BoE Stand Pat on Brexit Eve

The latest market highlights and our views on the key developments as the BoE stand pat and strike a less dovish tone than expected; coronavirus fears continue to grip markets; while eurozone releases come into view today, ahead of Brexit ocurring at 11pm

Previous Day's Market Highlights

BoE - On Hold

Bank of England Governor Carney signed off from his final policy meeting at the helm by living up to his unreliable boyfriend nickname one last time; delivering a more upbeat policy decision than markets had expected after policymakers had become increasingly dovish throughout January.

Having priced a roughly even chance of a rate cut going into the policy decision, markets were somewhat surprised by both the decision to leave rates unchanged at 0.75%, and by the vote split remaining at 7-2; with no other policymakers joining the dovish dissenters Saunders and Haskel.

The policy guidance, however, was largely in line with consensus, with policymakers shifting to a more data-dependent stance. The now-familiar line of 'limited and gradual' tightening being required was dropped, replaced by a reference to 'modest tightening' possibly being required if the economy evolves in line with the MPC's expectations.

This saw markets rollback their bets on policy loosening from the Bank, with a rate cut in 2020 now fully priced out, despite policymakers noting that policy may need to 'reinforce' the return of inflation to target if data doesn't improve.

From the guidance, it is clear that the BoE will be paying extremely close attention to incoming data, with particular emphasis on whether the recent bounce in sentiment surveys is followed by improving 'hard' data.

Governor Carney stated as much in his post-decision press conference, noting that an economic recovery is 'not yet assured' and describing the post-election bounce as being 'lees a case of so far so good than so far good enough'; implying that policymakers want to see a greater uptick in economic activity.

Despite this, the BoE's forecasts for the coming years were relatively bleak, expecting growth of just 0.8% this year.

For sterling, the 'wait and see' policy stance and lack of hints at any upcoming rate cuts resulted in movement to the upside. Against the dollar, sterling added just shy of 0.6%, though struggled to convincingly break above the $1.31 handle.

The pound made similar gains against the euro, ending the London trading day 0.5% higher.

In my view, the Bank have made the correct policy call by not rushing to cut rates this month. It is prudent to assess whether the post-election sentiment bounce will translate into improving data in the months ahead; while standing pat allows policymakers to assess the likely fiscal stimulus in the March budget and avoids wasting valuable policy headroom.

 

US Growth - Steady As She Goes

Across the pond, Thursday's major data release came from the US, with markets receiving the first read on fourth quarter GDP growth.

The report showed the economy expanding at a steady pace of 2.1% on an annualised QoQ basis, exactly in line with expectations.

 

The details of the GDP report were also largely as expected, with personal consumption the primary positive contributor to growth (+1.2pp), and business investment the major drag on growth (-1.08pp).

On the whole, the GDP report brought little in the way of surprises, and showed the US economy continuing its steady pace of expansion. As such, the figures will do little, if anything, to alter the FOMC's policy outlook, with rates set to remain on hold for the remainder of the year.

As a result, the dollar was largely unmoved by the release, though ended the day a touch softer, down 0.15% against a basket of peers.

 

Shaky Sentiment

Meanwhile, risk appetite was relatively shaky, with market participants remaining concerned over the ongoing coronavirus outbreak, particularly after the World Health Organisation declared the outbreak an international health emergency.

As a result, in G10 FX, typical safe-havens gained ground, with the Japanese yen adding 0.25%, and the Swiss franc gaining 0.4%.

In contrast, the risk-sensitive antipodean currencies lost ground; the Aussie dollar ending the day 0.65% lower, and the Kiwi dollar shedding 0.6%.

 

In equities, fears over the coronavirus outbreak pressured European markets, with the pan-continental Stoxx 600 ending the day around 1% lower. The virus didn’t, however, concern US investors, the S&P 500 ending the day 0.3% higher.

The flight to safety resulted in solid demand for bonds, and gains for precious metals. Bonds rallied amid increased demand, which resulted in the US 10-year yield falling a further 4bps to 1.55%, resulting in part of the yield curve inverting once more.

In contrast, oil prices faced headwinds as markets worried about declining demand from China. Global benchmark Brent settled 2.5% lower, while US WTI crude shed 2.2%.

 

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1890 1.1918 1.1632 2.40%
GBP/USD 1.3100 1.3172 1.2954 1.66%
EUR/USD 1.1020 1.1172 1.0992 1.61%
GBP/AUD 1.9505 1.9549 1.8766 4.01%
GBP/NZD 2.0200 2.0202 1.9544 3.26%
GBP/CAD 1.7315 1.7335 1.6918 2.41%

Today's Market Highlights

Brexit Day

In the three-and-a-half years since the EU referendum the UK has seen five major Parliamentary votes on Brexit, three Prime Ministers, three Article 50 extensions, 2 different divorce deals and 2 general elections.

However, today, after the rollercoaster ride that politics has taken us on since 2016, the UK will be leaving the European Union.

At 11 o'clock this evening - midnight in Europe - Brexit will occur, and the UK's 47-year membership of the EU will come to an end.

This won't, however, be the end of the Brexit story.

Once the clock strikes 11, the post-departure transition period begins, which will last until the end of the year. During this period, nothing changes, while negotiators from both sides attempt to negotiate the post-Brexit UK-EU trading relationship.

Below is a timeline showing some key dates to look out for during this period:

 

 

 

Eurozone Economic Health-Check

Turning to today's data releases, a number of eurozone reports will be in focus.

Firstly, the first estimate of fourth quarter economic growth is set to show the bloc continuing to expand at a rather anaemic pace. The economy is set to have grown by 1.1% YoY as 2019 drew to a close, representing the slowest pace of growth since the final quarter of 2013.

On a quarter-on-quarter basis, growth is expected at 0.2% for the third straight quarter.

The lacklustre pace of expansion should come as little surprise, with output across the bloc set to have been dragged down by the ongoing manufacturing slump and weak business investment.

It isn't just about growth this morning, however, with the bloc's latest inflation figures due.

The flash estimate for January CPI is expected to show prices increasing by 1.4% YoY, a level which would be the fastest pace since April.

However, the core CPI measure - which excludes volatile items such as food and energy - is expected to pullback to 1.2% YoY, a 4-month low.

The continued subdued pace of inflation, and likely lacklustre growth rate, point to the ECB still having significant work to do in order to turnaround the eurozone's economic fortunes.

However, as I've noted many times before, the onus is now on fiscal stimulus to play its role in this economic turnaround, with policymakers' monetary toolkit largely exhausted.

 

Anything Else to Look Out For?

Elsewhere, in the North American session, a number of notable releases are due:

  • December's core PCE price index - the Fed's preferred inflation gauge - is expected to have increased by 1.6% for the second month running.
  • Remaining in the US, final consumer sentiment figures from the University of Michigan are expected to point to consumers remaining upbeat, with the index expected to remain unrevised at 99.1.
  • North of the border, in Canada, November's GDP report is set to show the economy stagnating on an MoM basis, though this would be an improvement on the contraction seen in October. With the Bank of Canada striking a more dovish tone, and taking a data-dependent stance, the report will be closely watched

 

Looking Ahead to Next Week

Looking ahead to next week, a number of impactful data points are due. Investors are set to pay close attention to January's PMI surveys for both the manufacturing and services sectors, which tend to prove useful leading indicators of economic activity. Global labour markets will also be in focus, with jobs reports due from Canada, New Zealand and the US -- the latter including the all-important nonfarm payrolls figure.

Meanwhile, the Reserve Bank of Australia are set to leave rates unchanged in their first policy decision of the year; while US politics will be in focus as the Democrat primary process gets underway with the Iowa caucus, and President Trump delivers the State of the Union Address.

Today's Economic Calendar

Time Currency Release Consensus Previous
10.00am EUR Flash CPI (YoY - Jan) 1.4% 1.3%
10.00am EUR Flash Core CPI (YoY - Jan) 1.2% 1.3%
10.00am EUR GDP (Q4 - 1st est. - YoY) 1.1% 1.2%
10.00am EUR GDP (Q4 - 1st est. - QoQ) 0.2% 0.2%
1.30pm EUR Core PCE - Price Index (YoY - Dec) 1.6% 1.6%
1.30pm CAD GDP (MoM - Nov) 0.0% -0.1%
3.00pm USD Final UMich Consumer Sentiment (Jan) 99.1 99.1
11.00pm GBP United Kingdom Leaves European Union