Market movers today
In the UK, the main event today is the Bank of England (BoE) meeting, with the rate announcement and an updated Inflation Report published at 13.00 CET. We expect that the BoE will keep its monetary policy unchanged so focus is on the minutes, the economic projections and Carney’s press conference. We also expect the bank to maintain its neutral bias by stating that interest rates could move ‘in either direction’, as we think the BoE is reluctant to indicate rate hikes at a time of elevated political uncertainty. As we think the BoE will continue to signal slower growth/higher unemployment in the updated projections, we think it will see through inflation moving above target if it is only temporary due to the weak GBP. We think the current market pricing of a 15bp hike this year is very hawkish and we expect the BoE to stay on hold for the next 12M.
In the UK, the government is expected to publish its White Paper on Brexit today, but it remains to be seen whether it will contain any new information or just mirror May’s Brexit speech from 17 January.
In the Scandi countries, we get currency reserves data in Denmark, see next page.
Selected market news
As expected, the Fed maintained its target range unchanged at 0.50-0.75% at the meeting yesterday and made no major changes to the FOMC statement. We did not get any significant news on the Fed’s economic outlook or when to expect the next Fed hike, so it will be important to look for hints in upcoming Fed speeches and the minutes. Based on the December meeting, the Fed still awaits more information about Trumponomics as ‘almost all’ FOMC members think there are upside risks to their growth forecasts. We still expect two Fed hikes this year (in June and December), but the probability of a third hike has increased due to a combination of strong US data and a more hawkish Fed at the December meeting. Since the Fed did not give any signals as to when to expect the next hike, a hike already in March now seems unlikely, as the Fed usually tries to prepare markets for upcoming hikes. However, if the economy continues to surprise on the upside and markets stay calm, a hike could come already in May. Whereas markets currently have priced in two hikes a year in 2017 and 2018, we expect the Fed to hike more often, with three to four hikes in 2018 (see also FOMC review: No major changes to the FOMC statement, 1 February 2017).
The market reaction after the meeting was very muted. The US dollar lost some of the ground it had regained earlier on Wednesday and 10-year US Treasury yields slipped back to 2.48% from Wednesday’s high of 2.52%. The picture for Asian equity markets this morning was mixed, with indices in Japan and China in the red. It seems that for now, market sentiment continues to be driven by Trump news.
Yesterday we also got further signs that economic growth gathered momentum, as manufacturing PMIs in the Euro zone, Japan and the US rose to multi-year highs. Even in the UK, where the weak GBP struck the sharpest rise in purchase prices on record, manufacturing activity remained robust.