Market Brief: Interest rate hike still on the table after inflation data

The markets delivered a surprise yesterday when UK inflation numbers came in on consensus at 3% in what should have been a positive for the pound as it reinforces the view that an interest rate hike is coming. In fact GBP/USD dropped a cent over the day! Dovish comments from the confirmation hearings of the two new MPC members weighed on sterling, while further pressure came from a stronger dollar on the back of speculation about a potential successor to Janet Yellen as head of the Federal Reserve, both of which will be discussed below. Headline CPI inflation rose to its highest level since April 2012, up from 2.9% in August. The drivers of the upward move in inflation were rises in petrol and diesel prices which rose by more than in the same month last year whilst there was also upward pressure from the airfares and recreation categories. Factory gate inflation data released at the same time showed producer input prices rising by 0.4% m/m, a smaller increase than the 1.2% m/m consensus expectation. That meant input price inflation was steady on the year at 8.4% y/y. Overall, the further move up in the targeted CPI inflation measure reinforces our view that the BoE will move forward and raise Bank rate by 25bps on 2 November.
However in a slight twist to the story, the two newest members of the Bank of England’s Monetary Policy Committee have suggested that they are not ready to vote for higher interest rates. Both Sir Dave Ramsden and Silvana Tenreyro told MPs on the Treasury select committee that they weren’t committed to voting with the majority for a hike. The November meeting is seen as the most likely time to announce a move as it coincides with the MPC’s quarterly Inflation Report which will simplify the communication of the change. Four members of the committee are known to back a rise from 0.25% to 0.50% but after the hearing yesterday it seems that the vote could be a touch closer than many would have expected. While still not a border line decision, it seems unlikely to be a unanimous one.
As mentioned above, U.S. President Donald Trump’s choice for the next chair of the Federal Reserve, which has been a focus for markets in recent weeks, lent some strength to the U.S. dollar yesterday. His decision will be unveiled before he leaves on 3rd November for an 11-day trip to Asia and Hawaii, a person familiar with the process said yesterday. The current pool includes incumbent Janet Yellen, advisor Gary Cohn, Fed Governor Jerome Powell, former Fed Governor Kevin Warsh and Stanford economist John Taylor. Taylor was said to have impressed Trump in an interview and this news proved positive for the U.S dollar given the assumption by many that he would favour tighter policy. 

The day ahead

The day ahead begins with some more data out in the UK: the most important being the labour market report. This is a key indicator for pay growth in the UK economy. There are also a number of number of speakers from the ECB and the US beginning with Mario Draghi, the ECB president, at 9:10am. The US also releases housing starts and building permits data for September later on the day followed by the Fed’s Beige book at 7:00pm. This is a report on the current economic situation gathered by each of the twelve Federal Reserve districts.

Thought of the day

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