The headline event from the UK last week was the Bank of England (BoE) monetary policy meeting. As expected, the BoE raised interest rates by 25 basis points to 0.50%. In a surprise split decision, four of the nine members of the Monetary Policy Committee (MPC) wanted to raise interest rates by 50 basis points to 0.75%, which would have been the biggest increase in borrowing costs since the BoE became operationally independent 25 years ago. In the meantime, the BoE said it would begin to unwind its asset purchases next month. These have been accumulated over the last decade in attempts to stimulate the economy in a process known as Quantitative Tightening (QT).
Looking to the week ahead the market will continue to decipher comments from central bankers and economic data for clues on future policy. BoE Chief Economist Pill will be speaking on Wednesday whilst BoE Gov Bailey is speaking on Thursday. Both speeches will be watched closely as these are senior officials that are speaking. In the meantime, the flash reading of the Q4 GDP is set for release on Friday.
Market Will Look For Clues in The EU Forecast to Decipher New Policy Path
The single currency pushed higher against both Sterling and the US Dollar following the European Central Bank (ECB) meeting. The ECB kept monetary policy on hold, keeping interest rates at 0.0% despite growing inflationary pressure in the Eurozone. However, during the associated press conference, ECB President Christine Lagarde commented that with the upside [in inflation] seen in December and January that there was concern within the council and that the Eurozone is no longer in a low inflation environment. Lagarde was pressed on whether the ECB now foresees a rate hike in 2022, but interestingly she did not repeat the rhetoric that a rate hike was “very unlikely” with markets deciphering a more hawkish tone. The market has now revised forward their bets for an initial 10-basis point hike from September to July this year as pressure mounts on policymakers in the months ahead to curb stimulus.
Looking to the week ahead, it is a much quieter week. The market will pay extra attention to ECB President’s Lagarde’s speech who is due to testify at a virtual hearing before the European Parliament Economic and Monetary Affairs Committee today. Following last week’s ECB meeting, the market will be looking for clues on future policy. In the meantime, on Thursday, the EU economic forecast is due for release with a particular focus on the inflation outlook.
US Jobs Defy Omicron. Will Inflation Set a New 40 Year High?
The big focus in the US last week was on the labour markets following the comments from the central bank in their recent policy meeting. During that meeting, the Federal Open Market Committee (FOMC) echoed a more hawkish tone than expected and commented on the spare capacity in labour markets. As a result, the market readjusted its expectations for an interest rate hike with the potential for five on the agenda for 2022. In the middle of the week, we saw the US Dollar soften following the release of the weaker than expected ADP jobs report. The report fell short of expectations at -301k against a consensus forecast of 185k. However, due to the historic disparity between the government official numbers and the ADP, the reaction was not as negative as it could have been. The official jobs number was released on Friday and painted a very different picture from the ADP. The Omicron wave has depressed economic activity, and this was meant to translate into weak hiring. However, the Non-Farm Payrolls figure posted 467k jobs created and massive upward revisions suggest a fundamentally very strong economy.
Looking to the week ahead, the calendar is light but given ongoing concerns about inflationary pressures the January US CPI report will be watched particularly closely by markets. Inflation seems certain to move up again and we expect a new 40-year high of 7.6% (from 7.0% in December).
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