The pound got hit by bearish pressure during the morning London session, thanks to not-so-hawkish comments from a bunch of BOE officials, including BOE Guv’nah Carney.
The Kiwi and the Swissy, meanwhile, were noticeably getting bid higher. Risk-taking returned, which likely propped up the higher-yielding Kiwi. The Swissy’s strength, meanwhile, was rather wonky since there weren’t really any major catalysts other than the early risk-off vibes.
- U.K. CPI m/m: 0.3% as expected vs. 0.6% previous
- U.K. CPI y/y: 3.0% as expected vs. 2.9% previous
- HPI in the U.K. y/y: 5.0% vs. 5.4% expected, 4.5% previous
- U.K. PPI input m/m: 0.4% vs. 1.2% expected, 2.3% previous
- U.K. PPI output m/m: 0.2% as expected vs. 0.4% previous
- German ZEW economic sentiment: 17.6 vs. 20.1 expected, 17.0 previous
- Euro Zone economic sentiment: 26.7 vs. 34.2 expected, 31.7 previous
- Euro Zone final HICP y/y: unchanged at 1.5% as expected
U.K. CPI meets expectations, but…
The Office for National Statistics (ONS) released the U.K.’s CPI report for the September period earlier today.
And according to the report, headline inflation in the U.K. rose by 0.3% month-on-month in Sepember, which is slower than the previous month’s 0.6% rise but met the +0.3% consensus, so
Year-on-year, CPI accelerated further from +2.9% to +3.0%, which is the strongest reading in five-and-a-half years and met expectations to boot.
More importantly, September’s annual reading of +3.0% was better than the BOE’s forecast of +2.8%, as laid out in the August Inflation report.
Inflation is therefore still evolving at a faster-than-expected pace, which is supportive of a BOE rate hike.
Looking at the details of the CPI report, however, 9 of the 12 CPI components actually increased at a weaker annual pace, which points to an underlying weakness.
It just so happens that the bigger increases in the cost of food items (+3.0% vs. +2.1% previous), transportation (+4.2% vs. +3.2% previous), and recreation and culture (+2.5% vs. +1.8% previous) were able to more than offset the weaker readings for the other CPI components.
In addition, ONS noted that:
“All else being equal, the depreciation of sterling seen in 2016 and particularly following the outcome of the EU referendum would increase the prices producers pay for imported goods. Whilst depreciation is likely to increase the cost of imports, other factors determine whether these are passed on to consumers.”
“The inflation rate for a range of goods has, however, picked up since the start of the year and the overall rate in the UK is higher than in most other EU countries, including all of the larger western European nations. Depreciation [of the pound] may have influenced this but increasing global commodity prices could also be a factor.”
In short, the pound’s weakness and higher commodity prices helped to drive up the U.K.’s CPI. In other words, external/temporary factors, not stronger domestic demand because of a strong U.K. economy, are the main drivers for inflation growth. And that’s not really very promising for rate hike expectations.
Not-so-hawkish BOE officials
BOE’s Carney, Tenreyro, and Ramsden were grilled by the U.K. Treasury Select Committee earlier (and are still being grilled as I type; watch it live here). And, well, the overall message wasn’t very hawkish.
Dave Ramsden was the first to set the tone when he said that “Despite continued robust growth in employment there is no sign of second-round effects onto wages from higher recent inflation,” which is why Ramsden explicitly testified that he was a dissenter from the consensus belief that a rate hike would be appropriate “in the coming months.”
Other than that, Ramsden also expressed concern that there’s a risk that uncertainties because of Brexit would lead to business investment growing at an even weaker pace than forecasted by the BOE.
Silvana Tenreyro was the next MPC member under the spotlight and she sounded hawkish when she said that “My view is that we are approaching a tipping point at which it would be necessary or justified to remove some of that stimulus.”
However, she was quick to stress that a rate hike “is very contingent on the data.” She also stressed that wage growth has been weak and that she’s wary of voting for a rate hike prematurely since that may lead to rate cuts later.
In short, Tenreyro is a hawk unlike the blatantly dovish Ramsden. However, Tenreyro made it clear that she’s a very cautious hawk.
Finally, BOE Guv’nah Mark Carney stepped up to the plate. And while he repeated his hawkish stance that a rate hike may be appropriate “in the coming months,” he also talked about how Brexit uncertainty has dampened business investment, resulting in weaker productivity growth.
Also, Carney said that “The sole reason that inflation has gone up as much as it has is the depreciation of sterling.” Not really a very upbeat assessment of the main driver for inflation growth, huh?
Signs of risk-taking in Europe
The major European equity indices initially moved lower before making a U-turn and moving higher later, so much so that most of the major European equity indices were already in positive territory by the end of the morning London session.
Risk-taking therefore appeared to be the more dominant sentiment in Europe, at least during the morning London session.
And according to market analysts, the later signs of risk-taking was due to upbeat earnings reports.
- The pan-European FTSEurofirst 300 was up by 0.05% to 1,538.55
- Germany’s DAX was still up by 0.08% to 13,014.25
- The blue-chip Euro Stoxx 50 was up by 0.17% to 3,612.50
Major Market Mover(s):
The pound initially jumped higher as a knee-jerk reaction to the CPI report. However, sellers were clearly waiting in the bushes. Whether this was due to profit-taking by bulls ahead of the BOE’s testimonies or disappointment over the details of the CPI report is not very clear, though.
And when Carney and company did speak, their not-so-hawkish message invited even more pound bears to jump out of the bushes to maul the pound.
GBP/USD was down by 65 pips (-0.50%) to 1.3186, GBP/NZD was down by 138 pips (-0.75%) to 1.8363, GBP/JPY was down by 81 pips (-0.55%) to 147.91
The higher-yielding Kiwi was the best-performing currency of the morning London session, likely because of the returning risk-on vibes. Although it’s also possible that European traders are taking New Zealand’s better-than-expected CPI report from earlier. It’s also possible that some Kiwi bulls were opening preemptive bets as another dairy auction got underway.
NZD/USD was up by 19 pips (+0.27%) to 0.7180, NZD/JPY was up by 17 pips (+0.21%) to 80.54, NZD/CHF was up by 12 pips (+0.18%) to 0.7022
The Swissy was the second best-performing currency of the morning London session, likely because of the early risk-off vibes since the Swissy did return some of its gains when risk appetite made a comeback. Also, there weren’t really any positive catalysts for the Swissy.
USD/CHF was down by 8 pips (-0.08%) to 0.9780, EUR/CHF was down by 4 pips (-0.04%) to 1.1503, GBP/CHF was down by 73 pips (-0.58%) to 1.2897
Watch Out For:
- 12:30 pm GMT: U.S. import prices (0.6% expected, same as previous)
- 1:15 pm GMT: U.S. industrial production (0.3% expected, -0.9% previous) and capacity utilization (76.2% expected, 76.1% previous)
- 2:00 pm GMT: U.S. NAHB builders surveyb (steady at 64.0 expected)
- 5:00 pm GMT: Philadelphia Fed President Patrick Harker will speak
- 7:30 pm GMT: BOC Senior Deputy Governor Carolyn Wilkins will speak in a panel discussion
- Dairy auction currently underway (-2.4% previous); auction usually ends at around 2:00 pm GMT