- UK dominates schedule with Construction PMI, MPC meeting / Inflation
Report and Govt white paper on Brexit; US sees Jobless claims, Productivity
and corporate earnings; France and Spain bond auctions, Czech rates
- BoE: Base Rate seen held, no additional Gilt QE, but Corporate Bond QE
purchases could be suspended; focus on scope of upward revisions to
CPI and GDP forecasts; likely to maintain neutral policy bias
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** EVENTS PREVIEW **
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Following the Fed's anodyne statement, today is likely to belong to the Bank of England MPC meeting and Q1 inflation report and the UK Government's 'white paper' on its Brexit strategy, given that the statistical schedule is modest, featuring the UK Construction PMI along with US Q4 Non-farm Productivity and weekly jobless claims. Elsewhere the Czech National Bank is expected to keep its official rate at 0.05% and confirm that the EUR/CZK 27.00 cap is likely to be dropped by mid-year, given that CPI (last 2.0% y/y) is clearly and sustainably back at target. Merck and Visa are likely to be among the highlights on another busy day for US Corporate Earnings, while there are multi-maturity bond auctions in France and Spain, for which sizeable concessions have been fashioned as Eurozone govt bond spreads carve out a higher political risk premium ahead of this year's elections.
** U.K. - BoE MPC meeting / Q1 Inflation Report **
- Base rate is unsurprisingly seen held at 0.25%, with its Gilt QE volume expected to be held at £435 Bln (i.e. concluded as of yesterday). There has been talk of the £10 Bln Corporate Bond QE being halted at current £5.7 Bln, which would be than justified by a balanced policy outlook, but is not the consensus forecast. The Bank will also announce what it will do with the proceeds of the redemption of the 1.25 Jan-2017 Gilt, which it is is assumed will be reinvested. The Inflation Report should see near-term inflation forecasts revised higher, perhaps also those for GDP, and the balance of risks on outlook will probably continue to signal that the next move in rates could be in either direction. As a reminder the Q4 inflation report saw the following revisions:
CPI: 2017 2.7% y/y vs. 2.0%, 2018 2.7% y/y vs. 2.4%, 2019 seen at 2.5%
GDP: 2017 1.4% y/y vs. 0.8%, 2018 1.5% y/y vs. 1.8%
Incoming UK data and surveys have continued to paint a solid picture of UK growth, even if the profile of Q4 GDP underlined just how lopsided it is, being wholly contingent on services and consumer spending, with no contribution from Manufacturing, Construction or Agriculture. While unsecured Consumer Credit growth slowed in December to 10.6% y/y, this is clearly not sustainable, a point which Mr Carney was keen to emphasize in his policy outlook speech in mid-January, though he was careful to say: "We do see a slowing in the economy and household spending this year... that's a slowing, not a stopping", just as was keen to stress that the next policy move could be in either direction. Eminently the BoE's critics believe that the package of easing measures last August was hasty, with ensuing data suggesting it was very premature, and some calling for the 25 bps rate cut to be reversed, above all given the mounting inflationary pressures. The MPC majority will doubtless continue to argue that the better than expected economic performance was down to the actions that they took, though this assumes a rapid monetary transmission effect to the real economy, which every bit of post-GFC period evidence completely refutes. Eminently the MPC / Carney will again repeat its two current mantras a) "There are limits to the extent to which above-target inflation can be tolerated"; and b) "Monetary policy can respond, in either direction, to changes in the economic outlook as they unfold to ensure a sustainable return of inflation to the 2.0% target" - the 'sustainable' caveat underlining that they will be loath to tighten policy to rein in inflation, if such an action were perceived to be likely to stall the economy and/or see a rise in Unemployment. As noted at the time of the Q4 Inflation report: "But in reality they will be quicker to respond to any weakness in growth or a rise in unemployment by easing policy, than they will be to tighten policy in the event of a clear overshoot. This is the asymmetric bias to central bank policy which BIS Claudio Borio has frequently referred (see various speeches here: http://www.bis.org/author/claudio_borio.htm)."
from Marc Ostwald
