Shifting balance of risks sees February 2025 firm for first rate cut – but easing still likely gradual.
Insight
The focus for markets overnight was well and truly back on the UK with Sterling the stand-out performer overnight, trading this morning with a solid 1.24 handle, a full three big figures above where it opened the week.
The focus for markets overnight was well and truly back on the UK with Sterling the stand-out performer overnight, trading this morning with a solid 1.24 handle, a full three big figures above where it opened the week. (AUD/GBP sits back at 0.617; the AUD/USD is trading at a solid 0.7682.)
The rally reflects a combination of 1) the overnight UK High Court ruling that only Parliament can trigger Article 50 of the EU treaty, potentially at least delaying the process (in some minds derailing it); and 2) a more hawkish Bank of England evident in its latest quarterly Inflation Report.
As would be expected, the UK Government has said that it is appealing the decision with an initial hearing likely between December 5-8 and a judgment then expected in late January. There is also the thought that in the event of a vote in Parliament – should it come to that – the House of Commons would be likely to give the trigger a green light but the Lords is another kettle of fish altogether. We watch and wait.
Adding to sterling’s attraction on yield grounds, the Bank of England not only left policy on hold as expected given better data but dispensed with their easing bias. The BoE also indicated a limited tolerance to above-target inflation that is now forecast through most of next year. Inflation forecasts have been upped through 2017 by up to ¾% for Q4 to 2.72% (Inflation is forecast to be above the 2% target from Q2 ’17.)
These higher inflation forecasts stem from the weaker Pound but also an upward revision to growth from a better-than-expected base and Sterling, the Oct UK PMI Services index was 54.5 after 52.6 and better than 52.5 expected, continuing the run of positive data surprises. This is all very different from before and could yet challenge the BoE next year given the big challenges ahead for the City and the broader economy after Article 50 is triggered and beyond.
Elsewhere in markets, risk-off sentiment was the general theme still with European equities soggy, a mood that’s carried over into the US. (The FTSE closed down 0.8%.) The US VIX has pushed higher to 22.21 and the US main boards are currently down by up to 0.95% (Nasdaq). US data has been mostly softer than expected (if still solid), the ISM Non-Manufacturing Oct index below expectations at 54.8 (on a par with the UK index) below the 56.0 consensus and last month’s 57.1. Ahead of payrolls, the employment component eased to 53.1 from 57.2. Jobless claims in the last week of October pushed a little higher to 265K from 258K but Q3 productivity was up by 3.1% from -0.2%.
There have been more developments on the commodity space with oil softer again, WTI and Brent down 1%-plus, WTI trading at $44.71 and US natural gas prices off 0.86%. As something to watch, the pullback in US natural gas prices might be beginning to weigh on Asian thermal coal prices (through expectations of increased US supply from more competitive gas-fired electricity generation). The Newcastle futures price down $5.85/t to $106.50. Met coal prices though continued to move higher, up another $3.50/t to $253.50 with iron ore up 0.23% to $65.46/t. We also note that Chinese steel prices were higher yesterday. LME prices were higher overnight too, copper +0.8%, nickel +1.55% and ally by 0.26%. Gold actually pulled back by $3.70/oz to $1304.50.
September retail sales and the RBA’s quarterly Statement on Monetary Policy (SoMP) will both hit the wires at 11.30. The market consensus expects retail Sales to have risen 0.4% m/m, the same pace of growth as the prior month while for the quarterly volume series which feeds into GDP, an increase of just 0.2% q/q is tipped, well below last quarter’s 0.4% increase. NAB expects somewhat softer monthly growth of 0.3% but a stronger 0.4% quarterly “real” print.
As for the SoMP, we will be interested in the Bank’s somewhat less worrisome outlook for inflation, the resilient aspects of housing and views on the labour market. We do not expect to see any material change to GDP and inflation forecasts but we’ll be very interested in their outlook for commodity prices and the terms of trade as a support for the economy.
Then the focus shifts to payrolls and whether that would shift the pricing towards a Fed rate hike in December, on economy grounds. Most aspects of the payrolls report will be factored into market thinking and then the focus re-sets on the Presidential election into the last few days of the campaign. Stanley Fischer speaks tonight too.
On global stock markets, the S&P 500 was -0.16%. Bond markets saw US 10-years +0.72bp to 1.81%. In commodities, Brent crude oil -1.11% to $46.34, gold-0.3% to $1,304, iron ore +0.2% to $65.46. AUD is at 0.7682 and the range since yesterday 5pm Sydney time is 0.7657 to 0.7686.
Good luck.
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