Rangebound Wednesday; BoE Set to Stand Pat

The latest market highlights and our views on the key developments as a host of inflation releases fail to inspire major volatility, the BoE are set to leave policy on hold, and the government plan to set out their agenda for the year ahead

Previous Day's Market Highlights

Markets remained confined to their recent trading ranges on Wednesday, despite a busy day of data releases, with a lack of market-moving news flow to blame for the lack of volatility.

 

All About Inflation

Yesterday's calendar highlight was a host of inflation figures from a number of developed economies, with each painting a slightly different picture.

UK

From the UK, November's CPI figures showed the pace of price increases remaining benign, increasing at just 1.5% YoY, unchanged from October's reading and equal to a 3-year low.

 

 

Nonetheless, the sub-forecast print should give little cause for concern, with the recent fall in inflation largely due to a reduction in Ofgem's energy price cap, which has depressed power prices over the past couple of months. As such, the BoE - and market participants - will look through these figures, instead focusing on the core measure, which strips out food and energy prices.

Core CPI increased by 1.7% YoY last month, as expected, which, while still short of the BoE's 2% target, points to a relatively solid underlying inflation dynamic - something which should give those on Threadneedle Street little to worry about.

For sterling, the inflation figures did little to arrest the pound's continued slide, now into its 3rd straight day, with investors remaining concerned about the prospects of the UK and EU failing to agree a free trade agreement by December 2020.

The pound ended the day with losses of 0.4% against the dollar, and 0.2% against the euro, hovering close to 2-week lows against both.

 

Eurozone

Across the Channel, final inflation data for November produced little in the way of surprises, showing CPI increasing at 1% YoY, and core CPI increasing at 1.3% YoY - both measures being unchanged from the flash estimates.

 

 

Despite core inflation rising at its fastest pace since April, both measures remain well short of the ECB's 'close to, but below' 2% inflation aim, indicating that President Lagarde & Co still have significant work to do to reinvigorate the bloc's economy.

As I've mentioned before, the ECB can no longer be the only game in town when it comes to this, with fiscal stimulus now urgently required to take some of the burden off of policymakers' largely exhausted toolkit.

Perhaps as a result of concerns over the ECB's inability to stimulate prices, the euro ended the day 0.3% lower.

 

Canada

Wednesday's final inflation print came from Canada, where both the headline and core measures continue to hover close to the BoC's price target.

Headline inflation ticked up to 2.2% YoY last month, boosted by an increase in energy prices, while the core CPI rate remained unchanged at 1.9% YoY.

Despite the increase in headline CPI, the Bank of Canada's policy outlook appears to hinge largely on external risk factors - namely US-China trade tensions. As such, the loonie showed little reaction to the figures, with policy set to remain on hold for now.

 

Wednesday's Other Releases

Barring the plethora of inflation figures, Wednesday also brought a host of other notable releases.

During the European session, the latest sentiment surveys from the IFO institute pointed to German businesses becoming more optimistic, with the index ticking up to 96.3, the highest since June. Whether this optimism feeds through into 2020 remains to be seen, with a further flare up of Sino-US tensions likely to see the index turn south rather quickly.

Overnight, a couple of notable antipodean data points have been released. Firstly, the latest GDP figures from New Zealand pointed to a faster than expected pace of expansion in the third quarter, with the economy having expanded by 0.7% QoQ, and 2.3% YoY. Australian labour market data also beat expectations, with data showing the economy added nearly 40,000 jobs last month, as unemployment ticked down to 5.2%. Both of these will be positive signs for the RBA, though policymakers are likely to maintain their easing bias for the foreseeable.

Meanwhile, the Bank of Japan’s final policy decision of the year sprang little in the way of surprises, with rates remaining on hold at -0.1%. The BoJ have survived yet another year with a severely depleted policy arsenal, and will surely welcome the recently announced fiscal stimulus package.

 

Any Other Business

  • President Trump became the third sitting US President to be impeached after the House of Representatives voted in favour of two charges - one for abuse of power, and one for obstruction of congress. There will now be a Senate trial on January, though Trump is highly unlikely to be removed from office, with Republican senators unlikely to impeach their own President
  • Equity markets were largely flat on Wednesday, with the pan-European Stoxx 600 and US S&P 500 both failing to move by more than 0.1% over the course of the day
  • Oil prices were broadly unchanged on Wednesday, despite a smaller than expected drawdown on US stockpiles
Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1755 1.2081 1.1620 3.82%
GBP/USD 1.3080 1.3515 1.2820 5.14%
EUR/USD 1.1125 1.1199 1.0981 1.95%
GBP/AUD 1.9015 1.9523 1.8863 3.38%
GBP/NZD 1.9840 2.0417 1.9830 2.88%
GBP/CAD 1.7160 1.7794 1.7023 4.33%

Today's Market Highlights

BoE - On Hold

Focus will shift to Threadneedle Street today, with the final Bank of England rate decision of the year due this lunchtime.

Expectations are for monetary policy to remain unchanged, with rates set to remain at 0.75%. However, the two dissenting MPC members from the November meeting - Michael Saunders and Jonathan Haskel - are likely to vote for a cut once again, with a 7-2 vote split in favour of standing pat expected. In the unlikely event that any other policymakers join the dovish camp in voting for an immediate 25bps cut, this would exert pressure on sterling.

 

 

 

Away from the vote split, the BoE's statement is likely to continue to strike a relatively cautious tone, despite the lifting of near-term political uncertainties after the Tories' landslide election victory. Continued subdued growth, as well as the prospect of business investment remaining sluggish next year, combined with sub-target inflation, means caution is likely to prevail among policymakers.

In the longer-term, expectations are for the BoE to remain on hold throughout the next 12 months, barring any unexpected Brexit-related shocks. However, this outlook could change upon the appointment of a new Governor, with Carney's term concluding at the end of January 2020.

 

Today's Data

Elsewhere today, the data calendar is relatively busy.

 

This morning, the UK's economic check-up continues with the release of November's retail sales report, expected to show sales rising at a healthy pace in the early part of the holiday shopping season. Both the headline and excluding fuel sales measures are expected to have risen by 0.3% MoM last month, representing the fastest pace of sales since July.  This would be a positive sign for the UK economy, helping to make up for the ongoing manufacturing slump and lacklustre investment.

Meanwhile, across the pond, the calendar sees a number of second-tier releases, including last week's initial jobless claims - expected in line with the 4-week average of 225k - as well as the Philadelphia Fed's manufacturing index, expected to soften slightly to 8.0.

Overnight, focus will shift to Japan, with the latest inflation figures due. As has been the case for some considerable length of time now, inflation is set to have remained practically non-existent last month, with CPI expected to have increased by just 0.2% YoY.

 

Anything Else?

  • Today sees the State Opening of Parliament take place, including a Queen's Speech, in which the Government will set out their legislative agenda for the year ahead. For markets, particular attention will be paid to Brexit-related policies as well as the possibility of any tax cuts
  • The central bank speaking calendar is barren today, with only ECB Chief Economist Philip Lane set to make scheduled remarks

Today's Economic Calendar

Time Currency Release Consensus Previous
9.30am GBP Retail Sales (MoM - Nov) 0.3% -0.1%
9.30am GBP Retail Sales ex-Fuel (MoM - Nov) 0.3% -0.3%
12.00pm GBP Bank of England Rate Decision 0.75% 0.75%
1.30pm USD Initial Jobless Claims (Dec 6) 225k 252k
1.30pm USD Philadelphia Fed Manufacturing Index (Dec) 8.0 10.4
11.50pm JPY CPI (YoY - Nov) 0.2% 0.2%