BoE: Barking without bite
Investors have been running ahead of central banks’ plans lately, growing confident that interest rates would rise earlier than previously anticipated as global inflation shows no signs of abating.
In the UK, though, the strong market pricing for a 15 bps rate hike has been somewhat reasonable. Policymakers including Governor Andrew Bailey have been constantly calling for a tighter monetary policy after showing willingness to raise interest rates before the bond tapering phase starts, citing the strength in the UK labor market and the unusual surge in prices.
Surprisingly, however, the hawkish talk hit a wall on Thursday, with the committee voting 7-2 to leave the benchmark rate stable at a record low of 0.10% and 6-3 in favor of keeping its total asset purchase program unchanged at 895 billion pounds.
Of course, the Bank attempted to maintain some credence, saying that it “will be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target”, though investors have already heard that story before, and today’s decision was upsetting enough to press guild yields along with pound/dollar sharply lower to an almost one-month low of 1.3531. Pound/yen also pulled aggressively below the key resistance of 156.0 to trade as low as 154.15, while euro/pound accelerated to a one-month high of 0.8544.
Apparently, raising interest rates is not an easy decision to take when there is a high degree of uncertainty around the pandemic, Brexit effects, and inflation. However, losing the trust of markets is not making the job easier either.
US jobless claims
Meanwhile in the US, weekly jobless claims came to endorse the Fed’s bond tapering announcement, showing that applications for unemployment benefits reached the lowest since the start of the pandemic, falling unexpectedly from a revised 283k to 269k in the week ending Oct.30.
The continuous decline in jobless claims follows the upbeat ADP private employment report and an outstanding ISM business PMI survey for the services sector on Wednesday, raising optimism that Friday’s nonfarm payrolls could also rebound above expectations. The question that arises at this point is will the US labor market improve fast enough in the coming months to call for higher interest rates next year?
The dollar index surged to a three-week high of 94.3 on the back of a weaker euro, though against the Japanese yen, the greenback could not capitalize, remaining steady for the fourth consecutive day around the 20-day simple moving average at 113.85.
Commodities
Still some commodities such as gold and WTI crude oil could perform better than the dollar, with the former advancing by more than 1.30% to $1,793/ounce and the latter by 2.0% to $82.70/barrel.
As regards the energy sector, some volatility could develop during the day as OPEC and non-OPEC oil exporters are gathering to decide on a planned 400k increase in production. A steeper increase could even bode well for oil prices if that somewhat alleviates the global energy crisis.
Stocks
Turning to stock markets, the pan-European STOXX 600 and UK’s FTSE 100 were last up 0.35%, with real estate and energy shares driving the gains. In the US, consumer cyclicals and technology stocks offset the sharp losses in healthcare stocks, pushing the Nasdaq 100 up by almost 1.0%. The S&P 500 had a mild positive start to the day, while Dow Jones was neutral.
