BoE Week – Bailey Picks Up the Baton
As expected, the world’s most important and influential central bank raised interest rates for the eleventh time in its last twelve meetings last Wednesday. After the meeting, the Fed’s chairman made it clear that they would act again in September if the data between now and then merited it. By then, the Fed will have digested two CPI reports, two job reports, and the Employment Cost Index, so there is plenty for them to consider. Markets immediately took this as a sign that the Fed has reached its terminal rate and the next move would be down, which, to say the least, seems foolhardy. The dollar drifted easier, but weekly unemployment, 2nd Q GDP and Durable Goods all beat estimates giving rise to more hopes of the dream Goldilocks landing. The Fed’s favourite data point, the PCE deflator, also showed some encouraging signs when released last Friday. The CME Fed watch tool shows that traders believe last Wednesday’s rate hike was the final increase for this cycle, and after the data run at the end of the week, they now expect the first rate cut to be in June 2024. The question is, why will the Fed need to cut if we get a soft landing?
The ECB also met and followed the Fed in delivering the expected 25bp rise. The central bank has been blunt in its fears that the risk of stopping rate hikes prematurely is much higher than going too far. However, the recent run of underwhelming data from the eurozone may just be giving them pause for thought. During the extravagantly tanned Christine Lagarde’s press conference, she reiterated several times that despite the weaker economic data, she remained upbeat that growth would recover. Her worry, and those on the council, is that inflation will prove sticky. Consequently, she left all doors open for the September meeting, perhaps even a cut! The data over the next couple of months will hold the key, and this week’s inflation and retail sales will be watched with interest. The last central bank to play was the Bank of Japan which slightly altered its Yield Curve Control mechanism in a well-telegraphed move. Whether this is a forerunner to more adventurous changes, time will tell.
This week looks to be the last busy week before summer takes over and skinny markets rule, perhaps making for increased volatility as junior traders take the reins. The US gets its entire run of labour data starting tomorrow with the publication of June JOLTS data on job vacancies. Forward a day to Wednesday when we get to see ADP’s take on white-collar employment, which, to be honest, is not always the best indicator of what’s to come later in the week. After last week’s weekly jobs data showed a smaller-than-expected rise, all eyes will be on the big one: Friday’s Non-Farm Payroll, which is expected to be around 200.000. The US also sees the release of ISM diffusion Indexes, but in a week of employment information, it’s hard to imagine that they will influence the markets overly.
On Thursday, the world’s 8th oldest central bank will step out of the shadows of Threadneedle Street and take centre stage. Until the most recent inflation data was published, it looked like the UK would be in for a 50bp hike, but following softer-than-expected figures, The Bank of England will almost certainly follow the route the ECB and Fed chose last week and raise rates by 25bp. There is still a chance that they will move by 50bp, and after the criticism that the Old Lady, and in particular its hapless governor, has faced, this move cannot be totally ruled out. The logic, if there is any at the Bank of England, will be that if they feel there might need a hike in September, they may as well get it done now. Personally, I feel that they won’t, but you never know; however, the vote split could be interesting. With arch dove Silvana Tenreyro leaving the committee, it is harder to predict, but after a series of 7-2 splits, this time, we could see a three-way split with a couple of the uber hawks looking for a 50bp move. Sterling has been under pressure since the last inflation data was released, and Thursday will be volatile. The options market is indicating an 80pip move on cable, one way or the other, so watch out! Whether the bank gives a hint about further moves is probably unlikely, but of course, the market will speculate and assume that we only get 25bp; two more hikes are likely in September and November before a pause. With increasing signs that a recession is looming in the UK, the Bank probably should be erring on the side of caution, but all will be revealed late Thursday morning.