August 1, 2019 / 7:43 AM / 4 months ago

Daily Briefing: BoE caught in a deal vs no-deal quandary

LONDON (Reuters) - Economists polled by Reuters are almost certain that the Bank of England's Monetary Policy Committee will vote 9-0 today to keep rates on hold at 0.75%.

FILE PHOTO: A man walks past the Bank of England in the City of London, Britain, February 7, 2019. REUTERS/Hannah McKay//File Photo

What is less clear is what happens after that. The standard way to assess the bank’s next move would be to look at its forecasts, which currently have the economy clicking along at a decent rate and inflation pushing over its target, both of which would imply a rate rise further down the line.

Yet that is based on the face-value government policy of securing a Brexit deal and so does not take into account growing concern that ultimately Boris Johnson will go for a no-deal exit that would plunge the economy into recession.

One solution would to publish a set of gloomier forecasts on the basis of no-deal, but the bank is reluctant to do that, as it would leave the bank open to the charge of anti-Brexit bias.

More likely is a modest tweaking of some of the assumptions on which its forecasts are based - essentially still leaving investors to make their own guesses about the future path of rates.

Final PMI numbers for manufacturing in the eurozone last month are likely t confirm the preliminary figure that came out last week, which showed activity at its weakest since December 2012.

Assuming this is the case, it will only underline the diminishing chances of any rebound in the second half of the year and once again set the stage for European Central Bank action next month.

UK's Johnson faces his first electoral test today in a by-election in the Welsh sheep-farming town of Brecon. A loss by the ruling Conservative Party loses would reduce his working majority in parliament to just one seat. The prospect of steep European Union tariffs being imposed on its Welsh lamb exports in a no-deal Brexit has prompted widespread concern among farmers.

It is also a test for collaboration between anti-Brexit parties to thwart Johnson: In a bid to boost the Liberal Democrats’ chances of winning by concentrating the support of “Remain” voters, other pro-EU parties, including the Greens and Plaid Cymru, are not standing.

MARKETS AT 0655 GMT

The dollar’s booming reaction to the Federal Reserve’s expected quarter-point interest rate cut says it all.

The dollar’s DXY index surged to its highest in more than two years, with euro/dollar dropping below $1.11 for the first time since May 2017 and Brexit-hobbled sterling resuming its steep decline to hit 30-month lows just above $1.21.

Dollar/yen topped 109 for the first time since May this year, with China’s yuan and MSCI’s overall emerging-markets currency index retreating to their worst levels since mid-June.

In some respects, the Fed was always likely to disappoint given how aggressive rate cut pricing had become, despite a still relatively buoyant U.S. economy.

But Fed Chair Jerome Powell perhaps threw more cold water on futures markets than many had assumed, by stressing the cut was "insurance" against any downturn and describing it as "mid-cycle adjustment to policy" and "not the beginning of a long series of rate cuts".

While strategists think one more cut this year is possible, Powell tamped down expectations for cuts of 100 basis points or more over the next year and futures markets now only see one chance in three the Fed will cut at its next meeting, on Sept. 18. With the European Central Bank locked and loaded for a rate cut and possible resumption of bond-buying stimulus next month, euro/dollar has taken the heat.

Sterling’s relapse comes as the new cabinet of UK PM Boris Johnson continues to beat the drum of a no-deal Brexit on Oct. 31, giving Bank of England policymakers a real headache at their meeting today.

Governor Mark Carney will have to address the likelihood of further easing in the event of no deal, but he will have be careful not to undermine the pound further, given the inflationary effects of weak sterling — the pound has nearly 8% on a trade-weighted basis in just three months.

The cautious Fed left stock markets a bit glum, too, with the S&P500 closing down last night by more than 1% for the first time since May and Asia’s main markets following suit.

With manufacturing surveys showing ongoing contractions in China, Japan, South Korea and Taiwan last month and with no real progress at this week’s reconvened U.S.-China trade talks, Shanghai and Hong Kong stocks lost almost 1% and Seoul’s Kospi was down 0.4%. Poor trade data from South Korea added to the gloom, with Seoul seeking some relief from Japan over the bilateral trade spat there.

Tokyo’s Nikkei outperformed to end flat, with the weaker yen helping. European stocks opened down 0.4%, with the weaker euro helping them to avoid the worst of Wall Street’s retreat.

Ten-year U.S. Treasury yields regained losses from before the Fed meeting and were at 2.0560% first thing.

In corporate news, Shell is seen down 3% to 4% after reporting its lowest profits in over two years.

That’s likely to drag FTSE 100 down. Barclays, StanChart, Rio Tinto and British American Tobacco were other big UK-listed names reporting this morning.

Barclays has boosted its dividend after reporting second-quarter results in line with estimates and StanChart profit has beaten estimates. Both banks are seen up 2%.

In the euro zone, ING reported better-than-expected second-quarter profit but warns rock-bottom interest rates will pressure future earnings.

SocGen's profits fell 14%, plagued by restructuring costs at its corporate and investment banking unit.

Siemens shares are sliding 1.7% in early Frankfurt trade after warning a weaker environment.

Chemicals company Evonik also said it saw “an increasingly gloomy economic environment.”

Siemens says it expects the downturn from customers in the automotive and machine building industries to continue well into 2020.

ArcelorMittal shares are expected to open down 4% after cutting its outlook for demand.

Zalando raised its profit forecast after a big jump in the number of visits to its site and orders in the second quarter.

Its shares rise 4.7% in early dealings.

Hugo Boss has lowered its outlook as well because of a challenging U.S. market, but foresees strong sales in China. Shares were sliding 2.2% in premarket trade.

Tobacco company BAT seen slightly higher after reporting a 4.6% rise in revenue.

A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets editor Mike Dolan. The views expressed are their own. 

Editing by King

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