Interest Rate Rumour Makes Sterling Less Interesting
Sterling fell in the early part of the week due to rumours of a near-term UK interest rate cut. Word on the street was that there was increasing support, of an interest rate cut, from at least two members of the Bank of England's (BOE) Monetary Policy Committee which sets interest rates. The rumour has now been confirmed.
MARKETS NOW ANTICIPATING A JANUARY RATE CUT
Interest rate futures prices suggest that markets now give more than a 70% probability to a quarter point reduction on 30th January up, from less than 10% just over a week ago (see Chart 1). The move has been driven by comments from BoE Governor Carney and two other Monetary Policy Committee members (Tenreyro and Vlieghe) all of which were regarded as dovish enough to suggest that they may vote for a near-term cut. As two members of the MPC voted for a cut at the last two meetings support from another three (of the nine person Committee) would be enough to ensure a majority.
NEXT WEEK’S UK DATA COULD BE CRUCIAL
The coming week’s UK economic data releases - in particular Friday’s ‘flash’ PMI data for January - now seem set to command inordinate attention as markets look for further clues on whether the BoE is set to move. Moreover, as Vlieghe said that he needed to see a significant improvement in UK data post-election in order not to vote for a rate cut, the focus will primarily be on forward-looking survey data. In December, the services PMI recorded a significant improvement between its first reading and the final estimate, which contained some post-election returns, rising from 49.0 to 50.0. We expect a further gain in January to 50.8. In contrast, the manufacturing PMI, which is more impacted by international factors, was only revised up modestly in December. We forecast a bigger rise in January (to 48.8 from 47.5) but that would still leave it well below the key 50 level signalling expansion. Tuesday’s CBI Industrial Trends survey, which usually gets less market attention, will also provide further forward looking evidence. Also of note will be the UK labour market report. Recent MPC updates have downgraded previous concerns that a very low unemployment rate and accelerating wage growth signalled the possibility of rising domestic inflationary pressures. We expect Tuesday’s outturns to show a fall in the unemployment rate to 3.7% and a big employment rise but a further deceleration in wage growth. That would be a decidedly mixed message for the MPC to consider.
WILL THE BOE HAVE ANYTHING MORE TO SAY?
Markets will also be interested in whether any MPC members publicly make the case for waiting. Prior to the unexpectedly weak December retail sales data, many economists were arguing that there was a strong case for holding off on any policy change at least until the March meeting, which will be after the Budget, to see if there is a pickup in growth. However, so far no MPC member has been prepared to publically say that markets are getting ahead of themselves and they are now running out of time before they go into their ‘quiet period’ ahead of the January announcement. Given the recent tendency for central banks to try and avoid surprising markets with their policy changes this lack of comment may be significant.
OTHER CENTRAL BANKS ON HOLD FOR NOW
The message from other major central banks is that after providing further stimulus late last year they are now on hold while they assess developments. That suggests that next week’s announcements from the Bank of Japan (Tue) and the European Central Bank (Thu) will be non-events for markets. The ECB is expected to deliver a similar message to December. Then it noted that the downside risks for the outlook may now be less pronounced but that if further stimulus was warranted it may be better if it came from fiscal policy. The ECB will also confirm that its comprehensive strategy review is now underway. It has been reluctant to talk about what this will cover but indications are that the inflation target will be discussed as will any potential side effects of both negative interest rates and the asset purchase programme. The BoJ is likely to say that they are now waiting to see the effects of the Japanese government’s recent fiscal package but that further stimulus will eventually be introduced if necessary.
AFTER THE US-CHINA TRADE DEAL
One of the things that central banks will be waiting on is indications of the impact of the US-China trade deal on the global economy. Last year it was often argued that a primary cause of the slump in global manufacturing was the negative impact on confidence from ongoing global trade tensions. So markets will be looking for signs from business surveys that confidence is rebounding in 2020. Amongst the first indications of this will be Friday’s January ‘flash’ PMIs. It’s probably too early to expect a significant rebound as yet particularly as the deal was formally signed on 15th January. So while we expect manufacturing PMIs in both the Eurozone and the UK to have picked up a bit they are both likely to have remained below the 50 expansion level. So the message for now will still be that service sectors continue to outperform manufacturing. However, that may change as the year goes on.
IMPLICATIONS OF TRUMP’S IMPEACHMENT
President Trump’s impeachment trial will get underway in the US Senate on Tuesday. Given that the Upper House of Congress is Republican controlled it is unlikely that he will be found guilty. Consequently, the key issue for markets may be whether the process has any impact on voting intentions ahead of November’s elections. Opinion poll evidence on how ‘floating’ voters view developments is still ambiguous. So perceptions may be shaped by whether or not the process is seen as fair.
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