Sterling loses more ground post BoE
The Bank of England MPC left interest rates on hold at 3.75% yesterday, as expected. The outcome was very tight, however, with 4 of the 9 Committee members voting for a 25bps cut. Moreover, the MPC said inflation is set to return to target about a year earlier than previously expected, hence interest rates are “likely to be reduced further”. A rate cut in either March or April now seems on the cards, sooner than the market had been pricing before yesterday. Sterling fell further against the dollar and the euro post the meeting, trading down to lows of about $1.35 and £0.8725 respectively before recovering some ground to around $1.3570 and £0.8690. The ECB also left interest rates on hold (at 2%) as expected. Its President, Christine Lagarde, said inflation and monetary policy are both ‘in a good place’, pointing to steady rates ahead. She also said the ECB is keeping ‘a close eye on exchange rate developments’, noting that the euro’s exchange rate is important for the growth and inflation outlook. The single currency was little changed against the dollar following the meeting and is trading at around $1.1790 this morning.
US government bond yields fell quite sharply yesterday amid soft (US) labour market data and a continuing slide in equity markets, declining by around 10bps across the curve. UK short-dated yields fell by about 5bps, as the market brought forward the expected timing of the next cut in BoE rates, but yields were flat to slightly to higher further out the curve, while German yields ended unchanged to marginally lower on the day. US equity markets sold off again with the S&P 500 shedding more than 1%, while the Euro Stoxx 600 closed around 1% lower.
The number of job openings in the US fell by more than expected in December, declining for a fourth consecutive month to the lowest level since late 2017 (excluding the pandemic period in 2020). The number of new jobless claims also rose by more than expected last month, albeit still remaining relatively low, while job layoffs rose by almost 118% year-on-year in January according to the latest Challenger report. The data led to some firming of Fed rate cut expectations, with the market now fully pricing in a 25bps cut in June.
In yesterday’s monetary policy statement, the BoE MPC said inflation is expected to fall back to around the 2% target from this April. It also noted that ‘consistent with evidence of subdued economic growth and building slack in the labour market, pay growth and services price inflation have generally continued to ease’, while adding that ‘the risk from greater inflation persistence has continued to become less pronounced, while some risks to inflation from weaker demand and a loosening labour market remain’. All of which in turn points to some further reduction in interest rates ahead.
It is a quiet end to the week in terms of economic data with the University of Michigan consumer confidence/inflation expectations survey for February in the US the only release of note. The ECB publishes its latest Survey of Professional Forecasters (SPF).