Data continues to be mixed

Will it turn out that the comments from MPC members about a rate cut at next week’s meeting were no more than a message to let the markets know that “we are still here, and we are relevant”?

The Bank of England had become more than a little sidelined by Brexit and all the political upheaval it caused. In the early days of the negotiations between London and Brussels it was assumed by the market that the Central Bank would play more of a role in the talks.

But given that the discussions quickly became more about politics than the economy (despite remainers dire warnings) Mark Carney came as close to being irrelevant as a Central Banker can be.

Now, as talk of Brexit no longer dominates the front pages, business and the financial markets are becoming more aware again of the economy and the fact that it is slowing.

With low inflation continuing to dominate, there can be very few risks in a rate cut next week and if the Government were still in charge of day to day monetary policy, a whole different set of ramifications would exist. However, an independent Bank of England must just comply with the Government’s targets for growth and inflation, so it can send out any signal it likes.

Yesterday’s employment report was far stronger than analysts expected. While this won’t have “thrown a spoke in the wheel” of next week’s meeting, Friday’s activity reports will take on greater significance.

The pound rallied to a high of 1.3084 yesterday, before closing a little lower at 1.3044. The 1.30 level remains pivotal with good buying interest around 1.2980 but short-term sellers remain around 1.3120.

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FOMC still on hold despite stronger data

President Trump got virtually as far away as he could from his impeachment trial taking place in Washington as he made a keynote speech at the World Economic Forum taking place in Davos Switzerland.

The annual meeting of the great and the good of finance, economics and politics meet to set out their vision of global geopolitics has a climate control theme this year. It was therefore more than a little ironic that Trump, was chosen to open the debate.

The President took the chance to extol the virtues of his “management” of the economy which, in his words, remains strong and growing and put down the naysayers and “old world Soothsayers” (again his words) predicting a climate driven Armageddon.

To say Trump’s view is out of step with the rest of global thinking is putting it mildly.

Back in Washington the impeachment hearing, taking place without the defendant being present got off to a bumpy start. As is often the case in such proceedings the ground rules were established but caused a bitter row as the decisions were made strictly along Party lines, although there were a couple of concessions to Democrat demands.

Having complained about the proposed length of the trial, the Democrats were given an extra day to put their case in a significant amendment to the original set of rules.

Having received President Trump’s endorsement, it can be assumed that any change in monetary policy at next week’s FOMC meeting can be discounted. However, Mr. Trump often has one set of comments for overseas consumption and an entirely different set for domestic use.

Yesterday, the dollar index fell initially to a low of 97.39 but managed to rally to close a little higher on the day at 97.62

Can activity match the rise in expectations?

There is a growing gap between confidence and expectation indexes and the reality of activity data in the Eurozone.

The ECB, which meets tomorrow to try to conjure up some stimulus to drag the economy of its recent tauper, appears to be happy to follow expectations as they are considered to be more a forward looking leading indicator rather than activity which while being “real” looks at past events.

The financial markets take a more holistic view of the Eurozone economy and remain unconvinced that the “good times” are coming.

Yesterday, the ZEW, an influential research centre based in Mannheim, Germany provided its findings on economic sentiment and the current situation in individual countries as well as the Eurozone as a whole.

Naturally the markets gaze was drawn to Germany and it was provided with a significant improvement in the current situation. It rose from a reading of -19.9 in December to -9.5 in January. Economic sentiment was even more positive, rising from 10.7 to 26.7. While these indices are impossible to unravel the economy is clearly expected to improve.

The data for the Eurozone was just as positive, economic sentiment rose from 11.1 to 25.6. Now all that remains is for similar positive data to be seen in the release of activity data on Friday and the market may start to be convinced.

Yesterday, the single currency mirrored the dollar index, moving higher initially to a high of 1.1118 but falling to close at 1.1087, just one pip above its low for the day.