The Bank of England and European Central Bank meetings are both due today with pressure on both increasing to amend their respective policies in different directions. Unfortunately for market watchers we are unlikely to see much, if any, action from the central banks today.
The Bank of England meeting is still obviously, for us at least, a hold in policy. The economy is pounding along at a decent rate, inflationary pressures seem to have subsided for now at least, and the jobs market is improving well. Eventually a change will need to be made but that time has not come yet. As we pointed out before the publication of last month’s minutes we expect policy to remain on hold for around 12 months from now but that does not mean that dissenting voices on a number of issues will not come to the fore earlier. The recent dip in inflation to a 4yr low as part of a landscape of rising sterling is cause for comment and I would not be surprised if the MPC issued comment – either today or in next month’s Quarterly Inflation Report – that further gains will be closely watched to prevent further additional slips in the rate of price rises.
Normally, opponents of a strong currency would focus on damage to the export sector and, while we have seen manufacturing gains throughout this period of sterling gains, we must wonder how tight margins can get for lower-skilled, more price competitive UK manufacturers. Stability of currency is key for companies looking at new markets.
Likewise, the dynamics of a robust pound around the UK’s – and in particular London’s – housing market is already in evidence; the bet on a bubbly market is only exacerbated by the potential for currency gains as well. Lastly, inflation has been steadily falling here in the UK for the past 9 months or so and a stronger pound will cause this to push further throughout the year. I am not worried about deflation but it would delay interest rate rises which some commentators already believe are too far in the future.
The inevitable hold in policy is due at noon.
A lot more can be said when we look at the European Central Bank. The market’s focus is more on next month’s ECB meeting than today’s partly due to the publication of updated economic forecasts at the June decision. Analysts expect that the new round of expectations will allow the ECB to make a more informed decision as to what to do with policy. We agree, but also agreed that they would wait until December to amend rates last year with updated forecasts. They cut in November, so this ECB does have previous form of surprising us slightly.
We certainly believe that the clock is ticking on some form of movement from the European Central Bank and that June’s revisions to policy will see another lower round of inflation forecasts, maybe just the nod that the committee needs to go ahead and ease policy. The risk is that the expectations leave the 3 year horizon of price rises on target; if the committee sees that inflation will eventually get there, then hands will be remain firmly sat on.
Data from the Eurozone in the past month has not exactly been rotten either; PMIs are showing slim growth, but growth all the same, while unemployment did fall in March according to the latest round of numbers. We expect Draghi to lean on this in the press conference at 13.30 BST with the actual decision taking place 45mins earlier. We expect no change in policy.
Somewhere we thought that changes would take place yesterday was the GBP/USD rate which, at the time of writing, has still not hit the 1.70 mark. Janet Yellen’s testimony reiterated that a ‘high degree’ of accommodation remains warranted for the US economy as long as labour market conditions are ‘far from satisfactory’. There was very little in her testimony that we have not heard already and hence the lack of market movement. She tap danced like a professional as questioner upon questioner asked her for a timeline on rate increases – with feet like that she could be on the next series of “So You Think You Can Dance?”. Dollar could be on course for some good news today should today’s initial jobless claims revert to trend following a difficult period over the week’s surrounding Easter.
In fact Yellen was overshadowed by another person for whom markets hang; Vladimir Putin. In a press conference yesterday Putin said that Russia had withdrawn troops from the Russian border and that the key to resolving the crisis lay in Ukraine, not in Russia and that pro-Russia groups in the east of Ukraine should postpone this Sunday’s independence referendum. This new, somewhat conciliatory tone from Russia’s President gave equities a boost and nullified a lot of what Yellen said. We will wait and see just how long this smiling bear lasts.
AUD enjoyed the new found risk sentiment overnight with good jobs numbers and strong Chinese data helping the drive higher. 14,200 jobs were added in April, more than the expected 8,800 increase whilst China’s trade balance improved with both exports and imports higher, a useful and welcome barometer for overall, global growth.
