Central banks likely to sit on hands once again
|Bank of England could issue statement but unlikely||•||Services ISM from US expands despite weather concerns|
|Hand wringing and excuses expected from the ECB||•||EM Finance Ministers criticise Fed over tapering effects on currencies|
Overnight price action has remained tight as traders and market participants wait for today’s two central bank meetings and tomorrow’s US jobs report. While we think there is little chance of any movement from either the Bank of England or the European Central Bank, central banks have been in the business of surprising the market recently.
The risk with the Bank of England is that today’s decision – which will see rates and QE held at current levels – will also have a statement attached. Statements from the Bank of England alongside decisions are rare, especially with the clarifying powers of next week’s Quarterly Inflation Report, but there’s a possibility that the MPC feels the need to reiterate its desire to amend forward guidance in the face of much faster improvements in the jobs market. For the record, we do not believe this will happen.
As is often the case, it is the European Central Bank that is the more difficult to predict; policy is confused even if the desires of the Bank are not. A handful of analysts are looking for a slim cut (10-15bps) today by Draghi et al but we would have to question its efficacy. There are significant deflationary issues to worry about in the Eurozone and yesterday’s poor retail sales number for the entire region has cast fears that discounting will pressure prices lower. As someone mentioned to me yesterday, if the ECB wants to really show the market that they mean business why not keep rates as they are and make a symbolic asset purchase of bonds today – just to show that they can. Nothing will be gained from a rate cut at the moment. Once again, we look for some clues as to additional easing from the Draghi press conference at 13.30 BST.
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The data picture in the US became all the more interesting yesterday as the services ISM showed a strong improvement; something that certainly surprised given the abhorrent, weather affected non-manufacturing number on Monday. A particularly heartening gain came in the employment sub-component as it increased to 56.4 from 55.6 – given the non-manufacturing side of the US economy accounts for roughly 80% of US GDP, an increase here should lead to a decent improvement in the US jobs market moving forward. We will see in tomorrow’s payrolls report if this is true or not.
Yesterday’s ADP number was slightly worse than expected, coming in at 175k vs 185k expected and with last month’s 238k gain revised to 227k. Dollar was little affected.
The UK services industry continues to expand at a strong rate but yesterday’s figure – 58.3 vs 59.0 expected – should leave people in no doubt that the pace of the UK recovery has definitely slowed since Q3 of last year. We expect to see a strong level of business to business service growth remain through the rest of the year but, once again, I must express concern about ongoing weakness in consumer spending and the likelihood that existing pressure on wages via inflation exacerbates this. In the meantime, the employment picture has once again improved, helped by the highest business confidence levels in nearly 4 years. The combination of the manufacturing, construction and services PMIs now points to a growth number of 0.8% in Q1 for the UK.
The emerging market perils of last week have slipped back over the past few days but we are now starting to see members of those emerging market governments and central banks criticise the Fed for its part in a stronger dollar. Indonesia’s finance minister warns in today’s FT that the Federal Reserve risks undermining “fragile emerging market economies unless it clarifies plans to taper its extraordinary monetary stimulus programme.” Expect this debate to run and run.
Disclaimer: The above comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as of the date of the briefing and are subject to change without notice. Any rates given are ‘interbank’ i.e. for amounts of £5million or more thus are not indicative of the rate offered by World First for smaller amounts. E&OE. Definitions of jargon/market terms can be found in our Glossary of Foreign Exchange Terms.