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Financial Markets - In Focus - Outlook for the UK after recent BoE Statement - Steve Miley | Avem Capital
Kate Leaman today discussed the outlook for the UK after the recent monetary policy statement issued by the Bank of England with Steve Miley, Senior Financial Analyst – EMEA. Coverage of the upcoming FED meeting is discussed with Miley in depth too.
Questions posed to Steve from Kate included –
- How do you see the impact of both the UK data over the past week and the Monetary Policy Statement from the Bank of England impacting on the future course for interest rates?
- How do you see this effecting financial markets in the UK?
- From a global perspective, how do these developments influence, if at all, on other global markets.
- Given the ongoing global normalization of interest rates, what is the focus this week and into latter September
- What challenges face the ECB and the Fed?
The full transcription of the discussion in focus is available toward the end of this technical article. This article has been provided as a support and verbose text, which can be used as information purposes in relation to the video and transcription.
Impact of the mid-September UK data and Monetary Policy Statement
CPI data for Inflation increased to 2.9% in May 2017 (with expectations of 2.8%) as prices in the UK increased, the largest rise in nearly four years. These inflation figures are at their highest level since June 2013.
UK unemployment remained at its lowest levels since 1975. During the three months to July 2017, unemployment numbers fell by 75,000, bringing the unemployment rate down to 4.3% from 4.4% in the previous quarter (expectation was for 4.4% this quarter).
Overall a very strong set of data from last week, potentially a concern for the Bank of England (BoE), given the remit to hit their inflation targets. A depreciating currency post-Brexit has caused cost-push inflation. From the monetary policy statement, have shifted more hawkish than the market was originally anticipating.
Until last week, many economists were expecting the BoE to wait until 2018/2019 before raising rates. However, the BoE somewhat surprised financial markets with the potential for a sooner than previously anticipated interest rate hike.
Markets are now expecting an interest rate hike, potentially even in latter 2017. Even if not this year, the chances are high for the first half of next year (2018). It remains important to watch the upcoming economic data, particularly inflation measures, which will determine how soon the interest rate could be hiked and if this would be one-off then a pause or whether a cycle of interest rate increases had been initiated.
Policymaker Gertjan Vlieghe, who is considered to be the BoE’s strongest opponent of an interest rate increase commented that borrowing costs might rise soon. On Friday, The GB Pound rallied to its highest level against the USD since the post-Brexit high just below 1.36
A Positive Period...
The GBP looks very strong from a chart perspective. There is high anticipation that the GBPUSD could be moving towards 1.40. The Pound is also rallying against Euro, which as the UK’s major trading partner is especially significant, with EURGBP previously looking toward a move into parity. The recent mid-September moves have for now rejected that threat.
The BoE must now juggle the increasing inflation rate, whilst keeping the economic recovery on track.
Developments impact on other global markets
The FTSE100 was hit to the downside ion mid-September, primarily due to the sudden strengthening of the pound. The FTSE 100 is a UK index, but many of the companies in it are very much global, with revenue streams that are from outside the UK.
The FTSE 100 sold off on the day of Brexit in 2016, but then rallied strongly and continued that rally right into summer 2017 as a wweaker GB Pound, is a positive for many companies within the FTSE 100.
Since the mid-September rebound in the GB Pound, there has been a selloff in the FTSE 100.
The FTSE 250 (stocks from the 101st stock to the 350th, by capitalization) have performed relatively well. They have performed better than the FTSE 100 during the recent mid-September sell off, the mid-cap stock index is still looking fairly healthy.
It could seem that the recent sell off in the UK Stock Market to be corrective and short-term in nature. The risk is still for broadly higher stock prices into latter 2017.
The rest of the world, ECB and a big week for the FED
This week it is all about the FED, however, the Bank of Japan are in play as well, with a potential here also for a shift in policy toward more hawkish.
During the summer FED policy makers have indicated potential of a policy mistake with the latest interest rate hike, possibly hiking too soon. They do have concerns that inflation is not coming through. However, the market has shifted to signal expectation of a potentially more hawkish FED going into the 20th September meeting.
The real challenge remains to inject inflation in the global system, with all eyes on inflation data into the balance of September and then on into Q4. If the market sees inflation coming through into the domestic and global economic systems, we could see global Central bankers becoming increasingly hawkish.
A fascinating time for the markets globally
Equity markets have weathered the move away from the ultra-low interest rate environment particularly well. Along with this, there is also the current geopolitical situation with North Korea, which has not gone away. But US equity markets are still making new highs. European equity markets have also rebounded with strength in mid-September, with a 2-4% increase over the last week.
“All-in-all global equity markets still looking very strong. And the outlook is still very positive. Until something tells me otherwise, the outlook still looks very positive for a risk on scenario going into the last part 2017” – Steve Miley – Senior Financial Analyst - EMEA
Transcription and References
Kate Leaman: Joining us now is Steve Miley, Market Analyst at EMEA, to discuss the outlook for England. And then we'll be looking forward to the FED meeting later this week. Hi Steve.
Steve Miley: Hi there, Kate. Are you well?
Kate Leaman: Yeah, very good, thank you. So, tell us, how do you see the impact of both the UK data over the past week and the monetary policy statements in the Bank of England impacting on the future course for the interest rates?
Steve Miley: Well, clearly, we had some very good data last week pre-running the actual NBC, the Bank of England meeting. So, we had the CPI data beating expectations. So, inflation continuing to increase. And obviously, we see an issue for the Bank of England. And then also we've had the employment data, again, beating expectations in here. So, we had a 2.9 on the CPI print with expectations of 2.8. I'm just checking my data in here. We had the unemployment rate of 4.3 with the expectation of 4.4 percent.
So certainly, very strong pieces of data and the Bank of England clearly recollecting the fact that inflation is picking up, continuing to pick up. There is a concern for them, clearly within their remit to hit their inflation targets. And being really this important inflation, we've had post-Brexit, we did the depreciation in the currency, creating some imported cost [inaudible 00:01:35] push inflation. So, a real concern for them. And, certainly, from the monetary policy statement, it seems that maybe they're going to be a little bit more hawkish than the market was anticipating. And, certainly, the market's reacted to that and weren't really pricing in any kind of interest rate hike anytime soon. I'm certain the market now expecting a hike, probably not still this year, but probably certainly early at some point next year.
Whether that then goes into a whole new cycle of interest rate hikes or whether we just go into a one-off kind of liftoff and then a pause, is another matter. But from my perspective, I think the data, alongside the fact that ... remember the interest rate hike is going to help the pound high. The pound already rallying, which we're going to talk about, I know. So, the pound already rallying in here at the moment. So that's certainly increasing the likelihood of an interest rate hike with less pressures on the inflation, going forward.
Kate Leaman: Yeah, I mean, the pound already back at its pre-Brexit level of 1.36 dollars. So, is this all as optimistic as it looks at the moment?
Steve Miley: Yes, in many aspects it is. I mean, if we take a look at the pound, yes, it's hit new highs. And, technically, it looks very strong from a chart perspective. We're at the post-Brexit, we've pushed through post-Brexit highs. Obviously, before Brexit we were actually trading at 150, so there's a long way to go to Brexit levels. But, certainly, as things are looking a lot stronger for the pound, so there is real anticipation that the pound could easily ... it gets the dollar move up to 140. And not just rallying against the dollar remember. I mean, the dollar ... the cable grabbing all the headlines. But remember the pound also rallying against the Euro, and that's our major trading partner. That's important as well, cause the Euro pound was looking like it could be moving towards parity. And then the moves over the last week or so, kind of rejecting the potential for that to happen.
Kate Leaman: So, is it the time for bankers at the Bank of England to sit back down and take a deep breath, and just relax a little bit, or are we not there yet?
Steve Miley: I think we're far from relaxing. I think the whole situation, particularly the inflation aspect, is something that needs to be monitored. And it's even more difficult for the Bank of England than the other global economies and the other Global Central banks. The other central banks are trying to create inflation in the system. I see, with the depreciation of the pound post-Brexit, there's been a real issue for the Bank of England. And, kind of trying to juggle that, is going to really be the challenge going forward. To keep the economy on track, to kind of reign in those inflationary aspects. But, at the moment, things looking fairly healthy. I mean, yes, certainly keeping an eye on any kind of inflation day-to-day going forward is going to be critical for both markets and, obviously, for the central bankers.
Kate Leaman: And, if at all, how do these developments impact other global markets?
Steve Miley: Well, the real other impact has been the FTSE 100 got significantly hit to the downside at the end of last week. That's because of that strengthening of the pound. Remember the FTSE 100 is almost a global index, and a lot of those stocks in that FTSE 100 are making their earnings not in British pounds, they're making their earnings abroad in Euros and in dollars. And they're bringing them back into and repatriating them as pounds. So the weaker pound post-Brexit actually helped FTSE initially sold off ... the FTSE 100 sold off on Brexit, for the day of Brexit. But then, after that, we went on a strong, strong rally and continue that rally right into the summer.
Since then, the FTSE has been sideways. But then, with this rebounding the pound, particularly against the dollar, but also against the Euro, you see the selloff in the FTSE 100. However, I must add in that the FTSE 250, now that's the stocks from the 101st stock down to the 350th stock, the next 250 stocks have actually done relatively well. Yes, they did go lower at the end of last week, but they've done a lot better than the FTSE 100. A reflection though, even though there's been some damage done to the FTSE 100 and the FTSE 250 because of the rebound in the pound. Despite that, the smaller or mid-cap stocks are still looking fairly healthy.
And, just to add in as well, when we had the expectation of a more hawkish Central Bank from the ECB, for example, through the summer ... the European Equity indices, the DAX, the CAK, the Euro Stocks 50 ... all sold off through the summer and now they're recovering, they're rebounding at the moment. So I think this is a temporary blip for the UK Stock Market. And then, the risk is all still higher stock prices.
Kate Leaman: So, what about the rest of the world then? The ECB and, obviously, a big week for the FED this week? Interest rates, what can we expect?
Steve Miley: Well, yes, certainly, I mean, ECB, as we just highlighted there, and the ECB certainly shifting to a more hawkish tone. Probably, when we're looking for ECB speakers, we're looking for those this week and looking for any developments there. I mean critically, as you say though, it's all about the FED this week. But, not forgetting, straight after the FED, within 12 hours of the FED, we have the Bank of Japan as well. Potentially, maybe looking for a possible surprise from the Bank of Japan. I'm not talking about an interest rate hike but maybe a slight shift in policy to a slightly more hawkish.
But all eyes on the FED and, if we return to the FED, I mean, I do think we've seen a summer where the FED in their rhetoric and their jawboning had indicated potential of ... maybe there's a slight policy mistake on the last interest rate hike, maybe they hiked too soon. They do have concerns inflation's not coming through. But certainly, the markets are telling you, with the rebound we've seen in the US dollar, with the strengthening or the move lower in bond prices, higher in bond yields that we're seeing in the last week in the US, it's certainly telling you the market is now seeing a potentially more hawkish FED going into this event.
Kate Leaman: So the two most influential central banks, and the ECB, and the FED, what challenges are they facing at the moment?
Steve Miley: Well, critically is that inflation issue.
Kate Leaman: Yeah.
Steve Miley: I mean, they've done a job of post-credit crunch of getting the global economy back on its feet by the various that have gone on, and through ultra-low interest rates. We've now had liftoff in the US well over a year ago. And then the ECB hinting at the removal of that quantity of easing. The real challenge is to get some inflation in the global system, and that's why all eyes are going to be on all inflation data. We have had their eyes on inflation data and, critically, watching that inflation data as it unfolds going into the balance of September and then on into the Q4. And, if we get some inflation coming through into the system, we could see Global Central bankers becoming a lot more hawkish than maybe the markets are discounting.
Kate Leaman: Sounds like a fascinating time for the markets globally then.
Steve Miley: Indeed, I mean I think, in the markets there are some challenges going forward in this next quarter. But I do feel that ... particularly the equity markets ... they've weathered this move away from the ultra-low environment. Over the last year or two, they've weathered it very, very well. They've weathered the weather, to have a pun really, over the last week. And also, there's the geopolitical situation with North Korea has not gone away. But US equity markets still making new highs. And European equity markets rebounding really strong over the last week or two, up two, three, or four percent over the last week.
So, I think, all-in-all global equity markets still looking very strong. And the outlook is still very positive. Until something tells me otherwise, the outlook still looks very positive for a risk on scenario going into the last part 2017.
Kate Leaman: Lovely to finally have a bit of positive news from the world of the global markets. Thank you, Steve Miley, as always.
Steve Miley: Thank you Kate.
Kate Leaman: And thank you guys for watching and be sure to join us again next week for more Markets in Focus. Bye for now.
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