While the market’s focus was expected to be primarily on the US CPI print for August, there was much more market action across the Atlantic with the Pound soaring on the back of a near term rate rise warning from the Bank of England.

While the BoE left its base rate steady at 0.25% as expected, it was the clear warning from Governor Carney who said he was with the majority of his fellow MPC members, most seeing the need for some withdrawal of stimulus likely ‘over the coming months’ if growth continues and underlying inflation continues to rise.  Of course this warning is conditional on the response from consumers and business, including in the aftermath of this warning.  But with two external members of the nine MPC members voting for a rate hike, there’s a sufficiently strong view that’s emerged that last year’s emergency rate cut support needs to be reversed.  At the end of the day, the market has taken seriously the BoE’s clear warning that “some withdrawal of monetary stimulus was likely to be appropriate over the coming months in order to return inflation sustainably to target”.  The labour market will be a key metric to follow; clearly this week’s lowest UK unemployment rate since the early 1970s resonated with the MPC.

The Pound soared, as did gilt yields.  USD/GBP spiked higher by two big figures from 1.32 to about 1.34, sitting just that level this morning.  AUD/GBP has pulled back to below 0.60, pressure also on EUR/GBP.  The Pound was the clear-out-performer among the major FX leader board, up 1.41%.  UK 10 year gilt yields rose 9bps to 1.23 as the market priced in a 50% chance of the BoE hiking at its next (2 November) meeting (up from a 10% chance), and 80% priced by the 14 December meeting (up from 36% pre-BoE).

US inflation for August (another of the diminishing pre-Harvey and Irma data set) printed toward the stronger side of expectations but there was not material USD relief rally to speak of, nor a surge in US Treasury yields.  (More threats from the North Korean leader – the latest to turn the US into ashes – might have supported Treasuries selling to a degree.) Headline CPI rose 0.4% for annual growth of 1.9%, a tenth more than expected while core inflation in the month rose 0.2% as expected, but annual core inflation at 1.7% y/y was a tenth higher than the 1.6% consensus.

The result supported yields and the USD at the margin.  The pricing for the 13 December meeting rose from a 50% chance to 57%.  With the activity side of the economy holding up, this report plays to the prospect that inflation medium term holds the prospect of still being on track to gradually return to the 2% target.  It will be interesting to see what changes if any Fed Chair Yellen and her colleagues make to their Fed funds rate forecasts at next week’s FOMC meeting.

The AUD had a see-saw pattern yesterday at lunchtime when it spiked after employment but run into a brick wall after the Chinese growth disappointments.  It’s tested somewhat lower overnight, but is back at 0.80 this morning.  Market pricing for the RBA for 2018 pushed a little higher, now pricing in a 50% chance by the 3 April 2018 meeting, the market fully priced for a hike by the September 2018 meeting.

For the AUD, while the domestic rate story from employment was supportive, the softer-than-expected Chinese industrial production, retail sales and fixed assets investment trifecta gave the market pause for thought.  These reports had the market thinking twice about whether the momentum of Chinese growth was already easing in contrast to the early month PMIS that pointed to a stronger picture.  The LMEX index eased 0.42% overnight, while iron ore also pulled back by 3.36% to $73.99/t, despite yesterday’s Chinese reports revealing that Chinese crude steel output surged to 74.6mt, the third monthly record.

Coming up

If the calendar is any guide then today’s APAC calendar looks quieter than the frenetic pace of the past 24 hours or so.  The Kiwi has moved little in the immediate aftermath of this morning’s REINZ August report a week out from the election.  Also to come is the BusinessNZ Manufacturing PMI for August (L: 55.4).

In the European session there are two ECB speakers, the ECB’s Daniele Nuoy (Head of the Bank’s Supervisory Board) speaking on “Shadow Banking: Intermediation beyond Banks”, followed by the ECB’s Sabine Lautenschlager speaking on “Banking Union:  How to make existing pillars more effective?”  Neither is focussed on ECB monetary policy.  EC Trade and Labour Costs reports are due too.

The market tonight will take a side glance at the Empire State Manufacturing report for September.  The real interest though will be reserved for the August Retail Sales report, closely followed by Industrial Production and the UoM Consumer Sentiment Survey preliminary reading for September.  The market is looking for only 0.1% growth in headline Retail Sales, “ex autos and gas” sales are expected to rise a more solid 0.3% and the “control” group that feeds into GDP by 0.2%.

Overnight

On global stock markets, the S&P 500 was -0.11%. Bond markets saw US 10-years -0.36bp to 2.18%. In commodities, Brent crude oil +0.22% to $55.28, gold+0.4% to $1,330, iron ore -3.4% to $73.99, steam coal -0.3% to $100.00, met. coal +0.5% to $207.00. AUD is at 0.8002 and the range since yesterday 5pm Sydney time is 0.7956 to 0.8044.

For full analysis, download the report:

• Markets Today: 15 September 2017 (PDF, 108kb)

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets

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