MPC goes unanimous again

Yesterday’s Bank of England meeting saw interest rates held at 0.5% for the 70th meeting in a row. The policy announcement was always going to be the most boring part of the day, however, and it was the minutes and the Quarterly Inflation Report that prompted some sterling volatility.

Within the minutes the main news was that the only Committee member who was voting for higher interest rates is doing so no more. Ian McCafferty has rejoined the pack and the vote was therefore unanimous to hold policy as is.

The news that the Committee is unanimous in its desire to hold rates as is gave the pound an initial jolt lower but sterling was picked up handily during Carney’s press conference. As we mentioned yesterday, given how distant rate expectations are at the moment, we have to think Carney would have had to set the building on fire to materially weaken GBP.

External more of a fear than internal

Within the Quarterly Inflation Report we saw inflation and growth expectations lowered, although expectations remain that inflation will hit the 2% target within the Bank’s forecast period. This ties in with what we have been hearing from other central banks (the Reserve Banks of Australia and New Zealand in particular) that domestic growth and economic fundamentals are not to be panicked about but that headwinds from abroad are strong and unpredictable.

Carney was not bombastically hawkish in his press conference but continual emphasis that ‘the whole MPC thinks the next rate move will be up’ and that there is ‘not enough tightening in market path’ gives us confidence that the market pricing in as much as 1-in-3 chance of a rate CUT by the end of the year is nonsense.

Referendum still hangs over the pound

The MPC has to remain apolitical but the risk around the referendum is such that it will be commented on in most – if not all – upcoming Bank of England communications. According to the release yesterday, the Bank believes that the recent pound declines may be down to the referendum risk. This speaks to our belief that a vote to remain may see a healthy rebound in GBP and subsequent sentiment in rather short order and that it is not too far of a leap to suggest that the Bank will feel a lot more comfortable hiking interest rates once the vote has been and gone.

In the near term, traders are expecting volatility to continue. Volatility charts are very steep so further whipsaw movements are anticipated, while option prices (-0.8) on protecting sterling downside are nowhere near the levels seen in the 2010 General Election (-4.0) or the 2014 Scottish referendum (-2.9).The lower the level, the more expensive it is to hedge against GBP underperformance.

US labour market rolling over?

It is truly Christmas in February for economists with ‘Super Thursday’ followed by ‘Jobs Friday’. Today’s US jobs report is a very interesting one as recent data has started to show that the US labour market may be starting to roll over following three years of very strong growth.

December’s rocket ship figure of 292,000 jobs added came out of nowhere and has caused many to feel that we will start 2016 with a disappointment. The slack employment component of the January services ISM reading was the major alarm bell for the dollar which is having its worst week since 2009.

Wages are more important in the longer run as they transmit into inflation expectations eventually and it will be interesting to see what the market does with the dollar should we see a poor headline number but decent wage growth.

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