Latest US jobs report due today
The Bank of England’s MPC cut interest rates by 25bps to 4.5% at yesterday’s meeting, as expected, though the vote revealed that two of the nine Committee members preferred a larger 50bps reduction. The pound fell initially, trading down to lows of about $1.2360 and £0.8380 against the dollar and euro respectively, but has since rebounded to around $1.2450 and £0.8350 (not much changed really from yesterday morning’s levels) as the market re-visited its initial take about how much more the MPC will lower rates over the remainder of this year, paring this back to around 60bps from 70bps. The euro firmed against the dollar yesterday and is trading at around $1.0390 this morning, ahead of the key employment report in the US later today with the economy expected to have added around 175k jobs last month according to the consensus forecast.
UK bond yields fell at first following the Bank of England rate announcement before reversing course quite sharply, with 2- and 10-year yields increasing by around 10bps from their lows to finish 3-4bps higher on the day overall. US yields closed marginally higher, reversing a small portion of Wednesday’s fall, as did German yields. In equity markets, UK stocks rallied, adding just over 1%, with European stocks chalking up gains of about 1.5%, while the S&P 500 in the US closed up around 0.5%.
In his remarks following yesterday’s meeting, Bank of England Governor Andrew Bailey said ‘we expect to be able to cut (interest rates) further as the disinflation process continues (but) we will have to judge meeting by meeting how far and how fast.” The Bank finds itself in an awkward spot, halving its forecast for GDP growth in 2025 (to 0.75% from 1.5%) while at the same time raising its forecast for inflation, which is expected to rise to 3.7% by the third quarter of this year (from 2.5% at the end of last year), mainly on account of higher energy prices, before falling back towards 2% over the course of 2026. This suggests it will continue with its gradual approach to lowering rates, with the market pricing in the next but one meeting in May as the most likely date for another 25bps cut.
As noted already, the key economic data release for the day ahead is the January jobs report in the US. The consensus expects employment to have increased by 175k last month (after a gain of almost 260k in December), with the unemployment rate seen remaining at 4.1% and hourly earnings growth expected to have dipped to 3.8% y-o-y (from 3.9%). Also in the US, the University of Michigan publishes its survey of consumer confidence/inflation expectations for February.