Good morning,
A bright spot
Friday’s US jobs numbers were a rare flash of positive light with the American labour market growing to the tune of 287,000 employees. One data point would never be enough to turn this market sentiment – and nor should it – but some people will be breathing a little easier courtesy of the best payrolls numbers since October of last year.
The rate expectations curve for the US has not shifted much in the aftermath; there are simply too many unknowns and second stage effects from recent geopolitical events to be factored in before markets start talking about a Federal Reserve ready to hike interest rates. In fact, we still believe that we may have to wait until June of next year for the Federal Reserve to feel comfortable enough to normalise rates further given its mood over the geopolitical situation in the UK, Europe and China.
Bank of England to watch and wait
This week’s focus is Thursday and the first post-Brexit Bank of England meeting. We are not expecting any policy change from the Monetary Policy Committee this month and expect that they will wait until next month’s Super Thursday policy announcement for a potential cut in interest rates and an increase in quantitative easing. There have simply been too few data points since the vote and while anecdotal news from Bank of England agents may be forecasting a slowing of growth, actual activity data is needed.
Does sterling rally on hold in policy? I think so, albeit briefly given markets are pricing in a full 20bps of cuts this Thursday but there is a very strong chance that markets sell into any move higher and any positivity is clipped pretty quickly.
Politics everywhere in favour of the status quo
Political news in Japan was a lot easier to read than the post-Brexit tea leaves with Shinzo Abe’s Liberal Democratic Party on its way to a super majority in the weekend’s elections. The Prime Minister last night stated that he wanted a “swift formulation of comprehensive, bold economic measures” while Economic Minister Ishihara is to begin organising the economic package from tomorrow.
It is difficult to say whether this limits the USDJPY downside and overall yen strength that has become the hallmark of these markets but additional Bank of Japan easing will not be far off should USDJPY break 100 in the coming days.
AUDUSD has also picked up a little ground following the concession of Bill Shorten’s Labour party to Turnbull’s Conservative party in their election. The winning coalition has had its legislative advantage trimmed however and it will therefore prove difficult for Turnbull to lead from the front.
China inflation still weak
Chinese data has shifted little over the weekend with the recent CPI figure matching expectations at 1.9%. There was little in the release to assuage our fears that the People’s Bank of China will need to loosen monetary policy via lower interest rates and possible cuts to Reserve Requirement Ratio in a bid to stimulate bank lending.
Today’s data calendar is very quiet although Bank of England Governor Carney will testify in front of the Treasury Select Committee on financial stability at 10am.
Have a great day.