The minutes of both the Bank of England and the Federal Reserve hinted at changes to the status quo; although it is the former where those changes are being seen sooner and are more necessary.
The Bank of England minutes did not set the world alight as some had thought, although there are definite hints that the Monetary Policy Committe (MPC) is becoming increasingly split on where rates should be at the moment. Disagreements are likely on spare capacity – with estimates varying on the MPC in recent weeks, according to BOE Deputy Governor Charlie Bean – the value of sterling and the prospects for the UK housing market.
For the moment, the risks of a rate rise seem to outweigh the benefits for MPC members and we maintain our view that rates will remain on hold until real wage increases are shown to be more persistent; something that we forecast for Q2 2015. Future dissent is all but assured from the more hawkish members of the MPC and some analysts are using those expectations to shift their own rate hike expectations to as early as pre-Christmas.
The Fed meeting on the other hand contained only the slightest of hints about normalization of monetary policy. While a headline that the Fed is debating plans on how to exit its stimulus strategy is potentially market moving, the reality is that this Federal Reserve, concerned over the impact of interest rate increases on its bloated balance sheet, has little to fear from that at the moment. A new round of forward guidance may be necessary to educate the market of the likely impact. “A number of participants suggested that it would be useful to provide additional information regarding how long the Committee would continue its policy of rolling over maturing Treasury securities at auction and reinvesting principal payments on all agency debt and agency mortgage-backed securities,” say the minutes.
The overall view of the US economy remained unchanged however; cautious optimism with participants still concerned over the level of the jobs market and the effects of a persistently low inflation.
Neither set of minutes really drove its particular currency one way or the other although sterling pulled higher as a result of a strong retail sales announcement. GBP/EUR rose to a 16 month high after the release.
UK retail sales tore higher in April, bouncing back from a disappointing March with people seemingly spending most of their Easter break shopping. Food sales were 3.6% higher in April from March – the best numbers since the Royal Wedding saw street parties and widespread celebrations – with clothing sales and household goods also charging higher.
The main reason for this seems to be discounting or price cuts – sales volumes were 6.9% higher year on year vs a 6.2% rise in sales overall. This means that while people are still pounding round the High Street, profit margins remain squeezed as retailers remain aware of real-time wage pressures. Q2 GDP has definitely started strongly and could easily breach the 1.0% level for the quarter for the first time since Q2 2010.
March’s 0.4% fall was revised to a 0.1% fall, something that should be enough to move overall UK GDP higher for Q1 from 0.8% to at least 0.9% on the quarter. The second reading is due today at 09.30 alongside the latest current account data and public borrowing numbers.
The situation has been quiet on the euro since Mario Draghi’s press conference 2 weeks ago. The pre-positioning of monetary policy that the market has taken from Draghi’s “comfortable to act in June” comments have made the data calendar a lot more short term-ist. Today’s preliminary ‘flash’ PMIs from France, Germany and the Eurozone as a whole are the first real pieces of data for this month and, as such, are likely to give the euro a fair jolt. PMI surveys in Europe as a whole were decent through Q1 – last week’s poor GDP numbers all the more of a surprise as a result – but we will be focusing on the movements in the price sub-component more closely. Herein lies whether we are seeing inflationary pressures or not and may be enough to give us an early hint as to May’s inflation numbers.
Chinese data has moved Asian markets positively following its own preliminary manufacturing PMI that rose to the highest level in 5 months. The figure of 49.7 remains in contractionary territory – anything below 50.0 denotes deterioration – but can be seen as a sign of stabilisation in the Chinese economy following recent government stimulus plans.
