As Bank of England looms will we get a Damp Squib or an Airbomb?
Yesterday saw another topsy-turvy session as US markets slipped back after US oil inventories showed a bigger than expected build, sending oil prices sharply back from whence they came earlier in the week, pulling equities along with them.
As oil prices were starting to slide back Fed Chief Janet Yellen was painting a fairly bullish outlook for the US economy, while the latest ISM services report was blowing the doors off expectations for October.
The resulting surge in the US dollar and treasury yields raised further the prospect that we could well see the first US rate rise in nine years next month, with US 2 year yields hitting their highest level since April 2011.
The change in sentiment is all the more startling given that just prior to the October FOMC meeting markets were assigning a 32% probability of a rate hike next month, and had been as low as 25%. That probability now sits at 58%.
Despite it being the 5th November it seems unlikely we will get much in the way of fireworks at today’s Bank of England rate meeting, minutes and subsequent inflation report, but if we do its more than likely to be a “Damp Squib” than an “Airbomb.”
The low expectations are a little surprising given the rebound seen in this week’s October PMI in the manufacturing and services sector data it does seem rather strange that markets aren’t pricing in the possibility of a UK rate hike much sooner than they are?
The reason for this is probably down to Governor Mark Carney’s continuous “Jumping Jack” contortions over when to expect a rise in rates over the last few months, as he has veered between hawkish and dovish.
Even the internals of the respective reports point to continued resilience in job creation, with gains across all three sectors along with robust pipelines of new orders.
When looking at UK economic data alongside US economic data there does appear to be a much more compelling case for raising rates here in the UK than there does in the US, yet all the talk is about the prospect of a US rate rise next month.
While inflation remains very low, wage growth here in the UK is well above US levels, and has prompted speculation that we could see another MPC policymaker break ranks with Ian McCafferty to argue for a rise in rates. If someone does do that, the smart money could well be on Martin Weale given that he was also a dissenter 12 months ago.
Today’s inflation report will no doubt take note of the slowdown in growth seen in preliminary Q3 numbers though it should be remembered that the data for this quarter is not fully complete and could be revised higher.
As such while we are likely to see a revision to the inflation and growth forecasts to the downside this will need to be balanced by the rebound seen in the recent October data which means any reduction in forecasts may be less than expected.
In the US markets continue to price in the prospect of a rate rise next month despite economic data that still shows significant weak points in parts. Yesterday’s October ADP employment report came in at 182k, with September being revised down to 190k, but on the other hand yesterday’s October ISM services report blew away expectations on all fronts, with the employment component showing one of its biggest gains in 10 years.
This strong report was rather at odds to a weaker Markit services report for the same month, and appears to show that while the services sector appears to be doing well, the higher paid manufacturing sector plainly is not, pointing to a significant divergence forming in the US labour market.
Given this pick up in hiring the next expectation would be for wages to start showing signs of rising and thus far we’ve seen little evidence of that in the data thus far. Today’s Q3 unit labour costs data might change that which are expected to show a rise of 2.2% up from the 1.4% decline seen in Q2.
On the Fed speakers side of the equation Governor Brainard stated that she still saw slack in the US labour market, and that the Fed was still carefully monitoring inflation expectations, and that wages growth had some way to improve. On the other side Fed Chief Janet Yellen’s comments that December was a “live” meeting for a potential rate rise but any decision would ultimately depend on the data.
Later today we can also expect to hear from Fed vice chairman Stanley Fischer and New York Fed President William Dudley.
EURUSD – the slide below the 1.0900 area has now opened up the euro for a move back towards the May and July lows at 1.0820, having broken trend line support from the 1.0460 lows. A break through 1.0800 would increase the prospect of a move lower towards 1.0500. Any rebounds need to push back above the 1.1080 area.
GBPUSD – having peaked again at resistance at 1.5510, the October highs and 200 day MA remain the key obstacles to a move towards 1.5630. Long term trend line support at 1.5215 from the 1.4565 lows remains a key level as does yesterday’s low at 1.5360.
EURGBP – the free fall in the euro has continued pushing below 0.7075 with the potential to retest the 0.7000 level and August lows at 0.6950. Resistance remains at 0.7150 after failing to push back above it earlier this week.
USDJPY – the September highs above 121.70 continue to act as strong resistance. Above 122.00 could suggest a return to the 124.00 area. We have support at the 120.20/30 area, with a break retargeting the 119.20 area.
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