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Bank of England set to see first dissent on bond buying?

Bank of England set to see dissent on bond buying

Yesterday’s disappointing ADP payrolls report for July coupled with a strong ISM services report, would appear to point to a US recovery that is lumpy at best, and uncertain at worst, particularly when it comes to the labour market.

Federal Reserve vice-chair Richard Clarida’s comments that the Fed could start tapering this year probably shouldn’t have been a surprise, however his remark that rates could start to rise by the end of next year was a shift, however the comments were very much predicated on outcomes, and given recent data on jobs there is still quite a lot that could go wrong. The reality is that Clarida’s comments may well not survive first contact with tomorrow’s non-farm payrolls jobs report if it disappoints in the way yesterday’s ADP report did. Nonetheless US equity markets remained on the back foot as a result of the comments, slipping back from this week’s highs.

European markets had another positive session yesterday, the third one this week, buoyed by the fact that while some of the recent economic data was slightly weaker than previous months, company earnings remain largely positive, and vaccination rates are broadly higher. This helps to give a margin of safety that Asia markets simply don’t have as we head into the winter months, as concerns increase over rising Delta variant infection rates in the region. Against that backdrop, a mixed Asia session, and a negative US close, markets here in Europe look set for a mixed open.

In the UK, the virus data appears to be heading in the right direction, with infections and hospitalisations both falling back, despite assertions a few weeks ago that the government was being unethical and reckless in announcing the dropping of all remaining restrictions. Despite this, the UK economy is still in the grip of the so called 'pingdemic', which in itself is a brake on economy activity, particularly on services, which is something that the Bank of England may be concerned about, however with vaccination rates so high, and the removal of isolation requirements on 16 August, it’s something the central bank won’t have to worry about for much longer.

Today’s construction PMI is expected to remain resilient, with an expectation of a modest slowdown to 64.4, from 66.3. With that resilience in mind, today’s Bank of England meeting could offer clues as to policymakers thinking about current levels of bond buying, particularly in terms of unanimity, in light of recent shifts in thinking from the likes of Dave Ramsden and Michael Saunders. With the departure of Andy Haldane as chief economist at the last meeting, there was little expectation of any discussion on the merits or otherwise of the Bank of England’s monetary policy strategy when it came to the bond buying programme much before the end of the year.

The lack of divergence between policymakers on the current status of monetary policy has been quite notable in recent months, despite the rebound in recent economic data as the Q1 lockdown got eased, and the economy rebounded. It was therefore with some surprise that we have seen two Bank of England policymakers break ranks in the last few weeks to question the merits of current policy, by articulating the prospect that the asset purchase programme might need to be reined in.

Perhaps we shouldn’t have been too surprised by deputy governor Dave Ramsden being the first to break ranks, given his resistance to negative rates less than a year ago. His comments that the case for considering the paring back of some stimulus measures was rising were noteworthy in acknowledging that the vaccine programme has potentially changed the game when it comes to dealing with the virus. It was also notable that he was joined in this view by external MPC member Michael Saunders, in expressing rising concern at how transitory or otherwise inflation levels were likely to be.

The comments from both came in the aftermath of the recent unemployment numbers. which showed that there appears to be up to 1m vacancies which UK business is struggling to fill, as the economy starts to reopen, raising concerns about a wage price spiral in the coming months. While there is little likelihood of a change in policy at the meeting this week, it will still be noteworthy if there is dissent on the pace of the bond buying programme, and whether the Bank will look at slowing the pace. Anything more or less than a 7-1 or 6-2 split on the asset purchase programme would therefore be a surprise, with 8-0 on keeping rates unchanged. The MPC’s main challenge will be anchoring expectations and keeping its options open on when to expect a rate rise.

US weekly jobless claims are expected to drop back to 383,000 from 400,000 last week.

EUR/USD – has finally slipped below the 1.1850 area, opening up the prospect of a move towards 1.1750 on a break below 1.1830. Resistance comes in at the highs this week at 1.1900.   

GBP/USD – continues to remain vulnerable to a drift back to the 1.3820 area, despite yesterday’s move up to 1.3955. A fall below 1.3800 argues for a return to the 1.3720 area. A move through the 1.4020 area is needed to reopen the path higher.    

EUR/GBP – slipped back from the 0.8560 area earlier this week but was once again unable to break the support at the 0.8500 level yesterday. A break below 0.8500 targets a potential move towards the 0.8480 area, and lower towards 0.8280.

USD/JPY – found support at 108.70 yesterday, but unless we move above resistance at 109.80 the risk remains for a move towards the 108.20 area.

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