February is a month that most people cannot wait to get over. If you’re anything like me then you are dealing with a cold, the New Year’s resolutions of being healthier have been quickly forgotten and there is a lot of month left at the end of the money. Sorry for the Monday mood.
In markets terms, traders are also waiting for March to begin as that is when the next European Central Bank, Federal Reserve and Bank of Japan meetings take place. These three central banks have been at the heart of market movements through the past quarter; the Federal Reserve have hiked interest rates, the European Central Bank are slated to further stimulate the European economy at their March meeting having disappointed in December and the Bank of Japan last week cut interest rates into negative territory.
That is not to say that other central banks will not have their say through February; the Reserve Bank of Australia meet tonight and the People’s Bank of China have the ability to disrupt markets should they slate further monetary policy easing for the Chinese economy as they go into next week’s Lunar holiday celebrations.
This Thursday’s Bank of England meeting is another SUPER THURSDAY policy extravaganza with the rate decision, meeting minutes and the latest quarterly inflation report all released at the same time. These announcements have previously been very negative for sterling as the Bank of England has refused to look through the low levels of headline inflation in favour of keeping rates at the current ultra-accommodative level.
We expect nothing to change that tack at this month’s meeting although we are unsure as how badly it can hurt an already depressed pound.
Market expectations of when the first hike will finally come have been pushed out into the middle of next year with some measures suggesting that an interest rate cut is more likely than a hike; a full three basis points – a cut of 0.03% – are currently priced in. This is inane.
Communications strategies, or the lack thereof, have been a huge sticking point throughout the financial crisis. The Bank of Japan’s was bulldozed last week as they cut interest rates into negative territory despite the Governor telling the Japanese parliament that no such plans existed.
Similarly Mark Carney and other members of the Monetary Policy Committee have reiterated time and time again that the next move in interest rates would be higher. Rightly or wrongly the characterisation of the Bank of England Governor as an ‘unreliable boyfriend’ has stuck and has damaged the credibility of the BoE.
Updated forecasts that will form part of the Quarterly Inflation Report will likely show weak but rising inflation pressures while growth is set to be revised slightly lower. Despite the increasing inflation outlook there is little reason to suggest any form of policy action before the EU referendum.
Herein lie the reasons for the possibility of a rather surefooted bounce back for the pound once the EU vote is been and done with; working on the basis that the UK votes to remain in the EU. The alternative is not a particularly happy prospect at all. Much like the whole month of February.
Elsewhere through the week we have the latest run of PMI data from the UK economy. This morning’s manufacturing PMI numbers suggested that consumer facing manufacturing recovered well in January. That bodes well for the Services number on Wednesday whilst we are looking for the Construction sector number, due Tuesday, to benefit from repairs and renovations that arose from storms and floods earlier in the month.