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Waiting and Seeing

Bank of England provides mixed message

 

Following yesterday’s Quarterly Inflation Report and the first MPC meeting for a couple of months, the Bank of England managed to produce a mish-mash of comments and signals to the market.

 

In what could be described as “advanced misguidance”, there was an inflation figure that will rise in 2.8% in the Autumn, almost 30% above the (current) Government’s target but no rate hike for two years.

 

The market has long considered Mark Carney to be a little dovish in his inflation view with the NIESR producing a report earlier in the week predicting inflation at 3.4%. The economy is likely to grow at 1.9% this year, up from last year’s 1.8% but lower than the earlier prediction of 2%. Growth forecasts for 2018 & 2019 have been revised up slightly as wage growth is expected to accelerate to above 3%.

 

Despite a relatively tight labour market with unemployment well below 5%, wages have been slow to catch up bringing concern over the ability of the consumer to drive the economy. Next week sees the release of both employment and inflation data for the U.K. The MPC will have seen preliminary data so little change from recent releases is expected.

 

Central Bankers are “Human After All”

 

In the manner of a child looking to its parents for the answer to every question, traders look to Central Banks to bring clarity and provide guidance for every event.

 

That ability was stretched to the limit by the financial crisis where the three then heads of The Federal Reserve, Bank of England and European Central Bank, Messrs Bernanke, King and Trichet performed miracles by managing to keep the financial system afloat.

 

Since their departure for a “lie down”, their successors, Yellen, Carney and Draghi have sometimes been criticized for their conservatism but driving a return to growth has been a delicate operation.

 

Earlier this week Mario Draghi voiced concern that the threat of deflation in the Eurozone had not yet been contained and will leave the negative bias on the economy in place. An earlier call from Fellow ECB member Yves Mercsch for a move to a neutral has been largely ignored. M. Mersche should meet Kristin Forbes!

 

Spare a thought for S. Draghi. Germany is growing at close to 2% annually. Next week Greece will, release GDP data showing a contraction of between 1.1% and 1.5% in its economy. Try creating a monetary policy that on the one hand ensures Germany doesn’t overheat and Greece produces growth!

 

I’ve said it once, I will say it again. One size does not fit all!

 

Trump on the back foot.

 

He would never admit it but Donald Trump appears a little non-plussed by the furore that continues to surround his removal from office of FBI Director James Comey. The swirling accusations of political expediency are not going away.

 

While this issue may eventually die down, Trumps ability to work with the Administration is yet again being called into question. He needs support rather than to continually be butting heads with Congress. The acceptance of the way Washington worked before his arrival and will continue to function after he is gone appears to be a difficult concept to grasp.

 

The dollar is driven by international events and while this is a domestic matter, for now. Any issue that spills over into Trumps fiscal agenda will be viewed as having a “knock on” effect on the economy and the prospect of a rate hike next month.

 

The dollar has been on the front foot recently, rising by over 4% against the JPY as risk appetite has improved. North Korea could blow up (figuratively or literally) at any point and there could be a further escalation in the Middle East but for now geopolitics are favouring a stronger dollar.

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