BoE stays on hold
The yen has bounced off multi-decade lows of near Y164 against the dollar after the Japanese authorities seemingly intervened to support the currency, though it is off its best post-intervention levels trading just north of Y160. There has been some spillover to other dollar crosses with the euro and sterling building on their post-Fed meeting gains to trade at around $1.1520 and $1.3450 respectively this morning, leaving EURGBP marginally softer at around £0.8560. The Bank of England left interest rates unchanged at 3.75% yesterday, as expected, and indicated current monetary and financial conditions might be sufficient to return inflation to target, prompting a paring back of rate hike expectations and a fall in UK bond yields.
The market is now pricing in about 30bps of hikes from the BoE by the end of this year, around 10bps less than was the case before yesterday’s meeting. Short-dated UK bonds have rallied as a result with 2-year yields more than 10bps lower, while 10-yields are down around 7bps. Equivalent US and German yields also fell yesterday, albeit lagging the decline in UK yields. In equity markets, US stocks staged a solid rebound from Wednesday’s heavy fall, led by the Nasdaq which gained almost 3%, while European indices advanced by around 1%.
The BoE MPC voted 6-3 to keep interest rates at 3.75% with the three dissenters preferring an immediate 25bps hike. The accompanying monetary policy statement noted that, while the risk of material second-round effects from the energy price shock is greater the longer higher energy prices persist, “there is little evidence so far to suggest such effects.” It also noted that “there have continued to be clear signs of underlying disinflation in recent data (while) loose labour market conditions, and higher interest rates faced by households and businesses than prior to the conflict, will also act to reduce inflation over time.”
US GDP growth in Q2 was a touch weaker than expected at 1.5% annualised – or 0.4% q/q non-annualised – a slight deceleration from just over 2% in Q1. Final Sales to Private Domestic Purchasers – i.e. consumer spending + investment – was very strong, growing by almost 4%, but this was accompanied by a jump in imports, which meant that net exports knocked more than 1% point off GDP growth in the quarter. Separately, the June PCE inflation data were benign. Headline PCE prices fell by 0.1% on the month (due to lower energy prices), while core PCE prices rose by just 0.1%, leaving the respective annual inflation rates at 3.7% and 3.3%, down from 4.1% and 3.4% in May but obviously still elevated relative to the Fed’s 2% target.
Looking to the day ahead, flash CPI inflation data for July are due in the Euro area. The consensus expects headline inflation to have nudged up to 2.9% this month from 2.8% in June, while core inflation is seen holding steady at 2.4%. Other data due include the Employment Cost Index (Q2) and Michigan consumer confidence (final reading for July) in the US.