Central banks remain the focus for markets on Wednesday, with the Bank of England announcing its latest policy decision tomorrow and the Federal Reserve next week.
It’s looking a little quiet on the US front today, with the blackout period meaning we get no more commentary from Fed policy makers ahead of the meeting and the lack of data meaning there is little to guide investors. We have plenty of data to come over the next couple of days, with retail sales, inflation, consumer sentiment and manufacturing surveys all being released, but this may leave traders in wait and see mode ahead of these.
Once again we’re left to absorb all the information we’ve had over the last couple of weeks, the result of which appears to be that the Fed will hold off on raising interest rates next week. While a number of policy makers would clearly be comfortable with raising rates at this point, I think there are enough that want to see more evidence of higher inflation to prevent a hike next week. Investors are clearly in agreement on this with markets pricing in only a 15% chance of a hike. While this may move around over the next couple of days, I don’t expect anything to happen that will convince investors that a hike is coming.
The Bank of England is likely to be equally hesitant tomorrow after announcing a large batch of new stimulus measures only last month. The data since has been much better, with the surveys of services, manufacturing and construction rebounding strongly and consumer sentiment looking unshaken. Moreover, the economy has had a boost from the weakened exchange rate. While this cocktail of boosts is unlikely to last, it’s likely to be enough to keep the finger off the trigger for now.
Today’s UK jobs report for July supports holding off for now, with unemployment and earnings data showing no initial hit from Brexit. Of course, this typically takes a little longer so we wouldn’t expect to see anything significant at this point. The small increase in the claimant count is a small concern although unless a trend forms, we shouldn’t get carried away with it. We’ve had a number of small increases over the last year as the pace of labour market improvement has slowed. This could just be another example of the slowdown.
Oil is trading slightly higher ahead of the EIA crude inventory data having fallen quite hard since Friday. Last week’s number showed a large drawdown in inventories due to temporary supply disruptions, something we could see partially offset in today’s report although the API release on Tuesday suggests we won’t. Today’s gains look suspiciously like a dead cat bounce and a decent inventory build today could be the catalyst for another leg lower.