Today brought more talk of rate cuts, but we need to see more post-election post-Brexit data .
Sterling took another knock this morning on softer data, as well as from comments from policymakers. But are concerns justified?
Speaking this morning, Bank of England Monetary Policy Committee member Michael Saunders added to speculation over potential for a near-term rate cut. Given that Saunders voted for a rate cut at both the November and December MPC meetings, the policymaker’s dovishness will have done little to surprise. It does however heap pressure on any economic data for the period following the December general election period as well as any data coming after what is now a fairly certain January 31 Brexit date.
Data released this morning showed another miss in UK data expectations, with consumer prices rising 1.3 percent on the year – the weakest growth since November 2016. Crucially, this falls short of the BoE’s 2 percent target rate.
The weaker price data released this morning follows Monday’s weaker than expected UK GDP data, which indicated a decline of 0.3 percent in November against consensus expectations of flat growth.
Of course, monthly GDP data always comes with the caveat that the monthly growth rate for GDP is volatile and so it should be used with caution and alongside other measures, such as the three-month growth rate, when looking for an indicator of the longer-term trend of the economy. The same applies in some measure to the CPI data, particularly given the influence of Brexit volatility on prices. Inflation had been driven higher by sterling weakness, but much of the recent softness in data can be attributed to appreciation of the currency following a post-election stabilising of parliament as Prime Minister Boris Johnson strove to push through Brexit votes.
We have said before that we are sceptical of any overexcitement about the potential for a rate cut from the BoE. This morning Saunders made the case that: “Unlike many major spending decisions for firms and households, monetary policy changes do not involve large sunk costs and hence the cost of a reversal – for example after a year or so – is relatively low in my view”. However if we see a pick-up in post-election data and surveys (starting with the Purchasing Managers’ Index surveys on 24 January), as well as what is likely to be a fiscally loose Budget from Chancellor Sajid Javid in March, then any rate cut would end up looking fairly short-sighted.
BIG BEAUTIFUL MONSTER
The rest of today’s market moves are going to be likely focussed on the US-China trade deal. We’re not going to pretend that we have any crystal ball giving us insight into the minds of the Chinese and the US trade negotiators following Donald Trump’s announcement yesterday that even following the signing of the first phase of the trade deal, tariffs on Chinese goods will remain in place until after the November US presidential election. The trade deal that Trump has labelled a ““big, beautiful monster” leaves as many questions (if not more) as it answers – such as China’s state subsidies and state-owned companies. The Trump administration has said that “This is not a free trade agreement, its purpose is to rectify unfair trade practices.” However, many will see this first phase of agreements, if not freeing global trade, at least giving Beijing some breathing space domestically to push through reforms following a period of weak growth - more on this tomorrow.
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