The UK continues to post moderately good data. We’re coming off the bottom and there is the possibility of putting on a decent bounce. While I fully believe in a UK recovery, I’ve said on many occasions that it’s unlikely to rocket. I’m expecting the positive figures to flatten off at some point and even post small declines in some areas. The problem is that as a recovery gains pace so do expectations. Even figures that show the economy improving may illicit adverse reactions in the markets if they don’t beat expectations. Much has been said of forward guidance including a great piece from Jim Trott. The UK and beyond Much like Jim my own view is that too much forward guidance gives the market even more expectation, which isn’t good for a market that can move 100′s of pips on single words in a statement. What most people forget is that the BOE has been providing forward guidance for many years via it’s quarterly inflation report. This has covered growth, prices, inflation and interest rates. Ok it doesn’t give MPC guidance on interest rates but it doesn’t go against market implied rates, which I’m sure it would do if they were excessively out of range. How much guidance do we actually need? All it does is zoom the microscope in that little bit further and opens the door wider to disappointment. Take the Fed. Despite the market’s insistence on going over the statements with a fine tooth comb it seems pretty straight forward to me. Tapering will happen when the data says so. Tapering will happen when the data and the Fed say so. Interest rates will rise when the data says so, etc etc. That’s not going to happen until unemployment is under 7%. You can’t get more simple than that yet the market hops up and down because the FOMC statement said “modest” instead of the “moderate” (or vice versa) it said last time. So as far as forward guidance goes you can keep it. They can’t even get backward guidance right. The US has just re-written their financial history for the last 84 years and still the Q2 GDP is missing data and is a first estimate only. The second estimate is on the 29th August. Maybe we’ll get a final read before the year end. Do me a favour. It’s the 21st century and they can’t collate three months of data? How are they going to guide us through an unknown future if they can’t even get the hard facts of the past down on paper? Anyway, that’s the rant over so back to the BOE QE and interest cuts are likely to be well off the table with the recent data. I expect them to show caution and to be prepared if things take a turn for the worse, but I think the big news possible is that they may start hinting at exiting out of QE. I don’t expect it to be belted out just that if the economy improves they may start to discuss looking at the exit door. Obviously from that the market will start getting in a tizzy over potential dates for rate rises even though the BOE will be a long long way from talking about those in detail. So my slant is slightly on the hawkish side. Of course I could be scuppered as Carney is seen as a massive dove, especially from our very own Adam (who I secretly believe was disappointed to lose him) The ECB is a different kettle of fish. I don’t expect any change to policy as they will also be pointing to the improved data and Draghi will probably talk it up more than it actually is. There may have been more influence to lower rates or ease in some manner than last time. He’s likely to point to unemployment falling and sectors picking up but the cautious tone will remain. Inflation is steady and he’ll be happy with that. He’ll reiterate the tools in his tool box to combat any given situation and will probably dismiss any talk of when interest rates will rise. I don’t think there’s much forward guidance the ECB can give as the economy is not in a position where they need to worry about the future. No doubt we’ll get the usual 20 pip loss when the algos pick up the words “downside risks” in the first part of the statement. Unless there is any major news I expect a fairly flat press conference and the prices will probably reflect that. We’ll move on the odd words or statement but will likely be right back where we started at the end. The afternoon will be about US data, which will be the focus leading into Friday and the big NFP and the taperers will be on the edge of their seats once more.
Posted on: Thu, 01 Aug 2013 10:55:34 +0000
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