Good morning,
Central Banks to take the stage
Currencies are all over the place, equity markets are falling at a rate of knots, oil prices are making new lows seemingly every day; it seems like there is little to be positive about at the moment. Previously, throughout the Global Financial Crisis and the years of recovery, central banks have acted as knights in shining armour; riding through the barren and wretched investment landscape to help summon liquidity and stability.
The next seven days are set up for a similar crusade to take place with the latest European Central Bank meeting today and policy announcements from the Federal Reserve, Bank of Japan and the Reserve Bank of New Zealand next week. The Bank of Canada meeting yesterday saw sanity prevail and there was no change in interest rates.
Draghi to bring inflation thoughts front and centre
Today’s ECB meeting is unlikely to see any policy announcements. Indeed, according to unnamed sources, a “serious policy debate” is not expected this month following the changes made last month and in the absence of new economic projections – due in March. The minutes of the December meeting, released last week, suggested that the rate setting committee of the European Central Bank is seriously split on policy at the moment; some were looking for no change in policy, some wanted a lot more than they got.
As per usual, the Draghi-led press conference is key to the path of the single currency. There are many things that are driving euro movement at the moment – aversion to risky assets, a strong current account, interest rate differentials, the migration crisis and weak economic data – and today may see the ECB President add his impetus.
It may be difficult for Draghi to convince markets that the March meeting is still ‘live’ following the disappointment in December but language around the Bank’s monitoring of the inflation outlook may drive some weakness in EUR by the end of the day. The decision is due at 12.45 GMT with Draghi speaking at 13.30.
UK wages not growing enough
Yesterday’s wage numbers allowed sterling to find a little bit of support albeit a recovery still looks way off. Slack in the labour market is still being taken up and unemployment has fallen to its lowest level in a decade. The absence of wage pressures given the tightness in labour markets is the factor that is puzzling and dismaying us and policymakers in equal measure. Average wages grew by 2%, not enough yet for a pick-up in inflation.
Retail sales could be strong, we now expect BOE rate rise in November
I am still bullish wages here in the UK but short term weakness in markets and the lack of headline inflation, courtesy of commodity prices, has caused us to delay our thoughts on when the Bank of England may hike interest rates. We previously thought that May 2016 looked the most likely meeting for the beginning of the Bank of England’s rate normalisation process; that has now shifted to November 2016.
This morning’s retail sales numbers may help sterling further. Today’s retail sales announcement for December is a difficult one to call. Anecdotal evidence seems to show that December was a strong time for the high street but the advent of ‘Black Friday’ means that November’s 1.7% gain may have eaten some of December’s lunch. ‘Cyber Monday’, the shopping day for people who cannot bear an out of town shopping centre, falls in December this year and should allow for decent strength.
News from the US yesterday was altogether rather poor; housing starts i.e. the number of housing projects that have broken ground in the past month, fell alongside a slide in building permits. Inflation also dipped below zero. Dollar bulls will hope that today’s initial jobless claims numbers will show a continued tightening of the US labour market.
Have a great day.