Good morning,
Bank of England at their most political
On balance yesterday’s Bank of England meeting was never going to set markets alight coming a month before a Quarterly Inflation Report and 12 weeks before the electorate go to the polls to decide on the referendum. The decision was unanimous to hold policy as is.
Fears and uncertainties over the outcome and impact of the referendum campaign and the eventual vote on the UK’s membership of the EU have remained front and centre for the Monetary Policy Committee and there was little incentive for policymakers to stick their head above the parapet for hikes or cuts until the result is known.
Not just the referendum
As we highlighted yesterday, structured economic data has also been a depressant and it is likely that Q1 was the weakest in growth terms since 2013 with expectations that businesses and consumers may suspend spending and investment decisions through Q2 as the vote closes in. The Bank of England agreed with these thoughts and it has become clear that the sooner the referendum is behind us, the better it will be for members of the MPC.
November is the earliest meeting we could possibly see the first hike by a Bank of England dealing with a UK that remains part of the EU but this is very much contingent on strong wage and price growth.
US inflation disappoints
The US dollar has remained strong through the Asian session despite a disappointing inflation release. Fed Chair Janet Yellen made sure to emphasise at the Fed’s March meeting that the recent pick-up in inflation could be transitory and today’s number shows that improvements are by no means a straight line.
As it currently stands it is a coin flip on whether the Federal Reserve will hike rates again this year and it largely depends on upcoming inflation fundamentals as to how that will play out. For my money I think that there is a chance of another rate rise, maybe 2 this year, but a broader pick up in core prices will need to be seen.
Help may come from the US labour market which continues to smash through recent records. The best jobless claims numbers since 1973 are all well and good but if they do not translate into higher wages then we are no closer to a normalisation of monetary policy.
China rebound?
Overnight news from China has been met positively by markets with GDP, credit, industrial output, investment and retail sales figures all beating estimates. Maybe the IMF were on to something when they revised Chinese growth estimates higher. Sentiment in Asian and Australasian economies are keenly balanced on good news and trade data with the behemoth that is China. This morning’s numbers will have helped that risk environment.
Today’s focus is twofold. The official campaigning for either side in the Referendum starts today as it marks 12 weeks until we head to the polls. Our opinion on the result and the likely reaction of sterling have not changed in recent weeks and our base case scenario remains that the UK votes to stay part of the EU.
Elsewhere we have US industrial production numbers at 2.15pm and consumer confidence numbers at 3pm.
Have a great day and a better weekend.