Yesterday’s slew of news from the UK economy came out exactly as we had thought, leading to a general decline in the GBP through the day. GBPUSD has fallen to fresh 14 month lows with GBPEUR below the 1.27 level for the first time in a fortnight. Initially the pound had run higher on a strong jobs report.
UK unemployment data was pretty strong overall despite a miss on the overall headline rate. It has been six months since we saw wages improve at a rate of 1.0% or above, although they of course remain negative in real terms. The two indicators are converging – however, the majority of that move is down to the fall that we have seen in inflation in the past three months. CPI is currently running at 1.2% and there is every possibility that we see it fall further when the next iteration is released on November 18th.
Additional good news came in the form of a 20,400 person drop in the claimant count to 931,700 – the lowest since August 2008. This is good news for the Bank of England and bullish for the UK economy as a whole. While the headline unemployment rate has been held at 6.0% against an expected fall to 5.9%, the internals of the jobs market are improving. The Bank of England has been very focused on wages and while I believe there is a way to go before the Bank raises rates, this will be heartening for the hawks.
As soon as Mark Carney took the stage, however, the pound came down like a lift with the cord cut. Both growth and inflation expectations were marked down with the key message being that rates will have to stay at current levels until next autumn in order to ensure that inflation does not fall below the 2% target on a three year time frame. Indeed, in the short term, the Bank thinks inflation is “more likely than not to fall temporarily below 1 per cent at some point over the next six months”.
Growth expectations were also brought lower. The Bank is now looking at 3.5 per cent growth in 2014, after the figures are revised, with growth of 2.9 per cent in 2015, 2.6 per cent in 2016 and 2017.
As I have said many, many times before, the Bank of England is more than happy to lean on a multitude of issues to justify its dovish stance. It is not so much that the BOE is particularly dovish – and actively proposing lower rates – at the moment, but is more laissez-faire around interest rates and will wait on the data to show a path from now on. For now, even with the decent run higher in overall earnings, the path is for the Bank of England to remain firmly sat on its hands. A Q4 rate hike didn’t happen because of the wage outlook; I have to think that a rise in Q1 will not occur due to the low inflation outlook. Q2 is politically dangerous with the general election in May and hence the overall belief that Q3/4 will work.
GBP will find support from data but is unlikely to do so from the Bank of England at the moment. House price data this morning has taken sterling lower still. The Royal Institute of Chartered Surveyors’ latest survey on UK house prices has shown that the largest amount of chartered surveyors in four years are seeing house prices fall in London. Nationally, it is the largest amount in 18 months. RICS puts the fall in London down to a reversal of 2013’s speculative surge and speculation over a proposed ‘mansion tax’ on high worth property.
The Asian session overnight has been notable in its tranquillity. Yen continues to slide lower across the board on the speculation that a snap general election could be called as soon as this weekend. Chinese data overnight has once again missed expectations, however. Industrial production rose by 7.7% compared to last October, the second smallest rise since 2009. This only continues our belief that the policy outlook from the People’s Bank of China will remain accommodative well into 2015.
Deflation in factory prices was shown this month to have increased, a pressure on output and future demand – something that has a double effect when we factor in the oversupply in the Chinese industrial sector.
The calendar is largely quiet today ahead of tomorrow’s run of Eurozone GDP numbers and US retail sales.
