Today’s data calendar will allow us into the thoughts of both the Bank of England and the Federal Reserve via the minutes of the former and courtesy of a press conference from Fed Chair Janet Yellen for the latter.
The importance of Bank of England minutes was set to increase as we moved through the summer as we began to reach an inflection point that would eventually cause a vote against the current monetary policy stance of lower rates via the Bank’s amended forward guidance plan. Last Thursday’s speech before a crowd at the Mansion House by Governor Mark Carney lit a fire under expectations as he told the UK to prepare for higher rates and that “there is already great speculation around the exact timing of the first rate rise and that decision is becoming more balanced”.
Today’s minutes will be raked through for potentially hawkish clues to back up the deviation in the Governor’s language from his first year at the head of the Bank of England. The obvious place for differing views is within the unemployment market, such is the nature of the Bank’s forward guidance plan. While the overall unemployment rate is below the original 7% level that was used as a waypoint for rate rises, the issue of slack in the economy has taken over. Carney estimated that overall slack in the jobs market was somewhere between 1-1.5% at last month’s Quarterly Inflation Report; we’ll see how much of a consensus that view is.
Alongside that we expect a debate on the prospects for real wages and the recovery. Despite yesterday’s slip in inflation, price rises remain double that of compensation increases.
Inflation dipped to a 4 year low in the UK, pushing sterling lower on the session. CPI fell to a year-on-year increase of 1.5% from 1.8% last month. This real lack of inflationary pressures has become the hallmark of developed nation recoveries in the past 12 months; stickily low CPI is being seen in the US and UK with outright deflation fears in the Eurozone prompting increased action from monetary authorities.
Here in the UK, somewhere that is being touted as the first, major economy to start a policy of tightening and normalizing monetary policy, inflation is not a concern for the central bank it would seem. There is pressure on Mark Carney and the rest of the MPC to hike rates on growth and housing market concerns but, given their central mandate of price stability, there is little cause to alter current policy.
Lastly, moves in the housing market have raised fears that recent growth has been unsustainable and that the level of stimulus and accommodation is no longer needed.
The minutes are due at 09.30 BST with sterling quiet at the moment.
Across the pond, we have to wait until 7pm tonight for the Federal Reserve decision with Yellen’s press conference not taking place for another 30 minutes. Like that of the Bank of England we can expect some rather bullish chatter given the move in recent fundamentals. News from the jobs market has been strong without being exceptional this year and yesterday’s inflation report was a welcome positive. CPI rose by 0.4% on the month, the strongest monthly gain since February 2013 with the overall core CPI rising to a year-on-year figure of 2.0% – a 3 year high. Improvements in both are central to the Federal Reserve’s decision to normalise its monetary policy over the coming 12 months.
We expect growth estimates by Federal Reserve workers for 2014 probably to fall to about 2.6% from around 3% at March’s meeting courtesy of Q1′s weather-fuelled negativity. This will depend on growth in H2 of around 3.3/3.4% in our eyes.
Emerging market currencies have taken a slight slip in the past 24hrs as US yields have moved higher and the dollar has gained in the run-up to the Fed decision. Elsewhere, markets are happy to wait.
