Growth forecast slashed
The Bank of England MPC voted unanimously to hold interest rates at 0.75%, as expected, but the kicker was in the press conference. Forecasts of GDP growth in 2019 GDP were slashed to 1.2% from 1.7% previously, the lowest reading since 2009 and inflation is expected to drop below the 2.0% target in the short term. The labour market remains tight with wage growth of 3.4%, a full 0.5% above the November forecast. With inflation expected to settle just above the 2.0% target, the 2019 forecast was increased and further gradual and limited increases in interest rates are expected.
Governor Mark Carney stated that the Bank was expecting some form of Brexit deal to be agreed and that markets should not price out further rate hikes, which will rise in likelihood if Brexit uncertainty is resolved. There were dovish elements to the guidance and futures markets cut the chances of a 2019 rate hike, although the tone was relatively hawkish compared to other central banks and Sterling bounced back strongly after its earlier losses.
Theresa May wore her rose-tinted glasses whilst commenting on talks in Brussels, Donald Tusk didn’t; no developments of note as yet. Next week’s parliamentary Brexit debate draws closer and speculation will rise on the date of the next vote. Sterling settled around 1.2950 after rising from lows near 1.2850 on the Dollar and the Euro retreated to near 1.1430 from 1.1360. There is no economic data slated today and Brexit comments are unlikely until at least this afternoon.
US jobless claims declined to 234,000 in the latest week from 253,000 previously, although this was again above consensus forecasts.
Federal Reserve (Fed) Vice-Chair Clarida stated that the US economy is near full employment, although there were no substantive comments on monetary policy. Dallas President Kaplan stated that rates were in the neighbourhood of neutral and that the Fed should not be stimulating the economy at this point. St Louis head Bullard stated that policy was slightly restrictive at current levels.
The Dollar maintained a robust tone given fears over global growth conditions as commodity currencies remained under pressure. Expectations of a shift in other global central banks to a more dovish stance also supported the Dollar.
The EU blamed global trade concerns and domestic uncertainty for cutting Eurozone growth forecasts. EU, German and Italian forecasts were cut, as were the 2020 outlooks. 2019 inflation forecasts were lowered and when combined with the fears surrounding Brexit, created a tough trading atmosphere for the Euro.
Against the Dollar, all this negative data meant that the slide continued from last week from the 1.1500 levels to below the mid 1.1350s, where it gained some support.
Today’s economic docket sees Swiss unemployment, German trade balances and industrial output for France and Italy. No shocks are expected, but bond and gilt markets are already starting to price in a no-deal Brexit.
Data to watch:
06:45 CHF Unemployment Rate s.a (MoM) (Jan)
07:00 EUR Trade Balance s.a. (Dec) (Germany)
13:30 CAD Participation rate (Jan)
13:30 CAD Net Change in Employment (Jan)
13:30 CAD Average Hourly Wages (YoY) (Jan)
13:30 CAD Unemployment Rate (Jan)