While the main story of the weekend’s sports pages was the defeat of England by Italy – cue chants about unemployment and debt to GDP levels – the main news on the business pages was still Carney’s Mansion House speech last Thursday. This continued chatter has helped move GBP/USD above the 1.70 level for the first time since August 2009. Indeed, Charlie Bean – outgoing Deputy Governor of the Bank of England – said that increases in rates “will be a symbolic step, because it will be an indication that we are on the road back to normality” and that “I would welcome us getting on to the path of normalization, as a demonstration that the economy is healing.”
We remain puzzled as to the timing of his decision to only now emphasise to businesses and individuals that rates will be heading higher soon and that we should all be prepared. It does come after nearly a year of almost full-throated dovishness and hence our surprise. If it’s a ruse to calm the housing market it’s an obvious one and I am not altering my expectations that rates will not rise this year.
Some complacency has entered these markets in recent months and the Bank of England has simply dug people in the ribs overnight to re-affirm that this will not last forever. Whether Carney is sick of playing Mr. Nice Guy – all kitted out with painful football analogies and pop culture references – or believes that the dynamics of the housing market need changing is up for debate.
The publication of this month’s Bank of England minutes takes place on Wednesday and is arguably the most important sterling measure of the week. Obvious areas within which Monetary Policy Committee members could find differing or disagreeing views are the issues of slack in the jobs market, and whether the amount has lessened in the past month, the prospects for real wages and the recovery, and the out-performance of the housing market and possible ways to calm its recent ascent down.
Issues around timing are key; we are looking to see whether Carney took his cues from the MPC and represented them as is, or whether they have been “doved down” to express a more conservative committee. We do not expect that anyone has dissented with a call for a rate hike as of yet however, and will be looking for a unanimous rate hold.
It would be a very real surprise if the Fed’s June meeting was anywhere near as hawkish as the minutes of the Bank of England, but this Wednesday’s meeting comes with a new set of economic projections. While inflation is expected to be revised higher, we also suspect that unemployment and growth will be revised lower. Alongside these, the changes in the membership of the Federal Reserve’s Open Market Committee this month will call focus back onto the ‘dot charts’ as to the predictions of where Fed members will be looking for rates to be over the coming years. Within this, there is the definite possibility of a hawkish surprise by the Federal Reserve in concert with updated economic projections.
News from the Middle East continues to bring geopolitical pressure on markets, particularly that of oil. Two thirds of Iraqi oil output is centred in the south of the country that, so far, remains clear of violence, although the ISIS rebels are said to control the pipeline from the country’s largest individual refinery. Should the conflict remain north of these refineries then oil prices have limited upside but a further push towards Baghdad will see Brent crude close to $120.
This week is yet another with inflation figures from the Eurozone (today) and the UK and US (tomorrow). We know that poor price pressures were forecast for May in the Eurozone and were evident in the preliminary reading published on June 3rd. We are therefore looking for the Eurozone-wide HICP inflation measure to confirm a print at 0.5% with core CPI remaining at a cyclical low of 0.7%. The release is due at 10am.
