Forward Guidance, My Foot!

Influencing market expectations on interest rates through so-called "forward guidance". The ECB has been indicating, for some time, that interest rates are set to remain very low for a prolonged period in the Eurozone. More recently, it has indicated that the key deposit rate will be maintained at -0.4% until at least autumn 2019. This shifted rate expectations downwards, with markets of the view that rates will remain lower for an even longer period of time in the Eurozone. Heritage Pay analysts were somewhat taken aback then, to hear ECB President, Mario Draghi, talk about “a relatively vigorous pick-up in underlying insflation” in his testimony on Monday to the European Parliament. The ECB expect rising wage growth, with core inflation up to 1.8% by 2020. The Eurozone economy has grown strongly over the past five years, coupled with corresponding fall in unemployment. This raises the question of why the ECB is not raising interest rates; particularly if it expects a vigorous pick-up in inflation.

However, this hardly seems to be grounds for keeping interest rates negative into 2020, but this is what the ECB is guiding. Bond yields spiked higher in response to Mr Draghi’s comments, before falling back again by end week. The forward policy guidance seems clear - rates are on hold until next autumn. What happens after that will be greatly in,uenced by wage growth and the outlook for core inflation, but some ECB Council members are starting to sound a bit hawkish.

In terms of the week ahead, the main release is the US employment report for September. The consensus is that non-farm payrolls rose by 188,000, above the July/August average increase of 174,000. The unemployment rate looks set to have dipped back to the 18-year low level of 3.8% reached in May, after increasing over the summer due to a firmer pace of labour force growth. All this is indicative of continued strong growth in the US.

Economics survey data are set to feature in the UK with September PMIs due for release. The key Services PMI (which makes up 80% of UK GDP) is expected to have dipped slightly, while still remaining above 50 - which indicates growth.

There is a comparatively light schedule in the Eurozone. The unemployment rate stood at 8.2% in August, a near ten year low, and looks set to have held at this rate in September. Eurozone retails sales /gures for August are also due out. Additionally, the Italian budget is likely to command much attention, especially with a Eurogroup meeting of Finance Ministers on Monday.

See you next week! To discuss how the above may affect you, please contact your Currency Dealer at Heritage Pay on +44 (0) 203 858 7274.

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