Good morning,

Dull economics and rapid politics

Once again I’m going to start with the economics of the past 24hrs, the politics are painfully obvious. Last night’s Federal Reserve was the most boring thing to happen in 2017 so far with a decision to hold rates as is and a statement that was very little changed from their pronouncements in December.

I feel sorry for the Federal Reserve in so much that they are increasingly looked at to predict and gauge the economy moving forward in a world of Trumpian influence that could do a full U-turn in 24hrs. Much like us, and the rest of the world, there is nothing that they can do but wait and refuse to speculate. Expectations of a rate hike at the next meeting (March 14-15) sit at about 33% but rise to around 70% for the meeting in June.

We expect Carney to keep sterling weak

Today is Super Thursday in the UK and with that comes an Inflation Report from the Bank of England and a set of new economic projections from the Monetary Policy Committee. We think the focus will fall on inflation and its impact on consumer spending with the latter’s influence over the imbalanced growth profile of the UK economy also something to bear in mind.

Carney will be under pressure to give hints as to whether the Bank of England sees the pick-up in inflation as cause for concern and a rate hike or something temporary as it has been diagnosed by ECB President Draghi.

While we expect upgraded growth and inflation estimates – growth to 2.1% on the year and inflation close to 3% – Carney is more than happy to ladle on the uncertainty and we think that sterling will fall lower as he speaks at Noon. It could easily run higher into the meeting and that is already underway in some crosses.

Wall of inflation coming for UK

Pound was not helped by yesterday’s manufacturing PMI that while showing that British manufacturing companies grew at a decent clip in January, price rises and the genesis of further inflationary pressures continue to stalk the sector. The devalued pound and increased commodity costs are hurting companies that are both part of a supply chain or standalone exporters of goods and products and while some of this is being passed on, we worry about consumption fatigue in the longer run.

World First data on currency hedging suggests that as much as 75% of the hedges that our UK SME clients – both importers and exporters – put in place before the referendum in June last year had expired by Jan 1st 2017. This leaves them exposed to the devalued sterling and provokes necessary price rises. The SMEs that will drive the government’s international trade vision are now starting to feel the effects of the Brexit vote and so will the UK’s consumers.

The feedthrough to consumer prices is already underway and we expect that CPI will break above 2% next month before breaking 3% later in the year. Despite this we believe that there is little chance the Bank of England can hike interest rates given expected falls in private consumption and investment spending in the coming quarters.

Brexit Whitepaper due today 

You would have to be living under a rock to not know that MPs voted to pass a bill to trigger Article 50 last night. Further debates are planned next week but the whitepaper on the government’s plans should be published later today.

The Day Ahead

Elsewhere President Trump is doing his level best to alienate Australia and Mexico at the moment following a diplomatic spat with Australian PM Turnbull and President Pena Nieto.

Apart from Super Thursday the data calendar is rather dull.

Have a great day.