One Retail Sales Swallow doesn’t make a Monetary Policy Summer!

Irrational reaction betrays market desire.

The reaction of the pound and analysts' expectation following yesterday's release of August retail sales data was simply bizarre. Hawk or dove, it is impossible to believe that a rate hike could be imminent based on a single data set particularly given the guidance given by BoE Governor Carney as to his view on such actions.

The pound reached a high of 1.3658 and 0.8797 although versus the dollar the rise was short lived.

In a poll of analysts, I wasn't one of them :(, by Reuters, 70% of those polled predicted a rate hike in November but an equal number also commented that this wasn't the right thing to be doing.

I can add my vote too! Not to those predicting a hike, but certainly to those who believe it to be wrong.

Mark Carney the Bank of England Governor has been consistent in saying that he doesn't react to one off anomalies in data neither is he likely to be swayed by retail sales which come in above analysts' expectations since all that proves is that the expectations are wrong.

May facing political life or death speech.

Ever wondered what David Cameron is doing these days? Well apart from smoking himself to death and making speeches in exchange for fees likely to be close to six figures he has vanished from our consciousness. His successor Theresa May faces a similar fate, although it is doubtful that she will take up smoking or excite sufficient interest to be invited to join the "after dinner speakers" circuit. Unfortunately, Mrs May is likely to join William Hague, Iain Duncan-Smith and Michael Howard whose stewardship of the Conservative Party has been quickly forgotten although at least May can cling to the fact that she was Prime Minister.

Tomorrow Mrs May will take her political life in her hands when she makes speech in Florence in which she will "poke her head above the Brexit parapet. It is not absolutely clear what she will say but it is likely to showcase her Europhile credentials even though she leads a country who voted the leave the EU. She won't admit defeat for her "no deal is better than a bad deal" mantra but it has been driven home by the more hawkish Brexiteers that there is going to be a choice between access to the single market and free movement. The issues are wider than that but that is the distilled choice.

FOMC turns hawkish

Yesterday was a momentous day for the global economy. Following a return to a tightening bias in December 2015 when it hiked rates for the first time in over ten years, the FOMC announced the withdrawal of quantitative easing.

The withdrawal of "extraordinary support" will begin next month and in a similar manner to its introduction at the height of the financial crisis, no one really knows what the effect will be. A significant immediate withdrawal would clearly influence inflation which is already benign but since the advance guidance from Janet Yellen yesterday was that rates will rise again as soon as December there will be little chance to gauge the effect before monetary policy is tightened further.

It is entirely possible that we have now seen the high for the single currency for 2017 as the fourth quarter is expected to see a widening of the gap both actual and anticipated between Eurozone and U.S. interest rates.

The bank of Japan also met overnight and left rates in negative territory. The G7 currencies all rose against the Jpy with the Dollar, Pound and Euro reaching 112.73, 152.25 and 134.08, all multi month highs.