Good morning,
Has Santa Claus seen enough?
If you’re an economist then you get a fair few extra Christmas mornings above and beyond the usual one on December 25th. Today is one of them with the publication of the latest Bank of England Quarterly Inflation Report, policy decision and meeting minutes in what has come to be known as ‘Super Thursday’. The market consensus is that there will be a 25bps cut today but once you get to thoughts around what else happens then we start seeing there is very little consensus over whether there will be an increase in Quantitative Easing, or if a credit easing plan will be launched, or something particularly imaginative.
The key question now for sterling is whether the 2 weeks between the flash PMIs and these final numbers have further driven MPC members into a mind-set of stimulus. The flashes were enough to prompt Bank of England member Martin Weale to retreat from a rather hawkish stance and instead back stimulus at this Thursday’s meeting; will a further dip in the composite PMI have strengthened that assertion?
Data supports our fears of a recession
Yesterday was a fantastic example of ‘another day, another indicator of UK economic performance falling to a 7 year low’. The 4.6 point fall in the strength of UK economy between June and July is the largest decline in the near 20 year length of the PMI survey and backs up the belief that the most important sector within the UK economy took a substantive body blow in the weeks post-Brexit.
That is not to suggest that this will continue of course. The uncertainty in these numbers are high and one cannot legitimately predict a recession off one month’s numbers; one swallow doesn’t make a summer and nor does one frost make a winter but a continuation of this trend will see Q3 GDP fall into negative territory.
Services businesses do seem to expect business activity to increase in the next 12 months but confidence is low and will remain so until we see some form of support to UK businesses from government and monetary authorities and clarification from Westminster on what Brexit really means.
Decision and reaction
The Bank of England policy announcement is due at noon with Carney taking to the stage for the policy statement and the press conference at 12.30. Any movement from the Bank of England over and above a 25bps cut will likely take sterling lower but should we see a marginal disappointment – no cut or only a 25bps cut – then we will see a significant rally in the value of sterling.
We are still holding out for a decline in sterling through the rest of the year; there is a lot more data to come and a policy soupcon today does not preclude a policy onslaught tomorrow.
Doldrums approaching
Elsewhere, price action has been typical of the summer doldrums and once today’s Bank of England policy announcement and tomorrow’s payrolls report is out of the way, with most parliaments on holiday until the end of the month at least, we think things will finally start to cool out.
Have a great day.