Debates about monetary policy and the timing of the first interest rate hikes for the UK and the US will dominate today’s news cycle. The catalysts du jour: the Bank of England and the Fed's Federal Open Market Committee are scheduled to publish minutes from their recent policy meetings.
Although no surprises are expected in terms of assuming that rate hikes will start no sooner than next year, today’s minutes will be closely read for clues on the next phase for policy on an otherwise light day for economic reports. On that note, today’s CBI Industrial Trends Survey is the first release of new macro data for Britain in the wake of the BoE minutes.
UK: Bank of England Monetary Policy Committee Minutes (08:30 GMT). Monetary policy is getting political in Britain, or so it seems based on the latest commentary from some members of parliament.
“It is abundantly clear that [Bank of England Governor] Mark Carney is attempting to delay interest rate increases until after the election when they rise immediately,” charged an MP who’s also a Treasury Select Committee member. A harsh allegation, to be sure, although The Telegraph wonders if Carney is simply confused – or merely inconsistent – with matters of monetary policy.
Politics and media-sourced innuendo aside, the case for tightening sooner rather than later looks a bit weaker this week after yesterday’s surprisingly soft inflation data for July. The Office for National Statistics reported that consumer price inflation decelerated to an annual 1.6% rise last month from 1.9% in June. The latest figures are comfortably below the central bank’s 2% target.
The ONS also published new data that showed house prices increased at a slightly lower pace in June: 10.2% versus 10.4% in the previous month. Analysts expected prices to accelerate to 11.4%, based on the consensus forecast. Prices are still rising at a robust rate, mostly due to properties in London. But the latest release suggests that the peak for price increases has passed.
In short, there’s a bit less pressure for raising interest rates. Nonetheless, it’ll be interesting to see what’s revealed in today’s release of minutes from the Monetary Policy Committee’s meeting on August 7, when policymakers decided to leave the UK’s benchmark rate unchanged at 0.5%. Most economists think that the first rate hike will come in the first quarter of 2015 – unless there’s something in today’s minutes to suggest otherwise. A surprisingly hawkish message is unlikely, however. The BoE is committed to inflation targeting and with the data running below the mark there’s no reason to think that policy will be tightened any time soon.
UK: CBI Industrial Trends Survey (10:00 GMT). Industrial activity has been on a roll lately, although recent survey data suggests that the sector’s settling into a phase of slower but still healthy growth. The cyclically sensitive manufacturing corner of the economy suggests as much, based on the July update for the Markit/CIPS UK Manufacturing Purchasing Managers' Index (PMI). Although the 55.4 reading for last month was well above the neutral 50 mark, Markit Economics noted that growth was “easing” and that the “overall pace of expansion slipped to its lowest in just over one year”.
A slower trend is also conspicuous via last month’s survey numbers from the Confederation of British Industry. Factory orders in the UK slowed more than expected, according to the July update of the CBI Industrial Trends Survey. The orders index fell to a reading of two, which means that only 2% of UK manufacturers reported an increase in orders – down sharply from June’s 11%.
The monthly CBI data is volatile and so it’s best to look across a longer horizon for a clearer profile of the trend. Nonetheless, with the latest PMI release pointing lower, it wouldn’t be surprising to see today’s CBI update stay well below its recent highs. Britain’s industrial sector remains on track to deliver a decent rate of growth for the near term. That said, another round of relatively soft data in today’s August update would give the Bank of England more leeway to push the first interest rate hike deeper into the future.
US: Federal Reserve FOMC Minutes (18:00 GMT). Traders will be looking at today’s Federal Open Market Committee minutes of the Fed’s July 29-30 meeting for new clues on what to expect for the central bank’s plan to wind down its monthly bond-buying program. The Fed has been clear in telling the markets that the purchases will conclude in October. That’s not likely to change after reading today’s release. The bigger question on everyone’s mind: When will policymakers begin raising interest rates?
Fed chair Janet Yellen hasn’t been shy in her recent public comments about keeping rates low for a lengthy stretch after the bond purchases end in October. But the hawks inside the Fed, and elsewhere, are quick to warn that inflationary pressures are building and so rates should start rising soon. Dallas Fed President Richard Fisher is leading the way among the hawks, as a report from Reuters last week reminds us:
A top Federal Reserve official known for his hawkish policy views said Tuesday the Fed is on track for an earlier rate rise than he and his colleagues had forecast just a few months ago.
"I think the committee, as I listen to them and I can only speak for myself around that table during two days of discussion, is coming in my direction, so I didn’t feel the need to dissent,” Dallas Federal Reserve Bank President Richard Fisher said on Fox Business Network.
"We are going to have to move the date of lift-off further forward than had been projected the last time we issued the 'dots'," he said, referring to the official Fed forecasts for short-term interest rates, last issued in June.
Perhaps, but inflationary pressures remain moderate. Consider yesterday’s update on consumer prices for July, which eased a bit on a year-on-year basis to 2% from 2.1% in the previous month. Core inflation (excluding energy and food) also looks contained, advancing 1.9% for the year through last month – unchanged from June’s pace.
Most analysts think that the first round of higher rates won’t arrive until deep into next year, a view that’s supported by the Fed’s June update on the outlook for policy (see chart below). The majority of FOMC members think that higher rates are appropriate for 2015 while all but one are calling for a hike this year, based on the June FOMC release. It would be surprising to learn otherwise after reading today’s minutes.