- The Bank of England expected to stay dovish in today’s policy announcement
- US jobless claims will continue to paint an upbeat profile for the labour market
- The recent rise in the US 2-year Treasury yield hints at a rate hike next week
The Bank of England updates its outlook for monetary policy today. The event will be widely read in the wake of yesterday’s disappointing report on UK industrial output. Later, the weekly update on jobless claims will provide additional perspective on the still-encouraging outlook for the US labour market. Meanwhile, keep an eye on the US Treasury 2-year yield, which is rising due to what appears to be a revised outlook for a rate hike at next week’s Federal Reserve Bank policy meeting.
UK: Bank of England Policy Announcement and MPC Minutes (1100 GMT): Yesterday’s surprisingly weak data on industrial activity for July give the Bank of England (BoE) a new reason to delay plans for tightening monetary policy.
Thanks mostly to a weak manufacturing sector, output slumped 0.4% in July from the previous month, well below the consensus forecast for a slight gain. The year-on-year comparison is still positive, but the 0.8% annual gain is the weakest in five months and well below the 1.5%-2% range that prevailed in the previous two months.
By some accounts, the industrial data is flashing a warning. “The economy is losing momentum. I don’t think it’s collapsing – but there are clear signs of stress,” an economist at Royal Bank of Scotland Group told Bloomberg yesterday.
Another sign that UK growth is ticking lower is yesterday’s softer GDP report from the National Institute of Economic and Social Research (NIESR). The consultancy estimated economic activity increased 0.5% for the three months through August, down slightly from 0.6% for the quarterly data through July.
Overall, the latest numbers suggest that downside risk has inched higher and so it would be surprising to see the BoE turn hawkish in today’s policy announcement. Unsurprisingly, the crowd’s assuming that the central bank will leave the policy rate unchanged at 0.5%, according to Econoday.com’s consensus forecast.
US: Initial Jobless Claims (1230 GMT): This week’s update of the Federal Reserve’s broad-brush benchmark of the labour market advises that a moderate pace of growth momentum remained intact through August. The data suggests that last Friday’s weaker-than-expected payrolls report for August isn’t a sign that macro momentum is deteriorating.
The Labor Market Conditions Index (LMCI) – a multi-factor benchmark that offers a comprehensive measure of the job market – rose to 2.1, which marks a seven-month high. Positive and rising values are associated with expansions, according to the Fed, and so the latest release offers an encouraging outlook for the labour market and, by extension, the economy overall.
Another positive for the labour market: yesterday’s release of the government’s estimate of job openings in July, which jumped to 5.75 million was an all-time high for the 15-year history of this data set.
Meanwhile, a bullish message remains intact for jobless claims, a leading indicator for the labour market. Although new filings for unemployment benefits increased to an eight-week high at the end of August, the trend is still falling, based on the trailing one-year period (see dotted red line in chart below).
The upbeat message is expected to be reaffirmed in today’s release. Econoday.com’s consensus view sees claims falling 7,000 to a seasonally adjusted 275,000 for the week to September 5.
In other words, claims are on track to stick close to the four-decade low as of mid-July. Granted, today’s data reflects a light week for filings due to the long holiday weekend that just passed in the US. In any case, today’s release probably won't provide the bears with fresh ammunition for arguing that the economy is slipping over to the dark side.
U.S. 2-Year Yield: The encouraging numbers for the labour market (see post above) have lifted Treasury yields this week. In particular, the 2-year yield - considered the most sensitive spot on the yield curve for rate expectations - ticked up in mid-day trading yesterday (New York time) to 0.75%, matching the highest level for the past four years, based on daily data from Treasury.gov.
In short, the crowd is again raising the odds that the Federal Reserve Bank may start to raise interest rates later this month at the policy meeting that's scheduled for September 16 to 17.
“The data - in absolute terms, and relative to the level of unemployment and the population - now signal unambiguously that the labour market is unable to supply the people companies need,” said the chief economist at Pantheon Macroeconomics. “Usually, that means wages will accelerate, though the evidence for that now is mixed.”
If wage growth is set to pick up, combined with ongoing growth in payrolls, the case for tightening monetary policy is looking stronger. For a real-time estimate of whether the Fed’s likely to pull the trigger later this month, keep your eye on the 2-year. Another rise for this maturity will boost expectations that a rate hike is just around the corner after all.
Disclosure: Originally published at Saxo Bank TradingFloor.com