The Forgotten Central Bank
Yesterday’s Bank of England meeting heralded little interest for sterling watchers although the accompanying minutes from the Monetary Policy Committee’s discussions did hint at further dovish pressures.
The headlines that caught my eye in particular were based around wages. Some members of the Monetary Policy Committee said that ‘nominal pay growth appears to have flattened off’ in the past few months – a worrying sign if we are to rely on wages to prompt inflation growth in the first half of this year.
The Bank of England also weighed in on the recent weakness in commodity prices by suggesting that the recent price drop will continue to subdue inflation into 2016. Combine that with fears that the government’s fiscal plans – cuts to benefits and wider government spending – will weigh on UK growth and we have an interesting dynamic for sterling.
Sterling unmoved for now
Sterling has been a target for the Bank of England since the middle of the year and the Quarterly Inflation Report was characterised by comments around the strength of the pound. As we pointed out yesterday, GBP is down around 2% in trade terms since the November meeting but the Bank of England viewed this as “too little changed” since then. This is a fairly overt suggestion that the Bank of England still wants further weakness.
All in all however, we see no concrete reason within these minutes or recent data from the UK economy to change our thoughts from a May rate rise, although risks remain to a longer delay.
China manages yuan weaker
Weakness in the Chinese yuan has continued apace overnight. A 0.7% decline in a normally liquid pair of currencies is a daily occurrence but for USD/CNY, it speaks to a wider issue of managed depreciation by the monetary authorities there. The yuan is close to the levels that it fell to as part of the August revaluation but the way in which it has got there is very different. China is looking to get ahead of any USD strength that may come from a Fed rate rise next week and we are happy to see them do it.
We are unsure as to the pass through of a weaker yuan into Chinese growth figures but we remain of the belief that additional, structured monetary and fiscal stimulus will come before the Chinese New Year celebrations.
Rand and Russia key for the day ahead
Commodities remain front and centre of the market focus this morning following further weakness. South African rand plunged to fresh lows again overnight – in the past five days the ZAR is down 6.6% against the USD – and today’s meeting of the Russian central bank may see an emergency cut in interest rates similar to what occurred last December as oil prices declined.
This afternoon’s advance retail sales number from the US will allow us a sneak peak at US consumers’ performance around Thanksgiving and Black Friday with a 0.3% gain expected on the month. Dollar continues to remain loved as we head into the Fed meeting.
Over the weekend, we will be keeping an eye on a slew of Chinese data released Saturday and the outcome of the second round of French regional elections.