Article Highlights

  • French flash services PMI: 52.6 vs. 51.9 expected, 51.6 previous
  • French flash manufacturing PMI: 53.5 vs. 51.8 expected, 51.7 previous
  • German flash services PMI: 53.8 vs. 54.9 expected, 55.1 previous
  • German flash manufacturing PMI: 55.5 vs. 54.5 expected, 54.3 previous
  • Euro Zone flash services PMI: 53.1 vs. 53.8 expected, 53.8 previous
  • Euro Zone flash manufacturing PMI: 54.9 vs. 53.7 expected, 53.7 previous
  • U.K. retail sales m/m: 0.2% vs. 0.0% expected, 1.8% previous
  • U.K. retail sales y/y: 5.9% as expected, 7.2% previous
  • SNB maintains currency monetary as expected
  • BOE: 9-0 vote to maintain the Bank Rate at 0.25% as expected
  • BOE: 9-0 vote to continue government bond purchases up to £435 as expected
  • BOE: 9-0 vote to continue corporate bond purchases up to £10B as expected
  • BOE maintains neutral policy bias
  • BOE says that recent pound recovery has lowered the threat of inflation overshoot
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Demand for the Greenback persisted during today’s morning London session. The pound, meanwhile, tossed and turned before the BOE statement and then got dumped when the BOE announced that it was maintaining its monetary policy.

Major Events/Reports:

Slower increase in U.K. retail sales – The headline reading for retail sales volume in the U.K. printed a 0.2% increase in November. This is a drastic slowdown from the 1.8% surge in October. However, it is still better than the consensus that retail sales would stagnate.

The details of the retail sales report showed a mix picture, with non-store retailing and non-food stores printing decent increases while food stores and fuel stations reported a contraction in sales.

Year-on-year, retail sales volume increased by 5.9% as expected, but is weaker than October’s 7.2% increase. Still, “all store types showed growth with the largest contribution coming from non-store retailing,” according to the retail sales report.

Another noteworthy comment from the retail sales report is the following:

“Average store prices (including petrol stations) increased by 0.1% in November 2016 compared with November 2015; this was the first year-on-year increase since June 2014. The largest contribution to the increase came from petrol stations.”

Risk sentiment recovers – After getting slapped lower pretty much across the board yesterday, European equity indices were broadly in the green today.

  • The pan-European FTSEurofirst 300 was up by 0.55% to 1,414.42
  • The blue-chip Euro Stoxx 50 was up by 0.89% to 3,246.50
  • Germany’s DAX was up by 0.82% to 11,337.00
  • The U.K.’s FTSE 100 was up by 0.35% to 6,973.50

Even U.S. equity futures got a modest boost.

  • S&P 500 futures were up by 0.17% to 2,255.75
  • Nasdaq futures were up by 0.06% to 4,935.62

According to market analysts, overall optimism was sustained by speculation on year-end corporate deals and the Fed’s decision to hike rates yesterday, which propped up banking shares.

SNB monetary policy decision – As expected, the Swiss National Bank (SNB) maintained its current monetary policy. The target range for the Libor rate is therefore still between -1.25% and -0.25%, with the median target rate at -0.75%. Meanwhile, the interest rate on sight deposits was maintained at -0.75%.

The SNB also repeated its promise (or threat) that it would “remain active in the foreign exchange market as necessary” because it believes that the Swissy is “still significantly overvalued.” As such, being active in the forex market (*cough* currency manipulation *cough*) is “intended to make Swiss franc investments less attractive, thereby easing pressure on the currency.”

Regarding economic outlook, the SNB’s GDP forecast for 2016 is unchanged at 1.5%. Although the SNB did say that it sees “considerable risks” in the global economy, namely from structural risks in advanced economies and political risks, such as “the future course of economic policy in the US, upcoming elections in several countries in the euro area as well as the complex and arduous exit negotiations between the UK and the EU.”

Still, the SNB projects that the Swiss economy would grow by “roughly 1.5%,” which is the same rate of expected growth in 2016.

As for inflation, the SNB maintained its inflation forecasts for 2016 at -0.4%. However, the SNB slightly downgraded its inflation projections for 2017 and 2018. Inflation is now expected to be at 0.1% by the end of 2017 (0.2% previous) and 0.5% by 2018 (0.6% previous).

Do note that these forecasts assume that the Libor rate remains steady at the median target range of -0.75%, so the SNB is apparently not in any hurry to change its monetary policy. SNB Chairman Thomas Jordan later emphasized the SNB’s desire to maintain its current monetary policy, saying that “Our monetary policy is expansionary and it has to remain expansionary because we still have a very difficult situation: We have negative inflation, we have a negative output gap and the Swiss franc remains significantly overvalued.”

However, Jordan later said to the press that “We cannot rule out that a further step lower will become necessary,” which implies that perhaps the SNB may be open to easing further after all. After that, Jordan then went back to his usual piece about the SNB being ready and willing to intervene in the forex market and that the Swissy is “still significantly overvalued.”

MPC rate decision and minutes – The BOE’s MPC released the minutes for its monetary policy huddle and below are some of the more important and/or interesting points in, well, bullet points for easier reading:

  • The MPC unanimously voted to maintain the BOE’s current monetary policy.
  • 9-0 vote to keep the Bank Rate at 0.25%.
  • 9-0 vote to continue government bond purchases up to a total of £435.
  • 9-0 vote to continue corporate bond purchases up to a total of £10B.
  • BOE forecasts GDP growth at 0.4% in Q4.
  • However, “reported investment intentions remained below pre-referendum levels.”
  • Some slowing in activity was therefore in prospect during 2017.”
  • Looking forward, the Committee expected inflation to rise to the 2% target within six months, boosted in part by the recent increase in oil prices.”
  • although the near-term global outlook had improved, this was counterbalanced by more elevated risks
  • The sterling exchange rate had appreciated and this would by itself point to less of an overshoot in inflation relative to the target in the medium term
  • Monetary policy could respond, in either direction, to changes to the economic outlook as they unfolded to ensure a sustainable return of inflation to the 2% target

The major message here appears to be that the BOE is maintaining its neutral stance, and that the pound’s recent recovery means that the chance of an inflation overshoot is lower, so switching to a tightening bias is unwarranted for now.

Major Market Movers:

GBP – The pound initially climbed higher at the start of the session, although it had difficulty against the Greenback at the get-go. Anyhow, the pound continued to climb higher, before turning around about an hour before the BOE statement. And when the BOE finally announced that it was maintaining its monetary policy, the pound got kicked lower some more.

GBP/USD was down by 70 pips (-0.57%) to 1.2468, GBP/AUD was down by 40 pips (-0.24%) to 1.6885, GBP/CAD was down by 49 pips (-0.29%) to 1.6634

EUR – The pound wasn’t actually the worst-performing currency of the morning London session. That, uh, distinction goes to the euro, which probably got weighed down by rising European equities.

EUR/USD was down by 73 pips (-0.68%) to 1.0413, EUR/AUD was down by 50 pips (-0.36%) to 1.4102, EUR/GBP was down by 10 pips (-0.13%) to 0.8349

USD – The Greenback continued to reign supreme, advancing against ALL of its peers yet again.

USD/JPY was up by 65 pips (+0.56%) to 118.27, USD/CAD was up by 41 pips (+0.31%) to 1.3342, USD/CHF was up by 66 pips (+0.65%) to 1.0304

Watch Out For:

  • 1:30 pm GMT: Headline (0.2% expected, 0.4% previous) and core (0.2% expected, 0.1% previous) readings for U.S. CPI
  • 1:30 pm GMT: U.S. initial jobless claims (255K expected, 258K previous)
  • 1:30 pm GMT: Philadelphia Fed survey (9.1 expected, 7.6 previous)
  • 1:30 pm GMT: U.S. current account (-$111.6B expected, -$119.9B previous)
  • 1:30 pm GMT: U.S. Empire State survey (4.0 expected, 1.5 previous)
  • 1:30 pm GMT: Canada’s manufacturing sales (0.4% expected, 0.3% previous)
  • 2:45 pm GMT: Markit’s preliminary U.S. manufacturing PMI (54.5 expected, 54.1 previous)
  • 3:00 pm GMT: U.S. NAHB housing market index (unchanged at 63 expected)
  • 3:30 pm GMT: BOC financial system review
  • 4:15 pm GMT: BOC Governor Stephen Poloz has a speech

See also:

Asian Session Recap

U.S. Session Recap

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