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Market wrong-footed on rate hike expectations

Market wrong-footed on rate hike expectations

GBP 
As expected the Bank of England held the interest rate at the record-low levels of 0.25%. Despite some expectations for further dissent amongst the rate-setting committee McCafferty and Saunders remain the only two calling for higher rates.

The accompanying statement contained some hawkish rhetoric with perhaps the most telling line revealing that all Monetary Policy Committee (MPC) members think that rate hikes will be faster than the current market pricing and this has provided the catalyst for a sharp move higher in the Pound. In short: All of the MPC believe rate hikes will be faster than the market thinks, early Q3 data stronger than committee anticipated in August report. Recent developments reinforce belief slack to disappear more rapidly than expected and underlying pay growth has showing signs of recovery, albeit still modest. There remains considerable risk to the economic outlook. All on MPC agree rise in Bank rate should be ‘gradual’ and ‘limited’. Overall, UK weighted world GDP growth in Q2 slightly stronger than expected by MPC.

The Pound surged higher immediately following the announcement, with a jump back up towards a 12 month high against the US Dollar. The appreciation has weighed on some stock however with the FTSE 100 tumbling to its lowest level of the day in the immediate reaction to the release.

USD

US consumer prices rose 0.4% in August compared with consensus forecasts of 0.3%. This was the largest increase since February and the year-on-year rate increased to 1.9% from 1.7%. Core prices increased 0.2% for the month which was in line with market expectations and the annual rate remained at 1.7%. Underlying services-sector inflation was running at 2.5% which should bolster Federal Reserve confidence that inflation will move to the 2% area, especially as the weaker Dollar will put upward pressure on import prices over the next few months.

There was a further adjustment in Fed Funds futures with the potential for a further interest rate this year moving back towards 50% from below 30% last week and the shift in expectations provided net US currency support.

The Dollar gained ground after the CPI data. Markets will monitor the US retail sales data on Friday with expectations of solid underlying gains, but only a limited headline advance

EUR

Today rounds off a quiet week for the Euro with some data out this morning with regards to the European Union’s Trade Balance for July. This data is the balance between exports and imports of total goods and services. That said, this data will have little effect on Euro sentiment unless there is a large deviant from consensus.

What will be watched closely for the Euro over the next coming weeks is the German election on 24th September. Angela Merkel is still on track to maintain her position in office, stretching her stint to her fourth consecutive term as polls have changed little since the TV debate. We continue to see another grand coalition of the The Christian Democratic Union (CDU) led by Merkel and The Social Democratic Party (SPD) as the most likely outcome.

Data To Watch
09:15am EUR ECB’s Lautenschläger Speech,
11:00am EUR Trade Balance n.s.a. (Jul), Trade Balance s.a. (Jul), Labour cost (Q2), 01:30pm USD Retail Sales ex Autos (MoM) (Aug), Retail Sales control group (Aug), Retail Sales (MoM) (Aug),
02:15pm USD Industrial Production (MoM) (Aug), Capacity Utilization (Aug),
06:00pm USD Baker Hughes US Oil Rig Count,

 

 

 

 

 

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