Bank of England’s (BoE) monetary policy meeting yesterday
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Today, the US jobs report for October due out at 13:30 CET will be in focus. We continue to receive mixed signals about the labour market. Claims figures continue to signal job growth well above 200,000, while the Markit PMI employment index for October points to growth just above 100,000. We estimate jobs growth was 170,000 in October. The unemployment rate rose to 5.0% in September due to an increasing participation rate. That the unemployment and underemployment rates have moved sideways in 2016 indicates that there is still slack left in the labour market. We estimate the unemployment rate was unchanged at 5.0% in October, with the probability skewed towards a fall back to 4.9%. We estimate that average hourly earnings increased 0.3% m/m in October, implying an unchanged annual growth rate of 2.6% y/y. Wage growth has moved sideways in 2016, indicating that the underlying inflation pressure is still subdued.
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In Europe, the October service and composite PMIs for Italy and Spain and final revisions of the PMIs in eurozone, France and Germany are due out.
Selected market news
Risk aversion continues to dominate financial markets as the US election approaches. Clintons lead in the polls has narrowed significantly in recent weeks and according to the poll aggregator FiveThirtyEight, the odds of a win for Clinton have fallen further to 66.2% from 67.7% yesterday. Around the third Presidential debate on 19 October the odds of a Clinton win was estimated to 87.3%.
The negative sentiment from the US session last night has been carried over to the Asian session where markets also trade lower this morning. The oil price declined further yesterday with the price on Brent crude seen trading as low as USD46.21/bbl. The Vix volatility index has also increased further and is trading close to the levels seen around the time of the UK’s EU referendum in June.
In the UK, Brexit uncertainties got a new twist yesterday as the UK High Court ruled that it is parliament – not the government – that has the power to trigger Article 50. The UK government has said that it will appeal the verdict, which means that we should get a final ruling from the Supreme Court in December. We still think Article 50 will be triggered eventually (although the triggering may be delayed past March). However, if the Supreme Court also concludes that the government cannot trigger Article 50 and that parliament will be more involved in the negotiation process, it means that a ‘softer’ Brexit has become more likely, as a majority of the members of parliament have a pro-EU stance and voted for remain.
We have changed our call on the Bank of England. Before the Bank of England’s (BoE) monetary policy meeting yesterday, we called for another 15bp rate cut in February. However, as the BoE changed its communication from an easing bias to a neutral bias, by saying it ‘can respond in either direction’, we no longer expect the bank to ease monetary policy further. We still think it is unlikely that the BoE will tighten monetary policy in a time of elevated political uncertainty, but we now think we need to see a substantial slower growth and/or higher unemployment before easing becomes likely again. UK money market is also pricing in an unchanged Bank Rate for the coming 12 months.
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