Market Brief: MPC takes a hawkish turn

11 Sep 2018

Kevin Musisi

Dealing Team

Yesterday the Bank of England’s Monetary Policy Committee opted to hold Bank rate steady at 0.50% with the QE total also maintained at £435bn.

Today's data releases
  Key levels
09.30 UK Industrial + Manufacturing Production      
09.30 UK Construction Output + Trade Balance
  Support Resistance
15.00 US Wholesale Inventories GBP/USD 1.3820 1.4273
16.45 BoE deputy governor  Cunliffe speaks GBP/EUR 1.1205 1.1508

Market overview

Yesterday the MPC, by a unanimous vote, opted to hold Bank rate steady at 0.50% with the QE total also maintained at £435bn and corporate bond purchase programme total at £10bn. The ‘Super Thursday’ communications did however deliver a more hawkish message on the outlook for monetary policy, with the MPC’s published view now being that if the economy grows ‘as expected’, policy will need to be tightened somewhat earlier and by a somewhat greater extent than was expected in November. 
 
Alongside a set of forecasts that point to inflation still being a touch above the 2% target 3-years ahead, and with this forecast conditioned on a slightly more aggressive path for Bank rate, it appears that the MPC now considers that a slightly less gradual path of tightening (around three hikes, rather than two) is now warranted over the next two years. Sterling rallied on the publication of this updated guidance, with the pound rising to a high of 1.4060 vs the dollar from around $1.388 beforehand. Short sterling interest rate futures have fallen and now point to the next move in rates coming over the next few months; our own view remains that the next hike is likely in May, however on the back of yesterday’s BoE Inflation Report, our economists have changed their view on the Bank rate. They now expect three hikes rather than two over this year and next, with the next two hikes being November 2018 and May 2019, following May 18’s hike.

In a strange twist overnight, the US government has shut down, albeit technically, for the second time this year after missing yesterday's midnight deadline in Washington DC. An agreement was all but agreed till Republican Senator Rand Paul unexpectedly delivered a nine-hour speech to object to the $300 billion that is added to the federal deficit over the next two years by the bill, thereby singlehandedly blocking its passage. The shutdown however is likely to be brief as in the early hours, the Senate have subsequently approved the bill and the House of Representatives is expected to vote it through in time for the start of the working day. The episode however does highlight the deep divisions among the Republicans. 
 

The day ahead

Looking ahead today, the UK takes centre stage this morning with the release of Industrial, Manufacturing and Construction numbers at 9.30am while data is a little light coming from the US with final wholesale inventories due at 3:00pm. In terms of speakers, Bank of England Deputy Governor Jon Cunliffe is due to present the keynote address to a forum in California. 
 
 

Thought of the day

With the weekend approaching, people are discussing their plans and of course the North London Derby has been a hot topic of conversation. With so many Tottenham fans and Arsenal fans in the office it is causing some debate. The two teams meet tomorrow at Wembley for the early kick off. Spurs are flying high, 4 points above their rivals, unbeaten in 11 games, having not lost since December. Whereas Arsenal haven’t kept a clean sheet in 5 games, and have lost 2 of their last 5. However, their recent win against Everton has Arsenal fans excited for a revival! This week the Dollar has seen a big revival, gaining 3 cents against the Pound and 3 cents against the Euro. In what has been a volatile week across a number of asset classes the Dollar’s safe haven appeal has helped the Greenback prosper. Is this a change of trend for the Dollar or just short-term strength? Please contact your Investec Dealer on 0800 055 6339 to discuss GBPUSD forecasts for 2018.

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