Markets today remind me of Christmas Eve. The day will be an interesting one in its own right, but the big day – the one that everyone has been waiting for – is tomorrow. Of course, tomorrow sees the latest European Central Bank meeting that is almost unanimously expected to lead to an asset purchase program being launched in order to stimulate the Eurozone economy. The expectations of what will sit under the monetary-policy-Christmas-tree vary widely; we simply hope that Mario Draghi and his elves don’t disappoint the children.
Selling of the European single currency continued yesterday and it would be a brave man to say that we have reached the pre-decision low in EUR/USD, EUR/GBP or EUR/JPY. Today may be the day that investors who have been profitably betting on the decline of the euro bank some profits before the decision at lunchtime. Contrarian bets that the European Central Bank reverts to type and disappoints us all are expected to increase today as well.
This policy may have been given away by the movements of the Swiss National Bank or the words of the French President in the past week, however, such is the level of anticipation around a stimulatory policy that a delay or refusal would throw markets into paroxysm. We will have a full run down of our thoughts on just what the European Central Bank will launch in tomorrow’s Morning Update.
Today, the focus is very much on the UK economy with the latest jobs report and the minutes of the December Bank of England meeting. While the overall unemployment rate provides a decent headline reading of how well the UK economy is performing, we will be looking at the wages side of things more closely. Wages are currently rising here in the UK in real terms i.e. at a faster rate than rises in inflation. This is a new development in the UK. Wages have only outpaced inflation in three months since June 2008 and even now, most of this positive motion is not coming from a substantial increase in wages but instead the recent large falls that we have seen in inflation.
Whether we have seen the inflection point for UK wages and whether they’ll run higher from here will be seen this morning. The combination of slower price rises and rising wages is an obvious plus for the UK economy and consumers within it. We are looking for unemployment to fall to 5.8% in the UK with wages rising by 1.7% year-on-year.
The Bank of England will mention both within the minutes of their meeting but it is their thoughts on inflation that will be the most eagerly pored over. While we will have to wait until February’s Quarterly Inflation Report for the Bank’s latest projections of inflation, it provides an obvious crutch with which to lean on should you be of the view that rate rises can wait.
I wonder what the odds of either Messrs Weale or McCafferty changing their votes from a 25bps increase to no change are at the moment. I don’t think that they will but it is possible at next month’s meeting given the larger falls in CPI seen in the past six months.
As we stated in this week’s Sterling Update the most important thing that we can glean from these minutes is to look at whether the majority of the Monetary Policy Committee is focused on the headline rate of inflation in the UK or whether it is core prices that is guiding their expectations. As we have seen with other inflation announcements in recent weeks, it is not so much about the headline index but more the ‘core’ reading in my opinion. The harmful effects of falling commodity and energy prices are obvious but should an economy’s ‘core’ prices – that do not include these volatile measures – remain strong, then that is cause for optimism, will fuel higher rate expectations and hopefully a stronger pound too.
Overnight, the main mover has been the Japanese yen after the Bank of Japan cut its inflation forecast but maintained its current level of stimulus. The Bank of Japan is in a similar predicament to the Bank of England; eager for higher inflation and having to discount away the falls in oil prices. It does give us doubts of whether the Bank of Japan will hit its 2% CPI target by October however, likely leading to additional stimulus spending by the government and the central bank.
