Will the last hawk flee the BoE?...

Week Commencing Monday 11th January 2016

Overriding Market Themes

We start this week with George Osborne’s harsh warning that the UK economy faces a “dangerous cocktail” of economic risks this year. In his speech last Thursday, Osborne identified the slowing BRIC economies, the continued slide in commodity prices and escalating political tensions in the Middle East as potential hazards for the UK economy. He did however omit the markets crucifying Sterling on the back of renewed fears that polling is pointing towards a “Brexit”. In its quarterly report, the British Chamber of Commerce said while its key measures of both services and manufacturing declined in the fourth quarter, the factory indexes fared worse, with many companies citing the strength of Sterling as their biggest concern. All of this continues to push the Bank of England’s interest rate hiking plans back into the long term, with estimates now placing the bank’s first hike in early 2017. One thing is for sure, Sterling will continue to remain under pressure while “Brexit” and poor PMI releases continue to dominate headlines! When will it bottom, who knows!

Over in the US, The greenback surged after non-farm payrolls increased by a seasonally adjusted 292k in December, well ahead of the 200k the market expected. Employment rose in almost all sectors, with the exception of mining which lost 129,000 jobs last year as oil related investment was cut. Unemployment has held at 5 per cent for three months in a row now, but Fed policymakers expect further declines this year. All this puts the Fed in a different position from the Bank of England, with many expected a further interest rate hike at some point this year. That said, the fed will seek to see some stronger evidence of rising pay accompanying the robust hiring numbers. Like the UK, lots of jobs are being created but they tend to be more lower income, service orientated opportunities which have little effect of income growth numbers, and vis-à-vis domestic demand. While officials have noted circumstantial evidence of rising wages, to date the trend in wage data has been disappointingly weak. Either way, things across the pond do appear to be lifting off, here’s hoping we can see a little contagion here!

 

GBP This Week

Thursday’s Bank of England meeting and minutes are the highlight of the week, and while the bank is widely expected to maintain its current policy position, the minutes should provide some valuable insight on the current levels of uncertainty in the markets. What is interesting is that since the last meeting, oil prices have continued to collapse by a further 10 – 15 percent, equities have continued to fall and Sterling has tanked. Markets will focus on the degree these events have changed the outlook of the bank and whether it is enough to change Ian McCafferty’s view as the only hawk on the committee. All things being equal, we expect the status-quo to remain and the voting to continue at 8-1, however expect the language to continue to push Sterling south against all majors.

The only other release of note is November’s industrial and manufacturing production figures on Tuesday. We expect a mixed bag here with industrial production to decline marginally by -0.1 percent on the month, while manufacturing production should rise marginally by 0.2 percent.

USD This Week

Last week’s non-farms continue to show the US economy defies its peers and continues to maintain a healthy job creation pace. In terms of data, we have a pretty quiet week ahead from the US with Friday’s retail sales, UoM consumer confidence and industrial production. In terms of expectations, we expect core retail sales to slow somewhat to 0.2 percent from the 0.4 percent previous posting, while non-core should slow to 0.1 percent from 0.2 percent. Consumer sentiment should remain flat on the month, with a 92.6 print expected.

EUR This Week

Much like the US, there is very little in the way of European data out this week, with most eyes focusing on next week’s ECB meeting. The only central bank release of note is the minutes from the last meeting in December, which are expect to be released this week. We doubt that the minutes will present anything new to the market, so should be relatively uneventful. Furthermore, the markets would likely discount anything contained within the minutes on the basis that global markets have changed so much over the last month that any assumptions would now be considered irrelevant.

The only potential economic release of note is Euro area Industrial Production on Wednesdays should decline by 0.5 percent on the month.

 

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