The BoE will give policy verdict and release minutes right after the meeting for the first time; this is the new communication strategy in that the BOE wants to at least appear to be transparent.
The major talking point is, among nine voting members, who may have slipped to the hawkish camp, and who may have refrained from favouring the policy normalisation. There is increasing probability that at least two MPC members will favour an interest rate hike at today’s meeting.
The market is after any hint to the timing of the first rate hike after eight years of loose monetary policy.
The hawk-dove balance at the heart of the MPC will be decisive for the pound today, given that many are expecting a split of 7-2, anything higher than this could turn the tables on which central bank will win the race to normalisation.
Certainly, a sufficiently hawkish tone from the BoE could help Cable breaking above the solid 1.5675/1.5700 resistance for a possible bullish development toward 1.5880, the Fibonacci’s 50% retracement on July 2014 to July 2015 sell-off. The key support remains at 1.5570 (50d MA & Jul-8 to-date ascending base), before 1.5385 (200d MA).
The convergence between the Fed and the BoE outlooks translates into higher demand in call options in favour of a pound appreciation versus the US dollar. Even if the put options trade at greater volume, the gap between call and put options maturing in three months is at narrowest of last nine months.
The euro has slipped below 0.70p in the continuation of its six-week descending triangle. Given the divergence between the BoE and the ECB, 0.70/0.65p range is expected to become the new playground.
With some companies trading ex-div this morning and in the aftermath of a plethora of corporate earnings, some better than expected, the FTSE is holding above the 6700 level but trading down 18 points, underperforming the likes of the CAC 40 and the DAX.
RSA Insurance Group PLC (LONDON:RSA); -1%
The insurer is in the midst of fighting off a bid from Swiss rival Zurich Insurance Group AG (SIX:ZURN), and has exceeded expectations with a Q2 pre-tax profit of £288mn. Zurich are close to a cash bid according the press, but in their own results today they have highlighted that they won’t overpay. Investors might have to choose between taking the money and running, or keeping faith in the highly regarded Stephen Hester and his turnaround that has so far been moving things in the right direction.
Rio Tinto (LONDON:RIO); +0.5%
Underlying revenue for the first half is down a whopping 43% from last year, but considering the commodities rout this is better than the market was hoping for. Two more years of belt tightening will follow however, and one of the minor’s main aims may be to keep itself in a healthy enough position to survive in its current state, without becoming prey for a takeover or merger, something which has already been considered by Glencore (LONDON:GLEN).
Aviva (LONDON:AV); +1.5%
The merger with Friends Life has delivered £63mn in just three months, which is “encouraging but nowhere near complete” according to management. The full year outlook remains optimistic, although they have pointed to underperformance at the asset management arm as somewhere to make improvements. The shares are well off their July lows, and at 530p they have returned to the kind of level they have sat at since early last year.
Inmarsat PLC (LONDON:ISA); +1.5%
For the six months ended 30 June, pre-tax profit fell to $131.6m from $136.7m on revenue of $616.2m, down from 652.3m in the first half of 2014. Revenue from “LightSquared” fell to $35m from $47.1m in the same period last year. A 5% increase in the dividend should please investors with a longer term view.
Aggreko (LONDON:AGGK); +0.5%
“The world's largest power provider said it expected trading in 2016 to remain difficult, with margins and returns set to be lower due to a restructuring following a profit warning last month.
Thoughts on the upcoming NFP
The ADP report disappointed the Fed hawks as the US economy added no more than 185K private jobs in July. As a fact, this has not been the worst ADP number over the past year, yet two times over three it happened to be below 200K, the NFP has also been below the 200K mark. This being said, the rolling correlation between the ADP and the NFP figures on 20 month basis remains below 50%. Statistics are statistics and we can only speculate before Friday.
Statistics put aside, the fundamental reason behind the weak data may well be the slide in energy prices, but also the negative impact of slower global growth and stronger dollar on the US economy. The Fed and the market are both well aware of the above stated macro factors and in a well-measured manner, consider a first Fed rate hike happening by September, if not by December. Nevertheless, the Fed will certainly take baby steps, meaning that a 10-15 basis point hike is all we might see at a time. Back to the NFP read, a read above 200K will certainly keep the September hike on the table, while a read above 250K (the past 12 month average being 245K) may overweight the probability of a September hike.
The US dollar remains bid as the post-ADP weakness remained short-lived after better-than-expected services PMI re-boosted the Fed hawks in New York yesterday. ISM manufacturing index has performed the best since 2005. As the market is looking for reasons to buy the dollar, good data tend to overweight.