Bank of England to buck the global trend

Despite presiding over 9-0 vote to leave short term interest rates unchanged, the Governor of the Bank of England produced a bullish statement on the economy yesterday.

Far from “battening down the hatches” and hoping to whether the Brexit storm, if and when it arrives in earnest, Mark Carney spoke of “multiple” interest rate hikes. This more bullish than the expected assessment of the future came as he also forecasts “unsustainably high levels of spending” in the economy in the years to come.

Carney’s words took the market by surprise but hardly galvanized it into action for two reasons. First, the market is only currently “geared up” to react to genuine Brexit news as that will dominate any other driver and two, unusually for a pronouncement from a Central Banker, traders are extremely dubious that he is correct in his assessment.

Brexit is coming, there is little doubt that the economy will take a hit in the initial stages no matter what agreement is reached. It is therefore hard to agree with such bullish sentiments.

The asset purchase facility remains at £435 billion after yesterday’s meeting and that will most likely be the first casualty should the economy perform as the Bank of England predicts.

The pound barely noticed the MPC meeting, trading between 1.3082 and 1.3018. It closed at 1.3033, sixteen pips lower on the day.

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It’s NFP day!

In a week which saw the FOMC meet, although it failed to provide any guidance to the market, traders will today turn their attention to the occasionally spurious, often revised, but always interesting U.S. employment report.

Following significantly better than expected headline Q1 GDP data last week, the market will be looking at the NFP to provide further evidence that “things are better than they seem” in the U.S. economy.

As with the GDP data, the devil is often in the detail in the NFP, and although bullish, traders will be keeping an eye on any downward revision in the March data. Market expectation is for an additional 185k jobs (as usual) to have been produced but there is a lingering hope that the number could be over 200k.

There are two other significant data releases today which, in the long term, may have a greater effect on Fed thinking than employment data. They are services ISM released by Markit, and the ISM non-manufacturing PMI, together with trade data. The trade deficit may only be of academic interest these days since the U.S. exported almost all its manufacturing capability to low-cost overseas markets, but it emphasises the importance of ongoing talks between the U.S. and China.

Services PMIs are more important to the U.S. than other G7 economies since U.S. dominance of that sector of the economy is an important GDP contributor.

The dollar index regained its composure yesterday, rising to 97.85 and closing at that level. There will be volatility in the index following every significant data release right up until the release of Q2 GDP as there is little guidance to the Fed’s thinking right now.

Euro facing the big question

Ever since its introduction and probably even before that the single currency has faced a solitary but highly significant question: Does one size really fit all economically?

History tells us that it simply cannot work to shoehorn (currently) nineteen singularly diverse economies into a single monetary policy. Successive ECB Presidents have bravely tried to fit square pegs into round holes.

The fact that the currency recently celebrated its twentieth birthday is something of a success, but the euro faces new challenges and isn’t maturing as it had been hoped. Indeed, there are whispers that it is the single currency and the strict adherence to rather restrictive budgetary policies that are the main cause of the current slowdown.

The EU, Eurozone, and the single currency are all now so inextricably linked that even were the UK to decide to remain within the EU, the pressure would come at some point, despite the UK’s veto, for the country to join the euro. That is something that even the most verbal remainer will battle to avoid.

A further green shoot of recovery was seen yesterday in Eurozone data. While still weak, manufacturing data for Italy, France, Germany and the Eurozone as a whole improved in April.
The data for Germany was a little below what was expected but it was still a positive development. The data for France and Italy was even more encouraging with France returning to expansion (but only just) and Italy comfortably exceeding market expectations.

While the European elections have been overshadowed by the “will they, won’t they” question over the UK, the elections are going to be extremely significant to several individual states who already have nationalist Governments or where the right is starting to become a serious factor.

Yesterday, the single currency corrected lower versus the dollar, reaching 1.1170 and closing just three pips from the low.