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Dovish Bias Expected In BOE Minutes, US Mortgages, US CPI

Published 10/22/2014, 02:26 AM
Updated 03/19/2019, 04:00 AM

Today’s Bank of England minutes for the previous monetary policy committee meeting are expected to strengthen the view that the first interest rate hike for Britain won’t arrive until deep into 2015 at the earliest.


Later, the crowd will be looking for more evidence that the US housing recovery is intact via the weekly update on mortgage applications. We’ll also see new data on US consumer price inflation, which is expected to remain subdued in the September report.

UK: Bank of England Monetary Policy Committee Minutes (08:30 GMT) Britain’s recovery faces new headwinds, according to this week’s updated forecast from the EY Item Club: "The economy has had a strong run but we are forecasting that GDP growth will slow from 3.1 percent this year to 2.4 percent in 2015 as people turn more cautious in the face of political uncertainties, both here and abroad.”
As a result, “The MPC is very unlikely to increase interest rates until import costs stop falling or until there are signs that wages are picking up in response to lower unemployment.” The bottom line: the group predicts that interest rates will remain unchanged until next spring at the earliest.
It’ll be useful to learn how the BoE views the macro climate these days. But today’s release of the minutes from the October 9 meeting of the monetary policy committee isn’t likely to deliver a hawkish message. Although the economic numbers for the UK have remained upbeat, it’s widely recognised that Europe’s latest run of trouble – including the likelihood that Germany has slipped into a mild recession – changes the macro climate.
An additional risk factor lurks via the rise of UK Independence Party (UKIP), which won its first seat in Parliament this month and is pushing for Britain to leave the European Union. That may be a low-probability event at this point, but UKIP’s recent political success implies that support for pulling out of the EU is on the rise – a scenario that raises any number of economic issues.

No wonder that the market is expecting that any change in the MPC’s view is likely to be in favour of the doves. Reuters reported on Monday that some analysts think that two former MPC members, who had previously called for rate hikes, withdrew their support for tightening anytime soon in the last meeting.
"The downside risk for sterling/dollar is that the two dissenting voters within the MPC might look at some of the recent economic data and switch their votes," said the chief market analyst for FXTM on Monday.
gbpusd.22oct2014

US: Mortgage Applications (11:00 GMT) Yesterday’s better-than-expected news of an increase in existing home sales for September offers a fresh batch of evidence for arguing that the US housing recovery, although battered and bruised lately, remains alive and kicking. Indeed, new sales jumped 2.4% last month to an annual pace of 5.17 million units – comfortably above the 5.10 million that the crowd was projecting.

The latest sales data suggests that the recent positive momentum in mortgage applications will roll on. In each of the last three weekly updates, demand increased for new mortgages. Loan application volume jumped 5.6% for the week through October 10, according to the Mortgage Bankers Association – the strongest weekly comparison in a month.

Falling interest rates have been a factor behind the recent increase in applications. “Growing concerns about weak economic growth in Europe caused a flight to quality into US assets last week, leading to sharp drops in interest rates,” MBA’s chief economist noted with the previous update. “Mortgage rates for most loan products fell to their lowest level since June 2013.”

Yesterday’s weekly report on interest rates from the Federal Reserve showed that the trend remained in force last week: the national average on a 30-year mortgage fell below 4.0% for the first time in over a year. Lower rates due to rising worries about macro troubles abroad may spell trouble down the road, but for the moment the lesser price of financing real estate purchases is likely to be a bullish tailwind for housing.
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US: Consumer Price Index (12:30 GMT) Inflation is expected to remain muted in today’s update for September. The consensus forecast sees the consumer price index as unchanged last month vs. August, according to Econoday.com's survey of economists. No change for headline inflation on a monthly basis translates into a lesser annual pace for the headline CPI: 1.6% vs. 1.7% in August.

Lower inflation would be troubling if the US economy was struggling. But recent updates show that the broad trend through September reflected moderate growth. Nonetheless, inflation is already below the Fed’s 2% target and the sight of CPI slipping lower at this point will raise new questions about whether the US is set to endure a stronger run of disinflation.

The optimistic view is that falling energy prices of late are the main source of weaker inflation rather than softer demand overall. In turn, cheaper gasoline bodes well for consumption on Main Street. “It’s a boost for consumers,” an economist at BMO Capital Markets explained earlier this week. “Gasoline pump prices also have a huge impact on consumer confidence.”

True, but if a deflationary wave is blowing in from Europe, there’s also a dark side to decelerating inflation, even in the US. For the moment, however, the downside risk is limited, as long as economic growth holds up.
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