UK Jobs giveth, BoE inflation report taketh away from sterling

<p>Sterling dropped towards its 14-month lows against the US dollar after the Bank of England’s quarterly inflation report sharply lowered near-term inflation forecasts, erasing all […]</p>

Sterling dropped towards its 14-month lows against the US dollar after the Bank of England’s quarterly inflation report sharply lowered near-term inflation forecasts, erasing all the gains seen following the release of a favourable UK jobs report. The BoE expects CPI to fall below 1.0% within six months and not regaining the 2.0% target until after 2017.  The BoE also cut its growth forecast for 2015 and 2016 to 2.9% from 3.1% and to 2.6% from 2.8% respectively.  With regards to slack (spare capacity), the BoE, maintained its estimate at “around 1%”.  The BoE QIR is another case of the central bank’s downplaying the prolonged decline in unemployment, and placing emphasis on cooling the pace of economic growth and spare capacity, with the aim of tempering market expectations for the first hike in interest rates.

The dovish report erases the rally in sterling and 10-year gilt yields, which took place after stronger than expected earnings growth and continued declines in jobless claims.

Earnings growth above inflation for the first time in five years

The highlight of the UK jobs report was the larger-than-expected increase in earnings growth exceeding the inflation rate for the first time in five years. Earnings growth, ex-bonuses, hit a six-month high of 1.3% y/y, exceeding the 1.2% inflation rate for the first time in five years.  Jobless claims fell by 20.4K, in line with forecasts, while the ILO measure of unemployment held unchanged at 6.0%.

GBP bears shift focus to inflation from wage growth 

With inflation expected to fall by more than a percentage point below the 2.0% target, BoE Governor Carney will be required to write a letter to Chancellor Osborne outlining the reasons for the deviation and the subsequent outlook. Since inflation can now officially be described as persistently undershooting market expectations, it forces markets to further push BoE tightening forward. According to Sonia fixings of UK base rates, the BoE is unlikely to deliver its first full 25-basis-point rate hike until Q4 2015, compared to the Q1 2015, expected  after the August meeting. We would not rule out if these expectations are further pushed out to Q1 2016. As we anticipated in yesterday’s piece, the BoE inflation report proved the catalyst for sterling’s ensuing selling wave.

UK earnings Nov 12

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.