Dollar benefits as stocks plunge
The Bank of England MPC raised interest rates by 25bps to 4%, as expected, with one member favouring a 50bps increase. The MPC also indicated that another increase is likely soon, probably either next month or at the following meeting in early February. Meanwhile, the dollar is benefiting from a ‘flight to safety’ amid a plunge in US stocks, the latter more than reversing the post-midterm election gains chalked up on Wednesday. The euro and sterling are trading at around $1.1190 and $1.3390 against the US currency respectively this morning, both down around a cent from yesterday morning’s highs, leaving EURGBP a touch firmer at around £0.8350. The focus for markets today will be on the October jobs (non-farm payrolls) report in the US.
US government bonds also benefited from a ‘flight to safety’ as stocks sold off. Yields ended 6-12bps lower on the day, with the largest declines seen at the short-end of the curve. German yields were a few basis points lower yesterday, while UK yields were largely unchanged post the BoE meeting. In equity markets, a sharp fall in semiconductor stocks left the Nasdaq down 5.5%, while the S&P 500 was off almost 4.5%. Asian equity markets were a good deal lower overnight, with Japan’s Nikkei shedding 6%, while European stocks are in the red at the open this morning, off more than 1%.
The Bank of England MPC voted 8-1 to raise interest rates by 25bps to 4%, with the lone dissenter preferring a 50bps hike. Following the renewed spike in energy prices, the MPC now expects inflation to rise to around 5% by the middle of next year, from 3.5% currently, and while it acknowledges that indirect/second-round effects from the energy price shock have been largely absent to date, it says “the degree of inflationary pressure in the pipeline is now sufficient to warrant an increase” in interest rates, noting that “activity data in recent months have generally been stronger than expected, adding to the case for modestly tighter monetary policy.” Looking ahead, BoE Governor Andrew Bailey said the increase in rates “shouldn’t be seen as the first in an inevitable long sequence of hikes (but) neither does it seem likely to be the last increase.” The market is pricing in around a 50% chance of another 25bps increase next month and more than pricing in a full 25bps hike by February, with just over 60bps of hikes in total expected by September next year.
As mentioned, the key economic data release today is the US employment report for October. The consensus expects the economy to have added almost 80k jobs last month, following an increase of 29k in September, while the unemployment rate is expected to remain unchanged at 4.2%. Other US data due include the University of Michigan consumer confidence index for November, while retail sales for September are scheduled in the Euro area. A number of Fed members are due to speak over the course of the day.