Carney Comments Crush Sterling

Not really the desired effect!

In his press conference yesterday following the news that the Monetary Policy Committee had decided to hike rates by 25bp, Bank of England Governor Mark Carney commented that the prime reason that inflation was at 3% and rising was the weakness of the pound. It is somewhat ironic therefore that a rate hike which was designed to lower inflation began by setting the pound on a path lower which will add to inflation.

Following Carney’s comments, where he said that any future rises would be “at a gradual pace and to a limited extent”, the pound fell by close to 2% from its day’s highs versus both the dollar and euro reaching lows of 1.3042 and 1.1189 respectively.

Sterling rose initially following the announcement of the hike and the news that the vote had been 7-2 in favour of the first hike in a decade. The two members of the MPC who voted to leave rates unchanged were Sir Jon Cunliffe and Sir Dave Ramsden both of whom are Deputy Governors. It seems Silvana Tenreyro and Gertjan Vlieghe who had both spoken recently of their need to be convinced that a hike was necessary were seduced by the committee’s agreement that this hike would be a one-off.

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Brexit remains a dark cloud on the horizon

Governor Carney’s particularly dovish remarks were due almost totally to concerns expressed by the MPC over Brexit and the effect it is having and will continue to have for several years to come. The Bank’s models see little change in the trajectory for inflation from its last Quarterly Inflation Report issued in July. The MPC decided that inflation wouldn’t start to fall on its own without help from monetary policy, hence the hike in rates.

The effect of the Brexit decision is having a serious effect on business investment although employment is at its highest level for forty years and more people are working than ever before in the U.K. However, the uncertainty going forward over what the outcome of Brexit will be is having a serious downward effect on both output and consumption. Once the picture becomes clearer the MPC will reconsider the continued economic effect and act accordingly.

The negotiations recommence next week so it may not be too long before the MPC has some further information to go on. The recent optimism surrounding both the start of stage two of the negotiations could be premature given the ambiguous nature of recent comments from Brussels.

Trump Plays it safe!

President Trump has nominated Jerome Powell, a lawyer by profession, and a current Fed Governor as his choice to be Chairman of the Federal Reserve. Mr Powell is the pragmatic choice given his experience on the FOMC and his balanced approach to monetary policy where he favours both proactivity and advance guidance to the markets. The markets view if the he is the best “non-Yellen” choice.

Powell’s most immediate job will be to withdraw emergency measures, put in place to provide support during the global financial crisis, without suppressing the nascent growth that is now gaining strength.

Today sees the release of the U.S. employment report for October. Given the revisions of sometimes up to 20% in the data the month after its release it should probably be renamed the “Estimate of Non-Farm Payrolls”. Analysts are expecting a massive change from September when 33k jobs were lost because of storms in the South West. The expectation is for a headline of 300k new jobs to have been created and a small positive revision to the September number.

FOMC members will be most interested to see the hourly earnings data, yet despite a potentially weak 0.3% increase compared to 0.5% in September, the Fed is still on course to raise rates next month.