’s US jobs report and today’s Bank of England decision, otherwise known as "Super Thursday". The BoE has been one of the central banks that has become much more hawkish in recent months and up until a few weeks ago, was seen as possibly following in the footsteps of the Bank of Canada and raising interest rates.
Since then, inflation has fallen from 2.9% to 2.6% which may have taken the wind out of the sails of those pushing for higher rates. At the last meeting, three policy makers voted for a rate hike and at least one other – Andy Haldane – has since claimed they contemplated doing the same and could be persuaded to at the upcoming meetings. Inflation running both above target and the level that the central bank anticipated was cited as the reason for voting for higher rates but with price pressures having cooled last month, logic suggests calls for such action should have to.
This assumes that higher inflation was the sole reason for supporting such a move and that the coordinated nature in which a number of central banks have appeared to lean towards tightening measures is a coincidence, which I’m not convinced it is. Given the latest data, today’s vote and the minutes, inflation report and press conference that accompanies it should shed further light on the BoEs expectations for interest rates. Markets have all-but priced out a rate hike today but recent moves in sterling and UK yields suggest traders are not convinced that the BoE will hold off too much longer.
Given the uncertainties surrounding both the UK economic outlook – as a result of Brexit – and the BoE’s position, markets could become quite volatile, particularly when the voting is released and during the press conference with Governor Mark Carney and some of his colleagues. Any suggestion that the recent inflation data hasn’t deterred policy makers in pushing for a hike could pushing the pound and UK yields higher once again, while the opposite could hurt them both with them already trading at quite elevated levels.
The US won’t fall off the radar today, with a plenty of economic data being released throughout the session. While tomorrow’s jobs report is widely regarded as the biggest release each month, the ISM-non manufacturing PMI, Markit services PMI, jobless claims and factory orders numbers all provide crucial insight into the economy, particularly the two reports focused primarily on the outlook for the all-important services sector. We can therefore expect plenty of interest around these releases, particularly as labour market aside, the data this year hasn’t blown anyone away.
