boe inflation report delays the inevitable 890072014

BoE governor Carney’s post-inflation report speech managed to bring down 10-year gilt yields by their biggest decline in 4 months (-3%) despite the release of fresh 5-year lows in UK unemployment rate, hitting 6.8% in March. The fact that average weekly earnings growth held unchanged at 1.7%, undershooting expectations of a jump above 2.0% have also helped temper yields down.

The BoE report reiterated inflation would remain below its 2.0%, while upgrading its 2015 UK growth forecast from 2.7% to 2.9%, while maintaining its outlook on 3.4% GDP for 2014.The message that any rate hike wouldn’t emerge before Q1 2015 was delivered via the BoE’s forecast that unemployment remains significantly above its estimate of current equilibrium of 5.25%-5.75%, which is anticipated in 3 years. That is roughly equivalent to the period over which, productivity growth is expected to regain pre-crisis levels.

Rate hike coming after less slack

Carney’s BoE sought to accomplish one major point: confirming the UK economy is nearing the point of higher rates, but any normalisation in interest would be slow and gradual as much more needs to be done in terms of getting rid of spare capacity -– currently estimated at 1.0% to 1.5% of GDP—and recovering productivity.

Unlike in the aftermath of the last inflation report in November when sterling’s resulting sell-off occurred on the novelty of inflation slowing towards its 2.0% target for the first time in 4 years, today there is nothing on the dovish side of UK data. Unemployment has dropped further below the 7.0%, formerly used as a forward guidance threshold for raising rates, and pound strength will be required to keep inflation stable. Assuming there are no downside surprises in economic figures, the next key data item would be an increase in earnings growth of at least 2.0%, required to achieve positive growth after inflation.

The charts below illustrate there is ample downside ahead in the unemployment rate than in inflation. This further supports the premise that the reaction function in FX markets is more GBP-positive than in the case of USD–as we saw in today’s decline in the US currency and US yields despite a back-to-back jump of +0.5% in US PPI.

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.