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Nervous Doves

Mr Carney and his colleagues on the Bank of England monetary policy committee will have been delighted with the pick up in UK economic activity over the summer months. They may however be forgiven for also welcoming the recent tempering of UK economic releases that have not quite met market expectations. For the most part they haven’t missed by much with the exception of the 0.9% fall for August retail sales.

The PMI releases (Construction, Manufacturing & Services) all came in slightly below Augusts’ highs and market expectations but still showing a UK economy that is rebounding strongly and indicating a healthy level of growth in the months ahead.

Nevertheless the recent misses will have eased the pressure on the MPC to defend or dare I say it amend their forward guidance.

So is there a distinctly upbeat tone to the mood music on Threadneedle Street?

You would think so but there are signs that not everybody on the MPC are comfortable with forward guidance. So far only Martin Weale, one of the nine members of the MPC has expressed his reservations concerning current monetary policy, he told British lawmakers on Friday that forward guidance programmes had to be designed carefully and he remained concerned about the policy framework. However is it reasonable to assume that the remaining eight members of the MPC are entirely comfortable with Mr Carney’s forward guidance, I suspect not!

The UK inflation report for September showing consumer prices increasing by 2.7% against market expectations of 2.6% coupled with a rise in core inflation from 2% to 2.2% will have done nothing to calm nervous doves on the monetary policy committee. With utility bills forecast to rise sharply in coming months we could see inflation remaining well above the Bank’s 2% target rate for the foreseeable future.

Nor will today’s (Wednesday) unemployment report help calm nerves on Thread Needle Street, while it showed the unemployment level remaining at 7.7% despite the creation of 155,000 new jobs in September (99,000 people came on to the jobs market during the month), the detail of the report & the trend in job creation is supportive of further declines in the unemployment rate in the months ahead.

Job creation remains the key to the unemployment rate and if we continue to get this level of job creation in the months ahead then the unemployment rate should reach the 7% level that the MPC is projecting for 2016 sometime in 2015. Their projections indicate that the unemployment rate will not decline to 7.0% until Q3 2016; the market is now betting that unemployment will reach that level in early 2015.

The implications for Sterling!

In my previous blog I said that I expected Sterling to find good buyers between .8700 and .8750. From here (.8450 at the time of writing) I think Sterling buyers will emerge first at .8520 and more decisively between .8550 and .8570. We have seen aggressive Sterling sellers at .8333/43 (1.1985/1.2000) and I would expect that level to be tested again later this month. If this level gives way then we could see a test of .8000 sooner than early 2014 which was my previous prediction in my August article.

I would like to hear your contrary viewpoints and alternative predictions so please use the comment box below.

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