US retail sales and Fed speeches in focus on Wednesday

Good morning,

• BoE cuts wage growth to 1.25% from 2.5% prompting mass sterling selling;

• Carney message mixed highlighting differing views among BoE policy makers;

• UK unemployment falls but wage growth also declines;

• US retail sales and Fed speeches in focus on Wednesday.

US futures are pointing marginally higher on Wednesday, tracking the moves made in Europe and Asia overnight. The focus this morning has very much been on the UK, with the release of the jobs report and the Bank of England inflation report.

A significant cut to the BoEs wage growth forecast saw sterling crash to a more than two month low against the US dollar, as traders took the revision to mean that the central bank won’t hike rates this year, pushing back some forecasts to the start of 2015. I think this always looked like the more likely scenario anyway but prior to today, there had been a growing number of investors pricing in an earlier hike, something that now appears less likely.

While the sterling reaction would suggest a very dovish inflation report and press conference, this was not necessarily the reality of it. Governor Mark Carney highlighted that while productivity was previously lower than it had expected, it had also improved much more than expected, resulting in a small net increase. This begs the question, if productivity is improving then why aren’t we seeing more wage growth?

This isn’t just stumping the markets, the BoE doesn’t appear to have any more idea on why this is than the rest of us. The comments from Carney and the other policy makers were very none-committal, which may have contributed further to the dovish response in the markets as they surely can’t start hiking rates when they don’t fully understand what exactly is going on.

The inflation report release came after the UK jobs report which, like the press conference, was fairly mixed but highlighted the poor wage growth still being seen in the country. The better than expected drop in jobless claims and drop in the unemployment rate was not enough to offset the weaker than expected wage growth, which showed a 0.2% decline when wages are taken into consideration. The selling seen in sterling after this release shows that the markets are finally coming round to the idea that wage and productivity growth, along with inflation, are going to be the key drivers of monetary policy going forward, not employment.

With the UK data and inflation report now behind us, focus will turn to the US economy, in particular the consumer. Retail sales are seen as one of the major economic releases of any month, especially at a time when people are looking for evidence that the US economic recovery is on a sustainable path. The consumer is very important to the US economy so proof that consumer confidence is high is always encouraging. That is what we’re expecting to see today, with core sales seen rising by 0.4%, in line with the increase in June.

We’ll also hear from two Fed member, one of which, William Dudley, is a voting member of the FOMC. As we approach the first rate hike, which I expect to come in the first quarter of next year, comments from Fed officials are likely to have more impact on the markets. Recently, Fed Chair Janet Yellen has refused to lower her dovish shield making any market reaction to hawkish comments unlikely, but it is always worth listening to comments for any change of tone that could pre-empt a similar change from the Fed in the coming months.

Ahead of the opening bell, the S&P is expected to open 7 points higher, the Dow 47 points higher and the Nasdaq 14 points higher.