It was pretty much all about the Bank of England overnight ahead of payrolls tonight.  As my colleague from London Nick Parsons reminded us, there was the real potential for the BoE to over-promise and under-deliver, net GBP shorts according to IMM data at the greatest level of this series.  But for once, the Old Lady over-delivered.

The Bank cut the Bank rate by 25 basis points to 0.25% (the lowest in its 322 year history) expected by all analysts in a MPC 9-0 vote, extending QE from £375bn £435bn, the £60bn increase in bond buying including £10bn of corporate bond buying.  Also announced was a Term Funding Scheme to reinforce the pass-through of the cut in Bank Rate.

While the moves were not totally unexpected, the concerted dual move from the BoE – as close as we could have expected to an “all guns blazing” or in the words of BoE Chief Economist Andy Haldane a “muscular” approach – saw GBP/USD immediately jag lower from 1.33/1.35 before the announcement to 1.3150 and below, testing 1.31 and not far above that level as we go to print, currently trading just above the figure.  AUD/GBP likewise jumped from 0.572 to above 0.58 where it sits this morning.

The UK rates market moved in tandem, two year UK gilt yields falling by 8 basis points to 0.117%, the market pricing in more easing.  The BoE’s Quarterly Inflation Report noted that “if incoming data proves to be broadly consistent with the QIR, a majority of members expect to support a further cut in the Bank rate to its effective lower bound at one of the Monetary Policy Committee’s (MPC’s) meeting during the course of the year.  The MPC judges this bound to be close to, but a little above, zero.

The easing and BoE Governor’s scheduled press conference was strengthened by a media blitz to sell the message of support for the economy form the BoE.  Carney also did several TV interviews while his two Deputy Governors have been doing interviews on the economy and BoE strategy.  Deputy Governor Michael Broadbent noted that recent PMIs suggest the economy is shrinking, with risks manifesting in a variety of indicators.  The QIR took the axe to its 2.3% growth forecast for this year, cutting it to 0.8%, including a flat second half; NAB’s expectation is that this half will see two quarters of contraction, a technical recession.  “Comprehensive, coherent and timely” is how the policy strategy was couched.

We have also enclosed with this morning’s note a fuller note from our London colleagues. 

The AUD/USD has remained bid, trading this morning at 0.7628 amid mixed commodities and softer US bond yields.

Coming up

There are two big events coming up in the next 24 hours, the first of which is the RBA’s Statement on Monetary Policy at 1130 and of course then the US Non-farm payrolls report tonight.

As far as the Statement on Monetary Policy is concerned, we have two main interests.  First, to focus on their discussion about the economy and any further clarification about any new reasons for further cutting the cash rate this week. Was it the second easing given the generally low inflation outlook or was there something more specific that was the catalyst for Tuesday’s move? We suspect the latter. The second major point of interest will be their forecasts for growth and inflation in the economy generally and specifically their GDP and inflation and forecast tracks and whether they will be any different from the forecasts published in May. We suspect not, but that’s not to day they won’t ease if inflation continues to lay low.  At least one more rate cut is likely to be embedded in their market pricing assumption behind their forecasts.

As far as payrolls is concerned, continuing low levels of jobless claims and relatively steady employment components in this week’s ISM releases suggest that payrolls growth likely continued at a relatively solid pace through July. Markets are centred on growth in payrolls of 180K and an unemployment rate of 4.8%.  There’ll be as much interest in earnings growth, the market consensus looking for monthly growth in earnings of 0.2% and annual growth of 2.6%, a continuing moderate uptrend.

Also out this morning is the AIG Construction index, Japanese labour cash earnings, and their Leading Index, then German factory orders and UK Halifax house prices tonight. As well as payrolls, the CAD will also be under focus with their July labour market report, the market expecting employment grew 10k with an unemployment rate up one tenth to 6.9%. The full June US trade report is out.

Overnight

On global stock markets, the S&P 500 was +0.02%. Bond markets saw US 10-years -4.12bp to 1.50%. In commodities, Brent crude oil +2.60% to $44.22, gold+0.2% to $1,367, iron ore -3.5% to $59.50. AUD is at 0.7627 and the range since yesterday 5pm Sydney time is 0.7597 to 0.7639.

Good luck.

For full analysis, download report

•  Markets Today:  5 August 2016 (PDF,85 kb)
•  UK Economic Comment (PDF, 1MB)

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

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